Tuesday, April 21, 2009

Coal-Fired Dragons

China is famous for its fire-breathing dragons. Maybe that fire is fueled by the country's ample coal supplies. Fanciful, yes. It is no fancy that China is the largest producer of coal in the world. So it is not surprising that coal-related operations are prominent among the Chinese companies listing stock the U.S. equity markets.

Crystal Equity Research recently issued reports on two China companies: L & L International Holdings, Inc. (LLFH: OTC/BB), a coal producer in Yunnan Province, and Sino Clean Energy, Inc. (SCLX: OTC/BB), a producer of a cleaner coal-based fuel they sell in coal-rich Shaanxi Province.

Our homework determined that both companies face significant untapped addressable markets, have profitable operations with proven business models, and are cash flow positive with low debt. Both have quality management and directors. Most importantly, both have positive cash flows to cover working capital needs and sustain modest growth. These are the attributes we look for in any small cap company.

What sets L&L and Sino Clean Energy out from the rest is that neither is dependent upon foreign trade to succeed. Indeed, both are in a highly fragmented industry - energy - and could benefit from strong Central Government support for consolidation and modernization. Thus these companies are likely to do well no matter how quickly the world economy recovers. Other than the exercise of translating renmimbi to dollars for reporting purposes, the dollar-yuan tug-of-war is not likely to affect demand.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has received compensation from either the issuer or an agent of the issuer for research on LLFH and SCLX. Crystal Equity Research has published research reports on LLFH and SCLX, but has no rating on LLFH or SCLX.

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