Sancon Resources Recovery (SRRY) Q3 results

Today Sancon filed their Q3 results. EPS Q3 $0.02 EPS first nine months $ 0.07

Revenue is generated by service charges and the sale of recyclable materials. Revenue for the three months period ended September 30, 2010 were $3,354,608 representing $542,691 or 19% increase compared to the sales of $2,811,917 in the same period of 2009.

The revenues in the waste service business increased from $2,188,996 for the three months period ended September 30, 2009 to $2,610,355 for the three months period ended June 30, 2010, an increase of $421,359 or 19%. The revenue in the material recycling business also increased $121,332 or 19% from $622,921 for the three months period ended September 30, 2009 to $744,253 for the three months period ended June 30, 2010. The increase in revenue in waste service is partially because of acquisition of Shanghai Sheng Rong in May 2010. Although suffering the global economic crisis, our material recycling business is getting better.

The cost of revenue is the direct cost for sale of the recycling materials. For the three months period ended September 30, 2010, the cost of revenue was $1,861,857. It was $244,336 or 15% increase as compared to the cost of sales of $1,617,521 for the three months period ended September 30, 2009. Among which, the cost of revenue in the waste service business increased $224,191 or 17% from $1,351,673 for the three months period ended September 30, 2009 to $1,575,864 for the three months period ended September 30, 2010. The increase mainly contained $224,287 of raw material expenses for our new cardboard business. Cost of revenue in the material recycling business for the three months period ended September 30, 2009 and 2010 was $265,848 and $285,993 respectively, an increase of $20,145 or 8%. The increase of cost of sales was in line with the sales.

For the three months period ended September 30, 2010 and 2009, cost of revenue was 56% and 58% of sales respectively.

The gross profit for the three months period ended September 30, 2010 was $1,492,751, representing $298,355 or 25% increase compared to $1,194,396 for the three months period ended September 30, 2009. The gross margin increased from 42% for the three months period ended September 30, 2009 to 44% for the three months period ended September 30, 2010.

Gross profit in the waste service business increased $197,168 or 24% from $837,323 for the three months period ended September 30, 2009 to $1,034,491 for the same periods in 2010. Gross profit in the material recycling business increased $101,187 or 28% from $357,073 for the three months period ended September 30, 2009 to $458,260 for the same period in 2010. The increase in revenue becomes the main reason for the growth in gross profit.

Selling, general and administrative expenses increased to $895,868 for the three months period ended September 30, 2010, from $588,521 for the three months period ended September 30, 2009, an increase of $307,347 or 52%. The SG&A expenses in the waste service business was $247,001 for the three months period ended September 30, 2009, this number increased to $436,545 for the three months period ended September 30, 2010. It increased $189,544 or 77%. The SG&A expenses in the material recycling business increased $95,224 or 30% from $315,120 for the three months period ended September 30, 2009 to $410,344 for the three months period ended September 30, 2010. The increase was mainly contained $53,303 of wages, $15,957 and $16,157 of equipment repair expenses of freight outwards. The SG&A expenses also included investor relationship expenses and option expenses which increased $22,579 or 86% from $26,400 for the three months period ended September 30, 2009 to $48,979 for the three months period ended September 30, 2010. The SG&A expenses was 27% and 21% of the revenue for the three months period ended September 30, 2010 and 2009.

Net income for the three months period ended September 30, 2010 was $546,288, compared to $504,012 for the three months period ended September 30, 2009, an increase of $42,276 or 8%. Net profit margin for the three months period ended September 30, 2010 was 16% while it was 18% for the same period in 2009.

Overview of the Company and its Operations

Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO14001 standards. Sancon currently ships more than 4,000 tons of recycled industrial and commercial waste material annually to its customers in China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as plastic, glass, cardboard, and paper before its re-entry into manufacture cycles as raw materials. Sancon also provides its full waste management services to large consumer products maker such as Pernod Ricard. The use of recycled material is both environmentally friendly and is a key part of today's competitive manufacturing process to lower costs. As China gains global manufacturing dominance and current economic crisis, Chinese manufacturers are increasingly turning to recycled materials to lower its costs, resulting tremendous demand for recycled materials import. The major customers for Sancon are Chinese manufacturers and recycled material traders which are located mainly in the Chinese provinces of Shanghai, Guangdong, Zhejiang and Fujian.

The Trend in Chinese Market
According to China National Resources Recycling Association, recyclable solid waste import to China has experienced a dramatic increase in the last 2 decades. During early 1990’s, China imported 1-2 million tons of recyclable wastes per year. By 1999, China imported 10 million tons of recyclable solid wastes per year. In 2006, China imported 37 million tons of recyclable wastes. China’s total domestic recycled volume is estimated to have reached over 1 billion tons annually.

The State Development and Reform Commission of China promotes the recycling industry with a four-pronged solution ranging from energy saving and clean production to integrated use of resources and developing environmental protection industry, to accelerate the development of the recycling economy. The concept of recycling economy is included in the 11th Five-year Plan.

The Chinese Government is emphasizing environmental policies & projects for all sectors and entities. On August 2008, China's top legislature passed a law to promote circular economy and will come into force on January 1, 2009. The aim of the law is to boost sustainable development through energy saving and reduction of pollutant discharges. At present China's environmental industry is highly fragmented and at its infancy stage.

Due to the serious environment pollution problems faced in China, the 11th Five-year plan emphasis energy saving, emission reduction and environmental protection at the highest level ever. At the end of the 11th Five-year plan, the annual production of the environmental industry will exceed 1.1 trillion RMB, of which environmental equipment spending is 120 billion RMB, environmental services is 100 billion RMB, resources recovery is 660 billion RMB, cleaning products spending is 250 billion RMB.

In the past 30 years of development, environmental production value in China increased from 0.5% of GDP to the current 1.6%. China will expedite the demonstration and promotion of technologies for energy saving and emission reduction; actively promote the development of the environmental services industry; and also intensify the financial services for the environmental industry; and tax benefit policies for the environmental industry. During the 11th Five-year period, investment for environmental protection will reach 1.4 trillion RMB. Central government financing is investing in environmental industry at annual compound growth rate of 18%. Chinese government set out policies supports 4 key areas: developing a resources recovery and recycling economy; pollution reduction and ecological protection; environment testing instruments; environmental services and the development of the environmental industry.

Sancon is uniquely position to benefits from these initiatives as an early mover in the industry and one of the few foreign companies being awarded a waste management license in China. Sancon has for the past years developed one of the largest collection and recovery network in China for commercial wastes and expects to expand into other areas of environmental services.

Sancon's Visions and Goals
The long-term objective of Sancon is to seek and develop further alternative resources recovery solutions, which will protect our environment and maximize sustainable usage for industrial waste materials. At Sancon we believe reducing the environmendal impact of manufactured products is through both professional services offered to manufacturers and commercial entities to increase recyclability of waste materials, and efficient redeployment of waste materials.

As we already mentioned in an earlier post we don't think it is possible to break an EPS 2010 figure of more than $0.10. The stock price looks cheap and could get a run up with increased government spending in the environmental industry.