China Direct: The Undervalued Newcomer

China Direct, Inc. (CHND.OB) maintains active, majority stakes in a diversified portfolio of Chinese companies, in addition to offering consulting services for both private and publicly traded Chinese entities. According to the company's website:

China Direct provides a platform to develop and nurture these entities as they expand their businesses globally. As your direct link to China, our Company serves as a vehicle to allow investors to directly participate in the rapid growth of Chinese economy in a diversified and balanced way.

CHND is relatively new to the OTCBB market, having debuted in November 2006, and is currently trading on relatively low volume. Yesterday, CHND released their Q1 earnings report with some impressive numbers, especially after some promising acquisitions made in October 2006 (see conference call transcript). Revenues increased from $206k in Q1 06' to $30m this quarter.

"The increase in revenues was mainly attributable to the three companies acquired in China since October 2006, Chang Magnesium, Lang Chemical and CDI Wanda Alternative Energy, as well as a strong performance from its consulting division," said CHND.OB in their conference call.

Income increased to $1.8m and .14 eps compared to $156k in Q1 06' . Now, this growth is quite extensive but take into consideration that this quarter included their three new acquisitions, which the previous quarter didn't. However, looking at Q4 06's results there was large sequential growth there as well, with $13m in revenues and $156k net income compared to the $30m and $1.8m Q1 07'.

Looking forward CHND gave 2007 full year guidance of $120m in revenues, recently raised from $100m, and net income of $6m raised from $5m. Now, looking at the forward ratios CHND looks very cheap at its current levels with much room to run into the future in light of catching up with
its growth.

At yesterday's closing price of 3.50, CHND is a very small company at $46m with a low float of just $13.2m shares O/S, giving CHND the ability to become very volatile. At just $46m market cap, CHND is expecting almost three times this amount in revenues for 2007, giving it a very attractive forward price to sales ratio of .38.

The forward P/E of CHND.OB looks very attractive as well; given that CHND doesn't issue more shares through dilution, they are expecting to have .45eps for full year 2007, placing their forward price to earnings ratio at a low 7.77. CHND look very cheap from this perspective being that the management services industry's average P/E ratio is 344% higher at 34.5x earnings

Technically, yesterday's breakout on the company's record volume, with a very healthy 20% rally to breakout out a bullish trading channel off of its all time lows, signifies the beginning of a possible very bullish new trend to come in the future.

All in all, CHND looks cheap to me at these prices and, in conjunction with its recent bullish activity technically, this is a combination for cash in the pocket.

CHND 1-yr chart

Disclosure: No position held currently

Comments

[Daniel Su]

www.sec.gov/Archives/e...

Has anyone read their SEC filings?