Cogo Group (COGO), a communications equipment provider, is a Chinese company with a curious case - stock price of $1.9, market cap of $62 million while quarterly revenues are $199 million. Or maybe that is not so curious after all - it is just a reflection of how the American market sees Chinese companies these days. As to the legitimacy of the earnings figure, the quarterly earnings was filed in a 6 K (Form 6 K is the only information given by foreign companies to the SEC between annual reports as they are not required to file Form 10 Q or 8 K), and the actual figure of $199 million was mentioned in an exhibit attached with the 6 K filling, Exhibit 99.1.
It stock is trading at $1.9 which is at a huge discount of its fair value. The company is undergoing a stock repurchase program which indicates that the company feels that the stock is undervalued and has a potential to rise in the future.
It may also be a case that being a foreign company, many investors are not aware of it. So here is how the company describes itself:
Cogo Group is the leading gateway for global semiconductor companies to access the rapidly growing Industrial and Technology sectors in China. It is mainly present in the B2B market. Cogo designs customized embedded solutions using technology from suppliers including Broadcom, Xilinx, Atmel and others for a customer base of over 1,600 Chinese OEMs/ODMs. Cogo's customer list includes approximately 100 blue-chip companies, including ZTE, BYD and NARI, as well as nearly 1,500 Small and Medium Enterprises (SMEs). The Company serves a broad list of rapidly growing end-markets in China, including 3G Smartphones, Tablets, Automotives, High-Speed Railway, Smart Meter/Smart Grid, Healthcare and High Definition Television "HDTV".
The company's description does give a nice picture and distinguishes itself from other Chinese companies but, let us have a look at the recent events for the company which can give us a hint of its expected future performance.
CEO bought assets
Last year, the Chairman and CEO of Cogo, Jeffrey Kang acquired certain subsidiaries of the company representing approximately 30% of the company's total assets, liabilities and business operations. The subsidiaries acquired were: Comtech (NASDAQ:CHINA) Holding, Comtech (NYSE:HK) Holding and Alphalink Global Limited. The acquisitions have been made for about $78 million. This transaction translates into a valuation of over $6 per share of Cogo. This deal hints that the CEO thinks that the company is undervalued.
In its Q3 2012 earnings call, a transcript of which is available on Seeking Alpha, CEO Jeffrey Kang said:
I am pleased to announce that I have presently completed the transfer of the $278 million required to close my proposed acquisition of certain subsidiaries of Cogo. This fund will help to fund already approved the 10 million shares buyback and as the Audit committee consisting of three independent board members recently approved the terms of the deal, I continue to strongly believe that the closing of this deal will help to legitimize the overall financial assets of Cogo. After the closing of the deal, we believe that our overall gross margin will improve because assets I intend to purchasing has a lower gross margin than Cogo's overall gross margin. And as stated in the press release Cogo's financial payment will be updated to show the sales during our next earnings call in February. Please remember that after the close I will still own over 30% of Cogo, I will be far and away its largest shareholder and my number one goal remains enhancing the shareholders that's for Cogo.
Cogo earns revenue from its product sales and the revenue achieved through providing technology and engineering services. Cogo has posted revenues in the previous two quarters. In the 4 Q 2012 Cogo has declared unaudited revenue of $199 million which is the highest quarterly revenue in the history of the company. The company has a good gross margin of about 6% in 4 Q 2012. Its balance sheet is sound and has current assets of $141 million. The interesting thing to note is that the company has cash of $71 million which is about 50% of the current assets. It has low debt levels after the sale of some of the assets, and net assets of $77 million in 4 Q 2012.
In the 3 Q 2012, the revenue of the company increased 47% over 3 Q 2011 but the gross profit decreased 10.9% from $15.15 million in 3 Q 2011 to $13.5 million in 3 Q 2012. This decrease is mainly due to an increase in exposure to the SME clients.
Stock Repurchase Program
The company is undergoing a stock repurchase program. Under the program it has announced to buy 10 million shares of Cogo which represents a big 30% of the outstanding shares (about 33.85 million). The buyback began on September 24th, 2012 and till November 15, 2012 it has repurchased 3,220,152 shares in the open market. Still 6.5 million shares are left as per the repurchase plan. The repurchase clearly shows that the company believes that its shares are highly undervalued and are currently trading at 40% of the Cogo's book value of ------$7.70 per share. The company has a high pile of cash and is using it strategically in the form of stock repurchase.
Cogo is buying back its share in huge quantities which also poses a question: Is the company going private?
Cogo's stock is currently trading just below $2 but the company is small as the market capital is only $64 million. Currently, the stock is trading at $1.9 and as seen from the repurchase plan, it is at a discount of over 40% of its book value of over $7 per share. This indicates that the stock is undervalued and really cheap. This may make a buy opportunity for investors for Cogo's stock. The stock has a five year expected PEG ratio of 0.25 and a quarterly revenue growth of 0.46.
Six analysts covering the stock have a median price target of $5 per share. The share buyback may significantly influence the share price upwards. According to fellow Seeking Alpha analyst Shane Blackmon the price of Cogo can reach $5 within 12 months. In 2012, there have been two purchases of Cogo, both by Jim Simons, at prices between $1.80 and $3.13. Jim is the manager of the $30 billion hedge fund Renaissance Technologies, which has consistently outperformed the indexes. 16% of the shares of Cogo are held by all insiders and 5% by owners. 18% of the shares are held by institutions and mutual fund owners and the major holders own 21% of the float as well. So, there may be opportunity for high trading gains from this stock.