China 3C Group (OTC:CHCG-OLD) held a hastily-scheduled conference call on 09/17/2007 after their stock went into free-fall at the previous week's end, falling nearly 50% at one point on extremely heavy volume. Ostensibly, the catalyst for the decline was an SEC filing announcing that their previously announced $11M PIPE funding fell apart though this seemed a major overreaction. Some key points from the call are summarized below:
09/17/2007 Conference Call Highlights (all numbers US$)
- $11M PIPE financing fell through, which will slow their expansion efforts
- They lowered guidanced from $0.50-0.54 to $0.40-0.44 based on lowered revenues of $310M-330M.
- Q3 sales estimated @ $64M-82M and Q4 should be better than Q3.
- Company finally released some rough ad hoc same-store sales figures
- Q2 2006 - they had 2 subsidiaries with 322 store-in-stores (SIS) w/ sales of $28M
- Q2 2007 - the same subsidiaries -- 354 SIS w/ sales of $33M
- Sales rose 18% while locations increased 10%
- In the 2nd half, the comp base will be around 800 locations
- Based on organic growth, they anticipate having 1,000 stores by YE 2007.
- 2008 should see 20% organic growth across the board.
- NASDAQ listing still in the works for YE 2007.
According to Joe Levinson, their IR guy, this revised guidance is based on bare-bones organic growth and their assessment of the minimum expectations for results during the remainder of the year. They hoped that providing the absolute lowest guidance would stabilize the stock as investors realize the company is not going out of business. The company does not anticipate acquisitions to benefit results this year and also mentioned a closure rate of 10-20 stores this year due to underperformance.
There are serious concerns. China 3C missed on Q2 results and now, lowered guidance for the rest of the year. They risk establishing a track record of disappointment and underperformance. Investor communications remains inadequate and much of this conference call were callers making suggestions on improving this. And finally, the company is vague on its plans for moving forward. Perhaps this may be excused when the company is growing by leaps and bounds but once earnings are missed and outlooks lowered, investors demand answers on how the company plans to fix the situation.
My original DCF analysis used trailing-twelve-month [TTM] numbers so based on straight numbers, I am keeping my position intact for the time being. If this had been an exchange-traded stock in a more transparent country, I would have doubled down on my holdings but the opaque, OTC nature of the issue makes me wary of overbetting. However, I'm willing to wait for next quarter's results for several reasons. First off, the company has taken a number of steps to establish credibility -- switching to an American accounting firm, bringing Kenneth Berents and Todd Mavis onto the board, working toward a NASDAQ listing. Also, their business model is attractive as they generate sales on very low overhead in a country teeming with possible new consumers. Finally, their main officers are very young. The CEO is 38 while the CFO is 33. Much of the miscommunication can probably be chalked up to inexperience combined with the cultural gap. To this end, they brought in Joe Levinson for investor relations. He's gotten off to a very rocky start but hopefully will get more acclimated going forward.
I do not think the loss of the PIPE financing will have an adverse long-term effect on the company's operations. The stock is still cheap based on cash flow, even with the lowered guidance. But this is my most speculative position and I'll be monitoring it closely for any further misses or disappointments.
Disclosure: Author holds a position in CHCG.OB