Archive for the ‘Company researches’ Category

Happy New Year, everyone. Welcome 2015!

After taking a break in Dec, I decide to start the year with a casual discussion about 2015 predictions in wireless, IoT markets. Some are my interpretations of other people’s predictions.

1. T-Mobile CEO Shots at Rivals in His 2015 Predictions

source: T-mobile newsroom

  • “AT&T will find new ways to cause their customers pain [in 2015] – especially those still on grandfathered unlimited plans,” predicts T-Mobile CEO John Legere, feisty as ever while making his 2015 predictions. The FTC recently sued AT&T for throttling the data speeds of unlimited plan users. Legere said, AT&T will continue to miss the important step – “which is to stop punishing their customers with domestic overages and instead get rid of them.”
  • He isn’t any kinder to Verizon, predicting Big Red will “keep trying to baffle American wireless customers with BS promos, like the one they did this year telling customers they could get a free iPhone 6 (don’t forget to read the small print!), as well as misleading advertising about everything from coverage maps to device trade-ins.”
  • As for share-losing Sprint, Legere sees them “continue throwing out campaigns, offers and promotions – anything to see if it sticks.” By mid-year, he expects the carrier to “realize they can’t slash their way to growth and start to invest in their network and customer care.”
  • One positive prediction for the industry in general: Legere forecasts 2/3 of devices sold next year by carriers will be subsidy-free, up from 41% in 2014. The margin improvement that has come from moving customers from subsidies to early-upgrade and installment plans has been a silver lining for the industry during its price war.

Original post by Legere on T-mobile: link


2. Significant Slow Down in Smartphone Shipments

Research firm IDC published a report (Dec 2 2014) which expects total smartphone shipments in 2014 to reach $1.3 billion units, representing an increase of 26.4% over 2013 (good news). But slow down to year-to-year 12.2% growth in 2015 with only 1.4 billion smartphones to be shipped. Some analysts even predict single digit growth in 2015.

Per IDC, this slower growth will continue for the next several years, with unit shipments approaching 1.9 billion units in 2018, resulting in compound annual growth rate (CAGR) for 2014-2018 to be 9.8%. Smartphone revenue will be hard hit by the increasingly cut-throat in pricing. Worldwide average selling price (ASP) will drop from US$297 in 2014 to US$ 241 by 2018.

This slow-down is bad for every smartphone manufacturers, more so for Android OS phone manufacturers.

IDC analyst Ramon Llamas said in a statement. “Apple’s approach with premium pricing ensures a growing portion of overall revenues despite its declining market share. Meanwhile, Android’s multi-faceted approach–with forked versions and low-cost Android One strategy–will produce mixed results, yet it allows deeper penetration into emerging markets. That can lead to additional pressure on its vendor partners, who will need to seek greater differentiation in terms of devices and experiences in the hyper-competitive smartphone market.”

As shipment volume slows, chip and smartphone components suppliers will get impact in 2015. IHS estimates global chip sales to be 3-5% growth in 2015 after it rose 9.4% in 2014 ($353B).

For those exposed to Apple and rising Chinese 4G phone sales (tailwinds), revenue should still be trending up. However, investors should concern about a ‘coming deterioration in pricing and/or margins’ for most smartphone components suppliers. Bankruptcy filing of GTAT, a supplier for Apple’s sapphire glass, hopefully is just an one-off bad example.

(I wrote about the key iPhone suppliers in my previous post — link)


3. Marriage of IOT Software and Hardware

2014 is a year for IoT and wearables. Many smart device (healthcare, infotainment, home security, remote control) startups emerge and doing very well, such as Jawbone, Fibit, Misfit, Nest (acquired by Google).  But we haven’t yet begun to see the potential of this category.

Transparency research says global wearable tech market will grow to US$5.8 billion by 2018.  And though we won’t see its full impact in 2015, I believe that the key winning IoT strategy is to build an ecosystem combining software and hardware together.

source: infocus.emc.com

It makes lots of sense because business with hardware alone cannot generate decent profits, missing the downstream revenue and customer interactions. For example, the world third largest smartphone manufacturer – Xiaomi — is expanding its footprint into more profitable Value-Added-Services (VAS) such as mobile security, well & fitness, media content, and cloud/IaaS areas. Xiaomi claims that it is selling phones at costs while making good portion of its profits from accessory and VAS.

On the other hand, business with software alone does not always own the end-customer experience beyond apps. Customer retention, stickiness is an issue. Imagine end-users can easily switch their default search engine, browser, and payment apps on their phones. Therefore, giant software companies such as Google, Facebook, Baidu, Alibaba, Amazon, have been acquiring (or developing their own) smart device, IoT hardware, robotic/drone companies.

Without a doubt, Apple is the best company which has built a harmony of hardware and software together.  Apple Pay will bridge the gap between online and offline world commerce while Apple Watch will mark the tipping point when wearables go from niche to mainstream.

IDC estimates Apple iOS share will stay around 13-15% worldwide in 2015. Mobile payments, Apple Watch, and IBM/Apple partnership are the driving forces for Apple in 2015.

(I discuss in detail about the implications of Apple Pay and Apple SIM in my blog)


I do look forward to the CES 2015 event next week. Besides seeing what’s new and cool tech trends for this year, it kind of sets the stage for the area of growth and investments for the rest of the year. Hope to share more insights from the show.

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Echo to my previous post — 3 Investment Opportunities From a Free Falling Oil Price, Goldman Sachs says oil refiners can average 25% gains in six months on Nov 18th.

Goldman Sachs analyst Neil Mehta is optimistic about oil refiner stocks, resuming the group at Attractive, adding Tesoro NYSE:TSO) to the firm’s conviction list and awarding Buy ratings to Marathon Petroleum (NYSE:MPC), Phillips 66 (NYSE:PSX) and Delek US (NYSE:DK).

The negative factors from 2013, such as shrank Brent-WTI spread, rumor about lift ban on US crude export, and heightened ethanol requirements, are behind us. Goldman predicts WTI crude oil price will remain weak near $70 in the 1st Q of 2015 unless OPEC cut its production level.

Mehta goes further to explain why he’s feeling optimistic about the group:

Refiners are defensive in a weak crude tape Given industry economics are driven more by crude spreads than the directional oil price – we believe refiners represent one of the few energy sectors that can grow cash flow in a declining crude price environment. In addition, we see a seasonal trading tailwind for refiners in 4Q/1Q.

Brent-WTI should widen out – a key positive We expect Brent-WTI spreads will widen out from $4/bbl currently to $10/bbl in 2015-2016 as US oil production/pipeline growth outstrips refining additions. 

Underappreciated Sum-Of-The-Parts (SOTP) value in midstream Midstream/MLP segments provide SOTP upside to refiners from growth, stability and cash flow.

Refiners offer FCF, returns and dividend yield We forecast refiners will generate 9%-11% of the current market caps in annual FCF and 15% ROCE in 2015/2016. Cash flow supports a healthy dividend yield of 3.0%, on median, for the sector.

Source: Barron’s article (link)

Cowen energy analyst team is also keeping a positive view on the refining sector due to solid underlying earnings potential and the developing theme of logistics growth. The firm sees 30%-40% stock price upside for Outperform-rated Delek S Holdings (NYSE:DK), Marathon Petroleum (NYSE:MPC), Western Refining (NYSE:WNR) and PBF Energy (NYSE:PBF).

2014 EIA Permian Basin InfrastructureMost of these refineries have more than 60% of the crude feed-stock sourced from Midland Basin in western Texas. Midland has seen tremendous growth in oil production due to proliferation of hydraulic fracking. The lower crude oil price may slow the frackers’ production rate but not a lot.

2014 EIA Permian Basin WTI Prices

Midland’s oil production outstrips the available pipeline infrastructure since 2009.  According to EIA Sept 2014 report (link), the spread between domestic WTI Midland and WTI Cushing oil prices is widening even faster than Brent-WTI spread.  A series of recent outages at refineries located in or near the Permian, and along the U.S. Gulf Coast caused the West Texas Intermediate (WTI) price at Midland to fall $17.50 per barrel below the price at Cushing, a record difference.

Being said, refiners, who purchase more light crude with cheaper WTI Midland, will benefit from this low oil-price environment.

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The West Texas Intermediate (WTI) crude oil price fell from $105/barrel on Jun 25th to $77 on Nov 5th, a drop of 26.7%, also a 3-year low. Last week, Goldman slashed their oil price forecast for Q1 2015 – expects Brent to be $85/bbl vs. $100 previously AND WTI $75/bbl vs. $90 previously (link). For sure, drillers and frackers will suffer but which businesses will benefit from this free falling crude oil price?

My investment focus is on US diversified and integrated oil refineries which can grow profit margin from the widening price gap between domestic crude oil and international refined oil product. I will discuss 3 investment opportunities at the bottom of this post.

Saudi/OPEC’s pricing power

Thanks to the so-called split-pricing (or discriminative pricing) by Saudi Arabia. What Saudi does is cutting crude prices for U.S. customers while selling at higher price to other countries. OPEC also cut production forecast in Nov-Dec. Apparently, this is a very targeted strategy by Saudi to force the blooming shale oil businesses in U.S. to slow down their production (if not driving them out of business). 2014-11-03 Ychart WTI spot price

$75 dollars a barrel

That’s the price crude oil would have to hit for frackers in North Dakota’s Bakken fields to feel pressure to slow new production, according to Greg Zuckerman, author of “The Frackers” and a special reporter at the Wall Street Journal. “All these guys have hedged. They’ve got production [and] they’ve already got the acreage. They’re not gonna stop but maybe they’ll kind of slow new stuff.”

In other parts of the U.S. the frackers are more resilient to free fall in oil prices this year. In Texas’s Eagle Ford and Permian basin, Zuckerman says oil prices would have to drop as low as $60 a barrel for production to be impacted.

(p.s. the Canadian sands production also becomes uneconomical at this low price for prolonged period. It may deter the approval of the Keystone pipeline bill in the US Congress even with a Republican dominance in the Washington.)

How big is fracking in US?

Analysts  say the fracking industry in the US grew from $18.4 billion in 2012 to $26 billion dollars in 2013 (source: BCC Research). We’ve gone from 5 million  barrels a day to 9 million in just about 5 or 6 years. The US is producing an additional 3 million barrels a day because of shale oil.  Overall, fracking is still a tiny fraction of the overall oil and gas industry in the United States. So, the industry is just in the third inning of a long & impressive revolution. Hard to believe a temporary crude oil over-supply will stop the revolution.

What is the real impact? A Supply Shortage in 2015?

In addition to targeting the US shale revolution, many believe that Saudis have other agendas: to target Iranians and Russian. While Russia supplies most of the the natural gas to Europe, the Ukraine relationship becomes an opportunity for Saudi or US to take market shares by exporting natural gas and other oil products to help free Europe  from Russian grandstanding.

Other oil export countries (such as Iraq, Iran, Libya, the North Sea, Venezuela, Nigeria)  built their government 2014-2015 budget based on $96-100/barrel. If the oil price continues to fall  $60-70, these countries may have budget deficit and are forced to lower their production in 2015.  By Q3 2015, we may see a tremendous oil supply constraints, shortage, that, “in turn will lead to the ‘super spike’ albeit from much lower levels than previously predicted” says Dan Dicker, president at MercBloc and author of Oil’s Endless Bid.

CEOs remain confident about profitability even in the world of $75 / barrel

Halliburton (HAL) CEO Dave Lesar is the most out-spoken one. He said that he is not particularly worried about falling oil prices, expecting them to climb next year.  Lesar believes the oversupply will quickly prove self-correcting, especially when it comes to U.S. shale production.  Unlike with conventional oil, shale wells peter out quickly and companies depend on constant new drilling to maintain production levels; lower prices will discourage new drilling, quickly removing the glut in crude supplies, Lesar says.

“We think there’s a lot of economic oil at $75… meaning we earn 15%, 16%, 17% returns,” Occidental (OXY) CEO Stephen Chazen said during earnings conference call last week.

Execs at several large U.S. shale producers, including CHK, EOG Resources (EOG) and Whiting Petroleum (WILL) said as they reported earnings that they plan to maintain and even raise production. Shale producers cite success in reducing costs as proof they can still be profitable at prices below $70/bbl; CHK says well costs at its two largest production areas – Pennsylvania’s Marcellus Shale and Texas’ Eagle Ford – fell 11% and 13% respectively Y/Y during the first seven months of this year.


Oil Refiners are the winners

Exxon (XOM), Chevron (CVX)’s recent earnings were boosted by refinery as oil prices slip. Both companies reported last Friday cited that 25% drop since July helped profit jump nearly fourfold.

The London-traded Brent Crude is usually higher than the WTI in US because it’s more expensive to drill and transport in Europe/Middle East.   So, the European refineries, which ship gasoline and diesel to our shores, must use the pricier Brent Crude. U.S. refiners, meanwhile, can undercut the importers whenever the gap between West Texas and Brent prices widen.

According to Citigroup, the gap may grow further.  Citigroup’s analysts expect rising U.S. output to push West Texas prices down even faster than Brent prices. What is now a $5 gap should grow to $8 next year, and $10 in 2016. The key takeaway: U.S. oil refiners will be able to produce gasoline, diesel, jet fuel and other distillates at much lower prices than their peers, setting the stage for rising domestic market share and a rise in exports.  (Btw, US government only allows refined product export but not US-produced crude oil. )

Risks to Consider: If U.S. oil producers decide to sharply cut output in the face of falling crude oil price, then the West Texas-Brent spread may narrow, which would negatively impact refinery margins.

For investors in refineries, there are 3 refineries (DK, ALDW, CVRR) on my radar. I did more in-depth research at DK while still reading earning reports for ALDW and CVRR.

1. Delek US Holding, Inc (DK)

2014-11 DK modelDK is a —Texas/Mid-Atlantic based integrated energy business with focuses: petroleum refining, distribution, logistics, and convenience store retailing. Nov 6th’s earning and revenue from Q3 both beats analysts’ estimates (link). (Disclaimer: I am long DK)

  • —IPO in 2006 on NYSE
  • —$41/share in Feb 2013,  dropped to $19 in Oct
  • —We bought at $19-20/share in 2013 Oct
  • Forward P/E: 10.89 (vs. ttm 23), P/S: 0.23, Div Yield: 1.8%
  • —Major reasons for the significant decline in early 2013:
    • —Abnormal WTI > Brent spread in early 2013
    • —Government mandatory Ethanol permit (EPA scaled it back in late 2013)
  • —Catalysts for upside:
    • Successful —Tyler expansion in Q1 2015
    • Continued expansion of El Dorado
    • Growing spread between Midland WTI and Cushing WTI
    • Reduced cost in retail store operations
  • —Current price at $32.  1-year target: $ 48/share.  Analysts at Barclays project $50 target price.

2. Alon USA Partners LP (ALDW)

ALDW is a MLP.  Forward P/E: 7.05 vs ttm: 8.28,  P/S: 0.36.

Citigroup analysts call for 37.6% EPS growth and long term growth rate at 23.9%.

What’s more impressive (if it’ll happen) is that Citigroup forecasts it will generate a $2.64 dividend payment in 2015.  That’s a 15% yield, based on current prices. Current dividend yield is 2.6% ($18.81 / share as of Nov 6th).

Citigroup’s $22 target price adds 25% potential share price appreciation to that income stream.

3. CVR Refining, LP (CVRR)

CVRR is a MLP.  Forward P/E: 7.76 vs ttm: 8.39,  P/S: 0.38, Div Yield: 8.39%.

CVRR suffered a huge setback on July 24th (link) when a fire injured four employees at their Coffeyville refinery and they were forced to shut down its 115K bbl/day production.  Coincidentally, Carl Icahn reduced his position in CVRR for $6.5 million shares on July 1st (link). Following this sales, Mr. Ichan still owns over 70% of CVRR.

CVR Refining’s profitability is directly linked to the Brent-WTI spread, which has narrowed considerably in the past few months. Recent low oil price will increase the profit margin of the partnership.

What interests me is its longer-term growth in 2015. From past history, CVRR should be able to reopen the Coffeyville refinery in Nov/Dec and turn it back to full operation in 2015. CVRR management said that they would use the downtown to re-tune, expand Coffeyville and do their yearly maintenance in order to minimize disruption of production.

Investors can also consider bigger refineries – VLO and HFC. Alon USA and CVR Refining, LP offer the prospect of double-digit annual dividend yields, albeit with a high degree of seasonality, while the larger refiners such as Valero (VLO) and HollyFrontier (HFC) appear set to offer solid dividends and ongoing share buybacks.

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In my previous blog (link) I discussed that virtualization of physical cards by Apple Pay is a huge revolution (& disruption) to incumbent payments system. I want to continue to comment on the long term impact of Apple Pay in this blog to explain why I will invest in Apple stock even at its historical high. (Disclaimer: I have no position in Apple)

Apple Pay is about customer payment experience

There has been much discussion recently (I call them noise) about the decision of two major retailers – Walmart and CVS (involves 1,000s of stores) in the US to block NFC payments from Apple Pay. I won’t go into depth here. An article from BillingView points out the key advantage of Apple Pay over CurrentC in payment experience. As Apple CEO Tim Cook said the other day;

“You are only relevant as a retailer or merchant if your customers love you“.

Apple Pay & Alipay combined will be huge in China 

So far, Apple Pay’s initial launch is limited to US only. News broke from Jack Ma (founder of Alibaba) during an interview with WSJ that Alibaba is interested and probably will form a partnership with Apple on Apple Pay (link).

Through this partnership, it’s believed that Apple can tap into Chinese payment network. In return, Apple may embed Alipay (virtual wallet by Alibaba) inside Apple Pay and Alibaba can access U.S. merchants.  Payment network is considered part of China’s national security, therefore, insiders believe that Tim Cook’s multiple visits to China is aimed at forming the trust and partnership on that end.

Other key partners I believe will be huge boosts to Apple Pay in China are JETCO and UnionPay. JETCO is the biggest network of automatic teller machines in Hong Kong and Macau while UnionPay is its counterpart in mainland China. Combined they have 20+ major Chinese banks in their networks.


Apple Pay is by far the most secure payment method 

Google lost badly to Apple. Google launched Google Wallet almost 3 years ago, selling NFC-enabled phones but it failed to gain consumers adoption and get buy-ins from major issuers and networks. One of the reasons is about security.

To be fair, both Google Wallet and Apple Pay is many times MORE secure than a plastic card. No matter what protection traditional issuers put in the physical card, you cannot prevent people to steal the card or simply copy your number, security code, & expiry date.

Being said, Apple Pay’s key differentiators over Google Wallet and other mobile payment services are:

#1 — Fingerprint sensor. It’s very difficult to fake your fingerprint. 2 years ago, there are only 3 companies in the world that could make this tiny sensor in the phone. Apple acquired AuthenTec in July 2013. Applaud to Apple’s strategic vision to internalize this technology in their phones. (read more here)

The new iPad Air and mini also have Fingerprint (Touch ID). You may would people bring a iPad to the cashier pay for coffee? My answer is no. I believe the fingerprint on the iPad is intended to enable a quicker online purchases via iPad. It will save you from entering password to iTune to complete a purchase.

#2 — Secure Element. Unlike Google Wallet’s need to store a user’s payment card data on Google’s servers, Apple has promised that no card data will actually be stored on any of its devices or servers. Apple devices will serve more as a conduit for mobile payments, receiving a tokenized Device Account Number (DAN) from payment networks that will unlock that ability for a user to pay.

This DAN is stored in the Secure Element inside iPhone 6 that requires a transaction-specific dynamic security code (known by payment network or issuers). The NFC chip inside iPhone 6 is custom made too, so it’s not easy to steal info through hacking into its NFC. Experts say Apple Pay offers the best security and privacy protection so far in the market.  (read more about Apple Pay security and expert opinion)

Samsung, Google and other competitors will try to follow or launch similar payment and fingerprint technology on their phones and wearables but I doubt the Next Big Thing is already here and harder for others to build similar ecosystem to compete with.

Why Apple at $107 Is Still A Buy?

Apple stock floating around $106 does seem pricey if you recall its $60 price tag 15 months ago. But in a longer term, Apple is still leading the revolution of smart devices, competitors are 12 months behind (in my view) and the consumer demand for Apple products are rising.

In early 2013, Forrester Research says U.S. Mobile Payments Market alone is predicted to reach $90B spent in 2017 (link). Gartner even says mobile payments to reach $617B in 2016 (link). With China/Asia included, the total spent could be over $900B. News reported that Apple gets 0.15% of each transaction spent. If that’s true, then Apple may earn an additional $200M to $1B revenue from Apple Pay in 2017.

This amount doesn’t put a dent or noticeable from Apple’s billion dollars revenue but the key is that it increase the stickiness to Apple products and consumer will be spending more time to play, purchase with Apple products online and offline.

Btw,I won’t go into detail here but there are many more reasons to invest in Apple. You shouldn’t forget the near 1.8% dividend rate, buybacks, enterprise partnership with IBM, and the support from several successful big hedge (like Dan Loeb’s) and long funds.

I made decent gains by investing in Apple at multiple price ranges: from $200 to $400, from $400 to 650. Based on the optimistic prediction I made above, I will add position in Apple around $700 (equivalent to $100 now) and intend to hold for longer term.

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Many analysts talked about disruptions to the global payment industry brought by Apple Pay (my previous blog on Apple Pay) but less coverage is about Apple SIM. Like how Apple Pay virtualizes the credit cards inside smartphone, Apple SIM eliminates the need to store a carrier-specific identification in a SIM card. It revolutionizes the way consumers shop for carrier plan and consume data across devices, and even make financial metrics (like APRU) obsolete for carriers. Incumbent industry giants should be worried about their business models and strategies in near future.

Apple SIM — 10 Times Easier to Switch Carrier Without Changing Devices

A decade ago, for international travelers, carrying multiple phones was very common in order to make calls in different countries without expensive roaming fees.  Few years later a mobile phone, which is capable of storing multiple SIM cards, was invented. It became so successful and evolved into a standard for many mobile carriers, especially those price-sensitive market in SE Asia.

What’s different now is Apple last week revealed the iPad Air 2, and along with it a new way to handle SIM cards. According to Apple, the new Apple SIM, a nano SIM card that allows the cellular models to switch between multiple mobile carriers without changing the actual card.

You no longer need to choose which carrier model when you purchase iPad Air. This new card gives iPad Air 2 owners unprecedented flexibility when it comes to choosing an LTE (4G) service provider. “Whenever you need it, you can choose the plan that works best for you — with no long-term commitment,” explained Apple. ” And when you travel, you may also be able to choose a data plan from a local carrier for the duration of your trip.”

At launch the card supports AT&T, Sprint, T-Mobile, and UK carrier EE. No word on why Verizon isn’t on the list.  Given that the iPad Air 2 supports 20 different LTE bands, similar to the iPhone 6 and 6 Plus, we can expect more international carriers will sign on.

Apple SIM creates a future problem for carriers. Current Apple SIM technology is believed to store the SIM registration in carriers’ data servers, not on the device. Apple SIM can change the paradigm of existing carrier model. Future Apple devices can allow multiple users to log into a iPad and then sign up an 1-hour carrier data plan with a specific user id. It’s similar to the way we use desktop and make connection to WiFi.


Cut the Carriers Off Mobile Payments 

The mobile carriers have seen this episode back in 2006/2007 when Apple negotiated deals with the mobile operators to launch the iPhone. It granted periods of exclusivity in exchange for having the mobile operators invest massively in things that Apple wanted to do, such as marketing, control over subsidies and even a minimum order commitments (which costed Sprint a lot). By the time the exclusivity periods ended, Apple devices were wildly popular and Apple had amassed enough bargaining power to cut even better terms with those same carriers without giving them any ability to fight back.

Seven years later, when it was time for Apple to consider payments, the carriers were completely left alone in the dark and didn’t even have a seat at the table for discussions over Apple Pay. The carrier billing, carrier-backed Isis mobile payment system, and many other efforts effectively become long-gone dream, fruitless and irrelevant.

Pay-Per-Use Becomes Standard, Hard to Retain Subscribers By Carriers

Simplifying the product line instead of shipping carrier-specific versions of iPhones and iPads seems like a huge benefit for Apple.  Although this move is limited to iPad Air 2 and the iPad Mini 3, we would expect Apple will extend this Apple SIM to other Apple products, including iPhone. In theory, you can jump between carriers based on the one that’s offering the data plan for the price you want, and you never have to swap out the SIM card to do it.

For now, it’s LTE data-only. It may evolve into voice and text also. Even it’s just data, consumers are smart enough to make calls using data connection (like WiFi or Voice-over-LTE) which skips the restrictions on number of minutes completely.
What it means is that post-paid and carrier lock-in plan will becomes history.  Pay-per-use model (usage metering) will become the future standard.   This also means the future mobile carrier competition will become more intense.  New carriers or MVNO (like Virgin Mobile) may emerge to offer very competitive plan to persuade subscribers to switch carriers.  Carriers will has less incentives to offer subsidized phone plan.
Eventually, it’ll be a competition on best quality services and lowest prices based on locations.

Multi-User on iPad >> APRU Not A Right Performance Measure 

Average Revenue Per User (APRU) is a common acronym that carriers used internally and externally reported during each earning call.  APRU is used as one of the financial measures to see  how much money spent per connection (i.e. SIM card).

However, the APRU is declining quickly because the incremental revenue added by additional user to your family plan is less than the first basic subscription plan.   The  APRU decline phenomenon proliferates when you extend to friends, co-workers in the Shared Plan world and when you purchase bundled services with voice, TV, home phone, and security together.

Since APRU decline reflects trends at a SIM connection level rather than the ‘real’ average consumer spending, some carriers introduce new measures, such as APRS (subscriber) and APRA(account) to help evaluate performance. As indicated by the GSMA chart below, APRS is increasing while APRU is declining in the USA.

In the case of Apple SIM, carriers have to allow a subscriber access their data service across multiple devices or multiple users access their data service in a single device. This makes a SIM connection no longer the accurate identification of an unique subscriber or account.

All these aforementioned changes to APRU definitions and calculations require great attention from mobile carriers. Question for carriers: how to evaluate their business performances accurately in the context of their current business and forward-looking market trends.

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September 9 2014 is the biggest day in Apple’s history — the announcement of new iPhone 6, 6 Plus, Apple Pay, Apple Watch, iOS 8, iHealth apps, and many new features and apps. People even comments the Apple Watch is the next big thing after iPhone.   If you miss it, you can watch recap here – link.

2014-09-09 iphone 6 pic


3 Important Moments For Investors

As a professional investor, I bought Apple stocks multiple times when its post-stock-split price hovered about $57-$78 a share and sold it multiple times as well after each peak. What interests me most is the supply chain impact because of Apple’s products.

Investors usually “buy the rumors (hype) and sell the news (event)”. Ahead of the big event there are those who are flashing back 2012 when Apple shares sprinted higher ahead of the release of the original iPhone 5. Apple shares peaked on almost exactly the day of the release then collapsed by almost half over the next six months. Even today the market cap of Apple is lower than those heady days (though the stock price is higher… buybacks make up the difference).

This trading pattern manifests itself in these 3 important moments from Apple (1) new iPhone announcement, (2) iPhone pre-order number news, and (3) when we receive iPhone in our hands. On the last step, companies like iFixit would normally fly to Australia to get their hands on new iPhone, tear it down (disassemble) into pieces to check which suppliers are used in the new iPhone. Speculative investors would pay to get the first hand information.

2014-09-09 iFixit iphone 5s teardown

Nowadays, leaked information flows faster than ever, many reporters had shown and written about mobile payment, health, fitness app and Apple Watch a week or even months earlier than the new iPhone announcement.  For example, 3 days before the Sept 9th official announcement, Techcrunch reported (link) that China Telecom might violate the contract to put a iPhone 6 pre-order page on their website. I guess that’s why Apple pulled China out at the last minute from the list of countries in the first launch.

2014-09-09 AAPL China telecom leak


Winners in the Supply Chain

Apple continues to demonstrate its unparalleled control of product ecosystem. Apple launched the first payment truly leveraging its hardware (NFC + Fingerprint). This is really a negative news for Square, EBAY’s PAYPAL, and other mobile payments startups.

In terms of winners, iPhone 6′ 5.5-inch optical image stabilization comes from the Japanese listed company 6770.tyo (ALPS), NFC chips are NXP Semiconductors (NXP). Both are iPhone’s new suppliers.

The stealth winner is InvenSense (INVN) which provides all the tracking software, accelerometers and gyroscopes in the iPhone 6.  The market rumor started last year from iPhone 5S but INVN was excluded in the final time trial production. This year iPhone6 ​​and Apple Watch, iPad, iPad mini will at least boost a hundred million to the INVN new shipments. INVN is also a supplier to Samsung phones that use optical image stabilization. INVN successfully breakthroughs in several markets simultaneously.

Broadcom (BRCM) draws roughly 28% of their mobile revenue from selling Wi-Fi chips and touch controllers to Apple. High chance that Apple will switch from 802.11n chip to a little bit more expensive 802.11ac chip in iPhone 6. (yet to see at tear-down)

Apple’s “A-series” chips (application processors), baseband inside iPhone 5 is done by Samsung since 2012.  It’s addictive not to think that Apple will transition to Taiwan Semiconductor (TSM) for the manufacture of its application processors. Risk is that Samsung has more mature and advanced 14-nanometer manufacturing technology (i.e. thinner/smaller). If not, TSM will gain significant share with iPhone 6

GT Advanced (GTAT) disappointed many investors that it will only supply sapphire glass display for Apple Watch but not on the 5.5 inch iPhone 6. Its share price plunged 12% on Sept 9th. The drop attributes to the fact that Watch release date is postponed until next year. Initial shipment is expected around 3M to 5M for Watch in 2015 Q1.  Also, online heated debate between Corning’s Gorilla Glass vs. GTAT’s Sapphire Glass pined down the net benefits of using sapphire (link).  IMO, GTAT sell-off is overdone especially because Apple has already invested $500M in GTAT to build 200 furnaces to produce sapphire. Even though the Apple Watch initial shipment is small and delayed, GTAT should be a “hold” given that it is a major supplier of sapphire and the volume is expected to increase due to higher demand of Watch.


Apple Watch Creates New Ecosystem

2014-09-09 AAPL iWatch

The new Apple Watch platform, the new big data is many entrepreneurs’ paradise. Once again, Apple creates a new ecosystem.  It opens up lots of possibilities, a new entry to mobile data for app developers to explore new applications among social, personal location, and healthcare. For example, emergence of Apple Watch is very positive for search service provider such as Google, Baidu (search, maps), YELP, Twitter, public comment and apps based on mobile end personal location service provider. My only concern is the battery standby time.

Apple Watch is a real threat to many emerging wearable bracelet manufacturers and to many $ 400 or higher watches manufacturers. Apple Watch appeared to prove that the era of wearable smart devices coming true. The Watch also plays the role of industry standards. Apple has ecosystem advantage that will give a two-year lead time for Apple to beat Google and Samsung.


Should You Buy Apple Stock Now?

If you own Apple stocks, you should stick with AAPL despite a potential sell-on-the-news reaction.  iPhone 6 is a big jump from iPhone 5 with its new hardware and features. Optimism around the iPhone 6 is running high given Apple’s user loyalty and installed base of more than 300 million iPhones, which could drive a big upgrade cycle. The larger screen size may also help to regain lost market share to Android.

2014-09-09 AAPL stock chart

If history hold truth, Apple stock price peaked roughly on iPhone 5 debut in 2012 and fell in the next 6-9 months. 5S and 5C launch was perceived to be a disaster. However I believe this time is different. Both iPhone 6 and Watch are big game changers. Some believe that these may bring lots of would-be Samsung fans to switch to the newest and cool stuff on the earth.

What have announced at the launch event yesterday (Sept 9th) is tracking what we expected from the leaked information. So if you haven’t bought any Apple stock, it’s wise to wait until we see the pre-order number news. If there is a lot of surprises on the upside, Apple stock price will definitely move to a new high around $120 level. You can still make a good 5-10% profit by riding the tide from current closing price of $98 .


Bonus: Interesting Fact — iPhone 6’s Impact on China GDP

Economists predict that because of iPhone 6, China’s GDP will increase by 1% this year and Taiwan’s GDP will increase by 2%. Almost 30% of the parts inside an iPhone are sourced from Taiwan suppliers and shipped it to Foxconn assembly plants in China mainland. In terms of economic $ value created by iPhone for China is about US$6-7 (net of import/export) and in Taiwan, $24-28.

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When we talk about technology stocks, most investors only think of Apple, Microsoft, or Facebook-alike. Nonetheless, there are many publicly listed green energy and recycling companies are disrupting their industry with new patented technologies. I am writing research reports about a couple of them. Here is my first company in the series:


GLYE (updated valuation 8-12-2014)

Couple month ago, a friend of mine referred me to a chemical waste recycling company called – GlyEco, Inc. (OTCBB: GLYE) . I was very skeptical at first since it’s on OTC. However, the deeper I dug into the business, the more I found this an interesting long-term value investment opportunity. The  I spent a month to meet with GLYE’s management team, board of director, industry specialists, and did a site visit at GLYE’s biggest recycling plant in Elizabeth, NJ in July.  Below is my investment research summary. Feel free to email me of any questions.

(Emphasis: this is not a recommendation to buy for short-term profit.  This company is in its expansion phase, bearing going concern and liquidity risk in the next 12 months. Its stock price is very volatile. I highly recommend you to do your own research and also watch the introduction and Q&A from RedChip Global Online CEO Conference videos – GlyEco (GLYE) — link (Jul 17), link (April 25))

(Disclaimer: I am long GLYE)

Investment Highlights

Why GLYE is a good business:

  • Input (waste glycol) is plentiful
  • Unmet demand in textile, plastic manufacturing industries (news)
  • GLYE’s patent pending technology can produce refinery-grade (virgin) recycled glycol at 40% gross margin
  • Huge opportunity for international licensing revenue (news)
  • Accomplished entrepreneur and management team with many years of thought leadership in solid waste, chemical engineering and glycol
  • One-time upgrade equipment costs are included in cost of good sales (COGS) which obscures the true cost and margin

Risks/concerns:

  • Delay in plant upgrade, personnel training, or natural disasters may cause the 2014 production volume and sales lower than expected.
  • GLYE is slowly coming out from its heavy equipment / infrastructure investment. Cash burnt is still a concern. $3.4M cash consumed in Q1 2014. $4M cash balance as of July 2014.
  • Slower A/R collections and future expansion projects or M&A may increase the need for raising additional capital via equity -> further dilute shareholders’ earnings.
  • Downward price pressure due to frequent insider selling (see Risks discussion below)

Near-term catalysts:

  • Consider the following stages of company lifecycle:
    • 2012 is Acquisitions/Roll-ups, 2013 is Upgrade Capacity, 2014: Increase Production, 2015 onward: Harvesting
    • The completed expansion will boost the Type I and Type II glycol production close to 5 million gallons in 2014.
  • Probably more announcements of major multi-national client or  partner deals in coming months.
  • As long as management can fulfill their promises on revenue growth, GLYE presents a potential 100% to 300% upside based on recent stock price.

Valuation (updated 8-12-2014):

  • We took a conservative approach in Base Case scenario: 2014 total ethylene glycol production = 2.52 gallon, blended sales price: $3.91/gallon, and a 12% gross margin.
  • All ratios calculations use numbers from the Base Case scenario.

Valuation Summary

  • For more details, please see valuation section at the bottom.
  • Credit to my intern – Ruoxi Zhao for her contribution to DCF modeling.

Company Snapshot (GLYE) 

GlyEco, Inc., founded in 2006, developed its GlyEco Technology™, a patent (provisional) pending technology that transforms hazardous waste glycols into profitable refinery-grade glycol products. Glycols are an indispensable production component in the materials we use every day, such as antifreeze in automotive, HVAC, textiles manufacturing, plastics manufacturing, medical/cosmetics use, etc.  In the USA alone, approximately 700 million gallons of waste glycol are produced each year. The vast majority of glycol recyclers can only take used antifreeze glycols and restore them to ASTM Type 2 standards.  GlyEco so far has the largest production capacity in the world to recycle various types of glycol feedstock into ASTM E1177 Type 1 standard (T1TM), a purity-level equivalent to refinery–grade glycols.

GLYE from waste to green

 source: GlyEco


Investment Thesis

1. Input is plentiful, unmet and fast-growing market demand for recycled glycol

  • More than 7 billion gallons produced & consumed in 2013.
  • The global market for ethylene glycol is growing at ~200 million gallons a year (a CAGR of over 7% from 2013 to 2018), and is expected to cross $38 billion by 2018 (source).
  • Explosive growth in polyester fiber and PET resins manufacturing (used to make clothing, plastic containers and plastic beverage bottles.), coupled with growing demand of antifreeze.
  • China consumes almost half (50%) of the glycol in the world.
  • In the USA alone, approximately 700 million gallons of waste glycol are produced each year, while 1.1 billion gallons of new glycols are used.
  • EPA estimate: only 12 % of used antifreeze waste is recycled.

2013 Waste Glycol 5 different sourcessource: GlyEco, Created by VIF

2012 Transparency Market Research - 2020 Volume of Glycol

source: Transparency Market Research — 2012-2018 Forecast for Ethylene Oxide (active ingredient for Ethylene Glycol)

2. Favorable Glycol Pricing

  • The target price range for T1TM recycled glycol is similar to refinery-grade ethylene glycol pricing.
  • According to ICIS Chemical, the benchmark average price for ethylene glycol in 2011 was approximately $5.69 per gallon, $5.4 per gallon in 2014 Q1, with a 7-year average sales price at about $5 per gallon.

gyeco-chart3

source: ICIS.com

  • Certain types of glycol (Diethanolamine, Triethanolamine) can be sold for 2 times higher than T1 Monoethylene Glycol (MEG).
  • T2 glycol sells for 15-20% less than T1 glycol. But depends on the demand shifts, the T2 sometimes can be sold higher than T1.
  • Average cost to recycle a gallon of waste antifreeze glycol is $2.8 to $3.0 (according to a CEO interview – video link)
  • This has projected 40% gross margin, a breathtaking profit margin opportunity.

3. Patent pending technology creates barrier to entry, cost reduction, and ability to produce Type 1 virgin glycol

  • Existing glycol processing centers are fragmented and small. Majority of recycling centers focus on producing Type 2 recycled glycol product (under 100% purity).
  • Large clients  often will supply waste glycol and buy recycled glycol at the same time.
  • In addition to conventional separation and filtration methods, GLYE’s proprietary technology primes on its chemical treatments to reuse waste glycol from all 5 major glycol waste streams in addition to antifreeze.
  • The technology can transform used glycol into valuable refinery-grade glycol (T1TM).
  • Streamlining the collection and transportation process also help reduce the production cost by 20-50% over conventional process.

GLYE - Production Process

source: GlyEco Company Presentation

3. Completed upgrades and expansions set to grow GLYE revenue and profits

  • GLYE successfully acquired (roll-up) 7 existing Type 2 glycol processing centers in USA over the last 2 years.
  • Capacities of these facilities have been expanded by 200% to 500%.
  • Especially company’s NJ facility is fully operated in Aug 2013 to produce Type 1 compliant recycled glycol for commercial use. (see NJ Site Visit Report below)

4.  Licensing and partnership in the huge untapped international market

  • On Aug 5 2013, GLYE announced partnership with Waste Management which GLYE will pick up waste glycol at WM landfills throughout the nation. (source).  (Great brand name effect but I suspect this is a low-margin business due to transportation and processing costs.)
  • GLYE is also exploring technology licensing opportunity in Europe where most EU countries have more environmental friendly regulations; provide subsidies and free feedstock to recycling companies.
  • GLYE recently got the approval and certification by Canadian government in several provinces to recycle glycol. Expect the first shipment of feedstock will happen in Q3.
  • According to CEO interview, they are in discussion with a Chinese textile company to license GlyEco Technology.
  • The global glycol market is almost 6 times larger than that of USA, like Europe and Asia-Pac.

Ethylene Glycol Market Share, By Geography, 2011

Ethylene-Glycol-Ethylene-Glycol-Market

source: Transparency Market Research 2012

5.  Management team has over many years of success and is very influential in the recycling industry

  • GLYE hired lab manager and independent 3rd party lab to establish a comprehensive Quality Control-Assurance Program (QCAP).
  • CTO Richard Geib, with 30 years background in glycol industry, owns the patent pending technology and served as Chairman of the ASTM Coolants Committee.
  • GLYE Founder, John Lorenz sold his company – Environmental Waste of America, Inc. to a public company which later rolled up to be Waste Management, Inc. (WM)
  • John is in his early 70s. In waste and recycling business, that’s not considered uncommon. He is a runner and still participate in triathlon.

6. True Cost of Good Sold (COGS) Will be Lower –> Better Gross Margin

In theory, GLYE can make 50% on gross margin but since it is in its expansion phase, the cost of goods sold (COGS) is skyrocketed. Its recent gross margin went down from 19.3% in 2012 to 6.3% in 2013. Because of GAAP accounting, all direct cost related to manufacturing plants, which include purchase of upgrade equipment, depreciation of equipment used, repair and maintenance, training, and process standardization.  We believe the one-time expansion expenses obscure the true COGS, including purchase, transport, store, and process raw materials.

NJ Phase 2 upgrade was completed in Q2 2014 –  revamped distillation towerGlycol distillation tower

source: NBT Equities Research

You can see from its Net Income and Operating Income quarterly trend chart below.  GLYE seems to be bottom-out in Q1 2014. Q2 and Q4 usually have higher sales due to seasonal factor. After finishing its major upgrade in NJ plant and other plants, its margin will increase going forward. On Q1 2014 earning press release, GLYE said that gross margin will convert to the historical norm.  One may guess it should be around 20-25%.

GLYE Margin - Income Trend

source: Google Finance


NJ Site Visit Report (July 1st 2014) 

In the Google Earth Picture below – Yellow circle part is the main GlyEco NJ Processing Center, located at on 534 S. Front Street, Elizabeth, NJ 07202, inside the Full Cycle Manufacturing Group facility (which is owned by a GLYE board member). NJ plant sits on 174,000 square feet property, the largest among 7 processing centers, 15 times bigger than the second largest plant in Maryland. Also, NJ plant has most of their equipment on an outdoor setting while other centers are enclosed indoor.

We couldn’t take pictures inside the plant but you can see from the Google Earth picture how the site looks like.  This Google picture is a year old, the current Phase II area already has concrete foundation finished and ready to have few more tanks for chemical treatment and storage purposes.

 GLYE NJ Plant

GLYE-NJ plant Google Earth

 source: Google Earth (S – Storage tanks, O – Finished Type 1 / 2 Glycol products, R – Rail roads, C – Chemical treatment tanks, Triangle – distillation tower.)

Several key takeaways:

  • Greeted by SVP Bus Development
  • Currently has 9 full-time employees
  • Top priority now is training, integration, quality / process standardization. Quality Control is very important
  • The new lab test engineer just started in his job for 2 weeks. Constantly testing samples every day. Plan to expand the Lab facility but will be relocated out side of this plant.
  • Approximate 25% T1 and 75% T2 production at this moment, will shift to more T1 in 2nd half
  • Current feedstock storage capacity is about 7 million gallons
  • Most input is a form of water mix, maybe 50 water / 50 used glycol (sometimes 60/40) from waste antifreeze.  So, if there’s 1 gallon of feedstock, there can produce 50-65% recycled glycol conversion rate
  • Textile / polyster producers are their major customers. This market is quite concentrated by few big guys. They also sell to glycol distributors and blenders for antifreeze.
  • Spot price for Glycol can be found on ICIS website or benchmarks from MEGlobal or SABIC.
  • Transportation: 75% from rail 25% from trucks.  Rail can haul 20,000 gallon loads or by truck in 5,000 gallon loads
  • 11 rail carts leased. Usually 4 rails carts are out collecting, rest are parked or used to transport output and wastes to disposal (furnace).
  • Farthest cities of feedstock suppliers: Chicago and Canada
  • Future plan:
    • Double the number of storage tanks
    • Double the pre-treatment/post-treatment chemical tanks
    • Maybe another distillation tower
  • They will shut down the plant for maintenance purpose for 2-3 days a month. They shut down for 3 weeks due to Sandy storm. The water level was higher than the top of the car shown below.

IMG_4045


GLYE Capitalization Structure

  • Outstanding      51.92MM (as reported)
  • Lockup                 32.2MM
  • Float                    28.8MM
  • Average Volume (3 Mon)  58.7K
  • Previous Capital Fund Raising:
    • April 2012 – $10MM equity raise (10MM shares at $1 per share with warrant at $1.50)
    • March and Sept 2013 — $8.5MM equity raised, $7.1MM alone in Sept
    • March 2014 — $1.3MM equity rise through 2.6MM shares at $0.5 per share to 2 investors
    • July 2014 — $3MM equity raised through 6.1 MM shares converted from warrants with short-term exercise price at $0.5
  • Insider Ownership: >40%
  • Institutional Ownership: <7%
    • Investors: Ventana Capital Partner (unknown %), Wynnefield Capital Management (6.47%), Geneva Investment Management (0.07%)

Major Risks:

1. Going Concern – Equity Dilution

Their cash burn is about $2 million per quarter. For major expansion projects at NJ and MN, it burnt almost $4 million cash in Q1 2014. Through July 2014, GLYE has raised $4M through private placement and warrant redemption. It is very likely GLYE will continue to raise capital in 2015 via selling more shares and dilute existing shareholders’ equity.

Q1 2014 Cash In-Out Flow

2. Anchor Price at $0.5 per Share

In July 2014, GLYE lowered the exercise price from $1.0 per share to $0.5 per share to existing warrant holders. Unless there is big positive surprise on earning, investors may consider $0.5 as an anchor and reluctant to buy more shares above $0.7 which is 25% premium to warrant’s exercise price.

3. Insider Selling

Majority 10% equity owner – Mr. Ralph Amato has sold 2.7MM shares (= 5.2% of total outstanding) with an average price of $0.48/share since Jan 2nd 2014. (source: Yahoo! Finance – link). He owned the public company which GLYE reverse merged into. This implies there will be more shareholders willing to dump their shares around $0.7 to $0.8/share, creating a ceiling on GLYE share price.

4. Unforeseen Mother Nature

During the Sandy thunder storm in 2013 as well as the pro-longed cold winter in 2014, the NJ facility construction and many other sites’ upgrade progress were significantly delayed for a month or two. Their cost of purchase was higher because they were forced to use trucks instead of rail cars on long-distance transportation. Any unforeseen natural disasters in future may affect the whole operations and earnings.


Competition

  • GLYE says there are 31-32 independent large glycol recyclers in USA but most only focus on antifreeze, lower quality glycol.
  • Key participants in the global ethylene oxide and ethylene glycol virgin market include The Dow Chemical (U.S.), SABIC (Saudi Arabia), Shell Group (The Netherlands), Formosa Plastics Group (Taiwan), Huntsman Corporation (U.S.), BASF (Germany), Sinopec (China), and Reliance Industries Ltd. (India)
  • Waste Management and Republic Services control the residential waste collection but not so much in industrial setting
  • GLYE aims at selling to industrial waste glycol producers and users. Per their press release, customer base increased 350% in 2013
  • Emerging new company – Recyctec based in Sweden. http://recyctec.se/en/.
    • It is public company but the English financial info is limited on line (we will show the comparison in valuation)
    • They also claim to have revolutionary patentable technology to recover 99% of waste glycol into sellable green products.
    • They formed a joint venture with a Chinese company Richy Ocean International Ltd. focus on glycol recycling in polyester market
    • Yet no profit
    • Maybe 2 quarters behind GLYE’s progress to build out infrastructure
  • Another existing player : EET – http://www.eetcorp.com/
    • Their website has very good description and looks like they have mature technology for antifreeze “upcycling” services
    • Don’t seem to me that they have many locations nor aims at processing glycol from other sources

Valuation

The key valuation inputs are (a) Price of Glycol, (b) Volume of Production of Type I and II Glycol, (c) Revenue Projection, (d) DCF Ratios, and (e) Industry Comparable.

Valuation Summary

In the base case scenario using DCF model, we project its glycol production to be around 3.52 gallon in 2014 which amounts to $9.8 MM revenue. In that case, the GLYE price per share would be approximately $1.27 per share, that is 67% premium above $0.76 as of Aug 4th 2014.

(a) Price of Ethylene Glycol per gallon

Assumptions on the total production volume of Type 1 and Type 2 glycol will be in a mix of 25% and 75% respectively. Type 2 sells for 20% lower of Type 1 and GLYE offers a volume discount of 20%.   The blended average price in this case is about $4.05 per gallon (see below).

Sensitivity table using Type 1 production % vs. Type 2 price discount to Type 1

2014-08 Blend Price Cal

source: VIF Capital Partners

(b) Total production level 

According to GLYE 2013 annual report, we estimate that GLYE approximately produced 1.45 gallons of glycol based on a $3.82/gallon market price.

2013 revenue to gallon produced

 

 

 

– In 2014 Q1 earning press release, even though the management says they hope to increase their NJ annual processing capacity to 10-12MM gallons by end of 2014, we take a more conservative approach.

– For a base case scenario, we assume

  • 2014 total production capacity: 5MM gallons of Type 1 and Type 2 ethylene glycol
  • Sales as % of Capacity: 33%

    – When the news says NJ has a processing capacity of 5-10MM gallons a year , it does NOT mean they will produce and sell 5-10MM a year.   Processing capacity is how many gallon of feedstock (waste glycol) can the plant take, not Production Capacity. For example, if the input is 50/50 or 65/45 water/glycol mixed antifreeze plus other toxic wastes, then the output of glycol probably will be less than 50% of the input.
    – Being said, we assume the Sales/Capacity is 33%, which means 1 gallon of feedstock will product 0.33 gallon of sell-able recycled glycol

  • 2014 total ethylene glycol production: 3.29 gallons
  • 2014 blended (Type 1 and Type 2) price per gallon: $3.91/gallon
  • Production grows 100% annual in DCF model, reaching 40 gallons in 2018
  • Gross margin at 12% in 2014, slowly improving to 25% in 2018

(c) Revenue projection

Using the above price and volume assumptions, below is our 2014-2018 revenue projection in 3 scenarios:

 

 

2014 revenue estimates2014-2018 Revenue Projection

(d) DCF Valuation 

Best Case: $2.99 (293% premium)

Base Case: $1.27 (67% premium)

Following is a snapshot of DCF in the base case scenario.

2014-2018 DCF PART 1

2013-2018 DCF PART 2

(e) Industry Comparable

We compare GLYE to 5 other waste management and recycling firms – market cap varies from 22 MM (ARCI) to 21 Billion (WM). Then, we use the average P/E, P/S, & P/B to estimate GLYE’s fair value. (assumption: GLYE’s sales per share value is based on a 5 million gallon production volume in 2014.)Competitors Comparables

Competitors Comparables p2

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