Saturday, November 17, 2012

3-S Bio ( Nasdaq SSRX ) -- Acquisition of the Company Remains Likely

3-S Bio (SSRX $13.25) reported excellent on target Q3 results.  The company accelerated research and marketing in the period.  That caused income to finish relatively flat with the prior year at $.22 a share.  Revenues improved 22% to $28.7 million.  Further margin compression is anticipated in upcoming quarters.  The Chinese government implemented a national health insurance program in 2010.  That legislation expanded the potential market.  But also gave the central authorities greater control over pricing.  One round of price reductions was implemented last year.  Another is slated for the first half of 2013.  Those will vary by product and they might be phased in.  The ultimate impact is expected to be in the 10% range.

Unit volume continues to expand.  3-S Bio expanded its marketing organization in 2012 to penetrate smaller cities and rural markets.  The company already had a leading market share for its principal products in the major population centers.  Those efforts promise to keep volume rising at above average rates well into the decade.  3-S Bio also tripled its production capacity in 2010.  The company still has ample room to expand within its current facilities.  That should reduce unit costs, helping offset the coming price reductions.

3-S Bio's CEO is leading an investor group to take the company private at $15.00 a share.  An committee comprised of outside directors is evaluating the proposal.  3-S Bio still holds approximately $6.00 a share in cash, following the write-down of an R&D investment.  Other bids are possible.  But the current deal appears likely to proceed in light of the CEO's involvement.

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Friday, November 16, 2012

L&L Energy ( Nasdaq - LLEN ) -- Sequential Gains Likely

L&L Energy ($1.60) appears on track to report solid on target Q2 (October) results.  The company is a Chinese coal producer run by Americans.  Thermal coal (electricity) prices fell during the summer due to a variety of factors.  They've bounced back in recent months.  Metallurgical coal (steel) prices remain depressed.  L&L Energy unloaded part of its metallurgical operation earlier in the year, minimizing the damage from that segment.  A series of acquisitions and divestitures are being made to position the company to take advantage of new government regulations that are slated to take effect in China.  Larger mines are being pursued.  And higher quality coal is being added.  Political (environmental) factors are forcing the industry to discontinue the use of dirty coal. 

Sequential earnings improvement is anticipated.  Our full year (April) earnings estimate is unchanged at $.85 a share.  Faster improvement is possible in subsequent years as the industry consolidates and the Chinese economy keeps growing at a fast pace.  The stock has been under pressure following President Obama's re-election.  U.S. coal producers are likely to feel the heat from tighter federal regulation.  But alternative fuels aren't generally available in China.  Equity values in China have declined across the board following the revent change in government.  The new group is considered to be far less progressive than what many in the country had hoped for.  That may slow the pace of reform.  Economic growth is likely to remain a top priority, though.  And coal is sure to remain a key source of energyin China for decades to come.

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