Shares of Douyuan Printing, Inc. (DYP) recently plunged on news that "Effective as of September 6, 2010, Deloitte Touche Tohmatsu CPA Ltd. ("Deloitte") was dismissed by the Audit Committee (the "Audit Committee") of Duoyuan Printing, Inc." You can read more about the dismissal here.
DYP manufactures sophisticated offset printing equipment. The main issue in that filing appears to be this statement:
In the course of its audit procedures, Deloitte identified supporting documentation for approximately RMB24 million of expenses related to advertising and tradeshow costs, the authenticity of which could not be verified to Deloitte's satisfaction. Deloitte suggested to the Audit Committee that it investigate these expenses. The Audit Committee has undertaken an independent investigation.
After reading this filing it appears that the market has overreacted to this event. The amount in question is not a significant amount relative to the cash position, or revenues (around $125 million per year), and the issues presented seem totally resolvable. The shares dropped from $7.50 to about $2.35 on this news. DYP has about $91 million in cash on the balance sheet which equates to about $3 per share in cash. At $2.35 the shares are trading well below the cash levels and even further below the approximately $6 per share in book value. If you consider that DYP has around $91 million in cash, minimal debt and a market cap of roughly $80 million, the market is essentially saying that the business operations have no value. I believe that the business does have value. The company is profitable and has earned almost $1 per share in the past year and is estimated to earn about $1.30 per share in 2010. There is always the risk that additional and more serious issues surface but for now, it seems that the reward outweighs the risk.
DYP has an interesting connection to another Chinese company. The founder and chairman of DYP is the founder and chairman of Duoyuan Global Water, Inc. (DGW) which also trades on the NYSE. The chairman of these two companies has very significant shareholdings in both companies and this should provide strong incentive to appoint a new auditor and file the financials as soon as possible. The shares of DGW have suffered since the auditor issue was announced at DYP and so the stakes are twice as large here.
The shares appear to have bottomed out and at these levels, the downside risk should be limited as long as management moves to resolve the auditing issue in a reasonable amount of time. If a new auditor is appointed, I expect the stock to start rebounding and continue to make additional gains towards fair value as financials are filed. The shares will have some tax loss selling pressure but that only makes the buying opportunity more interesting. Stocks that see end of year tax loss selling often rebound sharply in January. If DYP can put these issues behind them, investors will once again focus on the growth potential this leading Chinese company has for the long term. Short term traders should also be able to take advantage of the opportunity here. Even a move back to $3.75 would generate returns of about 50% from these levels.
Disclosure: Long DYP