China 3C Group, (CHCG)

For those who know me know I have been investing since I was 15. Every once in awhile I divert from the usual web 2.0 topics to that of a investment I have taken a position in. Today is one of those days since China 3C Group, CHCG has gotten pummeled today as what I believe to be a over-reaction by speculators to FY2007 results today. I consider the consumer electronics retail sector in China as an opportunity to reap the history of one of the fastest growing staples of any growing economy. Mix that with $25 million in cash on the books and a solid, real (sometimes you just don't know with over the counter stocks). As always, do your own DD but as I see it the stock still looks extremely cheap on a valuation basis even after the guidance, and is building a base on which to spring higher. Not including cash and simply assigning an industry PE of 10 we should be at $4.50 on normal growth rates. Besides the speculators, & extremely volatile world markets, the company has still struggled to provide decent insight through PR about operations leading to rumors, misinformation, and like what we saw today, over-reaction.

Here is China OTC Player's take:

Monday, March 17, 2008

Update: CHCG.OB Pummeled

revenues and earnings were quite stellar. Sales increased by 86% to $276 million and EPS was $0.44, the high end of guidance. Yet, the stock has fallen to its 52-week low. Why is this the case?

Well, it looks like Q1 2008 is going to be pretty bad. We already know that the recent winter storm was devastating, and now CHCG is quantifying it for us:

The first quarter of 2008, which is seasonally the Company's strongest quarter, is expected to be negatively impacted by the heavy snow storms that paralyzed much of China during January and February of this year. The Company believes that 2008 first quarter revenue results could fall by as much as 15-20% compared to prior year results of $84.5 million.

Given this, CHCG is expecting overall FY2008 revenues to be flat in the best case scenario, and perhaps even be 5% less than 2007's figure, not accounting for acquisitions. There is an important implication in this, which is: same-store sales growth for the last three quarters of 2008 is expected to equal, at the most, $16.9 million, or looking at it another way, the implied growth rate is a paltry 8.8%, at best. Also note that CHCG closed about 27 non-performing stores in the last three months, and is looking to close another 100+ over the course of the year.

And there is worse news. Due to mandated employee benefits, CHCG's operational margins will be negatively impacted, by up to 5%. I'm now estimating a FY2008 EPS of $0.25 for the company, which would be a decline of over 40% from 2007. Having said that, China 3C has cash of approx. $25 million and is looking to make an acquisition, possibly in the second half of 2008. The company may also consider a share buy back.

I am long and added more today. If your not light-hearted and can take some turbulence, you might want to consider.


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