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SGOCO Group, Ltd. (SGOC) headquartered in China, is a company focused on product design, brand development and distribution in the Chinese flat panel display market, including computer monitors, TVs and application specific products. SGOCO sells its products and services in the Chinese market and abroad.

Change In Business Model

In December 2012, SGOCO Group announced that it has changed the company's business model. The company is transitioning itself from an asset heavy business model to an asset light business model. This change is significant. An asset heavy business is one that requires more assets to realize a profit. An asset heavy business has recurring high capital requirements needed to maintain and grow its business. In SGOCO's case, it was a manufacturer that produced the flat panel displays, utilizing large plants, assembly line equipment and capital. Converting to an asset light business eliminates the large asset costs, and allows SGOCO to expand its product offering and distribution channels. The company plans to expand its existing flat-panel display product lines to include e-boards and smartphones. The change in the company's business model will shift the sales and distribution model from its current distributor-focus to a more diversified model including direct sales to the industry end-customers with its tailor made, application-specific products. This news itself should have sent the stock to new highs, as the benefit of the change will be greater revenue and profit growth.

Stunning EPS And Growth

April 19, 2013, SGOCO Group released its fourth quarter 2012 EPS. Quarterly revenues increased 143.5% SEQUENTIALLY to $63.4 million over the third quarter 2012 revenues, which were $26 million. Net income was $3.2 million as compared to net loss of $1.1 million in the third quarter. Diluted earnings per share were .19 cents compared to a diluted loss of .06 cents per share in the third quarter. This stunning revenue growth is a result of the benefits of moving upwards in the value chain. The company can expand its product mix to meet consumer demand, and at the same time make operational improvements due to lower costs. The company is expecting further growth in 2013. Mr. David Xu, CFO of SGOCO Group said on the company's fourth quarter conference call, "In 2013, we expect to sell more of our market-oriented, application-specific products. Those products are part of the solution products customized for large, industrial, industry end users. Those customized solution products typically have higher gross margin standards of our standard product offering. Management believes that our renewed focus on this development and distribution will set a critical foundation for establishing SGOCO's future market presence in China's display market." According to a global television replacement study, more than 40% of consumers in emerging markets intend to replace or purchase a new flat panel TV in the next 12 months. That is just for flat panel televisions and doesn't even include the smartphone market, which SGOCO is also targeting.

Potential Short Squeeze

SGOCO has 17.46 million shares outstanding with the majority of the shares being held by insiders. This leaves the share float traded in the market to only be 2.88 million shares. A lower float stock is easier for short sellers to manipulate, which I believe has been the case for SGOCO. It may come as a surprise, that the company's first quarter 2013 earnings will be released in the month of May. Based off of the CFO's comments, I am expecting continued growth for the company and another quarter of solid revenues and earnings per share which could ignite a massive short squeeze.

Risks

One of the reasons SGOCO changed its business model was because of the intense competition in China's general display market. So far so good, but the company's ability to implement its strategic initiatives will be key to its success. Keep in mind SGOCO Group, Ltd., is a Chinese ADR, and some Chinese ADRs have had a history of trouble. Also SGOCO is a low float stock, which may cause volatility in the stock price.

In my opinion, the stock is a basement bargain right now and is a solid investment for the remainder of 2013.

Source: SGOCO Group: Firing On All Cylinders