cr and doing the sums

I've been thinking a little bit about all this since the recent China trial announcements, then looking back at the AGM Presentation and then again since the announcement of the CR.

If you work through it all, it could easily explain the reason for the CR and its all about a requirement for growth/demand over and above expectations.

The Nanjing production capacities, current and planned, are way underdone when one considers the potential if just the two recent China trials convert to contracts, let alone any further trials and subsequent contracts.

Here is what I calculated earlier based on info provided on the first two trials (I'm pretty sure the figures are fairly accurate - the sales figures are based on info and quantities provided by Cardia in relation to the trials):

The Nanjing trial equates to a permanent contract of around $19m per year with annual profits estimated conservatively at $4-5m.

The latest trial is 2-3 times bigger. Permanent contract estimate = $40-60m per year with annual profits conservatively $10-15m.

Now look at the second last page of the AGM showing the Nanjing plant capacity - see below:

If the Nanjing trial is converted to a contract, this equates to an annual contract of around $19m. This already exceeds current production capacities.

If the second trial converts to a contract, then together with the first trial, we are looking at annual sales of approx $60m-$80m, but compare this to the budgeted internally funded expansion of manufacturing facilities (in 2011/12) to $22m.

You can see that the internally funded expansion only takes Nanjing production to around one quarter of the capacity required if just these two trials convert to contracts.

There is also a reference in the recent quarterly report talking about the extruder expansion which the above production expansion relates to.

My conclusion on all of this is that the CR may well be triggered by the potential that these Chinese trials will turn into contracts - if this is the case, based on the info provided, it looks like there will be an urgent need to dramatically expand production well beyond the capacities of the estimates (above) from the AGM presentation...

...which case the CR could very well be private and already locked down...

...in which case, this CR is indeed a very positive signal to current and potential shareholders.

All my opinion based on my own research.

I urge anyone to please try to find holes in my figures.

I have one question based on the above deductions and perhaps someone could contact management on this:

How many extruders (or how much expansion) can the Nanjing plant cope with? It seems to me that there are more trials in the wings and if they do start converting to contracts, serious expansion might be needed.