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FUQI International (FUQI)

|Includes: Fuqi International, Inc. (FUQI)

Fuqi International (OTCPK:FUQI), a Chinese jewelry wholesaler and retailer, is scheduled to report 4th quarter and year-end 2009 results in the next few days.  Last year, FUQI's stock price exploded from a low of $3.31 in early March 2009 to a high of $32.68 in September 2009.

Since then, FUQI experienced a 61% retracement of those gains to a low of $14.80 on February 5, 2010.  Since that date, FUQI has been in an uptrend and reached a high of $20.82 on March 10, 2010.  The 50-day moving average, now about $18.50, just started increasing on March 8th after more than four months in a declining pattern.

FUQI's growth story has been compelling over the past five years.  Revenues have increased from $57 million in 2004 to $73 million in 2005 to $92 million in 2006 to $146 million in 2007 to $368 million in 2008 to an estimated $525 million in 2009.  Similarly, EPS has increased from $.34 in 2004 to $.48 in 2005 to $.50 in 2006 to $.86 in 2007 to $1.32 in 2008 to an estimated $2.24 in 2009.

FUQI has a very strong balance sheet with almost no long-term debt.  The company had a secondary common stock offering in August 2009 that produced about $120 million in cash for opening new retail outlets, stocking retail inventory, and other corporate purposes.

As noted earlier, FUQI is a Chinese jewelry producer and wholesaler that has expanded into the retail marketplace.  At the end of September 2009, FUQI operated 7 retail stores and 72 jewelry counters in department stores (all in major Chinese cities).  FUQI plans to open 15-20 stores and retail counters per quarter for the next couple years.

The expansion into retail is significant because retail margins are normally higher than wholesale margins.  In addition, FUQI's corporate strategy is to move toward being a vertically integrated company by building on their historical base of jewelry design and manufacturing, and traditional wholesale operations.

With the recent high of $20.82, FUQI's valuation is still very low with a P/E ratio of 9.3 (based on estimated 2009 earnings per share).  Even with a growth rate of 20% (conservative by historical standards), this translates into a PEG (P/E to growth) ratio of less than 0.50.

Insider ownership is over 40% with most of these shares owned by the CEO.  Short shares are currently about 40% of the float.  The conference call next week should be interesting.

Disclosure: Long FUQI