Is SinoHub Undervalued?

| About: SinoHub, Inc. (SIHI)
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Sinohub, Inc. (NYSEMKT:SIHI), a US-listed Chinese electronics company, is comprised of three business units, Electronic Component Purchasing (ECP), Virtual Contract Manufacturing (VCM) and Supply Chain Management (SCM) services, within the mobile device space. Operating both in the People's Republic of China and overseas, the company is involved in serving the suppliers and purchasers of electronic components for manufacture domestically, and sales and production of mobile devices internationally.

The individual businesses' growth rates are indicated in the table below:
















$1.8 MM


$1.5 MM







$35.3 MM







$19.0 MM


* The VCM business did not exist in the comparable periods of 2009.

Total business gross margins for the first nine months of 2010 were 18.0% compared to 18.7% in the same period of 2009. The company attributed this to the lower contribution to sales from the high-margin SCM business. SG&A expenses have increased year/year for the 9-month period from 4.2% to 4.5%. The financial condition of this company seems relatively healthy at the moment with a current ratio of 3.3:1. A red flag is the large increase in accounts receivable, which seems to pervade the Chinese small-cap space. The company does not seem overly concerned about this or the impact on its cash flow. It does seem clear from the latest 10-Q, however, that their expansion plans will be financed through bank borrowings at a relatively low cost of capital.

2011 Outlook

The company stated in its 2010/3 10-Q that its

Strategic plans include continued expansion and support of our SCM Platform (consisting of SinoHub SCM, key service centers in Hong Kong, Shenzhen, and Shanghai, and a supply chain management service team providing real time support), growth in our electronic component and mobile device sales businesses, including growth of our VCM business, investment in inventory for both procurement-fulfillment and VCM orders, and investment in the manufacturing facility for our VCM business.

The SCM business has very high gross margins at almost 98% in 2010/3, but this business has been in decline year/year as the above table shows. The VCM business showed much more modest gross margins at 17.2% in 2010/3, but the company expects

VCM gross margins to remain in the high teens in the future.

The VCM business is growing very rapidly and is the focus for future growth. If nominal sequential revenue growth continues for the VCM business, the prospects for this company are indeed bright. Using the average nominal sequential gain in revenue for 2010/2 vs. 2010/1 ($6.9 MM) and 2010/3 vs. 2010/2 ($5.7 MM) or $6.3 MM for the VCM division, a revenue estimate of $25.3 MM can be made for 2010/4. Assuming an average of the first three quarters for the other two businesses, the total revenue estimate for 2010 of $196.7 MM slightly exceeds the guidance of $192 MM revenue given by the company in the press release announcing 2010/3 results.

For full year 2011 estimates, a slight sequential decline (5%) in the nominal growth rate of the VCM division will be assumed to account for the inevitable slowing in growth due to the law of large numbers. Using this method, revenue estimates for the VCM division then become $31.3 MM, $37.0 MM, $42.4 MM, and 47.4 MM. This equates to $158.1 MM for the full year for the VCM division. Assuming the company makes good on its promise to invest in its SCM division, which has been in decline year/year, this analysis will assume flat revenue performance year/year for that division.

Given the planned lack of focus on the ECP division, the growth rate will be assumed to continue at the rate demonstrated over the last nine months (18.8%). Revenue estimates for the three divisions for 2011 then become $6.5 MM (SCM), $150.2 MM (ECP), and $158.1 MM (VCM). The total company revenue estimate is, therefore, $314.8 MM. Gross margins for the individual segments will be assumed to remain the same as the first nine months of 2010, and SG&A expenses will be assumed to remain the same as well.

Using these assumptions as well as a 27% tax rate and a similar interest expense yields $28.3 MM net income. At 28.72 MM fully diluted shares, the earnings per share estimate is $0.99.


A discounted cash flow analysis for SIHI starts with its twelve-month trailing earnings per share of $0.56. Assuming 20% growth in earnings per share for the next five years and a 13% discount rate yields a fair value of about $9.00.Using a forward PE ratio of 10 (common for fast-growing Chinese small cap stocks) yields a fair value of $9.90.It is fair to assume that SIHI is undervalued at its current price of $2.83.

Technical Considerations

The strong move in this stock from $1.67 in late September, 2010 to $3.30 in late November, 2010 is currently being retraced. It looks like some more work needs to be done before this retracement is complete. The commonly used long-term buy signal known as the golden cross will occur soon, however, which will more than likely lead to price appreciation. The last time this happened in May, 2009 a greater than 120% move ensued. It will be interesting to see what happens this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.