China 3C Group Gets Pummeled on Stormy Outlook

China 3C Group (CHCG.OB) announced its FY2007 results Monday and revenues and earnings were quite stellar. Sales increased by 86% to $276 million and EPS was $0.44, the high end of guidance. Yet, the stock has fallen to its 52-week low. Why is this the case?

Well, it looks like Q1 2008 is going to be pretty bad. We already know that the recent winter storm was devastating, and now CHCG is quantifying it for us:

The first quarter of 2008, which is seasonally the Company's strongest quarter, is expected to be negatively impacted by the heavy snowstorms that paralyzed much of China during January and February of this year. The Company believes that 2008 first quarter revenue results could fall by as much as 15-20% compared to prior year results of $84.5 million.

Given this, CHCG is expecting overall FY2008 revenues to be flat in the best case scenario, and perhaps even be 5% less than 2007's figure, not accounting for acquisitions. There is an important implication in this, which is: same-store sales growth for the last three quarters of 2008 is expected to equal, at the most, $16.9 million, or looking at it another way, the implied growth rate is a paltry 8.8%, at best. Also note that CHCG closed about 27 non-performing stores in the last three months, and is looking to close another 100+ over the course of the year.

And there is worse news. Due to mandated employee benefits, CHCG's operational margins will be negatively impacted, by up to 5%. I'm now estimating a FY2008 EPS of $0.25 for the company, which would be a decline of over 40% from 2007. Having said that, China 3C has cash of approx. $25 million and is looking to make an acquisition, possibly in the second half of 2008. The company may also consider a share buy back.

I'm going to hang on to my shares for now, as I like the management and believe in the long term possibilities for this company. I suspect it is not until early 2009 that we will see the light of day for this beleaguered company.

My Position: Long.

Comments

[MindBoggling]

Do you know how credible the CHCG story is? How well has the management been able to keep promise? Case in point, plan to list on a major exchange. Do you know the Chinese name of its subsidiary "Shanghai Joy & Harmony"? Or are you able to find out? When basic elements do not fall in place, one has to wonder if its "numbers" even matter all that much.

[Big Steve]

I believe that management is being overly conservative about '08.
Their guidance does not include the effects on net new store openings, an increase in retail prices which usually lag increases in wholesale prices and increased costs, and possible acquisitions.
At the current price it is a tremendous take over target. It is valued at about 5 times '08 earnings.
If you paid $70 million for the company you would acquire $25 million in cash and no debt and earnings of approximately 12 million. At this price an acquirer could borrow the entire amount of the purchase price and still make money after interest payments. This company is way under valued.

[nosbodic]

The only thing I liked about their year-end report was that they didn't sugar sugar-coat it. I hope they're this honest with their numbers.

[Arch]

"The company may also consider a share buy back." - Are those company's words or yours?