china america holdings inc

Analyst: Victor Sula, Ph.D.Initial Report

March 4th, 2009

China America Holdings Inc. (OTCBB: CAAH) 1


March 4th, 2009

Background

China America Holdings Inc.333 E. Huhua Rd. Huating Economic &Development Area, Jiading DisctrictShanghai, China, 201811

Phone: 86.21.5997.4046Fax: 86.21.5997.4148E-mail: [email protected] Website: www.chinaamericaholdings.com

MARKET DATA

Symbol

Exchange

Current Price

Price target

Rating

Outstanding fully diluted shares

Market Cap.

Average 3M Volume

Source: Yahoo Finance, Analyst Estimates

CAAH

OTC BB

$0.025

$0.13

Speculative Buy

135.8 Mill ion

$3.40 Mill ion

106,377

Revenues, $ Mn.

Gross margin

Operating margin

Net margin

EPS, $

P/E

P/S

16.3

14.07%

-4.24%

-6.87%

(0.012)

n/m

0.17

37.1

9.99%

4.16%

0.61%

0.003

7.19

0.07

39.4

12.14%

7.50%

4.93%

0.014

1.42

0.07

43.6

12.37%

7.81%

5.48%

0.017

1.19

0.06

China America Holdings Inc. (CAAH), through its 56%-owned Chinese sub-sidiary, Shanghai AoHong Industry Company Limited, processes, distributes and imports/exports environmentally friendly fluoro products, fire extinguish-ing agents and refrigerants and liquid coolant products used in automobiles, air conditioning systems and refrigeration units. The Company supplies many well-known multi-national companies in the Shanghai market, including Chev-ron Phillips Chemical Co. Ltd.; Jiangsu MeiLan Chemical Co. Ltd.; Sinochem Modern Environmental Protection Chemicals Co. Ltd.; and Daikin Fluorochem-icals Co. Ltd. CAAH sells its products primarily in the United States and Asia.

The Company’s AoHong subsidiary has commenced manufacturing steel cyl-inder refrigerant products on a new production line developed through a joint venture with Shanghai Ronghua High-Pressure Vessel Co. Ltd. In addition, CAAH has just completed construction of a new 8,000-square-foot factory that will produce environmentally friendly products. In late 2007, AoHong received

03/02/09

volume

0.04

0.03

0.02

0.01

0.00

1.5

1

0.5

0

© BigCharts.com

CAAH daily

09 Feb

Mill

ions

Share Statistics 3-Mar-09 2007 2008E 2009E 2010E


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DOT-39 certification for non-refillable steel cylinder tanks from the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration. DOT-39 is the standard for non-refillable cylinders, used for packaging compressed gases, refrigerants and fluorine chemicals. DOT-39 certification enables AoHong to ex-port non-refillable steel cylinders to the U.S. market.

In 2008, the Company signed a contract valued at approximately $8.6 million with Shanghai 3F New Materials Co. Ltd. to supply it with refrigerant R22. Shanghai 3F uses R22 as a raw material for producing a synthetic fluo-ropolymer, Polytetrafluoroethylene (Teflon), which is utilized as a lubricant and non-sticking coating. CAAH also signed a $2.5 million agreement with China FAW Group Corp., a pioneer of China’s auto industry, to supply it with refrigerant R134A, which is used in the air conditioning systems of manufactured automobiles. China FAW has joint ventures with Volkswagen, Mazda and Toyota, and produces more than 7 million vehicles per year.

Distributor of fluorochemical and refrigeration products

With the acquisition of a 56.08% membership interests in Shanghai AoHong, CAAH entered the China market for air conditioning and refrigeration products. AoHong specializes in the processing, distribution, and import/ export of refrigerant and coolant products used in automobiles, air conditioning systems, refrigeration units and fire extinguishing agents. Its products are distributed in 16 Chinese provinces and districts. In addition, the Company is actively exploring markets outside China and has sales in Thailand and the Middle East, with plans to export to the U.S., Latin America and the Caribbean.

Robust revenue growth

We expect AoHong’s annual revenues to increase from $16.2 million in 2007 to approximately $37 million in 2008. AoHong is growing its business by escalating manufacturing capacity, developing innovative products and establishing a market presence and strategic partnerships in the Americas. As a result, we expect the Com-pany’s revenues to rise to $39 million in 2009 and $43 million in 2010.

Profit margin improvements

During the first nine months of 2008, CAAH’s gross margins fell to 9.2% due to a temporary shortage of raw material resulting from business interruptions caused by the Beijing Olympics. Going forward, we expect the Company’s profit margins to recover as a result of lower materials purchasing costs since the Chinese govern-ment has lifted its restrictions on the transport of chemicals. Margins should also benefit from the disposal of the Company’s unprofitable Biometrics and Big Tree segments.

Enhanced manufacturing capacity supports growth prospects

CAAH has begun manufacturing steel cylinder refriger-ant products at a new joint-venture production line and has just completed construction of a new 8,000-square-foot factory that will produce environmentally friendly products. CAAH was one of the first to recognize the

Investment Highlights


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growing market for safe, non-toxic products, and is actively marketing its environmentally friendly products. Approximately 37% of AoHong’s 2007 net revenues were derived from higher-margin, environmentally friendly products. In 2008, AoHong forecast sales of environmentally friendly products will be higher year-over-year. Quality assurance standards increase the competitiveness of its offering

In response to environmental issues such as ozone depletion and the need for better indoor air quality and protec-tion of the limited resources, authorities are implementing stricter quality standards for refrigerants and fluoro-chemicals. CAAH has implemented ISO 9001:2000 Quality Assurance System requirements; Environmental Man-agement System ISO 14001:2004 standards; TS 16949 certification (international quality management certificate for the automotive industry); and other certifications related to its operations.

In late 2007, AoHong received DOT-39 certification for non-refillable steel cylinder tanks from the U.S. Depart-ment of Transportation Pipeline and Hazardous Materials Safety Administration. DOT-39 certification enables AoHong to export non-refillable steel cylinders to the U.S. market.

Established distribution network in China

The Company distributes its products within 16 provinces and districts in China, including Liaoning, Jilin, Beijing, Xinjiang, Shangxi, Chongqing, Sichuan, Jiangshu, Zhejiang, Anhui, Guangdong, Hainan, Hong Kong and Taiwan; and exports to countries such as Russia and Thailand. Approximately 90% of CAAH’s customers have been in a business relationship with the Company for more than three years. Because of strong repeat business, CAAH is better able to estimate customer demand and maintain appropriate inventory levels. The Company has a total area of near 26,000 square meters (of which 9,000 square meters is for a workshop) and can maintain the needed inven-tory to accommodate a variety of orders during peak selling season and meet customer demand on short notice.

Significant China market opportunity

China’s massive size and rapid modernization is creating one of the greatest investment opportunities in the world. The Chinese government is increasingly encouraging entrepreneurship; China’s National Bureau of Sta-tistics reported 11.4% GDP growth in 2007, and China has become the world’s fourth-largest economy behind the U.S., Japan and Germany. Since its admission to the World Trade Organization (WTO) in 2001, China has become a global trading powerhouse with the European Union and the U.S. as its two largest trading partners.

China is the world leader in the air conditioning market. In 2006, the Chinese market for packaged air condition-ing was estimated at $8.9 billion, a 10% increase from the previous year. In 2007, the Chinese air conditioning market was valued at $12 billion. The market value of China’s car air conditioner market was $525 million in 2007. With car sales expected to reach 10 million by 2010, the car air conditioner market is expected to grow 15% annu-ally through 20101.

1.www.researchandmarkets.com/reportinfo.asp?report_id=662068


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January 15th, 2009

Nanometrics Inc. (NASDAQ: NANO) 4

CAAH provides products for the global air conditioning and refrigeration industries. In June 2007, the Company acquired a 56.08% membership interest in Shanghai Aohong, a family-owned business that sells and distributes liquid coolants to manufacturers and retailers of refrigerators, automobiles, residential and commercial air con-ditioning systems, coolants, fluoroplastic, fluororubber, heat insulation, chemicals, pharmaceuticals, fire extin-guishing agents and assorted aerosol sprays.

CAAH purchases supplies from a variety of sources, including Chevron Phillips Chemical (China) Co., Ltd., JiangSu MeiLan Chemical Co. Ltd., Daikin Chemical International Trading (Shanghai) Co. Ltd., and Sinochem Modern Environmental Protection Chemicals (Xi’An) Co. Ltd. The Company then repackages bulk quantities of liquid coolants into smaller packaging for resale and/or distribution directly to customers, who in turn resell the product. In addition, CAAH mixes various raw materials to customer specifications to create new products. For this purpose, the Company employs engineers who work with customers to derive proper mixtures.

In 2007, AoHong partnered with Shanghai Mengda Chemical Co. Ltd. to form Shanghai Mengjin Chemical Co. Ltd. Under the terms of this joint venture, AoHong owns a 60% interest and Mengda owns a 40% interest. Mengjin distributes environmentally friendly refrigeration lubricants in China, including two ozone-friendly refrigeration lubricants manufactured by a subsidiary of Lubrizol Corporation.

Environmental issues such as ozone depletion, poor quality indoor air and depletion of natural resources have required government authorities to impose strict quality standards on refrigerants and fluorochemicals. CAAH has implemented ISO 9001:2000 Quality Assurance System requirements; Environmental Management System ISO 14001:2004; TS 16949 (international quality management certificate for the automotive industry); and well as other certifications related to its operations.

The Company distributes its products within 16 Chinese provinces and districts, including Liaoning, Jilin, Bei-jing, Xinjiang, Shangxi, Chongqing, Sichuan, Jiangshu, Zhejiang, Anhui, Guangdong, Hainan, Hong Kong and Taiwan. It also exports to countries such as Russia and Thailand. Approximately 90% of CAAH’s customers have business relationships with the Company longer than three years. Because of strong recurring sales, CAAH is better able to estimate customer demand and maintain appropriate inventory levels. With total space of nearly 26,000 square meters, the Company can maintain sufficient inventory to accommodate a variety of orders during peak selling season and meet customer demand on short notice.

Business Model

Chinese Market for CAAH products

Source: Company’s Web site.


March 4th, 2009


The Company’s strategy combines organic growth with complementary acquisitions, with the goal of capitalizing on China’s rapid economic growth. The Company also intends to expand into new markets such as the U.S., Latin America and the Caribbean. CAAH plans to invest in a robust marketing campaign that will help grow the cus-tomer base, support distribution channels and drive further adoption of the Company’s products.

Overall, CAAH’s strategy aims to:

• Improve its capital position and operating cash flow;• Acquire growing businesses with substantial opportunities for growth;• Enter markets that are underserved by the competition;• Establish effective marketing channels for its products through a network of distributors and retailers in se-

lected markets;• Seek strategic partnerships and relationships with multi-national companies; • Develop advertising campaigns using professional advertising in TV, radio, print and over the Internet; and• Build a seasoned team of professional engineers.

HFC-134a

HFC-134a is a substitute for CFC-12 in refrigeration, polymer foaming and aerosol produc-tion, which is widely used in automobile air-conditioning, home applications, small fixed re-frigerators, medium-temperature refrigerators in supermarkets and industrial refrigerators. HFC-134a can also be used as a carrier for pharmaceutical inhalation, and in aerosol produc-tion because of its extreme limited toxicity and flammability.

R22

Chlorodifluoromethane is a colorless, non-toxic, non-flammable and transparent liquefied gas. It has excellent thermal and chemical properties, and does not corrode metals. It is used pure or in mixture for refrigeration (medium-high temperatures), a raw material for Polytet-rafluoroethylene, and as an intermediate for Halon 1211 production. It is also a blowing agent for extruded polystyrene and polyurethane foams.

R-410a

Refrigerant R-410A is used to replace R22 and R502. R-410A air conditioning and heat pumps are today’s “state of the art” systems, and utilize the most advanced technology available for efficient, reliable operation. The heart of every air conditioner or heat pump is the compres-sor, and newer systems are specifically designed to use R-410A refrigerant.

Corporate Strategy

Products


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R-407C

R-407C is used in the majority of comfort cooling applications. While similar to R-22 in many of its physical properties, is an azeotropic mixture of HFCs, which does impose cer-tain application restrictions and handling and equipment design requirements. R-407C was developed to replace R-22 in air conditioning and heat pump applications, and is now the most commonly used refrigerant fluid for new systems.

R-404A

R-404A is a “nearly-azeotropic” HFC replacement blend, which is used as an alternative to R502 in new equipment. It can also be used in some systems operating with R502 such as commercial refrigeration equipment, food industry factories and refrigerated transports. R404A can be used within all the same working temperatures and pressures characteristic of R502.

R-600a

Refrigerant R-600a, or isobutane, may replace other refrigerants to reduce the impact on the environment. It has zero ozone depletion and modest global warming potential. R-600a was used in most refrigerators up until the 1940s and is finding new use today in home refrigerators and freezers in Europe, especially in Germany, where more than 90% of refrig-erators are manufactured using R-600a as refrigerant.

China’s massive size and rapid modernization is creating one of the greatest investment opportunities of the 21st century. The Chinese government is increasingly encouraging entrepreneurship: China’s National Bureau of Statistics reported 11.4% GDP growth in 2007. China’s economy grew to$3.43 trillion and ranked as the world’s fourth-largest economy behind the U.S., Japan and Germany. Since its admission to the World Trade Organiza-tion (WTO) in 2001, China has become a global trading powerhouse. Total foreign trade hit a new high of $2.17 trillion in 2007, up 23.5% from the prior year and resulting in a record surplus of $262.2 billion, according to China’s General Administration of Customs.

Commercial air conditioning and refrigeration equipment

Commercial air conditioning and refrigeration are indispensable for health and comfort, economic vitality and worker productivity worldwide. In 2007, the world market for air conditioning was valued at $62 billion, up from $55 billion in 2006. Asia Pacific is the largest market, with total sales of $28 billion in 20072. According to Freedonia Group, world demand for commercial refrigeration equipment is projected to rise 4.5% per year (in-cluding price increases) through 2012 to $29.5 billion, with developing nations expected to register the strongest gains. The majority of commercial refrigeration equipment output originates in the U.S., Western Europe and Japan. China has been posting the strongest annual output gains and this trend is expected to continue due both to rising domestic demand and increasing exports3.

Industry Outlook

2. www.ehpn.de/en/aktuell/kat3/akt377.html3. www.the-infoshop.com/study/fd75921-refrigeration.html


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Since the mid-1980s, commercial refrigeration and air conditioning systems have undergone a transition from using ozone depleting compounds, including chlorofluorocarbons (CFCs), to low and no-ozone depleting com-pounds, such as hydrochlorofluorocarbons (HCFCs) and hydrofluorocarbons (HFCs). CFCs are considered 100% ozone depleting. For the last 50 years, most air conditioners and many refrigeration systems have used R-22 re-frigerant or Freon. These HCFCs are considered only 5% ozone depleting and less a danger to the earth’s ozone layer. However, clean air laws mandate units using R-22 cannot be produced after 2010. R-134a and certain other blends are replacing chlorinated compounds. One popular 50/50 blend of R-32 and R-125 is now being increas-ingly substituted for R-22 is R410A, often marketed under the trade name Puron. Another blend containing R-32, R-125 and R-134a, with a higher critical temperature and lower global warming potential, is R-407C4.

Chinese air conditioning market

China is the world leader in the air conditioning market. In 2006, the Chinese market for packaged air condition-ing was estimated at $8.9 billion, a 10% increase from the previous year. In 2007, the Chinese air conditioning market was valued at $12 billion.

Minisplits have remained the dominant product type in the Chinese market and account for 97% of the total packaged market in volume terms. In 2006, sales within the minisplit market reached $8.9 billion, up 9.2% from 2005. The market for central plant air conditioning was valued at $1,924 million in 2006, and up 19% from 2005. In 2006, 105,400 U.S.-style ducted splits were sold in China. Demand for these units is forecast to grow 7% annually through 2011. Chiller sales totaled 82,816 units in 2006, confirming China as the largest chiller market in Asia5.

After its accession to the World Trade Organization in 2001, China’s automotive industry has posted impressive growth, with sales crossing 8.7 million units in 2007. China is the now the second-largest automotive market af-ter Japan and world’s third-largest automotive market. In the last five to seven years, China’s car purchases have grown 50% annually6. Due to rapid economic growth and a high car retention rate, the car air conditioner market is poised for additional growth. The market value of China’s car air conditioner market was CNY 3.5 billion ($525 million) in 2007. With car sales expected to reach 10 million by 2010, the car air conditioner market is expected to expand 15% annually between 2007 and 20107.

According to China’s Refrigeration Air Conditioner Industrial Association, 9.1 million air conditioning compres-sors were produced in China in 2007. The output of car air-conditioning compressor increased to 6.93 million in 2007 from 1.29 million in 2001, with annual growth of 34.4%. The supply of car air conditioners is expected to reach 13.8 million by 2010.

4. http://en.wikipedia.org/wiki/Refrigerant 5. www.bsria.co.uk/news/1970/ 6. www.researchandmarkets.com/reportinfo.asp?report_id=342765 7. www.researchandmarkets.com/reportinfo.asp?report_id=662068


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China household refrigeration industry

China has become one of the world’s largest refrigerants markets. After experiencing rapid growth in 2006, the output of domestic refrigerators rose 7.8% in the first half of 2007. Output of domestic household air conditioners grew 13.5% in the first six months of 2007 and strongly rebounded following declines in 20068.

Car Air-Conditioning Compressor Output in China, 2001-2008 (million)

Source: www.researchinchina.com/Htmls/Report/2008/5591.html

Output of Chinese Refrigerators Output of Chinese Household Air Conditioners

Source: National Bureau of Statistics

8. www.researchinchina.com/Htmls/Report/2008/5201.html


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Revenue

The Company began generating meaningful revenues in the second half of 2007 with the acquisition of AoHong. AoHong generates revenues from the sale and distribution of liquid coolants, which are utilized in a variety of applications and repackaged into smaller quantities for or resale and distribution.

During the first nine months of 2008, AoHong’s revenues reached $27.1 million, including:

• 14.5% from the sales of liquid coolants purchased in bulk and repackaged into smaller qualities for resale;• 15.3% from custom mixing of various raw materials to customer specifications into a new product; and• 70.2% from distribution of bulk quantities of liquid coolants directly to customers who in turn resell the prod-

uct.

AoHong customers include manufacturers of automobiles, refrigerators and air conditioners, as well as retail distributors of coolants in China. In addition, 10% to 15% of AoHong’s customers are located in the Middle East and Thailand.

Income statement

During the first nine months of 2008, CAAH’s gross margins fell to 9.2% from 16.1% for the same period of 2007. The gross margin decline was caused by a shortage of raw material resulting from business interruptions due to the Beijing Olympics. From July 2008 through September 2008, China restricted the transport of chemicals. Due to these restrictions, some manufacturers suspended production. Declining raw material supplies caused a spike in materials costs during the period. The Company anticipates gross margins will return to historical levels in 2009.

Financial Analysis

Revenue by quarter, $ Mn

Source: SEC Filings


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March 4th, 2009


For the nine months ended September 30, 2008, total operating expenses decreased approximately 21.0% as com-pared to the nine months ended September 30, 2007, mainly due to:

• a decrease in consulting and investor relation expense attributable to a reduction in stock-based consulting expense;

• a decline in compensation and related taxes expenses mainly related to the disposition of the Biometrics segment; and

• a reduction in general and administrative expenses mainly related to bad debt recovery of an accounts re-ceivables previously written off.

Net loss for the nine months ended September 30, 2008, fell to $99,046 from a net loss of $1,183,122 for the nine months ended September 30, 2007.

Operating segments

Since the Company disposed of its Biometrics and Big Tree segments in FY 2008, operating results of AoHong are indicative of the Company’s future performance. Considering only AoHong’s results, CAAH would have been profitable in the first nine months of 2008.

Income statement, $

Source: SEC Filings

Net revenues Cost of salesGross profitTotal operating expenses, including Selling expenses Consulting & investor relations expense Compensation and related taxes General and administrativeIncome from operationsOther expensesMinority interest Income before income taxes Provision for income taxesNet income Diluted EPS

Gross marginOperating margin

7,897,8146,663,4401,234,3741,444,106

158,825313,830538,744432,707

(209,732)(8,284)

(311,553)(529,569)

0(529,569)

(0.01)

15.6%-2.7%

7,949,3746,666,3701,283,0042,146,551

158,825675,990739,374572,362

(863,547)(8,022)

(311,553)(1,183,122)

0(1,183,122)

(0.02)

16.1%-10.9%

10,143,9229,463,667

680,255496,194214,548

10,045101,244170,357184,061(23,880)

(111,338)48,843

(48,321)5220.00

6.7%1.8%

27,108,82924,610,691

2,498,1381,695,483

634,883300,066301,810458,724802,655(31,594)

(501,023)270,038

(369,084)(99,046)

(0.00)

9.2%3.0%

28.4%42.0%

-44.9%-65.6%35.1%

-96.8%-81.2%-60.6%

n/mn/mn/mn/mn/mn/mn/m

-8.9%4.5%

241.0%269.2%

94.7%-21.0%299.7%-55.6%-59.2%-19.9%

n/mn/mn/mn/mn/mn/mn/m

-6.9%13.8%

Q3 2007 Q3 2008 9 months 2007

9 months 2008

% Chg % Chg


March 4th, 2009


Liquidity and capital requirements

At September 30, 2008, CAAH had cash and marketable securities of $1.3 million as compared to $2.0 million at December 31, 2007. This decline is attributable to increases in accounts and notes receivable, inventories and pre-paid expenses to finance future growth. In addition, the Company used $1.6 million to acquire equipment for its newly completed operating facility.

To date, the Company has financed its growth through issuance of equity and debt securities. While the Compa-ny’s operations are close to breakeven in 2009, under the terms of its purchase agreement with AoHong, CAHH is required to contribute an additional $1,780,000 to registered capital, including an additional $200,000 on or before December 31, 2008, and the remaining $1.58 million on or before June 27, 2009. In addition, the Company must repay a $400,000 note to China Direct Inc., which was due on December 31, 2008.

AoHong’s operating results, $

Source: SEC Filings

Net revenues Cost of sales Gross profit Operating expenses Operating income

Net income

Gross profit margin Operating margin Net Margin

27,069,77624,606,462

2,463,314918,925

1,544,389

639,740

9.1%5.7%2.4%

9 months 2008

Balance sheet, $

Source: SEC Filings

Cash and securitiesTotal Current Assets

Restricted cashProperty and equipment, netOther AssetsTotal Assets

Current liabilities, including DebtMinority InterestShareholders’ equity

Net Working Capital

2,012,4808,107,182

437,5111,928,137

801,46211,274,292

3,052,5801,665,6674,378,0423,843,670

5,054,602

1,192,2807,806,754

02,918,461

637,14911,362,364

2,931,52025,000

4,675,1493,755,695

4,875,234

1,142,78210,774,474

698,5073,365,975

111,18214,950,138

5,910,0543,193,0204,859,3834,180,701

4,864,420

1,304,09110,356,013

525,1563,475,684

111,35114,468,204

5,482,9283,559,8924,970,0354,015,241

4,873,085

31-Dec-07 31-Mar-08 30-Jun-08 30-Sep-08


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CAAH’s lacks sufficient cash for all of its capital needs. While AoHong has historically reported profitable opera-tions, under Chinese law the Company is not able to use funds from that company to pay operating expenses in the U.S. As a result, the Company will require additional capital to continue operations.

Outlook

The Company has disposed of its Biometrics and Big Tree segments and acquired a refrigerants distribution business which can leverage its strong position in the Chinese market. As a result of asset restructuring, CAAH retains a 56% ownership in Shanghai AoHong Industry Co. This business generates annual sales of $35 mil-lion-$40 million and net income of $2 million-$3 million per year.

AoHong is growing its business by escalating manufacturing capacity, developing innovative products, and establishing a market presence and strategic partnerships in the Americas. It has recently commenced manu-facturing steel cylinder refrigerant products on a new production line and completed construction of a new 8,000-square-foot factory dedicated to environmentally friendly products. Aohong has obtained DOT-39 certifi-cation enabling it to export non-refillable steel cylinder tanks to the U.S. market.

We expect CAAH’s revenues to rise to $44 million in 2o10, resulting in net income of $2.4 million. We think the Company’s profit margins will recover in 2009 as material costs decline in response to the lifting of the ban on the transport of chemicals and the disposition of the unprofitable Biometrics and Big Tree segments.

Comparative analysis

The Company competes in the global fluorochemical and refrigerant market with established players like Al-coa Inc., Arkema SA, E.I. DuPont de Nemours & Co., Honeywell International Inc. and others. These chemical industry’s company trade at median P/S multiples of 0.51 times 2010 revenue and P/E multiples of 10.26 times 2010 EPS.

Valuation

Financial outlook

Source: Analyst estimates

Net revenues, $ MnGross profit, $ MnOperating profit, $ MnNet income, $ MnDiluted EPS, $

Gross MarginOperating MarginNet Margin

16.32.3

(0.7)(1.1)

(0.012)

14.1%-4.2%-6.9%

37.13.71.50.2

0.003

10.0%4.2%0.6%

39.44.83.01.9

0.014

12.1%7.5%4.9%

43.65.43.42.4

0.017

12.4%7.8%5.5%

2007 2008E 2009E 2010E


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CAAH trades at a sizable discount to its peer group based on P/E and P/S multiples. Despite the smaller size of the Company and greater risks associated with doing business in China, we believe CAHH deserved a higher multiple.

We value CAAH at 8.00 times 2010 EPS. Accordingly, we are initiating coverage of China America Holdings Inc. with a Speculative Buy rating and a $0.13 price target. However, we strongly advise investors to consider the risk factors mentioned below since a Company at this early development stage faces many challenges in attaining its production targets.

Peer comparison

Source: Yahoo Finance

Alcoa Inc. EI DuPont de Nemours & Co. Dow Chemical Co. Honeywell International Inc. 3M Co.Arkema SAMedian

China America Holdings Inc.

AADD

DOWHONMMM

AKE.PA

CAAH

8.424.5710.8833.4452.3913.28

0.02

6,72022,17010,06024,38036,330

726

2.7

n/m11.9910.3610.6812.53

6.7810.68

12.9210.41

9.1410.1011.626.39

10.26

0.370.740.210.721.630.140.55

0.320.690.210.731.610.130.51

Company Name12.01.09

Tickersymbol

Price per

Share, $

Mrkt. Cap.$ Mn

P/E P/S

2009E 2009E2010E 2010E


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History of losses

The Company has an accumulated deficit of $16.7 million. The acquisition of AoHong and disposal of Big Tree and Biometrics will likely allow CAAH to turn profitable and being reducing the accumulated deficit. However, as a result of China’s currency restrictions, profits from AoHong’s operations are not available to the Company to offset its cash needs in the U.S. As a result, CAAH will need to raise additional capital to fund its commitments and operating needs.

Ability to integrate AoHong and meet SEC reporting requirements

In June 2007, the Company acquired a majority interest in AoHong. The original owners of AoHong retain a minority interest and are responsible for its day-to-day operations. While AoHong reported solid results for the first nine months of 2008, there is no assurance that CAAH’s efforts to integrate its operations with AoHong will be successful or that benefits of the acquisition will be fully realized. In addition, the Company must prove its ability to operate and report under SEC requirements.

Significant competition

The market for liquid coolants in China is very competitive. There are approximately 13 coolant distributors op-erating within China, of which CAAH estimates approximately four or five are large companies and the remain-ing eight to nine are smaller companies. The Company believes it differentiates itself from its competitors by its ability to accommodate a variety of order sizes and meet customer demand on short notice.

Country risk

Chinese operations are subject to the PRC legal system. Since 1979, many laws and regulations addressing eco-nomic matters have been promulgated in the PRC. Despite this, China does not have a comprehensive system of laws. In addition, enforcement of existing laws can be uncertain and sporadic, and implementation and interpre-tation inconsistent. The PRC judiciary is relatively inexperienced in enforcing these laws, resulting in a higher than usual degree of uncertainty in litigation outcome. Even where adequate laws exist, it may be difficult to obtain swift and equitable enforcement.

In the last 20 years, the protection afforded foreign investors in Chinese businesses has improved significantly. However, there can be no assurance that changes in legislation or its interpretation will not adversely impact future business operations or prospects.

Risks


March 4th, 2009


Mr. Hu has served as CEO of AoHong since co-founding the company in February 2000. From May 1993 to April 2000, Mr. Hu served as vice general manager of Shanghai Lixin Gas Co. Ltd., an industrial gas and refrigerant manufacturer. In this role, he was responsible for sales and business development. From September 1982 to May 1993, Mr. Hu worked for Shanghai Chemical Light Industry Co. Ltd. in sales and marketing.

Aihua HuChief Executive Officer, AoHong

Mrs. Zhi has served as CFO of AoHong since October 2002. She was an accountant at Singapore Liquan Information (Shanghai) Co. Ltd. from April 2001 to September 2002. From October 1993 to March 2001, Mrs. Zhi was an accountant and then director of the accounting department at Shanghai Lixin Gas Co. Ltd., a large industrial gas and refrigerant manufacturer. Mrs. Zhi was responsible for budget forecasting, financial analysis and other accounts payable and accounts receivable related issues. From November 1973 to September 1993, she was an accountant for Shanghai Hongkong Hardware Electric Co. Ltd.

Huayan ZhiChief Financial Officer, AoHong

Management Team

Prior to joining the Company, Mr. Wang was the director of the Information Department of Shanghai Min-gjia Real Estate Development Co. Ltd. from June 2006 to November 2008. From January 2004 to May 2006, Mr. Wang was the vice president of Shanghai Zhida Industrial Technology Development Co., Ltd. Mr. Wang was a marketing manager of Shanghai Yazheng Information Technology Co. Ltd. from October 2000 to December 2003. From 1994 to 2000, he traveled to New Zealand and received training in business ad-ministration at Auckland Institute of Technology. From November 1990 to August 1994, Mr. Wang was a marketing manager in the Shanghai Representative Office of Hongkong Yilong Technology Development Co. Ltd. Mr. Wang was a teacher at the Shanghai Police College from August 1984 to October 1990 and received a bachelor’s degree in computer science from Shanghai University in 1984.

Shaoyin WangChairman, Chief Executive Officer, President and Chief Financial Officer


March 4th, 2009


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Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Produc-tivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

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shanghai market

friendly products

china faw group

nonrefillable cylinders

friendly fluoro products

refrigerant r22