2010 06 08 LIWA Initiation

8/6/2019 2010 06 08 LIWA Initiation

1/24SEE ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES AT THE END OF THIS REPORT

Global Hunter Securities, LLCHouston w Los Angeles w New York

Newport Beach w New Orleans w San FranciscoInstitutional Sales & Trading: (949) 274-8050

Research: (949) 274-8052www.ghsecurities.com

June 8, 2Initiation of Cover

Ch

Dmitriy Shadshapiro@ghsecurities.

(917) 239-0

Joe Giamicjgiamichael@ghsecurities.

(212) 644-8

Lihua International, Inc.(Nasdaq: LIWA)

Event: Initiating coverage with a Buy rating and $16.00 price target. Verticaintegrated manufacturer of copper alternative products.

Investment Considerations

Lihua is a small cap investment vehicle targeted at those looking for value and growth orienexposure in the Chinese market. Lihua is an opportunity for investors to benefit from the secdemand growth from increased copper consumption, with minimal commodity price risk that is typicassociated with the sector. The company is involved in the copper supply chain from recovery/recycling aspect through smelting and the production of copper rod, wire, magnetized wire copper clad aluminum (CCA) wire. Lihua has developed proprietary, patented CCA drawing capability unique pre-treatment and refining process for recycled copper, positioning them as a leader in the

copper alternatives market. CCA technology offers users the equivalent levels of electrical conductivitsolid copper wires, while incorporating only 40% as much copper, making this a low cost alternative totraditional methodology. The process is past proof of concept and initial commercialization and Lihua essentially sold out its existing CCA manufacturing capacity to several consumer electromanufacturers. On the refined copper side, LIWA is able to produce refined copper rod and wire 99.96% purity, above the government and industry standards for pure copper of 99.95%, which offerscompany a substantial cost advantage over other suppliers of pure copper products who require nemined or imported copper.

Lihuas near term growth is driven almost exclusively on an organic basis, as a result of capaexpansion; the company has added and will continue to add production capacity acrossproduct lines, eventually internalizing the entirety of its commodity rod production; which sholead to both margin expansion and earnings growth. Utilizing the funds from the recent equity offethe company is planning to quadruple its refining capacity by year-end 2011, while at the same tincreasing its copper and CCA wire production capacity by 150% and 100% respectively. As CCA copper magnet wire are increasingly being accepted as alternatives to pure copper wire in the induswe believe that the company is in the earliest stages of revenue and earnings growth as it continuecapture share in the $30 billion solid copper wire and cable industry in China.

The company has a solid balance sheet with over $75MM in net cash (on a post-raise basis) has a $20MM credit line from local banks, of which only $2.2MM is currently drawn down. Basedour assumptions, Lihua should be able to finance its future capacity expansion plans using existing con hand, without having to tap capital markets in the near-term. LIWA has also been able to consistegenerate substantial cash from operations and free cash flow, even though the company is currently inearly growth phase. The company generated $15.8MM and $8.4MM in operating cash flows in FY08 FY09 and $11MM and $3.3MM in free cash flow, respectively. As a result of LIWA s tolling based sstructure, the company holds very little inventory; in addition, most of LIWA s customers have to padelivery (with few customers receiving 30 60 day terms), which allows the company to enjoy a qcash conversion cycle of only 29 days.

As a result of the recent capital raise, difficult market conditions and negative sentiment generaby a series of short reports, shares are currently trading at depressed levels and represent onthe most attractive valuations among the US listed China universe. The companys shares curretrade at 6.5x P/E and 3.3x EV/EBITDA our FY10 estimates, significantly below the peer group s averaOn the FY 2011 basis, after the planned capacity expansion is completed, the current valuation translato approximately 4x P/E and 2x EV/EBITDA. Based on the current valuation and what we view as low

growth assumptions, LIWA is a top pick in the US China universe; offering limited downside risk givencurrent capitalization and near term earnings power that should provide significant upside.

We are initiating coverage of Lihua International with a Buy rating and a 12-18 month price tarof $16. Our $16 price target is predicated on 8x FY11 P/E and 4.9x EV/EBITDA multiples, in line withother Chinese industrial companies. In our opinion a target price of $16 is easily justified by Lihimpressive margins and profitability, robust capital expenditure plans that are expected to quadrcapacity by the end of 2011 and significant historical and forecasted growth opportunities in the domesmall diameter wire market. Lihua also has a solid balance sheet with a net cash level of over $75MMthe post-raise basis), a current ratio of 6.5x, a cash conversion cycle of only 29 days and an intecoverage ratio of 141x. In our view this is a compelling stock on both an absolute and relative value band should be a top pick with US listed China investors or more broadly with small cap investorgeneral.

Company Description: Lihua International, Inc., manufactures and sells bimetallic composite condu

cable and wire products, and refined copper products in the PRC.

2 0 0 9 2 0 10 2 0 11

Revenues

Q1 M ar $20.6 A $63.2 A N/A E

Q2 Jun $48.8 A $68.8 E N/A E

Q3 Sep $40.9 A $60.5 E N/A E

Q4 Dec $51.3 A $74.7 E N/A E

FY $161.5 A $267.2 E $597.9 E

EV / Sales 1.0 x 0 .6 x 0 .3 x

Pro Forma EPS*

Q1 M ar 0.19 A 0.28 A N/A E

Q2 Jun 0.32 A 0.32 E N/A E

Q3 Sep 0.39 A 0.27 E N/A EQ4 Dec 0.30 A 0.35 E N/A E

FY 1.34 A 1.21 E 1.99 E

P/ E 5.9 x 6 .5x 3 .9 x

EBITDA (Adjusted; see model)

Q1 M ar $5.2 A $10.6 A N/A E

Q2 Jun $8.4 A $13.3 E N/A E

Q3 Sep $8.5 A $11.3 E N/A E

Q4 Dec $9.9 A $14.6 E N/A E

FY $32.0 A $49.7 E $83.8 E

EV / EB ITD A 5.1x 3 .3 x 2 .0 x

Rating: Buy

Price Target: $16.00

Price Target M etrics: 13.2x FY2010 and 8x

FY2011 on a P/E basis and 8.3x FY 2010

and 4.9x FY2011 EV/EBITDA ba sis.

Current Price: $7.85

Diluted Shares: 30.6MM

Float: 12.9MM

Short Interest: 1.0MM

Average Daily Volume: 418k

52-w eek Range: $4.6 - $12.69

Market Cap: $240MM

Cash & Investments: $79MM

Debt: $2MM

Enterprise Value: $164MM

Net Cash/Sh: $2.50

Tangible Book Value/Sh: $2.73

PRICE CHART

ESTIM ATES - US $ (M M s except mult iples & EPS)

Pro f orma excludes amorti zation of acquisi t i on-re lated intangib les, r estructur ing

harges & stock opti ons expense

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Lihua International, Inc. (LIWA) Initiation of Coverage June 8, 2010

Global Hunter Securities, LLC Equity Research Page 2

Company Description

Lihua International, Inc. (Lihua) is one of the first China-based vertically integrated companies to produce low cost, high qualityalternatives to pure copper magnet wire and pure copper alternative products. Pure copper magnet wire possesses very highconductivity and hence serves as a fundamental building block in many components in a wide variety of motorized and electricaappliances such as dishwashers, microwaves and automobiles. Lihua's products include bimetallic copper-clad aluminum wire (CCAand pure copper products including copper wire and copper rod, which are produced from recycled scrap copper. Lihua s CCA andpure copper products are great and less costly substitutes for pure copper magnet wire.

On the CCA side, LIWA purchases its wire raw material supplies from producers which focus on cladding of copper and aluminum (i.eFushi Copperweld (FSIN, Not Rated)) and uses its patented processes and machines to draw the wire to fine and superfine diametersranging from 0.025 millimeter to 0.18 millimeter. Lihua utilizes its proprietary technology to put the CCA wires into drawing, annealingand coating processes and produce fine and super fine CCA magnet and tin plated wires. Tin plated wire is primarily used for thepurpose of transmission of audio and visual signals in different applications, while magnet wire is used in a range of motorizedappliances because of its high electrical conductivity. At the end of Q1 FY2009, the company began utilizing its proprietary recyclingand cleaning technology to recycle scrap copper to manufacture and sell low content oxygen copper cable and copper magnet wires toits existing customers. Since then, refined copper products have evolved to become the company s primary business focus and growthdriver going forward. Lihua s annual production capacity stood at 7,500 metric tons, 25,000 metric tons and 20,000 metric tons for CCAwire, copper smelting and copper wire at the end of Q1 FY2010.

The company sells its products directly to manufacturers in the consumer electronics, white goods, automotive, utilitytelecommunications and specialty cable industries, as well as to the distributors in the wire and cable industries and currently hasapproximately 330 customers. Sometimes Lihua also sells raw wire to smaller wire manufacturers for further processing. The companyis headquartered in Danyang, Jiangsu province, the heart of China s copper manufacturing industry, with satellite offices in ShandongAnhui, Zhejiang, Fujian and Guangdong. As of the end of Q1 FY2010, Lihua employed just over 300 full-time employees. Lihua sshares trade on the NASDAQ Exchange under the ticker LIWA.

Source: LIWA, GHS Research

Company Background

Plastron Acquisition Corp., which changed its name to Lihua International, Inc. in September 2008, was incorporated on January 242006, as a blank check company for the purpose of raising capital for merger, acquisition, or entering into a business combination withan operating business. Plastron s wholly owned subsidiary, Ally Profit Investments Limited, was incorporated in the British Virgin Islandson March 12, 2008. In June 2008, Ally Profit became the parent holding company of Lihua Holdings Limited, which is a companyorganized under the laws of Hong Kong and is the 100% shareholder of both Lihua Electron and Lihua Copper. Lihua Electron andLihua Copper are both limited liability companies organized under the laws of the PRC and incorporated on December 30, 1999 andAugust 31, 2007, respectively. Since inception, Lihua Electron and Lihua Copper have been under the common management, operatedon an integrated basis and controlled by Mr. Jianhua Zhu.


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Lihua Electron was primarily engaged in the production and sales of audio, video and computer plugs and sockets prior to October 302006, when it changed its business and began manufacturing and selling composite conductor wire, including CCA fine wire, CCAmagnet wire and CCA tin plated wire. Lihua Copper was primarily focused on the development of copper scrap recycling technologyhowever, beginning in March 2009 it began manufacturing and selling low oxygen content copper cable and copper magnet wire toLihua Electron s existing customers by utilizing and recycling scrap copper.

In June 2008, Magnify Wealth Enterprise Limited, a British Virgin Islands holding company and parent company and sole shareholder oAlly Profit, which was 100% owned by Mr. Chu, developed a two-phase restructuring plan. The first phase was for Lihua Holdings toacquire 100% equity in both Lihua Electron and Lihua Copper, which at the time were owned by companies controlled by Mr. Zhu (the

current CEO) and minority shareholders (Mr. Chu and Europe EDC). The second phase was for Magnify Wealth to merge into a U.Spublic reporting company, under which it acquired Ally Profit, Lihua Holdings and both PRC operating companies.

The current organizational structure of LIWA is as follows:


On October 31, 2008, the company entered into Private Placement purchase agreement (PIPE) with accredited investors for theissuance and sale of approximately 6.8MM shares of Series A Convertible Preferred Stock and Series A Warrants to purchaseadditional 1.5MM shares, for aggregate gross proceeds of approximately $15MM. Concurrently, LIWA entered into a make goodagreement with the investors, where Magnify Wealth placed 6.8MM shares into an escrow account to guarantee the achievement ofperformance thresholds of $12MM in net income and $0.50 in EPS for FY 2008 and of $18MM in GAAP net income and $0.76 in EPSfor FY 2009 (the calculation of EPS of $0.76 shall exclude up to $5MM in shares of stock issued through a public offering). Thecompany earned $11.7MM in net income in FY 2008, which amounted to 95% of the 2008 performance threshold. For that reason, theescrow shares were continued to be held in escrow pending the 2009 results. In FY 2009, Lihua reported results substantially abovethe required thresholds and hence, escrow shares were returned to Magnify Wealth.

On September 4, 2009, Lihua International announced the pricing of a public stock offering of 2.6MM shares (including the 300K sharesoffered in an over-allotment option to the underwriters) at $4.00 per share. This public offering closed successfully on September 102009, with all of over-allotment options being exercised. Concurrently with the public offering, Lihua International commenced tradingon the NASDAQ Capital Market under the symbol LIWA. This IPO was later ranked among top performing IPOs in 2009.

On April 14, 2010, LIWA closed a public offering of 4.3MM shares (including the 559K shares offered in an over-allotment option to theunderwriters) at $8.05 per share, resulting in net proceeds of about $32.5MM. The company plans to use the net proceeds from thisoffering for the construction of a new smelting facility, which should accelerate the production of refined copper products by quadruplingLIWA s annual refined copper smelting capacity. Construction of this new facility is expected to begin in Q4 FY 2010.


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Segment Description - LIWA Offers Various Pure Copper Alternatives

Lihua International is one of the first vertically integrated companies in China to develop, design, manufacture, market and sell lowcost/high quality alternatives to pure copper magnet wire, including CCA wire and recycled scrap copper wire. Copper is one of themost widely used metals in the world and copper wire is one of the primary building blocks of many components in a wide variety ofmotorized and electrical appliances such as dishwashers, microwaves and automobiles, due to its chemical, physical and aestheticproperties. Lihua specializes in the production of small diameter wire, ranging from 0.025 millimeter to 0.18 millimeter. Lihua is welknown throughout China for the superior quality of its products and has a diverse customer base (currently about 330 customers acrossChina) with no customer accounting for more than 10% of the net revenues. Lihua generates approximately 98% of its total revenue

from Chinese market, while the remaining 2% come from exports to approximately 20 countries through distributors.

Lihua International currently operates through two PRC subsidiaries, Lihua Electron and Lihua Copper. Prior to 2009, the company wasprimarily focused on CCA wire products through Lihua Electron, whereby it would acquire CCA wire with a 2.05mm diameter as a rawmaterial from its suppliers and process it to reduce the diameter to a range of 0.025mm to 0.18mm, depending on customespecifications. It is important to point out that LIWA is not involved in CCA cladding; instead, it buys CCA products from FushCopperweld and other suppliers, whose primary focus is on the cladding of copper and aluminum and copper and steel. The process ofreducing the diameter of the CCA wire is very complex, since the wire must maintain its 10% copper outside / 90% aluminum insidecomposition even at diameters close to the size of a human hair and hence, it involves many proprietary technologies and tradesecrets, including specific temperatures, oils and molding requirements. Lihua designs its own machines, which the company smanagement believes to be the most efficient and fastest in the current marketplace. In order to meet customer demand, Lihuaexpanded CCA capacity from 2,200 tons per year in 2006 to 7,500 tons per year as of the end of 2009. During the past four yearsLihua s sales of CCA wire were 2,009 tons (FY06), 4,065 tons (FY07), 5,966 tons (FY08) and 6,081 tons (FY09). So far, during the firsquarter of FY10, LIWA sold 1,452 tons of CCA wire. The company is in the process of expanding its CCA operating capacity further to10,000 tons per year by the year end 2010 by adding four new production lines, of which 6,000 tons will be CCA magnet wire and 4,000tons will be CCA fine wire and further to 15,000 by the year end 2011. Currently, Lihua Electron is one of the leading manufacturers osmall diameter bimetallic composite conductor wire and its products include CCA fine wire, CCA magnet wire and CCA tin plated wire.Lihua Electron sells its products directly to the distributors in the wire and cable industries, as well as to the manufacturers in theconsumer electronics, white goods, automotive, utility, telecommunications and specialty cable industries.

In 1Q FY09, Lihua launched production in its new plant, which occupies about 66,000 sq. meters and is 6x bigger than the old plant,and began manufacturing copper rod from recycled scrap copper through its other operational subsidiary, Lihua Copper. Lihua Coppeprocesses refined copper rods into copper wires, including copper fine and super fine wire, copper magnet wire and copper tin platedwire, and sells it directly to end customers. The pure copper market, which CCA is trying to cannibalize, is much larger and proven thanthe CCA market and therefore, as of Q1 FY10, 79% of Lihua s revenues come from the pure copper after it was recycled using Lihuasproprietary cleaning process. However, Lihua s copper wire production capacity is currently limited as compared to the copper rodoutput; the company sells the excess rod to smaller copper wire manufacturers for further processing. The company realizessignificantly higher margins from copper wire as compared to copper rod and hence, Lihua is currently in the process of expanding itscopper wire production capacity. As of March 31, 2010, the company had a total copper scrap refining capacity of 25,000 tons and

copper wire capacity of 20,000 tons per year. During FY09, Lihua sold 9,272 tons of copper wire and 9,630 tons of copper rod, whileduring the first quarter of FY10 the company sold 3,196 tons of copper wire and 2,997 tons of copper rod. Lihua plans to raise itscopper wire capacity to 25,000 tons by the end of 2Q FY10 by adding four new production lines, in line with its existing copper refinerycapacity, to benefit from selling more higher-margin products. Of that capacity, 15,000 tons will be copper magnet wire and theremaining 10,000 tons will be copper fine wire.


CCA wire ,$41.1

Copperrods,$52.1

Refinedcopperwire,$68.3

Revenue Breakup FY2009

CCA wire ,6,081 tons

Copper rod,9,630 tons

Refinedcopper wire,

9,272 tons

Total Tons Sold in FY2009


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Going forward, refined copper is expected to become the company s primary focus. LIWA plans to use the net proceeds from the recenequity raise to complete a land purchase for the construction of a new smelting facility in Q4 FY10. The facility is expected to come online by year end 2011 and should add 75,000 tons of annual smelting capacity, bringing the total to 100,000 tons. The company alsoplans to further increase its copper wire production capacity to 50,000 tons by year end 2011 and to work on broadening its productportfolio.

LIWAs Manufacturing Process

Lihua s copper recycling process is divided into several phases. The first phase is pre-treatment, which utilizes Lihua s proprietary

cleaning technology, for which the company has filed for an invention patent. The process involves sorting, stripping, shredding andmagnetically separating the scrap copper, which is then compacted and pre-treated with a number of chemicals. During the next phasethe metal is smelted and fire refined in a furnace, which involves loading the furnace with the pre-treated metal, smelting it, and thenrefining and reducing it. The molten copper is then continually belt cast and treated further. Finally, the copper rod is wound intobundles for further processing or sale.

The next step involves wire drawing into a fine and superfine wire. This process utilizes either recycled copper rod or CCA and entailsdrawing the wire to the desired final diameter. The drawing process occurs in multiple steps, including heat treating, annealing, bakingcooling, quenching and spooling to achieve the desired wire diameter according to customer specifications. The process is similar foboth, recycled copper rod and CCA; however, the CCA drawing process is somewhat more complex and employs Lihua s proprietarytrade secrets to ensure that the wire maintains the original bimetallic bond from the raw material. The fine or superfine wire is theneither sold to end customers or is coated and further processed to become magnet wire or plated to become tin plated wire.


LIWAs Products

Lihua is positioned to capitalize on the fact that CCA wire and copper magnet wire are low cost / high quality alternatives to pure copperwire which exhibit the same properties as pure copper wire. The company s products include:

Copper Clad Aluminum (CCA)

Copper clad aluminum wire is an electrical conductor consisting of an outer sleeve of copper that is metallurgically bonded to a solidaluminum core and can be used in various electrical applications as a low cost alternative to pure copper wire. Bimetallic materials havebeen in existence for a long time, but until recently they were not widely used because of higher production costs (CCA wire has a highfabrication cost because the cladding process is more complex compared to conventional wire-drawing) and historically low coppeprices. However, as a result of the copper price increasing in recent years, companies have started to use CCA bimetallic materials asan alternative to pure copper. Raw materials for CCA wire are usually 35% - 40% cheaper per ton vs. solid copper wire. Raw materialsfor CCA wire, as well as pure copper, are purchased based on weight and since aluminum, which is a cheaper metal, contributesapproximately 85% to overall volume of CCA wire, each ton of CCA wire can yield approximately 2.7x the length of each ton of purecopper wire. In addition to lower cost, CCA has other advantages vs. pure copper and pure aluminum: it is lighter than pure copper


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wire, has higher conductivity and strength than pure aluminum wire, has better solderability, due to the lack of an oxide layer, andsuperior corrosion resistance than aluminum. In light of these advantages, CCA has become a popular alternative to pure copper wireover the past five years in the PRC.

CCA Wire Illustration


Lihua manufactures CCA wire with the line diameter ranging from 0.025 mm to 0.18 mm, as per customer specifications, and can varybased on both, the thickness of copper layer on the aluminum core and the diameter of the CCA wire. The company is primarilyinvolved in production of:

Raw wire raw material for CCA magnet wire and CCA tin plated wire; sold to small manufacturers for further processing

Magnet wire basic building block of motorized appliances mainly used for its electrical conductivity; can be both fine and

super fine

Tin plated wire mainly used for the transmission of audio and visual signals

Copper Rod and Cable

In March 2009, Lihua began manufacturing copper rod using its recently acquired continuous production system for fire refining, meltingand rod casting. The Company buys scrap copper and uses it as the raw material to manufacture and sell copper rods. In addition,Lihua uses copper rods to produce cable and copper magnet wire. Copper cable is used for telephone drop wire and conductors;electric utilities, transmission lines, grid wire, fence and structured grounds; industrial drop wire, magnet wire, battery cables,automotive wiring harnesses; and for radio frequency shielding in electronics.


Magnet Wire

Magnet wire is an insulated copper or aluminum electrical conductor used in motors, transformers and other electromagnetic equipment

and is considered a sub category in the cable and wire industry. When wound into a coil and energized, magnet wire creates anelectromagnetic field, which is used for energy generation and transformation. As a result of these properties, magnet wire isconsidered a basic building block of a number of motorized appliances, including electronic motors, transformers, water pumps andautomobile meters. It is used in many different industries, including automobiles, industrial machinery, residential and commerciaheating, ventilating, air conditioning and refrigeration (HVACR), computers, phones and other industrial, commercial, and residentiaindustries


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Market / Industry Overview

Global Cable and Wire Market

China is the world s largest cable and wire producer and it has held this industry leading position since 2003, according to theInternational Cablemakers Federation.

Source: International Cablemakers Federation, 2009

China Magnet Wire Market

Magnet wire is an insulated copper or aluminum electrical conductor and it is considered a sub-category of the overall cable and wireindustry. Magnet wire is used in motors, transformers and other electromagnetic equipment for a number of purposes, including energygeneration and transformation. When magnet wire is wound into a coil and energized, it creates an electromagnetic field, due to whichmagnet wire has become a basic building block of many motorized appliances, including automobiles, industrial machinery, residentiaand commercial HVACR systems, computers, cell phones and other white goods.

Global consumption of magnet wire stood above $10Bil in 2006, with China having the largest demand for magnet wire in the world,according to Gobi International. The growth in China s magnet wire market has significantly outpaced the global market, with China sdemand for magnet wire growing at a 17% CAGR from 2000 to 2005, compared to only a 3% CAGR of global demand, according toBeijing Kaiboxin Enterprise Consulting Company. In 2005, China accounted for about 29% of the global market, which is expected to

increase to 48% of the global market share by 2015, primarily due to strong expected growth in the IT sector. Please see the chartsbelow for the breakdown of China s total magnet wire demand by sector in 2005 (left) and historical and projected growth by secto(right).

Source: Kaiboxin, 2007

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China cable production

China copper wi re output Global market share

Homeappliance,

18%

IT, 29%

Electricmotor,53%

Segment demand in 2005

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Historical and projected sub-sector demand growth

2000-2005 2005-2015


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Copper Consumption and Production -- Industry Overview

Copper is the third mostly consumed metal in the world, following iron and aluminum, primarily due to its specific chemical, physical andaesthetic properties, which makes it very useful for numerous applications including electronics, communications, constructiontransportation and industrial equipment. Copper s main commercial use stems from its electrical conductivity, which is second only tosilver, with almost 75% of copper s total consumption being employed for electrical uses, including power transmission and generationbuilding wiring, telecommunication, and electrical and electronic products. Building construction is the largest market for copperfollowed by electronics and electronic products, transportation, industrial machinery, and consumer and general products, according tothe company estimates.

Copper is well known as the red metal and equally well accepted as a green metal. The green nature of copper is explained by itsdurability and ease of re-melting and re-refining. Copper maintains its electrical conductivity and generally does not deteriorate ocorrode over time, which is why it is often used in products designed to last a lifetime, or longer. Moreover, the durability of copper ishigher than most other metals, such as steel and aluminum, which translates into lower scrap recycling rate (the ratio of old scrapconsumption to total consumption) of copper as compared to steel, aluminum and plastics. The main reason for the higher scraprecycling ratio of steel, aluminum and plastic is that those materials are often used as packaging products and therefore, have alifecycle of only a few weeks and may be recycled several times a year; while copper-based products have very long usable lives. Thislimits the supply of copper scrap to be used for recycling, leading to a severe supply crunch.

Worldwide copper consumption grew by a CAGR of 3.7%, from 14.9MM tons in 2001 to 18.5MM tons in 2007, according toInternational Copper Study Group (ICSG), with China accounting for the highest copper consumption. In 2006, China was responsiblefor 22% of worldwide copper consumption for that year, followed by US with 14% and Germany and Japan with 7% each. In 2008China consumed approximately 7.9MM metric tons of copper, or about $56Bil based on recent copper pricing. Although China is one ofthe largest countries in terms of production as well as proven copper reserves, it has to import substantial quantities of copper to satisfydomestic demand. The last year s strong copper demand in China was one of the prime reasons cited for the rally in copper prices.

China consumed 627K more tons of refined copper than it produced from primary sources in 2006, according to ICSG; with the shortfalbeing filled by recycled scrap copper and copper imports (imports are substantially more expensive due to freight costs). As theChinese economy is expected to continue to grow at a healthy pace over the foreseeable future, partially due to Chinas RMB 4Tristimulus package and the ongoing urbanization process, demand for copper is likely to remain strong.

Source: Copper Development Association Inc., 2008 and KGS research

Copper Price Volatility

The last year s rally in copper prices has been fueled by higher growth in demand from China, limited stocks and supply problemswhile investors seeking short-term gains have further added to price volatility. Although copper prices started declining from September2008, copper prices during the first 3 quarters of 2008 remained at or near record high levels. Copper prices at London Metal ExchangeLtd. (LME) reached an all time high of $4.08 per pound in April 2008 and averaged $3.61 per pound for the 9M 2008. Global commodityexchange inventories, which were at the low levels in beginning of 2008, experienced a further slump over the next 3 quarters of 2008.

Despite various expansion initiatives in mine capacity by copper miners, global copper mine production for the 2008 was slightly lowethan the 2007 production figures. This was attributable to several factors, including labor unrest, lower ore grades, rapidly escalatingproduction costs, technical problems and utility and equipment shortages. From October 2008 onwards, copper prices have starteddeclining, primarily due to the onset of the global financial crisis, with copper prices on the LME plummeting below $1.50 per poundThe demand for copper began picking up in 2009 and continued to grow in the 1H 2010, significantly driven by the surge of demand

worldwide copper consumption

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Production


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coming from China, which translated to rising copper prices to over $3.50 per pound in April 2010. We believe that demand from Chinawill continue to be robust in the upcoming years, which may result in a continually high copper prices over the next couple of quarters.

Source: InfoMine.com, GHS research

The limited supply and growing Chinese demand for copper, as well as the recent copper price volatility, has contributed to thecontinued search for cost effective alternatives to pure copper. Manufacturers in the cable and wire industry have begun adoptingalternative technologies, including the use of scrap copper, cheaper metal aluminum and bimetallic composite wires.

Scrap Copper

The secondary copper recovery process is comprised of pyro-metallurgical processes, which are divided into four separate operations

scrap pre-treatment, smelting, alloying, and casting. Pre-treatment is the cleaning and consolidation of scrap in preparation for smeltingsmelting is the heating and treating the scrap for separation and purification of specific metals; alloying is the addition of other metals tocopper in order to obtain specific qualities; and casting is the pouring of molten metal into moulds of different shapes.

Secondary refined copper accounted for approximately 15.2% of refined copper production in 2007, according to ICSG, with a pricespread between them reflecting the profit for the recycling process. This spread fluctuates in relation to the movement of copper pricesas well as scrap consumption, which is illustrated in the charts below, but has historically averaged at about $1,000 per ton.


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China has significantly increased its refining capacity in recent years and in order to meet rising demand it has increased imports of raw

materials, including scrap copper. China s import of scrap copper increased from 2.5MM tons in 2000 to 5.58MM tons in 2007according to China Metals Information Network. The import of scrap copper was also supported by the PRC s government, which hasestablished industrial policies to encourage the use of scrap copper and has removed the import duty on scrap copper beginning in2007.

Copper Replacement Market

In light of strong copper demand coupled with significant volatility in copper prices, Chinese companies realized the potential marketopportunity for the production of CCA wire as a replacement to pure copper wire. These companies have installed additionamanufacturing capacity for the production of CCA wire, which has made China the leading global supplier in the CCA market. Manyindustry players in the PRC have also gotten involved in the secondary refining process, due to the copper price uncertainty in thefuture. The copper replacement industry is still in a very early stage with a limited production capacity.

Based on data provided by the London Metal Exchange, the average annual price of copper has increased by over 300% between2002 and 2007. During this same period, the price of aluminum has increased by less than 150%. CCA wire costs about half the priceof pure copper cables and can be a great alternative to the expensive pure copper. This price difference has made bimetallic wires,especially CCA wires that contain an aluminum core, an inexpensive alternative. Moreover, bimetallic wires also offer greater value toend-users compared to traditional copper wires by weighing less while retaining the corrosion resistance and electrical conductivity ofpure copper wires.

Chinese economy has grown at a CAGR of 11% from 1996 through 2007 and domestic demand for and consumption of copper andCCA products has increased substantially as a result of this growth. We anticipate that Chinese economy will continue to show ahealthy growth in the upcoming years and hence, so should the copper and CCA markets. In addition, China s four trillion RMB stimuluspackage should continue to feed the rate of copper demand through ongoing and accelerating housing and infrastructure investments.

Government Regulation and Support

Cable and wire industries are heavily regulated by the government in the PRC. The government has established numerous laws andregulations on the company s manufacturing operations relating to human health, safety and the environment. These laws specifically

address matters like wastewater discharge, air quality and exhaust fumes, generation, handling, storage, treatment, disposal andtransportation of solid and hazardous wastes and releases of hazardous substances into the environment, as well as noise levelsgenerated by the manufacturing operation, among others. Companies operating in this industry have to implement a comprehensive seof environmental protection measures and make periodic capital investments in order to keep those measures up to date.

Since China consumes more copper than it can produce, the government is a strong supporter of the import of scrap copper, which ischeaper than pure copper. The government has established industrial policies to encourage the use of scrap copper and has removedthe import duty on scrap copper, which historically stood at 1.5%, beginning in 2007. China s 11

thFive-Year Plan also encourages the

use of scrap metals to help ease the shortfall in supplies and set the target consumption of secondary copper at 35% of total nationalcopper consumption.


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Company Analysis

LIWA is Poised to Capture Additional Market Share

Copper prices have fluctuated significantly in recent years, growing to a high of $8,730 per ton in April 2008. In light of this fluctuationand uncertainty in the copper price, many Chinese companies realized the need to search for replacement products in order to reducetheir dependence on copper wire. Additionally, many industry players in China have moved to get involved with the scrap copper andsecondary refining processes. China is anticipated to maintain its rapid growth in the upcoming years, which should continue to drivethe demand for copper consumption and hence, should contribute to the adoption of less costly alternatives to pure copper, such as

bimetallic composite conductor wire or copper products produced from recycled coppers. These trends have presented a unique markeopportunity to Lihua, since the company is one of the innovators in both movements and is well positioned to capture additional marketshare in the magnet wire industry. CCA and recycled copper wire are increasingly being accepted as alternatives to pure copper wireIn addition, China s government policies support the development of copper replacement products due to China s status as a neimporter of copper.

Lihua, with its current annual CCA fine and superfine wire production capacity of 7,500 tons (which is expected to increase to 10,000tons by year end), is one of the leading CCA wire producers in China. The company was also one of the first to produce CCA superfinewire on a commercial scale in China. This early-mover advantage, coupled with the reputation for high quality products, has allowedLihua to establish a broad customer base of about 330 customers across China, including large, publicly traded conglomerates, as welas to establish strong supplier relationships.

The copper replacement industry is still in an early stage of development with a limited production capacity. As market awareness anddemand for copper replacement products grows, the demand for Lihua s products should grow as well. Beginning in Q1 2009, LIWAhas entered the market as a low cost provider of pure copper products in order to capitalize on the large demand for copper in China. Indoing so, the company has expanded its product offering by launching production of wire and rod manufactured from refined scrapcopper and is currently in the process of developing a super-micro-fine wire production technology, as well as copper foil to be used inthe semi-conductor industry. Based on its proprietary recycling and refining technology, which allows the company to producesustainable materials with 99.96% purity (above the government and industry standards for pure copper of 99.95%), Lihua is able tosustain a substantial cost advantage over other suppliers of pure copper products who require newly-mined or imported copper. Webelieve that Lihua is well positioned to leverage its growing production capacity and innovative technologies to expand existingcustomer base and product portfolio, in order to meet China s growing demand for pure copper alternatives.

Shifting Product Mix Towards Refined Copper

During Q1 FY2009, Lihua decided to enter a much larger pure copper market and began manufacturing copper rod and wire fromrecycled scrap copper. Since then, refined copper products have evolved to become the company s primary business focus and growthdriver. Growth in FY2009 was primarily attributable to the contribution from the new recycled copper segment, which accounted for

almost 75% of revenues in 2009 and continued to grow to ~80% of both revenues and production volume in Q1 FY2010.



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Lihua s annual copper production capacity increased substantially from the segment s inception. At the end of Q1 2010, annuaproduction capacity for copper refining and copper wire stood at 25,000 tons and 20,000 tons, respectively, up from 20,000 tons and6,000 tons only a year ago. Going forward, refined copper products are expected to become an even bigger portion of total revenuessince the company plans to continue to expand its copper manufacturing capacity to address the growing demand. Lihua plans to raiseits copper wire capacity in line with its existing copper refinery capacity by the end of 2Q FY10. LIWA also plans to use the netproceeds from the recent equity raise to build a new smelting facility, which should come on line by year end 2011 and should add75,000 tons of annual smelting capacity, bringing the total to 100,000 tons. The company also plans to further increase its copper wireproduction capacity to 50,000 tons by year end 2011.

Some of the main reasons why Lihua decided to focus its expansion plans on the refined copper instead of CCA include: a) much largeroverall end market, b) much faster return on capital and cash conversion cycle (which includes ordering raw materials, production andcredit terms) for copper products of about 20 days vs. 50 60 days for CCA products; c) dependence on specific CCA suppliers likeFushi Copperweld for inventories, while scrap copper is readily available from multiple sources. Even though refined copper productshave a substantially lower gross margin compared to CCA products, we believe that this approach should allow LIWA to more rapidlycapture additional market share and grow its top and bottom lines.


Ability to Pass-Through Raw Material Costs Shields LIWA from Commodity Fluctuations

Lihua prices its end products, both copper and CCA wire, based on the underlying market price for raw materials plus a fixed mark-up(tolling basis). This mark-up translates to a gross profit for the company, which effectively protects the company from the fluctuations inthe commodity pricing. The price of the primary raw materials fluctuates daily, in parallel with the copper prices. Copper trading pricesare published twice a day on the Shanghai Changjiang Commodity Market, one of the major metal trading markets in China, with pricesfor Lihua s raw materials and finished products mirroring these movements. Despite this movement in raw materials and finished goodsprices, the mark-up that Lihua charges has remained relatively unchanged in the absolute dollar terms in the past three years. Toprotect itself from the copper commodity risk exposure, Lihua maintains minimal raw material inventory. The company places rawmaterial purchase order with suppliers only after it receives relevant sales order of final product from its customers. To accomplish this,

Lihua has tie-ups with multiple long-term and reliable suppliers, which ensures an uninterrupted raw material supply for the company soperations. As per the agreement, suppliers reserve relevant portion of their CCA and scrap copper inventories to meet Lihua srequirement. Over the years, Lihua has built a large network of reliable suppliers that deliver high quality raw materials.

Strong Emphasis on R&D Accelerates New Product Introduction

Lihua s reputation for producing high quality products in large quantities was one of the major reasons for the company s leadingindustry position and expanding customer base. Lihua employs an in-house R&D team which is responsible for developingtechnological improvements to the company s manufacturing and production processes that have resulted in improved operationaefficiency and reduced production costs. Lihua has already received one utility model patent for its manufacturing process and hasthree other patents related to its production processes pending. In addition, the company has entered into technology cooperationagreements with the China Jiangsu University to develop new techniques and processes. Lihua s trade secrets, combined with itsproprietary technologies in recycling, drawing and enameling processes, enabled the company to use the lower-cost recycled copper asa raw material and to produce wire with a smaller line diameter. We believe that LIWA s strong R&D team and emphasis on

technological innovations are some of the key reasons that the company was able to become one of the earliest and leading CCA andrefined copper manufacturers in China.

Lihua s R&D team consists of over 30 professionals focusing on quality assurance, equipment maintenance, process maintenance andimprovement, and new product and process R&D. This team was responsible for developing Lihua s superfine copper wiremanufacturing technology and is currently working on developing a super-micro-fine CCA wire with line diameter below 0.025millimeters, which is used for cell phones, micro-electronic motors, micro-transformers, relays and audiphones and is currently in thelaboratory testing phase. Another new product that is currently in the R&D phase is a copper foil, which the company is going to use toenter the semi-conductor industry once it is completed. Majority of the development technology related expenses get absorbed intoCOGS and hence, the company reports very low R&D expenses. The actual amount of technology development related expensesincurred by Lihua is greater than most of its China-based competitors, according to the company.

CCA Refined Copper

Gross Margin High Lower

Cash Convers ion Cycle 50 - 60 days ~20 days

ROIC Slower Fast

Market Size Small but growing Very large

Commodity Risk No No


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Rigorous Quality Control

In order to assure high quality of its products, Lihua imposes rigorous quality control standards at each stage of the production process.Its CCA plant has been ISO9001:2000 certified since January 2007, while the company obtained a National Industrial ProductionLicense for copper magnet wire in January 2009 and satisfied the UL certification standard in October 2008. Additionally, recycledcopper rod produced by Lihua satisfied the national standard for electrical copper wire, according to a test report by China s MachineryIndustry Quality Supervision and Test Center for Electrical Material and Special Wire and Cable, a government inspection and testingagency, dated April 17, 2008. The company was also the recipient of China High Quality Growth Enterprise Award in both 2008 and

2009. We believe that LIWA s close attention to quality control provides the company with a competitive advantage over the majority odomestic competitors and safeguards the company in case Chinese government decides to implement stricter quality standards in thefuture.

Natural Barriers to Entry Provide Competitive Advantages

China s bimetallic and refined copper magnet wire industry is still in the early phase of its life cycle and can be characterized by rapidgrowth and a concentration of manufacturers. The industry, due to its significant capital and technology requirements, poses significanbarriers to entry for newcomers. We believe that Lihua now enjoys competitive advantages in the space due to its first-mover andindustry leader status. Lihua is an approved vendor for many of its clients, while qualifying as a reliable vendor could be difficult andtime consuming for new entrants. Additionally, Lihua s experience and proprietary technology allow it to offer cost-effective productsthat are superior to most of its competitors, which would not be easy to achieve for any new entrants. Specifically, it is difficult tomaintain high quality during the drawing, annealing and coating CCA wires, especially finer diameters, or to develop recyclingtechnology to produce copper magnet wire of a high enough quality to serve as a substitute to pure copper wire. Therefore, we believethat Lihua was able to differentiate itself from its current competitors and potential new entrants by being an early mover in the industryoffering superior product quality, competitive pricing and timely delivery.

Diversified Customer & Supplier Base

In light of its high quality and cost competitive products, Lihua was able to build a broad customer base of about 330 customers,including some very large Chinese and multi-national companies, with no single customer accounting for more than 10% of sales. Thisrepresents a 65% growth from 200 customers at the end of FY2008. Lihua sells its products in China directly to manufacturers in a widevariety of industries, including consumer electronics, white goods, automotive, utility, telecommunications and specialty cableindustries, as well as through distributors in the wire and cable industries. In FY07, FY08 and FY09, Lihua s largest customer accountedfor 3.0%, 6.6% and 1.6% of total sales, respectively, while five largest customers accounted for 14.5%, 20.2% and 6.9% of total sales.Lihua usually collects cash payments on delivery and only extends credit from 30 to 60 days to very large and established customerswith good credit history. Lihua currently targets the coastal provinces of Guangdong, Fujian, Zhejiang, Jiangsu and Shanghai, while

maintaining 9 sales offices in China. The company also began exporting some of its products to Brazil, India, Pakistan and Vietnamsince 2008. International exports have contributed less than 5% to the company s total sales so far. Going forward, Lihua intends tostrengthen existing relationships while expanding customer base by increasing sales personnel and using customer feedback toimprove its service quality. The company also plans to leverage its strong industry reputation and existing customer network to expandgeographically into other strategic locations across China.

Lihua maintains long-term relationships with its key suppliers, which offers the company a competitive advantage in China. Many of itssuppliers prefer to deal with Lihua over its competitors due to Lihua s ability to purchase large quantities of raw materials, as well as itsestablished track record for prompt payments. Lihua s largest supplier of CCA provides ~30% of CCA raw materials, but Lihua hasestablished a large network of reliable suppliers who have demonstrated sufficient quality control and reliability and therefore, does notdepend on any single supplier. For the scrap copper refinery, Lihua usually purchases raw materials from dealers and the scrap metalmarket, and has recently established a scrap copper raw material warehouse. Lihua purchases scrap copper using cash-on-deliveryterms and believes that it has access to a sufficient supply of scrap copper due to the large number of dealers located in Guangdongprovince. Lihua plans to broaden existing relationships and further diversify supplier network to accommodate anticipated growth in itsproduction facilities while leveraging its purchasing power to obtain favorable price and delivery terms.

Expanding Capacity to Meet Growing Customer Demand

To meet strong demand for its products, Lihua has increased its CCA production capacity from 2,200 tons in FY06 to 7,500 tons as ofthe end of Q1 FY10. In addition to its CCA business, Lihua opened a new plant and began producing copper rod and copper wire fromrecycled scrap copper beginning in Q1 FY09. As of the end of Q1 FY10, Lihua s production capacity for copper rod and copper wirestood at 25,000 tons and 20,000 tons, respectively. Please see the table below for the historical development of Lihua s productionfacilities up to now:


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In light of the fact that Lihua s production lines have been running at full capacity for several years and in order to increase its markeshare in the alternatives to pure copper space, Lihua plans to continue to expand its production capacity in the future. The company isin the process of increasing its CCA capacity further to 10,000 tons by the end of this fiscal year and expects to raise it to 15,000 tonsper year by the end of 2011. Lihua is also currently working to expand its copper wire production capacity in order to be able to convergreater percentage of the copper rod it produces into the copper wire, which carries a significantly higher profit margin. The companyplans to increase its copper wire production to 25,000 tons by the end of Q2 FY10, in line with its existing copper refinery capacity. Bythe end of FY11, the company plans to construct a new plant, which is expected to increase Lihua s annual copper smelting capacity to100,000 tons and copper wire capacity to 50,000 tons. Please see below for the details of the future capacity ramp up:


As Lihua accelerates its expansion, it plans to invest in maintaining existing machines, as well as adding manufacturing equipment inthe new facility. In addition, Lihua plans to concentrate on expanding its profit margins by enhancing equipment management,optimizing processes and product structures, improving supplier systems and cutting production costs.

Significant Short Interest and a Flawed Short Argument

As of June 4th

there were slightly more than 1MM shares of LIWA short, as reported by www.shortsqueeze.com. This accounts foroughly 3.5% of the total outstanding shares, and backing out management and insiders ownership this is 8% of the approximate floatWe view this, on an aggregated basis, as a significant position and believe that the rationale behind it is two-fold: first, some of theposition could reflect positioning around the recent capital raise - shares were meaningfully impacted during the marketing processsecond, there have been a series of negative articles written by different authors, with disclosed short positions, which have beenposted on seekingalpha.com and whose content has been republished in Barons. While we do not intend to address the assertions ona point by point basis we will say that the issues raised largely tie back, initially, to a factually incorrect thesis that did not account for theincremental capacity additions and the impact from the build out of the recycling business. The secondary argument relates toinconsistencies between LIWA's SEC filings and supposed 2009 filings with China State Administration for Industry and Commerce(SAIC) which is a business registration bureau rather than a tax authority. This argument is supported by factually incorrect documentsprovided by a 3

rdparty, which were attained and the subsequent article published, prior to LIWA having filed its 2009 results with SAIC

These documents in a vacuum would certainly raise questions, had they been verified as the actual filing and if the documents had notstipulates clearly that the facts provided should not be relied upon. It is our opinion that both authors have raised valid questions, butthat these are questions that are raised on a superficial examination of the business and its filings and had either author more

aggressively sought the answers or been more objective in their approach - having pre-existing disclosed short positions, these articleslikely would not have been written or have contributed to created this overhang.

Strong Historical Growth

Lihua was able to demonstrate considerable growth in the last few years. The company s top line has grown by a CAGR of 117.5%from $15.7MM in FY06 to $161.5MM in FY09, while its bottom line grew by a CAGR of 78.5% from $4.5MM in FY06 to $25.6MM inFY09. Fiscal year 2009 has marked an important period in the company s operations, during which time Lihua expanded its producportfolio by including copper rod and copper magnet wire to its offerings. In FY09, Lihua generated $161.5MM in sales, a 223%improvement over FY08, and adjusted net income of $25.6MM, corresponding to a 140% Y/Y growth (adjusted net income excludes thenon-cash charge resulted from the change in the fair value of warrants). Growth in 2009 was driven by the continued strong demand in

Plant 1 Plant 2

Location Danyang, Jiangsu Danyang, Jiangsu

Began construction Mar-99 Mar-08

Began production Jan-06 Mar-09

Copper refinery-25,000

Copper wire-20,000

Site area (square

meteres)11,000 66,000

Capacity as of March

31, 2009 (mt per year)CCA wire-7,500

LIWA's Production Facilities

FY 2009 FY 2010

Copper wire (MT) 18,000 25,000 50,000

CCA wire (MT) 7,500 10,000 15,000

Copper refinery (MT) 25,000 25,000 100,000

LIWA's CapEx PlansFY 2011


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the market for pure copper alternatives, as well as the contribution of the new copper recycling facility, which accounted forapproximately 75% of total sales.


Recent Financial Results

In Q1 FY10 Lihua International continued to demonstrate robust growth. The company reported sales of $63.2MM, a 207.6% increasefrom $20.3MM reported in the same period last year. Robust growth in the top line was primarily attributable to continued strong marketdemand for LIWA s copper rod and copper wire products from the scrap copper refinery business as well as for CCA wire products. InQ1 FY10, sales of copper rod and copper wire attributed to ~79% of sales, compared to ~50% in the same quarter last year. Grossprofit has increased by 107.4% Y/Y to $11.8MM; however, gross margin has declined from 27.7% reported in 1Q FY09 to 18.7%, dueto the greater percentage of revenues coming from the lower margin copper products and the sharp increase in copper price (DuringQ1 FY2010 the average copper price was $7,320 vs. $3,739 for Q1 FY2009).

SG&A expenses have increased from $0.7MM in Q1 FY09 to $1.7MM, as a result of significant business expansion as well as due to

higher administrative and professional fees associated with being a public company. However, as a percentage of sales, SG&Aexpenses actually declined from 3.6% in Q1 FY09 to 2.8% in Q1 FY10. Lihua reported an operating income of $10.1MM, a 103.4% Y/Yincrease compared to the same quarter last year. Interest expense in Q1 FY10 has declined to ~$29K, from ~$113K for the sameperiod last year as a result of the repayment of short term bank loans by the company. Net income came in at $7.4MM, or $0.28 pershare, an 85.5% increase compared with the same quarter last year, and corresponded to an 11.7% net margin.

Financial Position

The company ended the quarter with $46.3MM in cash (not counting the $32.5MM in net proceeds received from the recent equityraise) and only $2.2MM in total debt, which translates to a post-raise net cash position of $76.6MM, or ~$2.50 per fully-diluted share.Lihua managed to earn $9.4MM in cash flow from operations and $8.7MM in free cash flow during the first quarter of FY10. During thelast two years the company was profitable on the cash flow basis as well, earning $15.8MM in operating cash flow in FY08 and $8.4MMin FY09. As of March 31, 2010, Lihua had a current ratio of 6.5x, a total debt to book value of equity of only 2.4% and an interescoverage ratio of over 140x. In addition, the company enjoys a cash conversion cycle of only 29 days and demonstrated a trailingtwelve months ROE and ROA of 31.2% and 24.1%.

Forward Looking Projections

Expect Revenue Growth to Continue

Going forward, we expect the company to benefit from continued strong market demand and greater adoption rates for its CCA andcopper wire products as alternatives to pure copper wire, as well as from its robust capital expansion plans that should quadrupleexisting capacity by year-end 2011. We expect Lihua to report FY10 revenues of $268.2MM, which would correspond to 66% Y/Ygrowth. In FY11, we believe that Lihua will continue to demonstrate its strong top-line growth and will report revenues of just abou$600MM. It is important to point out that our revenue growth assumptions are based on increased sale volumes, while we are modelingpricing for both CCA and copper products to remain relatively unchanged from current levels.

$-

$25.0

$50.0

$75.0

$100.0

$125.0

$150.0

$175.0

2006 2007 2008 2009

Strong Historical Growth

Revenue EBITDA Net Income (adjuste d)


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Gross Margin Expected to Decline on Shifting Product Mix

We anticipate Lihua s gross margin to continue to decline from historical low 30 s reported in FY08 and prior, due to the changes in theproduct mix. The launch of the scrap copper refinery business in Q1 FY09 and the continually increasing revenue contribution from thissegment should continue to affect gross margin. Both copper magnet wire and copper rod have lower selling prices and lower mark-upcompared to CCA wire. Additionally, copper rod and CCA raw wire are semi-finished products are hence contribute lower margins thanfully finished products like CCA magnet wire, CCA tin plated wire and copper magnet wire. Until the company ramps up its wireproduction facilities, in both CCA and copper segments, we expect the company-wide gross margin to remain at depressed levels. We

have modeled FY10 and FY11 gross margins at 20.5% and 15.5%, respectively. This translates to a gross profit of $54.9MM in FY10(slightly above the company s guidance of $48.9MM 50.7MM) and $93.2MM in FY11. It is important to note that LIWA sells itsproducts on a tolling (or cost plus) basis and as a result is cushioned to movement in copper pricing, which is the reasonwhy the company offers gross profit guidance instead of the revenue guidance.

SG&A Expenses to Continue to Decline as % of Revenue

We anticipate that Lihua s SG&A expenses will continue to decline as a percentage of revenue going forward. The company has done agreat job in controlling its SG&A expenses historically, even in the face of substantial growth of the company s business, continuedupgrades to its information technology infrastructure, increase in the number of sales personnel, as well as expenses associated withbeing a publicly listed company. However, SG&A expenses are expected to continue to grow somewhat in dollar terms. We havemodeled SG&A expenses at $7.1MM in FY10 and to $11.4MM in FY11, compared to $5.7MM reported in FY09.

Effective Tax Rate

The company-wide tax rate is expected to increase to 25% in 2010 and remain at that level going forward. According to China s lawsforeign invested enterprises created before January 1, 2008 were entitled to full exemption from income tax for two years, beginningwith the first year of profitability, and a 50% tax reduction for the following three years. Since Lihua Electron was converted into a sino-foreign joint equity enterprise in 2005, it was entitled to the EIT exemption in 2005 and 2006, and received a 50% income tax reductionfrom 2007 to 2009. It is important to point out that both of LIWA s operating companies file separate tax returns.


Growing Bottom Line

We expect Lihua to report FY10 non-GAAP net income of $35.8MM in FY10, corresponding to an almost 40% Y/Y growth (in line withthe company s guidance of $35.1MM 36.3MM), which translates to $1.21 per fully diluted share. In FY11, we expect Lihua to repornet income of approximately $61MM, or $1.99 per share, which would translate to a 2008 2011 non-GAAP EPS CAGR of 41.8%. Onthe EBITDA basis, we expect the company to report $49.7MM and $83.8MM in FY10 and FY11, respectively.

Capital Structure

As of the end of Q1 FY10, the company was financed through a mix of equity ($91.8MM) and short term debt ($2.2MM). The companyhas a revolving credit facility of $20MM, of which only $2.2MM were drawn down as of the end of Q1 FY10. The company went throughan IPO in September 2009, raising approximately $7.9MM in net profits in the process, and has recently completed a secondary

offering of 4.3MM shares at $8.05 per share, raising $32.5MM in net profits. Following the raise, Lihua has 29.14MM basic sharesoutstanding and as of June 5, 2010, had a market cap of ~$240MM. As of March 31, 2010, had 1.4MM warrants and 65K optionsoutstanding, which brings the fully diluted share count to 30.6MM.

2007 2008 2009 2010 2011

Lihua Electron 12.0% 12.5% 12.5% 25.0% 25.0%

Lihua Copper 25.0% 25.0% 25.0% 25.0% 25.0%

LIWA's Effective Tax Rate


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The impact of dilutive securities includes the following: Up to 65,000 of common stocks issuable upon exercise of options outstanding at March 31, 2010 with a weighted average price

of $4.06 per share.

1,258,100 shares of Common Stock issuable upon the exercise of Series A and Series B warrants outstanding at March 31,

2010 with a weighted average exercise price of 3.50 per share.

138,000 additional shares of Common Stock issuable upon the exercise of Series C warrants issued in conjunction with the

public offering and outstanding at March 31, 2010 with a weighted average exercise price of 4.80 per share

Lihua has a free float of 12.9MM, while about 50% of shares are controlled by Magnifying Wealth in which Mr. Jinhua Zhu, presidenand CEO of the company, holds an 81.9% stake. Institutions hold approximately 4.75MM shares, or 16.3% of total, according to Capital

IQ, with five largest holders including China Merchants Hidden Jade Partners, Vision Capital Advisors, Gruber & McBaine CapitalManagement, Straus Capital Management and Wall Street Associates.

Source: Capital IQ, GHS Research

Security Type # SharesExercise

Price

Avg Remaining

Life (years)

Basic Shares (March 31, 201 24,857,717

April 2010 Offering 4,285,715

Warrants Outstanding 1,396,100 $3.63 3.55

Options Outstanding 65,000 $4.06 9.2

Total 30,604,532

Holder # Shares % of Outstanding Position Date

China Merchants Hidden Jade Partners 2,381,818 9.58% Mar-24-2010

Vision Capital Advisors, LLC 741,711 2.98% Dec-31-2009

Gruber & McBaine Capital Management, LLC 321,200 1.29% Mar-31-2010

Straus Capital Management LLC 256,050 1.03% Mar-31-2010

Wall Street Associates 216,900 0.87% Mar-31-2010

Allianz Global Investors AG 173,500 0.70% Mar-31-2010

Millennium Management, L.L.C. 89,264 0.36% Mar-31-2010

Westfield Capital Management Company, L.P. 76,500 0.31% Feb-28-2010

BlackRock, Inc. (NYSE:BLK) 64,895 0.26% Mar-31-2010Morgan Stanley, Investment Banking and

Brokerage Investments

41,863 0.17% Mar-31-2010

Institutional Holders


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Management Overview

Lihua has brought together a very experienced management team and key operating personnel. LIWA s management possessesextensive management skills, relevant operating experience and in-depth industry and Chinese market knowledge, which should helpthe company to formulate sound expansion strategies and to take advantage of market opportunities.

Jian Hua Zhu, President and CEO of the company and the Chairman of the Board of Directors, has over 25 years of experience inChina s copper industry. Mr. Zhu founded Lihua Electron in 1999 and Lihua Copper in 2007 and served as the sole member of theboard of directors until July 30, 2008. Mr. Zhu currently serves as the Executive Director of Lihua Electron and Lihua Copper and is

responsible for corporate and product development and governmental regulations, in addition to overall management of the company.

Ya Ying Wang, Chief Operating Officer and a member of the Board of Directors, has over 25 years of experience in China s coppeindustry. Ms. Wang was also the founder of the company with Mr. Zhu, has strong technical knowledge of copper and extensiveindustry relationships. In addition to her responsibilities as COO, Ms. Wang is responsible for the Sales and Production Departments.

Yang Roy Yu is the company s CFO. Mr. Yu served as a member of the Board of Directors from June 24, 2008 until his resignationon December 8, 2008. Between June 2006 and April 2008, Mr. Yu was the Executive Vice President of Finance at Fushi CopperweldInc. (NASDAQ: FSIN). From May 2005 until June 2006, Mr. Yu served as the Chief Financial Officer of Songzai International HoldingGroup, Inc. (OTCBB: SGZH). From October 2004 until May 2005, Mr. Yu worked as the Vice President at Yinhai Technology andDevelopment Co. Mr. Yu attended London Southbank University from 2001 to 2004, from which he holds a degree in accounting andfinance.

Zhu Junying, VP Sales and Marketing. Ms. Zhu has served as the VP of sales of Lihua Electron since its inception in 1999. Ms. Zhuhas more than 10 years working experience in Copper Clad Aluminum magnet wire industry. She had held various executivemanagement positions since Lihua Electron was established, including VP of operations, from 2001 to 2005. During her career, MsZhu has focused on the business development, strategic market planning, key account management, contract negotiation and lossprevention. Ms. Zhu graduated from Changzhou Accounting College with a degree in marketing.

Daphne Huang is the Executive VP of Finance and Director of IR with the company. She has 9 years of corporate finance and debcapital markets experience and has previously served as VP of GE Capital & Banc of America Securities. Ms. Huang is a CPA andused to work as a Senior Auditor at PricewaterhouseCoopers. She holds an MBA from Stern Business School of NYU.

Valuation

We are initiating coverage on Lihua International with a Buy rating and a twelve to eighteen months Price Target of $16. At yesterday s

closing price of $7.85 the stock is trading at 6.5x FY10 and 3.9x FY11 on a P/E basis, significantly below the peer group averages of10.5x and 9.5x, respectively. On the EV/EBITDA bases, Lihua is trading at 3.3x and 2x for FY10 and FY11, based on our estimates

which represents a significant discount to peer group multiples of 6.5x and 4.9x. Our peer group consists of profitable Chinesecompanies operating in the industrial sector, as well as US and international companies operating in copper smelting and wire

businesses (excluding some outliers from the peer group average calculation).

Our $16 price target is predicated on 8x FY11 P/E and 4.9x EV/EBITDA multiples, in line with the other Chinese industrial companiesIn our opinion a target price of $16 is easily justified by Lihua s impressive margins and profitability, robust capital expenditure plansthat are expected to quadruple capacity by the end of 2011 and significant historical and forecasted growth opportunities in thedomestic small diameter wire market. Lihua also has a solid balance sheet with a net cash level of over $75MM (on the post-raisebasis), a current ratio of 6.5x, a cash conversion cycle of only 29 days and an interest coverage ratio of 141x. In our view this is acompelling stock on both an absolute and relative value basis and should be a top pick with US listed China investors or more broadlywith small cap investors in general.


19/24



Potential Risks

a) Potential disruptions in the availability of raw materials; b) Fluctuating copper prices c) Customers honoring contracts in a volatilepricing environment d) Limited public operating history; e) Geopolitical risk of operating in China; f) Currency exchange risk

Name Ticker Rating Price Market Value EV Net De bt/Total Cap P/E P/E P/E PEG EV/EBITDA EV/EBITDA EV/EBITDA

2009 2010 2011 ' 08 - '11 2009 2010 2011SmartHeat Inc. HEAT Not Rated $5.51 $190.1 $154.2 -18.3% 8.5 9.0 6.9 0.5 7.3 6.1 4.3

Suntech Power Holdings Co. Ltd. STP Not Rated $8.64 $1,623.9 $2,397.9 22.6% 25.7 14.7 10.0 0.7 12.0 7.7 6.8

Yingli Green Energy Holding Co. YGE Not Rated $8.43 $1,311.7 $1,595.5 12.9% NA 9.5 8.7 1.4 10.2 4.8 4.3

Trina Solar Ltd. TSL Not Rated $15.72 $1,301.8 $1,316.9 0.8% 11.0 7.7 7.3 0.6 8.4 5.0 4.6

Duoyuan Global Wate r Inc . DGW Not Rated $ 19.39 $ 499 .9 $289.0 -42.2% 11.5 14.8 12.0 2.0 6.7 6.3 4.5

JA So lar Holdin gs Co. , Ltd. JASO Not Rated $4.5 3 $ 775 .0 $768.0 -0.7% NA 6.1 6.6 0.7 18.6 3.7 3.6

Hong Kong Highpower Techno lo , HPJ Not Rated $3.47 $49.0 $57.7 13.3% 9.4 7.9 6.4 0.3 7.6 6.9 5.6

China Fire & Security Group, Inc. CFSG Not Rated $11.44 $319.0 $293.9 -7.9% 13.1 6.8 5.7 0.3 10.2 5.3 4.3

Harbin Elec tric , Inc. HRBN Not Rated $16.35 $512.3 $492.8 -3.4% 26.8 6.2 5.8 0.3 8.2 4.0 3.8

RINO In ternationa l Corporat ion RINO Not Rated $11.20 $358.1 $276.0 -22.0% 5.2 5.5 5.7 0.2 4.8 5.0 3.9

51job Inc. JOBS Not Rated $19.32 $534.3 $347.8 -34.9% 34.4 17.0 14.2 0.7 18.3 9.2 7.2

A-Power Energy Generation Sys ,A PWR Not Rated $6.91 $333.9 $188.6 -40.9% 12.1 6.3 5.5 1.1 6.1 3.3 2.5

Solarfun Power Hold ings Co. L td . SOLF Not Rated $6.91 $419.8 $601.1 24.6% NA 6.8 7.7 NA 16.5 5.2 5.3

China XD Plast ics Company Ltd. CXDC Not Rated $6.44 $290.5 $312.5 6.9% 14.3 11.2 9.2 NA 13.6 8.3 5.4

Jinpan Inter national Ltd. JST Not Rated $15.17 $269.9 $250.8 -6.9% 8.7 8.5 7.2 0.6 7.3 7.3 5.8

China BA K Batter y, Inc . CBA K Not Rated $1.80 $120.9 $322.0 55.6% NA NA 12.0 NA 32.9 15.0 8.3

Fus hi Copperw e ld, Inc . FSIN Not Rated $9.32 $366.2 $293.5 -19.5% 10.2 7.2 6.1 0.8 5.2 4.1 3.3

China Valves Technology, Inc. CVVT Not Rated $7.83 $299.7 $295.1 -1.5% 10.2 6.6 5.4 NA 10.3 5.1 4.5

China Wind Sy stems , Inc . CWS Not Rated $4.17 $74.9 $74.1 -0.9% 13.0 9.1 6.1 0.4 6.0 3.8 NA

China Suner gy Co. Ltd. CSUN Not Rated $3.51 $162.6 $171.7 2.9% NA 8.8 8.2 NA NA 4.0 4.1

China Ritar Pow e r Cor p. CRTP Not Rated $3.30 $75.4 $76.8 1.5% 8.7 6.5 5.0 0.3 6.4 4.7 4.0

China Average $470.9 $503.6 -2.8% 13.9 8.8 7.7 0.7 9.7 5.9 4.8

Coleman Cable, Inc. CCIX Not Rated $6.65 $115.3 $362.3 63.8% NA 13.5 10.2 NA 7.7 6.0 5.3

Enc ore Wire Corp. WIRE Not Rated $18.93 $439.0 $308.6 -29.7% 64.2 52.1 17.3 NA 12.5 10.5 4.8

Gener al Cable Corp. BGC Not Rated $27.30 $1,497.7 $2,005.1 20.9% 9.6 13.6 10.1 NA 5.5 6.0 5.2Metalico Inc. MEA Not Rated $4.39 $211.8 $333.4 35.9% 878.0 9.8 7.2 NA 11.5 5.6 4.8

US and International AVERAGE $566.0 $752.4 22.7% 9.6 12.3 11.2 0.7 9.3 7.0 5.0

Combined AVERAGE $518.4 $628.0 10.0% 11.8 10.5 9.5 0.7 9.5 6.5 4.9

Lihua International, Inc. LIWA Buy $7.85 $240.2 $163.6 -31.6% 5.9 6.5 3.9 0.3 5.1 3.3 2.0

M ult iple s w it h Pr ice Tar ge t $16.00 489.7 413.0 12.0 13.2 8.0 0.5 12.9 8.3 4.9


20/24



Financial ModelsIncome Statement

Source: Company Report, GHS Research

Lihua International Inc (LIWA)Income Statement

All Fi gures $MM, except per s hare FY 2006 a FY 2007 a FY 2008a Q1 3/09 a Q2 6/0 9a Q3 9/09 a Q4 12/09a FY 200 9a Q1 3/1 0a Q2 6/1 0 Q3 9/1 0 Q4 12 /10 FY 2010 E FY 201 1

15.7 32.7 50.0 20.6 48.8 40.9 51.3 161.5 63.2 68.8 60.5 74.7 267.2 597.9% growth year-to-year NA 107.5% 53.0% 109.4% 224.7% 185.9% 372.7% 223.0% 207.6% 40.9% 47.8% 45.7% 65.4% 123.8%

10.6 22.9 33.2 14.9 39.1 31.2 40.4 125.3 51.4 54.2 48.0 58.7 212.3 504.767.6% 70.1% 66.4% 72.3% 80.1% 76.1% 78.8% 77.6% 81.3% 78.8% 79.4% 78.6% 79.5% 84.4%

NA 115.1% 44.9% 119.7% 278.5% 241.2% 478.2% 277.4% 246.1% 38.6% 54.1% 45.4% 69.4% 137.7%

5.1 9.8 16.8 5.7 9.7 9.8 10.9 36.2 11.8 14.6 12.5 16.0 54.9 93.232.4% 29.9% 33.6% 27.7% 19.9% 23.9% 21.2% 22.4% 18.7% 21.2% 20.6% 21.4% 20.5% 15.6%

NA 91.5% 72.1% 86.6% 106.6% 88.4% 181.8% 115.6% 107.4% 49.9% 28.0% 46.8% 51.4% 69.8%0.2 0.4 0.7 0.2 0.6 0.5 0.5 1.7 0.5 0.6 0.5 0.5 2.0 4.8

1.5% 1.3% 1.4% 1.0% 1.2% 1.1% 0.9% 1.1% 0.7% 0.8% 0.8% 0.7% 0.8% 0.8%NA 81.7% 67.7% 134.1% 241.2% 44.5% 273.4% 146.0% 121.8% -6.3% 7.1% 8.9% 16.6% 138.2%0.3 0.5 1.9 0.5 1.1 1.2 1.2 4.0 1.3 1.2 1.2 1.3 5.1 6.6

2.1% 1.4% 3.8% 2.6% 2.2% 2.9% 2.3% 2.5% 2.0% 1.8% 2.0% 1.8% 1.9% 1.1%NA 35.4% 319.2% 177.9% 171.1% 261.5% 19.4% 109.3% 138.6% 13.2% 2.1% 14.8% 27.4% 29.3%

4.5 8.9 14.2 5.0 8.1 8.1 9.2 30.5 10.1 12.8 10.8 14.1 47.8 81.8% of Revenue 28.8% 27.2% 28.4% 24.1% 16.5% 19.9% 18.0% 18.9% 15.9% 18.6% 17.8% 18.9% 17.9% 13.7%

NA 96.1% 59.6% 78.7% 94.7% 78.9% 2.0% 115.0% 103.4% 58.9% 32.9% 2.0% 56.5% 71.3%Interest Expenses (0.0) (0.1) (0.5) (0.113) (0.1) (0.1) (0.1) (0.3) (0.029) (0.0) (0.0) (0.0) (0.1) (0.4

-0.3% -0.3% -1.0% -0.6% -0.2% -0.2% -0.1% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1%NA 125.2% 433% 47.4% -0.6% -63.5% -66.4% -34.9% -74.2% -72.4% -53.5% -45.7% -65.2% 242.8%

Interest Income 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.2 0.0 0.1 0.1 0.1 0.3 0.30.0% 0.0% 0.1% 0.1% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% 0.2% 0.1% 0.1% 0.1%

NA 288.9% 336.6% 797.6% 520.2% 267.1% -9.9% 154.3% 37.6% 111.9% 50.6% 177.8% 91.8% -10.0%Change in fair value of warrants - - - (0.1) (0.2) (8.0) (0.5) (8.8) - - - - - -

0.0% 0.0% 0.0% -0.6% -0.4% -19.6% -0.9% -5.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%NA

Other Income, net 0.0 - (0.3) - 0.5 (0.0) 0.0 0.5 - - - - - -0.0% 0.0% -0.5% 0.0% 1.0% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

NA -8875.0% -100.3% -296.0% -100.0% -100.0% -100.0% -100.0% #DIV/0Total Non-Operating Expenses (0.0) (0.1) (0.7) (0.2) 0.2 (8.0) (0.5) (8.5) 0.0 0.1 0.1 0.1 0.2 (0.1

-0.2% -0.2% -1.4% -1.0% 0.5% -19.6% -0.9% -5.3% 0.0% 0.1% 0.1% 0.1% 0.1% 0.0%NA 123.5% 768.1% 187.7% -316.7% 5122.9% NA 1109.5% -102.0% -68.7% -100.9% NA -102.6% -146.2%

Income Before Taxes 4.5 8.8 13.5 4.7 8.3 0.1 8.8 22.0 10.1 12.9 10.9 14.2 48.0 81.7

28.6% 27.0% 27.0% 23.1% 17.0% 0.2% 17.1% 13.6% 15.9% 18.7% 18.0% 19.0% 18.0% 13.7%NA 95.9% 53.1% 75.7% 105.4% -98.0% 267.7% 63.2% 112.7% 55.4% 12099.7% 61.9% 117.9% 70.3%

Income Tax Expense - 1.1 1.8 0.8 1.6 1.4 1.5 5.2 2.7 3.2 2.7 3.5 12.2 20.70.0% 12.4% 13.3% 16.1% 19.0% 1600.7% 17.0% 23.8% 25.0% 25.0% 25.0% 25.0% 25.4% 25.4%

Amortization of Pr eferred Shares discount - - 1.0 - -

4.5 7.7 10.7 4.0 6.7 (1.3) 7.3 16.8 7.4 9.6 8.1 10.6 35.8 61.028.6% 23.6% 21.4% 19.3% 13.7% -3.3% 14.2% 10.4% 11.7% 14.0% 13.5% 14.2% 13.4% 10.2%

NA 71.7% 38.5% 68.8% 91.5% -134.8% 624.6% 56.8% 85.5% 43.9% -709.7% 46.3% 113.4% 70.3%Earnings per share - fd 0.32 0.55 0.70 0.18 0.31 (0.08) 0.29 0.88 0.28 0.32 0.27 0.35 1.21 1.99

NA 71.7% 26.8% 8.5% 23.1% -128.6% 336.8% 25.7% 53.8% 2.6% -440.3% 21.5% 38.2% 64.3%14.0 14.0 15.3 21.8 21.8 17.1 25.4 19.1 26.3 30.6 30.6 30.6 29.5 30.6

Non-GAAP Adjustments - - - 0.1 0.2 8.0 0.5 8.8 - - - - - -

4.5 7.7 10.7 4.1 6.9 6.7 7.7 25.6 7.4 9.6 8.1 10.6 35.8 61.028.6% 23.6% 21.4% 20.0% 14.2% 16.4% 15.1% 15.9% 11.7% 14.0% 13.5% 14.2% 13.4% 10.2%

71.7% 38.5% 74.1% 97.7% 74.5% 670.0% 139.4% 79.9% 39.4% 21.6% 37.7% 39.8% 726.7%EPS - fd - non-GAAP 0.32 0.55 0.70 0.19 0.32 0.39 0.30 1.34 0.28 0.32 0.27 0.35 1.21 1.99

71.7% 26.8% 11.9% 27.1% 43.3% 364.2% 91.8% 49.2% -0.6% -32.1% 14.4% -9.7% 610.6%

4.9 # 9.4 # 15.0 5.2 8.4 8.5 9.9 32.0 10.6 13.3 11.3 14.6 49.7 83.8

30.9% 28.8% 30.0% 25.4% 17.2% 20.7% 19.3% 19.8% 16.7% 19.3% 18.7% 19.6% 18.6% 14.0%

93.4% 59.5% 78.0% 94.2% 78.3% 230.9% 113.3% 102.7% 58.3% 33.0% 47.4% 55.4% 68.4%

0.3 0.5 0.8 0.3 0.3 0.4 0.7 1.7 0.5 0.5 0.5 0.5 2.0 2.0

2.1% 1.6% 1.6% 1.3% 0.7% 0.9% 1.3% 1.0% 0.8% 0.7% 0.8% 0.7% 0.7% 0.3%

56.2% 56.5% 65.8% 81.5% 65.4% 179.7% 103.5% 88.8% 43.9% 34.1% -27.5% 19.5% 0.0%

Net Sales

Cost of Goods Sold

% of Revenue

% growth year-to-year


% of Revenue


% growth year-to-year% of Revenue

Gross Profit

% growth year-to-year% of Revenue

% of Revenue

% of Revenue


General a nd adminis trative expenses

Selling expenses


adjusted EBITDA

Operating Income




% of Revenue

% of Revenue


Net Income Available to Common Sto ck Holders

% of Revenue

% of Revenue


% of Revenue


% of Revenue



Depreciation & Amortization

Weighted Avg. S/O (mil)-fd

% of Revenue

Net Income - non-GAAP

Tax Rate %


% of Revenue



21/24



Balance Sheet

Source: Company Report, GHS Research

Lihua International Inc (LIWA)Balance Sheet

All Figures $MM, except per share FY 2006a FY 2007a FY 2008a Q1 3/09a Q2 6/09a Q3 9/09a Q4 12/09a FY 2009a Q1 3/10a Q2 6/10 Q3 9/10 Q4 12/10 FY 2010E FY 2011E

Assets

Cash and Cash Equivalents 0.9 3.2 26.0 25.3 28.1 38.5 34.6 34.6 46.3 94.6 91.5 73.0 73.0 85.2Restricted Cash - - 1.8 1.0 0.7 0.7 0.6 0.6 - - - - - -Notes receivable, net - 0.7 0.3 - -Accounts Receivables, net 1.2 5.4 5.0 5.5 7.8 7.2 11.0 11.0 16.4 12.0 13.1 14.3 14.3 32.0Other receivables 0.0 0.0 - 0.9 0.6 0.7 0.5 0.5 0.2 0.2 0.2 0.2 0.2 0.2

Inventories 1.3 2.6 0.6 4.3 7.9 12.7 17.5 17.5 13.5 14.0 17.0 15.3 15.3 36.4Prepaid land use right current portion - 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Deferred income tax assets 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1Due from related parties - 4.0 - - - 0.0 - - - - - - -

.Total Current Assets 3.4 16.0 33.9 37.1 45.4 60.0 64.5 64.5 76.7 121.1 122.0 103.1 103.1 154.1

Buildings, machinery and equipment, net 5.1 5.9 7.4 14.3 15.3 15.4 18.4 18.4 18.1 20.6 26.1 50.6 50.6 68.6Construction in progress - 2.5 6.0 1.0 1.1 1.5 0.1 0.1 0.5 0.5 0.5 0.5 0.5 0.5Deposi ts for buil dings, machinery and equipment 0.9 1.2 1.1 1.6 0.6 0.6 0.0 0.0 0.2 0.2 0.2 0.2 0.2 0.2Prepaid land use right - l ong term portion - 4.4 8.3 8.3 8.2 8.2 8.2 8.2 8.1 8.1 8.1 8.1 8.1 8.1Intangible Assets, net - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Deferred income tax assets - - 0.0 - - - - - - - - - - -

Total Assets 9.4 30.1 56.8 62.3 70.6 85.7 91.2 91.2 103.6 150.5 156.9 162.5 162.5 231.6

Liabilities

Accounts Payable 1.9 2.5 1.6 3.5 5.1 5.2 4.9 4.9 5.9 10.5 9.7 5.6 5.6 13.2

Other payables and accruals 0.5 0.5 0.8 1.1 0.6 0.8 0.7 0.7 1.1 1.1 1.1 1.1 1.1 1.1

Income Taxes Pa yable - 0.4 0.4 0.7 1.6 1.4 1.6 1.6 2.7 2.7 2.7 2.7 2.7 2.7

Short-term bank l oans - 4.1 6.1 5.0 4.4 4.4 2.2 2.2 2.2 2.2 1.2 0.2 0.2 0.2Due to related parties 1.1 3.5 - - - - - - - - - - -

Total Current L iabilities 3.5 11.0 9.0 10.3 11.6 11.8 9.4 9.4 11.9 16.5 14.7 9.6 9.6 17.2

Common stock purchase warrants - - - 2.4 2.6 10.7 - - - - - - -

Total Liabilities 3.5 11.0 9

Documents

2010 06 08 LIWA Initiation