Company Report: China Direct Industries, Inc.
Success is Elemental Harnessing the potential of China's most dynamic entities yields results for CDII

By bringing American management, financial expertise and capital to industrial China, China Direct Industries, Inc. (CDII) is busy scooping up opportunities in a tumultuous economy. The origins of CDII trace back to 2001 where its founders started a consulting firm developed to give emerging companies in the People’s Republic of China the business tools needed to gain a foothold in the global economy. As the company grew, management saw an opportunity to shift its focus by also acquiring growing China-based businesses. Toward that end management incorporated CDII in January of 2005 and in August of 2006 the company came public through a merger. Today, CDII owns controlling shares in 10 China-based companies in the magnesium and basic materials sectors, and is listed on the NASDAQ.

The leap from assisting Chinese firms seeking entry into U.S. capital markets to acquiring and managing industrial producers and distributors arose organically, but required a change in the company’s business model.

“What we look to do is take a number of companies within a sector that have a similar subset of complementary product groups, and then create a segment, aggregate it, and eventually monetize it,” says VP of public and investor relations Rich Galterio. “Right now we are relatively young in this business model, which we started at the end of 2006. We’ve been in the building phase so far, building these different subsidiaries up and creating a larger organization inside of our own organization.”

When it came time to identify the market segments suited to the model, Galterio notes that CDII’s approach was relatively agnostic. “We were looking for a situation more than we were looking for a specific product. That situation was to find cash-constrained companies, provide the capital, and unlock growth with a management team that has been proven, has been in the field for a number of years, and has been profitable,” he says. In two short years, CDII has acquired an impressive portfolio of companies and consolidated them as either wholly-owned or majority-controlled subsidiaries.

MAGNESIUM AS A GROWTH MAGNET
Lighter and stronger than aluminum or steel, magnesium is an element in great demand, and that demand is expected to grow exponentially over the next several years driven by the automobile industry as many governments are mandating more fuel efficient vehicle standards in the coming years. By taking advantage of China’s highly fragmented magnesium industry, China Direct is building the International Magnesium Group (IMG), a consortium of companies that they predict will together become the world’s leading producers and distributors of magnesium. So far, that prediction is right on the nose: from its inception in 2006, IMG revenues skyrocketed to $170million in 2008, representing 71 percent of the company’s consolidated revenues. The five firms in CDII’s magnesium sector produce and distribute magnesium ingots, powders and scraps.

“We came into magnesium because it actually ended up fitting all of our requirements,” Galterio continues. Geocentricity was an added bonus. “The majority of players in magnesium were in Shanxi Province, which is where most of our subsidiaries are so we could make acquisitions inside of this area where everything was available to us in a very close proximity. Magnesium distribution is a business that’s relatively easy to understand, and it’s relatively easy to get your arms around from an accounting standpoint. And that’s why it really was a great fit.”

According to the CDII website, global production of magnesium was approximately 800,000 metric tons in 2008, with China representing approximately 80 percent of the world’s production. CDII’s current annual production capacity is approximately 50,000 metric tons.

Despite tight contractions in the market in 2009, prices are stabilizing once more, and the potential for growth in the industry is immense. While he acknowledges that the magnesium industry isn’t immune to the economic woes, Galterio is understandably sanguine about the future. “We have positioned ourselves so that even in a declining industry we could actually take a lot of market share because we are one of the most well-capitalized players in China in magnesium.”

CDII is currently tackling the lengthy process of securing permission from the U.S. Government to sell their pure magnesium directly to customers here in the states; a practice currently prohibited by anti-dumping laws. “That would be a very big milestone for our company should we be able to do that, but it’s a long process,” Galterio admits. “Hopefully we will eventually be successful.”

BACK TO BASICS
In addition to pure magnesium production and distributing and consulting, CDII also operates a basic materials segment, a group of five companies that distribute industrial-grade synthetic chemicals, steel products, non ferrous metals, and recycled materials. A zinc plant is ready to go online in the near future. Recently, CDII received several sales contracts for the delivery of various synthetic chemicals and reinforcing steel bars which have the potential to generate revenues of approximately $30.5 million for that sector in 2009. The outlook for basic materials is shining brightly; CDII is projecting revenues of between $65 and $75 million – a 25 percent increase from the prior year.

CDII’s consulting arm continues to flourish, as well. That business segment provides a range of consulting services, including M&A strategy planning and analysis, financial management, SEC filings, SOX 404 compliance, legal counsel, merger & acquisition and accounting management.

CULTURE CLUB
CDII’s multicultural team oversees its business segments from its headquarters in Deerfield Beach, FL and a management office in Shanghai. “The largest undertaking for us is really financial management. The challenge has been putting systems in place that can give us a more real-time capability to assess needs and to react to problems as they occur. We’ve spent a lot of effort and time into putting together networking systems, accounting formats, systems so that we are able to better manage the operations from a financial standpoint and an organizational standpoint,” Galterio asserts.

One of the major cultural differences that CDII successfully bridges – to its continual benefit – is organizational management. According to Galterio, many Chinese companies lack viable corporate structure. Take succession planning, for example. “In China, very often it doesn’t exist. That’s a challenge for us as well. Building an organization and creating a management team as opposed to a figurehead and a king is a challenge for us as well. We’ve been working toward building that within our organization.”

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