Another Lesson In Caution for Investors in Chinese OTC Companies

A full thirteen C.O.P. Index companies (unlucky for some?) reported their earnings Monday (11/19) and the results are truly shocking. ALL EXCEPT ONE COMPANY reported flat or negative earnings growth. Of those, three are losing money with one swinging from profitability to loss.

A quick summary follows. Since this is a snapshot, I focused on the EPS for the 3-month period ending Q3 2007, fully diluted and less any non-recurring income, as compared to Q3 2006 earnings.

These companies reported shrinking EPS: (CHLN.OB), (CRTP.OB), (WWMU.OB), (CYXI.OB), (CDSG.OB), [CKGT.OB], (BPMA.OB), and (SGAS.OB). I discounted the one-time tax benefit accruing to CDSG.OB which inflated its earnings. This company swung from profitability to loss: [LWLL.OB], and two companies are still operating at a net loss: (SOBM.OB) (loss widening) and [SFBE.OB] (loss flat).

One company reported flat EPS growth: (CHBU.OB). The only bright spot is (CIWT.OB), which doubled its EPS from $0.03 to $0.06.

Wow! If this is indicative of anything, it again shows how careful one needs to be when investing in Chinese OTC companies. Luckily, I don't hold any of these stocks.

My Position: None.

Comments

[china_stock_investor]

EPS is a calcuation of net income divided by Weighted Average Common Share Outstanding (WACSO).

Given that some of these companies have only been public for a little more than one year, the WACSO figures are skewed by the WACSO figure when these companies were still shell companies.

For example:

1. CYXI filed a 8K to go public on May 2006. Its post reverse split common share total is 33.6 million and was effected in July 2006.

CYXI had net income of 1.7 million in 3rd quarter 2007 vs. 2.9 million in 3rd quarter 2006 (of which 2.2 million was due to a tax benefit provision). Normalized, income from operations for Q3 2007 was 1.7 million vs. 0.7 million in Q3 2006.

WACSO for the 3rd quarter 2007 was 40,309,204. For the 3rd quarter 2006 WACSO was 11,418,877.

2. CDSG filed a 8K to go public on November 2006. Its post reverse split common share total is 31.5 million and was effected in March 2007.

CDSG had net income of 22.6 million in 3rd quarter 2007 vs. 3.1 million in 3rd quarter 2006.

Normalizing both figures for tax, income from operations for Q3 2007 was 4.8 million vs. 4.6 million in Q3 2006.

WASCO for Q3 2007 was 31.5 million vs. 8.1 million for Q3 2006 (when it still reflected the financials of the shell company)