5 Reasons Why China Retail, China 3C Group Are on a Roll

First announced in late November, China 3C Group (CHCG.OB) has now affirmed its FY2007 fully-diluted EPS to be between $0.43 and $0.47. This is a relief. The company's shares briefly touched a 52-week low last week, amid radio silence from its new IR firm. In the meantime, a snowstorm lashed the eastern region of China, where CHCG operates.

In fact, retail in China has been on a roll lately, with domestic consumption really kicking in. In my opinion, apart from tourism, retail is the most exciting Chinese sector to invest in right now. These are some data points:

1) China's bank card spending amounted to US$4.03 billion during the recent Chinese New Year holiday, up a whopping 59.7% from the previous year.

2) Shanghai, where CHCG operates, experienced its highest retail sales in 8 years during the recent festive period despite the snowstorm, with overall spending up by 20.5% from a year ago.

3) China recently overtook the U.S. as the second largest retail gold market in the world (ranking after India), with sales expanding by 23.5% in 2007.

4) Wal-Mart (WMT) store sales in China exceeded expectations in 2007 with many foreign retailers currently looking to get in. In the past quarter alone, we saw announcements from U.K.'s Tesco and Korea's Lotte.

5) Overall retail sales in China surged 17% in 2007, much greater than its GDP growth in the same period, and easily besting 2006's 13% increase.

Is it any surprise that China's CPI rose by its highest ever rate of 7.1% in January? According to reports, this was due less to the effects of the snowstorm (and lack of supply) than to the excessive growth of money supply.

In fact, CHCG should already be well on its way to finishing its annual report for 2007, and I suspect, may even be conservative in this guidance. After all, one has to consider that in Q4, in addition to the period being the lead-up to the Spring Festival, the company established an online presence, expanded the number of outlets and product offering, and more interestingly, its CEO bought a total of 120,000 shares, all in the $3+ range.

Tuesday's announcement from CHCG also represents the first press release from its new IR firm ICR. I certainly encourage more communication, for its share price jumped by over 10% and is already more than 20% above its 52-week low. What a difference a day makes.

My Position: Long.

Comments

[megiddo666]

Great summary. A couple of anecdotal comments from the Google message board add to your premise, made by zhisheng. This first regards the Chinese retail business cycle, the second the winter strom impact inrelation to CHCG:

1) I am Chinese and here are my two cents: there are two peaks of
weddings in China's rural or urban areas: The first lunar month
(Mainly from the Spring Festival to the 15th of the the first lunar
month), and October when most people have at least one week long
holidays (National day on Oct 1). Getting married is becoming more and more expensive now in China, I don't have the number but besides
furniture following things must be purchased for their new home: a
nice TV, digital camera or camcorder or both (to record the phynomenen events of the new couple like wedding, birth of new baby, etc.), a PC (remember China became number one in internet users, most average home has one PC, though the family does not use them very often - Chinese are very fast to pick up new technologies :) Now you know what this mean to the Q1 and Q4 earnings of electronics stores like China 3C.

2) The winter storm would have some impact on the sales but I would not worry too much in a long run. I talked to my friends in China on this issue, they are all optimistic with 2008. Plus the regions that were
hard hit are mainly in Hunan and Guizhou, China 3C's sales region are
mainly in Jiangsu and Zhejiang (big cities as shanghai, nanjing and
hangzhou are in this region), the impact of the snow on this area is
not that bad, people lived normal life during the storm - they
experienced a few cold days and the streets were slippery due to ice,
other than that I've nothing very severe, like the cut of power lines
and close of the stores, etc.

[bigrgub]

Hey Bro you have been consistently wrong on this stock and I have followed your lead. Do you have any insight into what the H is happening to this pilllaged dog?

[migman]

I have been following this stock for about a year. The stock drop has nothing to do with financials. This should be a 6-7 dollar stock based on past results and future sales opportunities that have been announced recently.

[AlanA]

You have been upbeat on China 3C Group since I have been reading your articles. As an investor since 2006 I find it interesting that you have not addressed the freefall this stock has suffered. The financials most certainly justify a much higher value. It makes me wonder what really spooked the investers last year to pull out of the financing for their expansion. I feel that something is not right in the reporting of this stock and am wondering if I am another smuck stuck holding the bag. As a matter of fact, your optimism for this stock is so out of line with it's performance, I wonder if you are on their payroll. I don't mind going against the flow of things, but I feel as if their is some negative information about China 3C that is not public knowledge.