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Second analyst initiates coverage on SOKO Fitness and Spa - PT of $6

|Includes: SOKO Fitness & Spa Group, Inc. (SOKF)

For what it's worth (and not much - I don't put much weight on analyst opinions, especially ones from third rate firms), here's another buy rating on SOKO, announced yesterday.

ROTH Captital Partners

SOKF: Initiating Coverage with a BUY Rating

We are initiating coverage of SOKO Fitness & Spa Group with a BUY rating and $6 price-target.

SOKO Fitness & Spa Group is an operator of high-end, luxury fitness clubs, spas, and beauty salons. At the end of fiscal 2Q11, the company operated 24 facilities in Northeastern China and Beijing, including 13 beauty salons and spas, one non-surgical medical beauty center, nine fitness centers & yoga studios, and one beauty school. SOKO was founded in 1992, completed a reverse merger with American Holdings, Inc. on April 17, 2008, and trades on the OTCBB under the symbol SOKF. We expect an up listing to the NASDAQ sometime in CY11.

U.S.-listed Chinese equities have been under pressure for past few months due to a deterioration in investor perception. Despite certain risks associated with investing in SOKO we are comfortable recommending shares following our due diligence process.

Key considerations for our BUY rating include:

■ Proven business model and favorable macro trends. SOKO offers investor's exposure to China's rapidly growing "Healthy Lifestyle" (i.e. beauty, spa, fitness market). We are bullish on China's leisure sector and believe a growing middle class, urbanization trend, growing discretionary income and the government's increasing efforts to promote healthier living, bodes well for SOKO's future operations.

■ Earnings quality high and cash flow positive. We consider SOKO's earnings quality as well above average given substantial deferred revenue (current deferred rev represents 41% of our NTM net revenue estimate), and operating cash flow that has consistently exceeded net income. Furthermore, the company is net cash positive with $15M or $0.62 per share. We believe the company's cash position is sufficient to fund its expansion plans in FY11/FY12.

■    Compelling valuation. Shares trade for 6x our CY11 EV/EBITDA estimate and 4x our CY12 EV/EBITDA estimate. Given roughly 23% EBITDA CAGR over next 3-years, we believe shares are compelling at current levels.

Our $6 price-target is based on 7.5x our CY11 EV/EBITDA estimate and is supported by our DCF analysis.