China 3C Group: Market Overreaction Creates Buying Opportunity

Investors in China 3C Group (CHCG.OB) have been taking it on the chin in the last few weeks as the company announced that financiers decided to abandon a recently agreed upon PIPE in the company. However, the recent conference call to discuss the issue provided some justification for the cancellation on the basis of market conditions. Specifically, the turbulent market dropped CHCG’s stock price to the point where the investors were no longer receiving a substantial discount for the PIPE, causing the investors to rethink the move.

While the news has weighed very heavily on the stock, its impact on the company appears to be less drastic. After listening to Monday’s conference call given by the company to discuss the issue, it appears that while the collapse of the PIPE deal has caused delays to some planned accreditive acquisitions, the company’s core business remains strong.

In the recent call, CHCG management announced revised guidance for 2007 of EPS of 40 to 44 cents per share for the year on revenues of at least $300 million. This was significantly down from earlier guidance of 50-54 cents for the year, as management stated that the revised guidance was a consequence of the company’s inability to complete an acquisition that would be accreditive in 2007. However, in comparison with last year’s revenue of $148 million and EPS of $0.24, we are still talking 100% revenue growth and EPS growth in excess of 60%.

As well, the balance sheet remains very strong, with the company sporting $15 million in cash and no debt. This, along with strong cash flow, raises the possibility of completing a smaller acquisition funded by company operations. Thus, we may just see the impact of acquisitions in the first half of 2008, which would obviously help propel earnings growth in the coming year.

Despite all of this, investors continue to push shares of CHCG lower, to the point where they’ve sunk below the $4.00 mark. Therefore, I chose to double my stake in CHCG at $3.80 today, with a definite value slant influencing my purchase. Based on the lower end of the company’s guidance (40 cents), the company is currently trading today at a multiple of 9.5 times projected 2007 earnings. Given the 100% revenue growth and debt free balance sheet, the stock certainly appears to deserve a more weighty multiple, but the combination of being listed on the bulletin board and losing previously announced funding is conspiring to push the company to an extremely low valuation.

Comments

[max petrisek:]

This Company had big plans but these plans seem to have developing cracks-recent lowering of future growth estimates. It appears that the competition from bigger Chinese companies in this arena limit their pricing power & sales growth. The Best Buy deal has not been a big deal either. This adds to the meaningful lowering of earnings. I would not consider the lower share price a strong buy as you have. I have sold months ago and now own none.
So I too am biased! The stall in share price is approaching a long year of dead money.

2007 Sep 22 07:43 AM

[User 111036:]

It looks like your investment is paying off now. Now that a few days have past, we have seen shares go back up. Volume was close to a million today and double topped.

2007 Oct 04 07:26 PM