Thesis. Chinese electronics retailer that operates mini-stores within Chinese malls with ~$280M in sales and ~9% net income margin. Despite strong history of both comps and sq footage growth, stock is trading at 6X 07 P/E due to a combination of 1) poor IR 2) pulled private placement in the middle of 07 3) Trading over the counter. Recently the company announced a change in their investment relations firm and confirmed existing process for NASDAQ-listing. The significance of private placement pull in my opinion is exaggerated, but here's what happened: stock was trading at $8 right prior to placement announcement in July. The placement itself was a small % of market cap (only $12M) and was at $5.60 per share. After the announcement the stock price tanked below $5.60. Management at that time was not too good at communicating with investors, so we don't know for sure what happened, but given the volatile price of the stock that sat at ~$6 per share in June, $5.60 does not look too unreasonable. Then, in September, with stock at $5, the sale was pulled. It's of course possible that investors did discover something negative about the company. More likely though investors didn't want to buy their mini stake at a premium, especially given the Chinese market that climbed 10% monthly.
Long-term growth. Management hopes to increase store count from current 1000 to 4000, and grow revenue to $1B. Ok, this seems a bit overly optimistic. More conservatively, assuming store count expands at 10% a year and comps grow at 8-10% (in line with Chinese GDP) we get to 20% growth.
Catalyst. 1) Strong full year 2007 sales and continued growth in Q1-Q2 2008
2) Nasdaq listing
Risks. 1) Fraud of some type is a risk of course but given the company hired new New York based accounting firm and that CEO himself bought 20K shares at $3.60 makes me more confident things are not too gloomy
No comments:
Post a Comment