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Subject:  KHD Humboldt Wedag International Ltd (NYSE: KHD) Date:  9/16/2008  3:02 PM
Author:  TMFRedwood Number:  81 of 89

KHD Humboldt Wedag International Ltd. (NYSE: KHD) September 16, 2008
Recent Price: $19.88

Market Capitalization  $606 M	Enterprise Value:  $176 M  	Minus Investment: $86 M
2007 Revenue $580 M Net Income $51 M ‘07 FCF: $127 M ’06 FCF: $38 M
Dividend yield: n/a Shares: 30.5 M
P/E: 11.9x Adj. EV/Adjusted Net Income*: 6.1x Adj. EV/EBITDA*: 5.1x
*Using an EV of $286 M and adjusting net income to remove $8 million of after-tax interest income
Intrinsic Value: $25-30

Company Description
KHD is a leading industrial plant engineering company. It supplies proprietary technologies to the cement, coal, and mineral processing industries including kilns, calciners, coolers, and grinders used in the manufacture of cement.

Investment Thesis
KHD is a case study in both operating efficiency and capital allocation. It spun off non-core assets and increased its focus on its core business. It is partnering with companies across the world to 1) diversify its product base, 2) more efficiently produce its products, and 3) tap new markets such as China. The shares are cheap due to fears of cyclicality but these are likely overblown and large cash hoard provides safety.

Why Buy?
• Fantastic technology and brand name – dates back to 1856.
• Shift to an intellectual property firm with JVs in local markets
• Incredibly asset light, high free cash flow business – D&A only 0.5% of sales
• KHD is paid in advance of performing work
• Deployment of cash into higher returning operations
• China is open for business due to new JV and earthquake which could inspire shift to quality cement
• Dirt, dirt cheap and still an incredibly obscure company (despite management’s best efforts)
• Chairman is a seasoned capital allocator

Risks
• Major cyclicality in cement and natural resources industries, and we are probably near the top of the cycle
• Leveraged to emerging markets like Russia and Asia
• Recent results buoyed by weak dollar, income from stake in Wabush iron ore mine, interest income from float
• Deployment of cash hoard into new business of building cement plants in Russia carries more risk

Value
I peg intrinsic value at $25-30. The shares are priced for zero to negative growth going forward. This is not at all certain. Yes, we may be nearing a cyclical peak, but the discount offered in the shares is enough to offset any decremental performance. Plus, KHD is fairly well diversified, has a large cash hoard, and is increasing intrinsic value per share through capital allocation and other means than simply market growth. That’s not to say this investment is without risks or scary, it is both. A 1% initial allocation is the order of the day.
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