China 3C Group Gets Catalysts From Best Buy, Intended U.S. Listing

China 3C Group (CHCG.OB) is a Chinese company that distributes electronics to retailers and operates 200-300 ft. “stores within a store” in major electronic retailers. The company has a market cap of just over $200M.

I’ve been tracking CHCG for several months, impressed with its low valuation (projected 2007 PE of under 16), clean balance sheet (over $5M in net cash) and enormous group prospects. As the Chinese middle class grows dramatically, so too is the population’s desire for the luxury items such as cell phones and MP3 players. At a recent investor presentation, the company promised to have 4,000 stores and $1B in revenue in 2010. In 2006, CHCG had revenue of $148M and ended the year with 800 stores. Its growth story is already off to a good start- the company turned in revenue of $84.5M and profit of $6.5M in the 2007 first quarter while opening over 100 new stores.

Despite the impressive numbers and prospects, I’m reluctant to dip into an OTC-traded foreign microcap. The company primarily operates in such stores as Gome, Carrefour, and Suning - perhaps household names in China, but nothing you’d expect to see at your local mall. Before investing in a company like this, I need to see some evidence of legitimacy- a profile in a major U.S. publication or contract with a major American company.

On June 15, I got the validation I needed, as the company announced that it would supply products and services to Best Buy’s first branded store in China, which opened earlier this year in Shanghai’s upscale Xujiahui district. Best Buy Int’l CEO Robert Willet recently commented, “the store is doing incredibly well. To say that it exceeded our expectations would be an understatement.” Based on this success, Best Buy plans to open another 10 stores around Shanghai in the next 18 months, providing even more opportunities for CHCG.

Another positive catalyst could hit later this year, as CEO Zhenggang Wang intends to list the stock on a major U.S. exchange.

The stock immediately jumped following the Best Buy announcement, only to fall back the remainder of June. July has brought increased volume and what looks to be a renewed up-trend, and I believe new investors can enjoy a ride to the double-digits.

Disclosure: SmartGuyAB is long CHCG.OB

Comments

[stechlier:]

Another new day, another overhyped China story.

SmartGuyAB gets all the validation he needs for an investment in 3G group when Best Buy opened its first branded store in Shanghai and chose 3C Group as a supplier. Validation of what? They can open up a store? The modern business history of China is filled with the greatest American companies that have struggled big-time in China: Google (minority market share), Ebay (losing market share, bad acquisition), and Wal-mart (losing to competitors). Best Buy is way late in the game playing with companies with entrenched leadership position, localized market knowledge, and huge amounts of cash. Best Buy is a non-factor in the China market. SmartGuyAB can talk about Gome, Carrefour, and Suning as "nothing you’d expect to see at your local mall," but yet can't see that Best Buy is "nothing you’d expect to see at your local mall [in China]?" Isn't it ironic, don't you think?

Let's do some due diligence here. The two areas that the China 3C Group focuses on are cell phones and...drum roll...fax machines and corded phones. You're going to place a huge bet on a company that does most of their sales in the distribution of largely commoditized products like fax machines and corded phones? Right...

They have no competitive advantage when it comes to fax machines and corded phones. These major retailers in China Gome, Carrefour, and Suning can go direct with the suppliers like Brother, Samsung, HP, and others any time they want. 3C's agreement with these China chains is very, very weak. All these huge retailers in China have to do is pick up the phone and they can cut out 3C anytime to boost their margins. Or, maybe these retailers think that this market segment is way to way to weak to get involved in. Either way, this does not portend the kind of growth estimates that 3C is overhyping.

Second, mobile phones. The market for mobile phones is highly, highly competitive in China with thousands of companies selling a huge range of handsets. Even if they manage to grow in this area, they are by no means the leader and margins will be slim to none.

3C group is another example of a way overhyped China story that is easy to fall for. It is not the real deal. Your money would be way better spent on China market leaders in rapidly growing industries of which 3C is obviously not.

2007 Jul 16 10:11 PM

[Max Petrisek:]

I believe the argument that CHCG has a lot of vulnerability is correct. Their product has little propietary advantage and possibly little price advantage if any. Why should the big Chinese reatailers or Best Buy plan to use CHNG as their source of a commodity type product. Thers is a small case for some of the "old products" to be in vogue in China and not in the more advanced countries? Even CHNG states the Best Buy may add $ 2M/ yr. to sales. No big deal yet! I am a owner of CHCG but with some skepticism that they can have good returns even on big sales growth. The BB deal was just a small pip and then it melted away in a few days. That isn't a big selling point. What is the "BIG PICTURE?"

2007 Jul 21 08:12 AM

[Siwei Zhong:]

these days any company with the name 'China' can sell.

though i have absolutely no interest in this China 3C, i've done a little sanity check

just visited the company web site www.china3cgroup.com

the whole site is PURELY in English, a very standard 'corporate web site' using familiar boilerplate type of template.

wait... may be we shall think again what's the objective of having a company web site? is it a means to done purely in English I think its objective is more of the latter.


I will avoid all these sort of companies in my portfolio.

2007 Jul 16 11:37 PM

[Siwei Zhong:]

somehting wrong in my message posted. it should read

"...may be we shall think again what's the objective of having a company web site? is it a mean to communicate with 'CUSTOMER' or to sell to FOREIGN INVESTORS'. If the site is done purely in English I think its objective is more of the latter...."

2007 Jul 16 11:42 PM