China 3C Group Finally Turns a Corner

Since announcing its preliminary Q2 results on July 10th, China 3C Group (CHCG.OB) has been on a roll. It was only less than two weeks ago that its stock price languished at $1.20, amid listless trading. Tuesday CHCG.OB closed at $2.17, a gain of over 80% in just nine trading days.

Of course, this is attributable to its better-than-expected financial results. Q2 sales is expected to come in between $81.5m to $82.5m, a 26%-28% increase compared to the prior year results. Net income is expected to be in the range of $7.3m to $7.4m, giving us an approximate EPS of $0.14 compared to $0.10 in the same period last year. These numbers trump the consensus earnings estimate of $0.11 on revenues of $69.9m for the quarter.

This also means that my previous expectation that the company's revenues would be flat for FY2008 has to be revised. With an approx. 27% improvement in top line, CHCG has already more than made up for the shortfall in sales for Q1 (an increase of $17.5m versus a decrease of $16.3m). In other words, even if growth remains flat from here on out, the company would still register a 13.8% growth rate for FY2008. Accordingly, I'm revising my previous (very conservative) FY2008 EPS estimate of $0.25 and doubling it to $0.50 (note than FY2007 EPS was $0.44).

If that appears aggressive, consider the two following pieces of good news. First, the company has just signed with Hangzhou Hansi Brand Design ("HHBD"), a Chinese advertising agency, to display ads and product information on HHBD's clients at CHCG's location. CHCG will in turn pocket a portion of the advertising revenues. Recalling the fact that CHCG currently operates in over 1,000 locations, these ad revenues could be quite substantial indeed. And that's not even counting the shopping bags, TV screens and company promotional materials on which ads could be placed. In short, this is a new and exciting revenue stream for CHCG, in a country where consumerism sometimes feels like a runaway train.

Second, CHCG's online partner 3c800.com has been doing gangbusters in e-commerce space. CHCG is the exclusive 3C supplier to this site, run by Hangzhou Xituo. One only needs to look at this chart to realize how well 3c800.com is doing. Six months ago, 3c800 ranked as the ~38,000 most trafficked site in all of China. Today its ranking is ~3,700, with traffic growing at more than 300% in the last three months alone.

The bottom line is, I believe CHCG has finally turned a corner and this is cause for optimism. That is not to say that the company has no major challenges in the months ahead - it certainly does. But I do think it is safe to say that the days of the low $1 trading range are well behind us.

My Position: Long.

Comments

[Karl Francis:]

This stock is grotesquely undervalued.

The downfall of the share price was caused by deficient communications from part of the management, a very conservative outlook for earnings at the beginning of the year and a general lack of interest in Chinese small caps this year. Such phases are recurring and are usually followed by some explosive share price recovery.

With current business trends, earnings of $.50/share in 2008 look very conservative.

Operating wise, management is doing a very good job - low cost operations, very fast turnover of merchandise. No debt, net cash currently around $35M or $.70/share.

Management is looking for acquisitions accretive to earnings. Without acquisitions, net cash will be around $50M or $1/share at year end.

Deducting that cash, expected 2008 PE is close to 2

It’s a $10 stock. The stock is coming down from $8.5. Nobody should be surprised if that level is revisited in the next 12 months.

2008 Jul 23 05:53 AM

[Tom Santamaria:]

2008 was suppose to be a off year for CHCG's upward growth trend with a return to previous growth trends in 2009.

Well as 2008 preceeds it appears CHCG management was only being conservative in its forecasts.

Only one good acquisition could put CHCG back on its previous growth track & it now appears 2008 eps will beat 2007 eps by at least 10%.

The pps meanwhile is even after rallying of late is still well off it 52 week high.

2008 Jul 23 09:03 AM

[megiddo666:]

The company is grossly undervalued, and will quite well, and the recovery in Chinese small caps will add fuel to the stock price. One more quarter of great earning will do the trick.

Disclosure - Long

2008 Jul 23 09:28 AM

[sbao:]

Thanks for your exhaustive work on 3c, I ve been burn everytime i pick up this stock but I am tempted. I just have a question do you ythink this is a good buy at the level and where do you see this stock going in the next 12 months. People throw figures around to dtermine how much a stock is worth or dicounting to book value a litle crash course in that area will be helpful. Perhaps this is something I ought to send you a private e-mail. Thanks again.
SBAO

2008 Jul 23 12:30 PM

[wagnermr14:]

Other than distribution does 3C have any equity in 3c800.com?

2008 Aug 27 03:23 AM

[wagnermr14:]

Does 3C have an equity in 3c800.com?

2008 Aug 27 03:23 AM