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  • KH: Slow Growth?
     KH reported first quarter earning report this morning. After conference call, KH's share price dropped through $18 level. Obviously, the market was disappointed with KH's slower than expected net income growth. Is KH really slowing down right after IPO? Let's take a closer look. 

    This is from KH's press release

    "Third quarter 2010 net revenue increased 33.9% to RMB63.6 million ($9.5 million) from RMB47.5 million in the third quarter of 2009. 
    Gross profit increased 35.6% to RMB45.7 million ($6.8 million) from RMB33.7 million in the prior year period.

    Gross margin for the third quarter of 2010 was 71.9%, compared to 71.0% in the third quarter of 2009. In addition, gross profit increased sequentially by 17.7% in the third quarter of 2010, from gross profit of RMB38.8 million in the second quarter of 2010.



    Operating income increased 52.8% to RMB32.4 million ($4.8 million) in the third quarter of 2010, from RMB21.2 million in the comparable period of 2009. Operating margin was 50.9% in the third quarter of 2010, compared to 44.6% in the prior year period."

    The only item on the income statement that disappointed investors is the growth rate of net income. 

    "Net income was RMB26.6 million ($4.0 million), equivalent to RMB 0.73 ($0.11) per diluted ADS, in the third quarter of 2010, compared to RMB24.4 million, equivalent to RMB 0.09 per diluted ADS, in the prior year period. Non-GAAP net income, which excludes share based compensation expenses, increased 4.4% to RMB28.2 million ($4.2 million) from RMB27.0 million in the prior year period."

    So why Net Income growth is slowing down? 

    If we check its income statement line by line, we can find in 2009, KH got RMB 6.6 million grants from government. In 2010, the grand decreased to RMB 0.33. Compared to its previous income statements, I think it is one time item. If we exclude this item, 
    KH's adjusted income before tax should be RMB 30.3 million in the past quarter and RMB 21.6 million in the same period in 2009. The growth rate is more than 40%.

    KH had RmB 2.9 million foreign exchange loss. My guess for the large one time foreign exchange loss is related to its IPO proceeds. A small part maybe from its export business. 

    So my conclusion is: KH is still a high growth company. 

    Disclosure: long KH
    Tags: MDT
    Nov 09 2:25 AM | Link | Comment!
  • The Trend observed from recent China IPOs
    It is not unknown to most China stock investors that the past a few weeks are a blood bath for most of them. However, if you look at these small cap reverse mergers and those big names such as BIDU, CTRP, EDU, VIT, etc, you can find atcually investors are still confident in those established names. 

    If we go back a few years, when BIDU did its IPO with offering price of $100+, there were lots of questions on its capability of competing with google in China and the share price dropped below $50. Two years later, it jumped to almost $300, and after 2008 financial crisis, this stock moved toward $800 and even touched $900 ( before 10-1 split). I observed similar patterns in CTRP, VIT, EDU, SINA etc etc.

    But the huge differences between these established names and those reverse merger stocks are:

    1. These companies are leaders in their industries in China.
    2. These companies are supported by large global institutional investors
    and the most important:
    3. These companies are backed by large bulge bracket investment banks such as Goldman and Morgan Stanley

    Before 2009, I bet bankers from Goldman, Morgan Stanley will never look at deals below $100 million ( to be conservative). However, after most state owned companies (big 4 banks, Sinopec, CNOOC, PetroChina etc etc) are listed, after most reputable private companies such as BIDU, EDU, Alibaba etc are listed, these bankers have to move down the ladders to compete much smaller deals with 2nd tier and 3ir tier banks such as Piper Jaffray, Rodman, and Roth.

    Recently, if you pay attention to those direct Nasdaq and NYSE IPOs, you will find these five companies:
    1. JK Solar (NYSE:JKS)
    2. Camelot Information Systems (NYSE:CIS)
    3. Ambow Education (NYSE:AMBO)
    4. China Kanghui (KH)
    5. China Borun (NYSE:BORN)
    Except BORN is led by Piper Jaffray, the other four's lead bookrunners are:
    Goldman, Morgan Stanley, JP Morgan, Credit Suisse, Merrill

    And how's the performance?
    JKS IPO price around $10, coverage initiated in July, stock price almost trippled within 3 months.
    CIS IPO price around $11, coverage initiated in August, stock price climbed 50% in 3 weeks.
    BORN IPO price around $5, coverage initiated in July, stock price climbed as high as $10 and dropped to $8.70 today.

    Coverage just initiated on AMBO and KH recently, it would be very interesting to see the performance in the following months.

    And compared to other reverse merge stocks, these stocks are not beaten down by shortsellers or market sell-off at all.

    In addition, if you check AMBO and KH's recent SEC filings, they continue to get large institutions support. Singapore Government Fund (GIC) has 18% and 5.5% stakes in AMBO and KH respectively. 

    I recently also talked to a few CEOs and CFOs of some reverse merger companies. They run legitimate businesses and their companies are not attacked by any shortsellers. But the distrust of China small cap world as a whole made them sad and wanted to delist in US and move to Hong Kong exchange if they can.
    They also told me that they hope to work with those tier 1 banks so that their capital structure won't be messed with tremendous amount of warrants or stupid complex convertible debts. 

    Well, the recent China IPO trend actually is very positive to address all these problems: Big guys are coming to small-mid cap world!

    If you check SEC filings, there will be 5 more China IPOs next week, 4 out 5 are underwritten by Goldman, Morgan, Credit Suisse etc. They are all less than $100 million deals.

    I believe, the China small cap world will see a big change in the near future. Those tier 3 banks will be out of banking business in China. Big banks and other decent middle market banks will be entering the small cap world.
    With clearer ADR listing at NYSE and Nasdaq, the myth of reverse merge will be solved.
    With support from large global investment banks and global institutional investors, short sellers will be hard to make up any rumors.
    With better capital structure, investors will not be diluted with unnecessary secondary offerings, which are usually only for those greedy tier 3 banks to make bonus.

    Let's wait and see. There will be more and more great Chinese companies for investors.

    Disclosure: none
    Sep 21 7:52 PM | Link | 1 Comment
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