Ouhua Energy Holdings (AJ2.SG)

One of my reader has requested me to comment on Ouhua Energy Holdings (AJ2) as he/she is vested. Following is some parts of the request:

"My reasons for not selling :
1. Oil has shoot up > US$100 but this counter has yet to move, shipping and logistic stocks like Cosco, keppel and Sembawang Marine seem to be taking a ride.
2. Ouhua is researching on adding Dimethyl-Ether (DME) to LPG, if successful, expected profits to move up substantially (a growth stock more?)
3.Venturing into emerging market - vietnam."

Firstly, I will like to thank this reader for the help she given me by sending me all related links and documents to this company. It is because of this help that I am able to give my two cents' worth in an hour. I hereby urge all other readers to do the same if they are in need of my comments urgently.

Please note that the following should be purely used as reference purposes. I am only going to touch on the pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities. Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Pros:

1. Prospects of the PRC LPG market remains bright with the government's strong initiative towards reducing pollution in the country. The PRC government has set the target of reducing pollution emissions by 10% to be achieved in the five-year period from 2006 to 2010, which is likely to promote the usage of LPG which is one of the cleaner and more efficient alternative energy sources.

2. 3rd largest importer of LPG in the PRC. Enjoys a significant market share being one of the few tier-one LPG distribution licence holder in the PRC.

Cons:

1. Low net margins of less than 5%. Not too sure what are the margins of its competitors, but personally do not favour such businesses as they tend not to be able to protect their profits when the economy goes on a downturn.

2. Income Tax of 50% will come into half effect by FY09, which will further squeeze margins.

3. From some websites, I gather that propane and butane prices are rising due to the rising crude oil. So with higher COGS, it is prominent that bottomline with be impacted.

4. During IPO, around 54% is allocated for general working capital, which is quite a high percentage. This flags out that not much future plans are in place.

5. In FY06, plans to increase production capacity from 900,000 tonnes to 1.2 million tonnes by end of FY07 (but this did not crystalise in actuality).

6. In FY07Q2, management informed that sales volume decreased as a result of road maintenance. Road maintenances should be known in advance and management should highlight this problem in advance to shareholders.

7. In FY07Q3, management highlighted road works only be completed by first half of 2008. Furthermore, the production capacity to 1.2 million tonnes can only be achieved by second half of 2008. Again, not much reasons are given.

8. Last but not least, there is an update on the utilisation of IPO proceeds in FY07Q3. Weirdly, no funds are utilised to expand the sales network till date, and all the general working capital is used up.

After looking through the announcements till date and weighing the pros/cons from the above, I will give it a pass to list more pros/cons and dig more into the financial details. The reader had actually asked for my advice whether cut loss should be done. However, as I have not cut loss on any of my holdings from my investing days, I am afraid I will not be competent to provide a good advice. But judging from my findings, I will stay away from this company as it will take at least a year for it to turn-around (if it ever turns).