eFuture's Cash Cow Keeps Getting Fatter

eFuture’s (EFUT) baby cash cow continues to grow fatter, and the pasture it feeds on (China’s retail sales) is getting greener and greener.  The latest results on China’s retail sales again showed impressive growth.  Many people realize that as the global economy slows, China’s export market will also have to slow down.  However, what is important to understand and often times over looked is the fact that China’s domestic retail sales is still in its infancy.  The second quarter retail sales have just come out and again showed that despite a global slowdown in the economy China’s domestic retail sales are still growing….and at record pace!

China’s National Bureau of Statistics just came out with June’s retail sales growth, and it was a 10 year high!  China's retail sales increased to 864.2 billion yuan (126.7 billion U.S. dollars) in June; a growth rate of 23 percent year-over-year.  The growth rate was 7.0 percentage points higher than a year earlier and 1.4 percentage points higher than in May.  Now inflation obviously plays a role in such growth, as it does in China every year, but even after subtracting out all inflation the growth rate was still 14.8%. 

eFuture will continue to benefit from continued strength in domestic retail sales, but due to its small cap nature in this risk adverse investing environment, it continues to go completely unnoticed. 

Bill Barker of The Motley Fool once said:

Small-cap stocks tend to benefit from having less attention focused on them, and therefore more of them (and a greater percentage of them) are likely to be mispriced.  That should be the cornerstone of any investor's market-beating portfolio: small-cap stocks in general, but in particular, small caps free of the investing public's attention.

It is unfortunate that EFUT has now gone completely under the radar, but at the same time it does provide a significant opportunity for those who are looking for a long term investment.  If we take a short but informative glance at the fundamentals and recent developments, it is evident that in time, Adam Yan and company will have grown a very respected software company in China. 

For me, the most important aspect of stable growth for eFuture is their service fee income.  In order for that to grow they much continue to grow their customer base, and therefore growth of new customers will be a key metric for future growth in eFuture.  In the first quarter of 2008 their service fee income grew 241.6% year over year from US$0.19 million to US$0.7 million, while new customers during their slowest quarter of the year grew a total of 117 new orders, a 350% increase from 26 in the same period of 2007.  In the last conference call, I obtained clarification as to what percentage stay with EFUT after the first year of free service and begin paying and the answer was about 85-95% which is a very high retention rate.    

In order for eFuture to continue obtaining new customers, it must maintain a strong product offering and slowly expand its product offering to increase sales of hardware and software that it will obtain service fee income from, which grew 1020% and 33.5% respectively in the Q1 of 2008.  eFuture has been aquiring new companies that fit nicely into the company to help expand its offerings and revenue base.  The individual companies have been talked about in past write-ups, and I would only like to share one small observation so that my article isn’t a thesis.  In the last conference call, Ping Yu kindly explained to me how they pay for their acquisitions.  I was pleased to learn that they pay solely based on performance and their payment is 4-6 times earnings or better understood as a P/E of 6.  So they pay 6 P/E for companies.....very good considering many stocks are trading at 20 P/E on the market. In the graph provided in this link (pdf warning), you see how cheap 6 PE is.  S&P 500 has only been that cheap twice in the last 83 years, 1949ish and 1979ish.  

Disclosure: I have a long position in this company

Comments

[daniela:]

Please stop advertising to lure people into buying this junk. With your explanation it seems China is untouchable. And you really believe that China is not affected by global economy? Do you believe China has inflation problem? Do you believe China is overheated? Do you believe China's market is transparent? How do you judge performance in such market? Please. Spare me.

2008 Aug 07 02:39 PM

[chl:]

While I generally agree with your positive analsys of EFUT; and having been in and out of this company several times since it went public; my personal opinion is that super fundamentals and future prospects will not move this stock. There are several reasons for this: Mostly, the world recession we are teetering on or in, and the great fear investors are experiencing due to numerous losses in many companies. The fear of investing in China both because of it's government system, no confidence in open market forces, and general ignorance of China's present and future roles on the world stage. Also, a large factor is the tiny float (2.8 million shares). This will keep large investors, and funds away due to insufficient liquidity.
What will move this stock is good earnings, company growth, or buying or merging with a large company. This may take some time; but when I look around the world in these troubled times, EFUT still looks like the best way to leverage my money - so that is where my money is also.

2008 Aug 07 07:11 PM

[Shareholder...:]

We have covered the company several times in the past, and continue to be bullish on it. It's an early stage opportunity, it's in a growth market (SCM is in it's infancy in China, relatively) it executes well and has very favourable financials. It's one of those sleeper companies that does nothing for a long while (now battered by the bear in China) and then suddenly burst to life. The latter will come, no doubt.
Shareholdersunite.com

2008 Aug 15 03:33 PM