Chinese Steel Stocks Are Heating Up Again: CHOP, CPSL, OSN


Odds are good that Ossen Innovation Co., Ltd. (NASDAQ:OSN) isn't a household name for most investors, in the United States or in China. Neither is China Gerui Advanced Materials Group Ltd (NASDAQ:CHOP) or China Precision Steel, Inc. (NASDAQ:CPSL) for that matter. But, perhaps they all should be, given the recent action from both. Not that the broad market tide tuning a little bullish hasn't helped, but there's a clear growing bias in favor of Chinese steel stocks like CPSL, OSN, and CHOP now that a re-entry into a global recession isn't a foregone conclusion.

Of the three, China Gerui Advanced Materials Group Ltd is probably the most complex situation. CHOP is China's top supplier of specialty steel... mostly cold-rolled narrow strip. But, the company can flatten steel more than any other company can - an obscure but highly marketable technology at a point in time when it's most profitable. Not that China has avoided economic ups and downs over the past twelve months, but its march towards being a consumption-oriented society rather than an export-driven one has continued. In fact, it's been so strong, all of China Gerui Advanced Materials Group's 200 customers are domestic buyers, even though China itself is the world's biggest exporter of steel products.

Guess what though. If CHOP is the market leader for high precision cold-rolled steel products, then is a close runner up. China Precision Steel, Inc. ....not that you'd ever know it from the company. It's not that CPSL has completely cut itself off from the investment community, but it's pretty clear it doesn't quite fully appreciate how frequently American investors like to hear from a company. Ironically, there's a lot to talk about. Revenues have been on the rise since fiscal 2007, jumping from $59 million then to $151 million in the most recently-completed fiscal year. While income has been skittish, at least cash flow has kept the company in the game.

Then there's Ossen Innovation Co., Ltd. It's not an ultra-thin cold-rolled flat steel manufacturer, but it's in the same 'specialty' vein. OSN makes plain-surface prestressed, rare earth coated, and zinc coated prestressed steel... materials used in the construction of bridges, highways, and other infrastructure projects. The company is as apt to export it as it is to sell it for China's infrastructure efforts. More important than that though, Ossen Innovation has quietly been cranking up the top line for years, $72 million in 2007 to 2010's $117 million. It's on pace to do about $150 million for 2011. [The share buyback doesn't hurt.]

It's all good news to be sure, but better still, these stocks are finally starting to reflect underlying results. All three stocks have recently crossed back above their 50-day moving averages - a sign the undertow really has turned for the better. It's more than the market can chalk up to mere volatility too.

The scary part about stepping into CHOP, OSN, or CPSL right now is obvious... are these just more Chinese frauds? Anything's possible, but if they're frauds, they're not acting like it; profits and margins aren't ridiculous (i.e. unbelievable), none of the companies have stood on a table and sung their own praises. These seem to be legitimate companies, mistakes and warts and all.

More than that, other data from China confirm that - despite some recent upheaval - the country's growing consumer market is still fueling tons of demand for companies like Ossen Innovation Co., China Precision Steel, and China Gerui Advanced Materials Group Ltd.  And, investors are starting to believe it again.


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