With all the talk of Chinese mobile handset growth, there is less focus on the companies providing the phones' various components. Here is one such Chinese company - that happens to be publicly traded in the United States. A profile and a critical thought:
China Digital Communication Group (CHID.OB) is a China-based manufacturer of battery shells and related technology for use in electronic products, including mobile phones, digital cameras, camera phones, PDAs and laptop computers in East Asia and beyond. The battery shells, both steel and aluminum, are sold to battery makers in the Shenzhen region. The company projects manufacturing volume of 100 million product units in 2005. China Digital also uses licenses, joint ventures, and mergers and acquisitions to bring Chinese battery and telecom equipment makers to overseas markets.
Key information (as of March 11, 2005):
- Share price: $1.10
- Shares Outstanding: 54.5 million
- Market Capitalization: $60.0 million
- Float: 13.2 million
- % of shares held by insiders: 76%
- 52 Week High: $2.55
- 52 Week Low: $0.76
Market opportunity:
- China's domestic mobile phone battery market is expected to reach 570 million units in 2005, up from 450 million in 2003.
- Chinese domestic battery sales are expected to increase 14% to $2.1 billion in 2005.
- The company believes that strong demand for mobile phones means strong demand for both mobile phone batteries and battery shells.
- Expanded R&D operations to develop and improve product lines. Cut raw material costs by 2-3%.
- Opened an office in the US.
- Announced plans to move its manufacturing operations to a new location in the Shenzhen region that has 40% more production capacity.
Latest SEC documents:
- 8K (December 16, 2004) - Pro-forma financials for 2002, 2003 and 9 months ended 9/30/2004.
Recent Q4 2004 Guidance:
(according to the company, actual results could differ materially)
- Sales increase of 152% to $2 million from $794,000 in Q4 2003.
- This represents 101% sequential growth over $995,000 in Q3 2004 sales.
- Net income of $33,000.
- Excluding one time stock compensation expenses, estimated net income of $638,000, or $0.01 per share, up 946% from $61,000 in Q4 2003.
- Excluding stock compensation expenses, sequential net income growth of 265% over $175,000 in Q3 2004.
Recent FY2004 Guidance:
(comparisons are year on year)
- Revenue increase of 118% to approximately $4.5 million.
- Net loss of $310,000.
- Excluding one time stock compensation expenses, estimated net income of $890,000, or $0.02 per share, representing an increase of "at least" 574% over 2003.
- Stock compensation expenses for Q4 and FY2004 consisted of a one-time expense for management consulting services incurred in connection with the completion of the acquisition of subsidiary E'Jenie as well as company restructuring.
Balance Sheet Guidance (as of December 31, 2004)
- Estimated cash and equivalents of $400,000, a 295% increase from December 31, 2003.
- No long term debt.
FY2005 Guidance:
- Estimated revenue of $8.5 million, or 89% growth year-over-year.
Upcoming events:
- CHID expects to report Q4 and FY2004 results on March 31, 2005.
Web site:
http://www.chinadigitalgroup.com/
Quick thought: With a limited operating history, and no sense of any comparable companies with which to compare CHID, a valuation is difficult.
However, if we assume the company's guidance is on target, and it earns $0.02 a share (excluding charges) for FY2004, CHID would be trading at a PE multiple of approximately 58. If we assume then that the company is fairly valued at present, it generates $8.5 million of revenue in 2005 (guidance released by the company), and it maintains a 20% net margin, the company would earn $0.03 a share in 2005, and be fairly valued around $1.80 (CHID now trades at $1.10).
Of course, for China Digital, a 58X PE multiple sounds a bit pricey.
Well, remember, this is a Chinese stock - and investors LOVE Chinese stocks. The company also has a darn good PR machine, and is aggressively spending advertising dollars to promote the company to the investing community.
Since the beginning of February, CHID has been profiled in, can you believe, FOUR small-cap newsletters. Feel free to click on the links to view the newsletters: WallSt.net, Secret-Money.com, SmallCapReview.com, and China-AsiaStocks.com. But a word to the wise, they all provide essentially the same information.
This is what they all have in common:
- None offer any valuation analysis.
- None offer any projections aside from what was released by the company.
- None offer customer information except for a consistent reference to a "solid customer base in the Shenzhen manufacturing sector".
- The newsletters are all salesy, make extensive use of superlatives, and place great emphasis on the market opportunity for battery shells due to the booming cell phone market.
- All claim that the company profile material is for information purposes only, and should not be construed as recommendations. Yet 3 of the 4 newsletters have sections entitled “Why buy now
