Los Angeles, CA (PRWEB) July 31, 2012
Maxsoar Financial and Investments LLC (“Maxsoar”) has initiated coverage of Longwei Petroleum Investment Holding Ltd. (NYSE Amex: LPH) ("Longwei" or the "Company") with a fair value assessment of $5.00 - $5.42.
Longwei is a large-scale wholesaler and distributor of gasoline, diesel, and other oil products in China with national wholesale and distribution licenses for petroleum products. The company owns 120,000 tons of storage capacity and in the process of acquiring a new facility to expand its storage capacity to 220,000 tons. The main customers of Longwei are coal mining companies, power supply plants, manufacturers, and retail diesel and gasoline stations in Shanxi Province.
Despite the uncertainties of global economies, China keeps powering its economic growth engine. In line with China’s GDP growth, demand and consumption for gasoline and diesel at national level are expected to grow at a stable rate for the next twelve months. According to industry experts’ estimate, following international crude price level, the domestic retail/wholesale gasoline and diesel prices are expected to increase by approximately RMB 300 per ton ($47.6/mt) in early August.
Longwei would benefit not only from the national GDP growth and oil consumption increase, but also the Central Government’s emphasis on the economic growth of central China regions and second tier provinces/cities. The Company has straight-forward business model and large amount of tangible assets. Historically the gross profit margin remained between 18% and 20% and is expected to be stable in the next twelve months. The management also achieved historical ROA and ROE higher than 20%.
Maxsoar’s investment analysis team reviewed the company’s business operations, financial results, supply and demand of its products, major developments and transactions, industry, local economy, and national economy in great detail and concluded that for an established gasoline and diesel wholesaler and distributor in an oligopoly competitive status Longwei’s stock is currently significantly undervalued from either intrinsic valuation standpoint or relative valuation standpoint.
For intrinsic valuation using DCF model, our analysts made very conservative forecasts of future financial results for its existing two facilities and for the new facility it is acquiring. In addition, the analysts used conservative values including a high market risk premium for the input parameters of CAPM and DCF models and added three extra risk premiums to the required rate of return derived from standard process to raise the required rate of return to a very high level of almost 20%. The fair value we obtained through this rigorous DCF valuation model was $5.41.
For relative valuation section, our analysts compared Longwei to Kinder Morgan Energy Partners LP and Enbridge Energy Partners LP, two of the most well-known oil and natural gas distributors of the world and took significant discount on these two comparable companies’ multiples to account for size and location differences. The analysts further compared Longwei to Fortune Oil plc and Chiwan Base, two small cap oil service companies in China, and Dialog Group Bhd, a small cap oil service company in Malaysia. The analysts chose to error on the conservative side and used the lowest valuation multiples among the three comparable companies to calculate Longwei’s fair value. The fair value range we obtained through our relative valuation model was $5 to $5.42 per share.
Our analysts acknowledge that the company does face numerous challenges and risks in its expansion plan and daily business operations. However, most of these challenges and risks are not proprietary or unique to Longwei but common for all companies operating in China or in oil-related industries. Our analysts do not see clear and strong reasons to apply excessive discount to Longwei’s fair valuation multiple derived from the average valuation multiple of Longwei’s domestic small cap peers. In fact, with the company’s recently published photos and videos of its assets and operations and reconciliation of its U.S. SEC filings and its SAT / SAIC filings in China, our analysts feel that the company stands out from its Chinese small-cap and mid-cap peers in terms of verifiability of business operations and reliability of reported financial results.
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Maxsoar Financial and Investment LLC is a professional financial service provider that offers an array of financial services including investment analysis, asset management and personal or corporate financial analysis and planning. Maxsoar’s analysts have extensive experiences in researching, analyzing, and managing a broad spectrum of financial assets including stocks, bonds, mutual funds, real estate properties, and private companies in mainland China, Hong Kong, Taiwan, U.S. west, and Canada west.
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SAFE HARBOR STATEMENT: The information contained herein contains forward-looking information including statements regarding expected continual growth of the company and the value of its securities. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 it is hereby noted that statements contained herein that look forward in time which include everything other than historical information, involve risk and uncertainties that may affect the company's actual results of operation. These statements are not guarantees of future performance and involve significant risks and uncertainties. Actual results may vary materially from those in the forward-looking statements. Factors that could cause actual results to differ include but are not limited to; the size and growth of the market for the company's products, the company's ability to fund its capital requirements in the near term and in the long term, pricing pressures, unforeseen and/or unexpected circumstances in happenings, the effectiveness of management's strategies and decisions, general economic and business conditions, new or modified statutory or regulatory requirements and changing price and market conditions.