“This fast-growing, small-cap company stands as one of the more unique members of China’s coal industry. ... They are bringing U.S. techniques and safety standards to a country that simply cannot continue its breakneck growth without more coal. The world’s most populous nation also ranks as its largest consumer of coal resources. Annual consumption accounts for nearly one-third of the planet’s use. Coal powers more than 70% of China’s energy production. Despite its moves into so-called ‘green energy’ for wind and solar, Chinese electrical generation will remain heavily dependent on coal through at least 2020. With its economy growing 10% annually—five times that of the U.S.—China has a demand for coal that far outstrips supply.
"[However,] there is a dark side to China’s coal story. The country has among the world’s worst safety records with hundreds of workers dying each year, compared with about 30 in the U.S. In a bid to improve safety, China shut down nearly 1,600 illegal mines earlier this year. That action shuttered roughly 10% of all Chinese coal mines, further reducing supply. L&L Energy, Inc.’s (LLEN, Nasdaq) CEO Dickson V. Lee was ahead of the curve [with his focus on creating a large, modern and safe coal mining operation.] Today, the company owns three coal mines, three coal washing facilities, a coal coking unit, and a coal consolidation and wholesale business. ...
“L&L has become a wealth machine. Over the past five years it registered a return on invested capital of a whopping 52%. During that period equity grew each year by more than 45%, and sometimes by more than three times that rate. Earnings per share jumped by more than 125% annually. [For the first quarter of fiscal 2011,] L&L generated $55.3 million in sales, representing 395% growth over the comparable period in fiscal 2010. Net income totaled $10.9 million, an increase of 306% from the prior-year period. Company officials noted much of the huge gains in sales and profits stemmed from the recent string of acquisitions. However, gross margins fell as L&L expanded beyond standard mining. ‘The decrease was largely attributable to the company’s expansion into the coal washing and coking businesses over the past year,’ Lee explained. ‘While profitable for the company, washing and coking tend to have lower margins than mining operations.’
Five Reasons To Buy This Stock Now
“We know L&L Energy is a well-run company with a unique strategy for tapping China’s nearly insatiable long-term demand for coal-generated electricity. The question is, can we score with this stock? In this case SCORE stands for:
• Support: At deadline, LLEN was trading well above both its 50-day and 200-day moving averages, a very bullish sign. Insiders own more than 35% of the stock, giving them a strong incentive to grow earnings. The CEO owns more than 7 million shares. At June 30 institutional investors owned 1.5 million shares, and 10 mutual fund managers reported purchases over the summer.
• Cheap: Recently selling for about $10 a share, LLEN is clearly cheap on an absolute basis. But as always the true cost of a stock is relative. Shares trade at less than seven times earnings, a figure that is less than one-third the industry average. The stock sells for less than two times sales and less than three times book value.
• Operations: Under CEO Dickson Lee, the company maintains high investment returns that show strong operating results. It had a recent return on assets of more than 66% and a return on equity of 32%. I would like to see more than the current $6 million cash on hand and better free cash flow. However, Lee is investing heavily in acquisitions as well as putting money into improved mining safety and efficiency.
• Returns: I think we have a chance to make an excellent return on this position with two-year gains of as much as 65% on a 2012 sticker price of $16.50. I estimate LLEN will grow earnings per share to about $1.65 that year. I then gave the stock a low multiple of 10, less than half the industry average.
• Earnings: For each of the past five years, LLEN has grown earnings per share by more than 100%. In its most recent quarterly report, the company said net earnings grew by 306% as earnings per share climbed by about 166%. Costs fell as revenues climbed. However, gross and net profit margins have declined with the expansion into the lower-margin businesses of coal washing and coking.
Recommendation
“Buy L&L Energy at up to $12 a share, a price that is well below the recent high of $14.91 but that would still leave a return of about 37.5%.”
Michael Robinson, American Wealth Underground, December 2010
