China Gerui Adv Materials (ticker CHOP) - Doubling Capacity Next Year

Bought 4% position in China Gerui Adv Materials (CHOP $5.83).

Reasons for Buying
Plans to double capacity by the end of 2011, with the majority of capex completed. Capacity coming on-line mid-2011, providing a growth driver since there is a shortage for cold-rolled steel in China and the company is running at capacity. Until more capacity comes on-line the company has adopted a cost-plus model, protecting gross margins and offering revenue growth from rising steel costs (limited upside growth over next few quarters). Chinese consumer ultimate end-market for product, especially the growing middle class.

CHOP trading at 5x the consensus C11 EPS estimate of $1.13, despite net cash on the balance sheet, healthy cash flow, mid-teens ROI, and growth potential next year. On an EV-to-TTM EBITDA, trading at 3.5x. At this level I am comfortable that the market is more focused on the risks than the returns.

Analysts almost all at Buy/ Strong Buy. Management providing investor conference on December 9, offering a potential catalyst at management details 2011 growth plans.

Concerns
Some delays in construction due to flooding in North China, raising some concern about execution. Exposure to risks in declining commodity prices, foreign exchange, and tightening Chinese monetary policy slowing growth.

Company Description
China Gerui Advanced Materials Group Limited is a leading niche and high value-added steel processing company in China. The Company produces high-end, high-precision, ultra-thin, high- strength, cold-rolled steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. China Gerui's products are not standardized commodity products. Instead, they are tailored to customers' requirements and subsequently incorporated into products manufactured for various applications. The Company sells its products to domestic Chinese customers in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries.