Valuation Analysis: China 3C Group Posted on Aug 6th, 2007 with stocks: CHCG.OB
Steven Rubis submits: China 3C Group (CHCG.OB) is a distributor which operates using a “store in store” concept in Eastern China. Based on company guidance of $1B in revenue by 2010, the company is worth $16.38 per share using a discounted cash flow valuation.
Recommendation: UNDERVALUED
Investment Thesis: China 3C Group combines two of the most powerful catalysts for share price appreciation: earnings growth and China. CHCG expects to operate 4,000 stores and generate revenue of $1B by the year 2010. If the company meets these expectations, revenue will grow at a 61% rate. China 3C Group trades at a discount for two reasons: [1] the stock is listed on the OTC Bulletin Board; and, [2] being based in China creates a dearth of information on the company.
Catalysts:
1.) AMEX listing: China 3C Group applied for listing on the American Stock Exchange on January 15, 2007. Listing on the AMEX would supply greater prestige for CHCG. Such prestige would generate share price appreciation because such a listing would increase investor familiarity. 2.) Information: Once the company is listed on the AMEX, more information on the company should be readily available. This will help determine whether growth estimates are realistic or blue sky estimates. 3.) Chinese Economy: Currently, China is experiencing unprecedented economic growth. If a recession were to hit the Chinese Economy, CHCG would be adversely affected.
Business Prospects / model: China 3C Group is a consumer electronics distributor, which operates nearly 800 stores in mainland China. The company distributes mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players, radios, Walkmans, and audio systems. China 3C Group expects to see strong growth from the mobile phone market over the next few years. The company has committed to operating 4,000 stores that generate $1B in revenue by 2010 [see company website].
In 2006, CHCG saw strong organic sales growth from its YYWC and HWDA subsidiaries. Each subsidiary grew revenues by 122% and 480% respectively. The company utilizes an acquisition strategy to compliment its organic growth of existing subsidiaries. CHCG acquired Hangzhou Sanhe Electronic Technology, Limited and Shanghai Joy and Harmony Electronic Development Co., Ltd. These newly acquired subsidiaries contributed $35M in revenue to CHCG in 2006.
The following chart describes the structure of China 3C Group’s subsidiaries.
Chart 1: Operating Structure of China 3C Group and Subsidiaries
Some analysts believe that the recent private placement of equity in CHCG raises red flags. Shares were sold at a discount to current prices, $5.60 per share, which we find reasonable. Such a discount is to be expected because CHCG trades on the OTC Bulletin Board. If the company were listed on the AMEX or NASDAQ, such a discount would be questionable. The discount represents the liquidity risk that the investor undertakes by providing capital to an OTC BB stock.
Best Buy(BBY) Agreement This Forbes articles gives investors confirmation that China 3C Group might be a legitimate company. Best Buy came to an agreement with CHCG to provide consumer electronics goods for Best Buy’s new store in Shanghai.
Disclosure: *CHCG is a highly speculative investment because of its listing on the OTCBB exchange. The company's location in mainland China makes it difficult to verify and obtain information on the company. The author cannot be held responsible for any monies gained or lost on trades undertaken based on information presented herein. The author currently owns: Agilent Technologies (A), Brasil Telecom S.A. (BRP), Biotel, Inc. (BTEL.OB), ChipMOS Technologies Limited (IMOS), and ConocoPhillips (COP).
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