SinoHub Share Price Should See Slow but Steady Appreciation

| About: SinoHub, Inc. (SIHI)

I’ve always believed in the adage, “When one door closes, another door opens.” In fact, I’ve even tried to pass on that nugget of wisdom to my teenage son on a few different occasions. Each time he’s politely told me to close his bedroom door behind me on my way out. No doubt he heeded my advice and, once his door was shut, hopped up out of his chair and opened a window. Or maybe not.

Thankfully, the stock market is much more forgiving than the average adolescent, and turbulent market times like these always present opportunities that otherwise wouldn’t be available. “When one door closes…”

While I do more than my share of day trading, I always track small cap stocks that look like they may ultimately have long-term value and significant upside. SinoHub (AMEX: SIHI), a contract manufacturer of electronics based in China, is one such play. Despite stellar earnings and a bright future, however, market forces have conspired recently to knock SIHI’s share price down to bargain basement levels. “…another door opens.”

Unfortunately, many investors tend to shy away from most U.S. exchange-traded Chinese companies because of ongoing revelations about cooked books, fraudulent statements, and in some cases the complete absence of an actual company. In fact, about five years ago, when Chinese stocks were still in vogue, I made a tidy sum on a company that ultimately turned out to be nothing more than a few still photos on a website and a bunch of bogus bookkeeping. Luckily, I had liquidated my position at what turned out to be near its price peak—long before the company ceased to exist. It wasn’t because I was on to the elaborate charade. I was just happy to take a solid profit and move on.

Call me a sucker, but I’ve got to admit that I’m still attracted to the potential that many Chinese companies have. But now, I’m much more skeptical. When I see an interesting Chinese company with a promising growth story, the first question that comes to mind is, “Is it real?” Well, in SinoHub’s case, the company’s website provides 15 separate videos showcasing their facilities and the work they do. You can access them here.

If these videos are staged, like some people believe about Neil Armstrong’s walk on the moon, then somebody hired a pretty good art director. And Barack Obama is a Muslim terrorist who was born in Kenya. NOT!

So, after looking at those videos and perusing the company’s home page, if you’re not satisfied that SinoHub is a going concern, then I’d suggest you stop reading right here. Okay. You’re still with me, and you believe that SinoHub is, indeed, a “going concern.” Now let’s look at how “going” of a concern the company really is.

On March 14, Sinohub reported record 4th quarter and year-end results. According to the company, full-year audited results showed a sales increase of almost $70 million, to $196.7 million in 2010, up from 2009’s full year sales total of $128 million. That’s a huge bump by any metric. Breaking it down further, SinHub’s year-over-year gross profit increased 69%, from $22.4 million to $37.8 million, with net income rising 54% to $19.1 million, from $12.4 million. That translated into .67 in earnings per diluted share.

Fourth quarter results were equally impressive. Revenues during the fourth quarter of 2010 increased 37% quarter-over-quarter to $58.5 million, and net income increased 95% to $7.2 million, despite a significant drop in the company’s supply chain management business of 16%. Operating income more than doubled to $9.7 million from $4.8 in the comparable period for 2009.

The best news of all for SinoHub is that a growing percentage of the company’s revenue is coming from their higher margin integrated contract manufacturing segment (ICM), which assembles smartphones. A new segment of SinoHub’s business, the ICM unit has logged sales of $60 million in its first year of operation. Much of this business comes from China Unicom (NYSE:CHU), a subsidiary of China’s giant communications combine China Telecom (NYSE:CHA). The company’s goal is to make three million smartphones this year, after reaching their production goal of one million phones in 2010.

So why is SIHI trading under $2 per share right now? As mentioned, investor mistrust of Chinese stocks is at its nadir, and the recent market swoon leveled the issue after an initially positive reaction to the recent earnings report pushed SIHI’s share price to $3.15 per share. The coup d’ grace turned out to be an $11 million secondary offering—announced two days after earnings. It was priced at $2.30 per share, at a time when the stock was still trading north of $2.50.

As a trader flipping shares, secondaries priced under a stock’s current trading price are the kiss of death. As an investor looking for growth companies that are truly growing, they often serve as confirmation that those companies are rapidly expanding and in need of capital to meet growing demand.

I would look for SinoHub’s shares to fight their way back to the $2.30 level before the company’s next earnings report. And, if my belief in SinoHub’s outlook is correct, and overall market conditions cooperate, we should see a slow but steady appreciation in SIHI’s share price in the months ahead. Key resistance is around the $2.50, $2.70 and $3 areas. A break and hold of $3.15 could send the share price significantly higher.

“When one door closes…”

Sources here and here.

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

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