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GRRF: Up 60% on fluffy PR -- Bid Win Worth Way Less Than People Think

|Includes: China Grentech Corporation Limited (GRRF)

Yesterday morning GRRF announced in its press release that the company has won bids from China Broadcasting Corporation to supply equipment and integration services for the China Mobile Multimedia Broadcasting (CMMB) project.  It said the company "become the only vendor to win all 7 bid sections among 34 bidding companies. The tender includes indoor and outdoor low-power transmitter, indoor antenna, passive components, among others."

The full press release is here:
finance.yahoo.com/news/China-GrenTech-Wi...

After the PR was released, the GRRF's stock price shot up 60% during the day, from $2.06 to $3.31.  Average volume over the 90 trading days in this thinly traded stock is only about 34K shares a day.  Yesterday, volume was over 2.6M shares.

If the PR is looked at carefully and dug deeper, it clearly does not justify a sky-rocketing 60% pop in share price.

The first thing I noticed in the PR was the lack of dollar amount in the bid win.  Just how much is the said project worth?  Many people in the Yahoo message board think it's a mega deal that's very significant for the company.  I suspect otherwise.

My friend at IHub contacted Kristin at CCG, GRRF's investor's relations firm, to get more details about the bid win.  Lo and behold, Kristin was not pleased about yesterday's PR and is trying to blame the lack of clarity on management. The revenues from the contract so far? Guess what ..... a big ZERO !! They've only won the right to negotiate for certain products. Good grief.  No contracts have even been signed yet.

Talk about a misleading PR.  Everyone thought the deal was signed and sealed.

And the funny thing is, many people think China Mobile Multimedia Broadcasting is somehow related to "China Mobile" the mobile phone operator.  Fact is, CMMB has nothing to do with "China Mobile".  It is simply a mobile multimedia standard developed by China's State Administration of Radio, Film, and Television.

Ok, so I was thinking, what IF they negotiate successfully for some products.  How much would the contract potentially worth?

In China, information on government project bids are posted on the web.  So I went over to the official web portal of the Procurement Center of the Central People's Government of the People's Republic of China (中国政府采购网)  Here is its web address:

www.ccgp.gov.cn/

The site is in Chinese only.  I searched the site with keywords "移动多媒体广播", which stands for "China Mobile Multimedia Broadcasting (CMMB)", and I came up with a list of results.  Here's the direct link to the results:

search.ccgp.gov.cn/search?page=1&Tit...+


The two search results that pertain to the project mentioned in GRRF's PR, are one describing the procurement requirement, dated 2010-09-21 with the title "移动多媒体广播覆盖工程设备采购CMMB小功率补点设备招标公告" (Mobile Media Broadcasting Coverage Engineering Equipment Procurement - CMMB Low-power Transmitter Bid Notice) , and the other one dated 2010-10-22 with the title "中广传播集团有限公司移动多媒体广播覆盖工程设备采购小功率补点设备项目中标公告" (China Broadcasting Corporation CCMB Coverage Engineering Equipment Procurement - Low-power Transmitter Project - Bid Winner Notice).

Here's the direct links to each of the two search results mentioned above:

Link to procurement requirements:
www.ccgp.gov.cn/cggg/dfbx/gkzb/201009/t2...

Link to the bid results:
www.ccgp.gov.cn/cggg/zybx/zbgg/201010/t2...

Notice in the bid results, that there are 7 bid sections (numbered 1 to 7 on the left-most column of the list).

In each of the 7 bid sections, GRRF's Chinese operating company, "深圳国人通信有限公司", is among the company names listed as the "Recommended Shortlisted Candidates".  GRRF is selected as one of the bid winners in each bid section.  This matches what is mentioned in the PR.

On the right-most column of the list, the "Recommended Shortlisted Price" is shown.  These are the bid prices (in RMB) submitted by the companies and accepted by the tender process committee.  Each bid price shown represents the price for one set of equipment in each bid section.  Each set of equipment contains several different items.  For example,   bid section #1 contains 3 items -- one 10mW CMMB low-power transmitter (indoor type), one 100mW CMMB low-power transmitter (indoor type), and one 500mW CMMB low-power transmitter (indoor type).  GRRF's bid price for this set of equipment is RMB 2560.  However, this number is useless because the number of units for each item is not stated in the bid result or in the procurement requirement.  We therefore cannot determine the exact total amount of RMB this project is worth for GRRF.

However, there's a way to estimate the amount.  In the procurement requirement (in the link above) under the sub-heading "bid bond", it is stated the bidding company, when submitting its bid, must submit a bid bond in the amount of RMB 200,000.  In China, a bid bond typically is 2% of the total bid amount.  So, the estimated bid amount by GRRF for this project is RMB 10MM (about USD $1.5MM).

The estimated RMB 10MM is what the contract is potentially worth IF they successfully negotiate for all products on the list.   In my opinion that's unlikely to happen because in each bid section there are at least 5 or 6 companies all trying to negotiate and get a piece of the pie.  Competition is fierce to say the least.  Theoretically, GRRF's revenue from this project can be a big zero.

Let's say GRRF has successfully negotiated for all the products in the bid and the total contract value is RMB 10MM.  Does RMB 10MM justify the single-day 60% increase in GRRF's stock price?  GRRF's revenue in fiscal year 2009 was RMB 1604MM.  In the first 6 months of fiscal year 2010, revenue was RMB 530MM.  The company's guidance for the third quarter of 2010 revenue is between RMB 395MM and RMB 420MM.  It is obvious the project amount of RMB 10MM is just a small fraction of GRRF's annual or quarterly revenue. 

Let's not forget also that GRRF operates in a very highly competitive environment.  The PR mentions there were 34 bidding companies in the bid.  That's a lot of companies in this CMMB market so there's no guarantee they will win the next bid.  The very high competiveness nature of the business also makes GRRF's profit margin thin -- around 25% for the last two years.  It's no surprise the company has been losing money -- net loss for first 6 months of fiscal year 2010 amounts to RMB 17.65MM, and net loss for the trailing 12 months is RMB 4.6MM.

It's obvious a lot of momo traders jumped in yesterday head over heals once they saw this fluffy PR.  Some people think this single bid win can significantly improve the company's top and bottom line.  I tend to think otherwise.  Certainly, this single project that accounts for less than 1% of the company's annual revenue does not justify a 60% single-day pop in share price.  The momo traders will soon rush out of the exit as quickly as they came in.





Disclosure: short GRRF

Disclosure: short GRRF