Opinion on  CHCG (CHCG)
China 3C Group (CHCG.OB): first glance

Ignore the neverending stream of articles in the mainstream press about the coming China market crash. Yes, trading in domestically-listed issues has become quite speculative. But many Chinese companies listed in the United States, especially Chinese microcaps, have reasonable valuations and dynamic growth opportunities. Chinese microcaps are already a prominent part of my microcap portfolio, and their weighting will likely increase in the coming months.

One Chinese microcap I am looking at is China 3C Group : CHCG.OB . China 3C Group operates “stores within stores,” mini-electronic retailers located in some of China’s larger department stores. According to a recent investor presentation , China 3C mini-stores are already in Gome, Carrefour, Trustmart/Walmart, and Suning stores. In June, it announced an expanded agreement with Best Buy .

China 3C is a growth story. In the first quarter of 2007, sales grew to $84.5M versus $13.5M in the prior year quarter, an increase of over 500%. The company estimates $360-380M in sales for 2007, and $1 billion in sales by 2010. With approximately 52.7M in shares outstanding, the company has a market cap. of around $208M. The company projects that it will earn between $.50 and $.54/share in 2007 . CEO Zhenggang Wang stated:

“We are also reiterating our previous guidance regarding store openings. We expect to open 1,200 stores by the end of 2007 and anticipate opening 4,000 total stores by the end of 2010, at which time we believe we will be realizing annual revenues of $1 billion. We will also be issuing first quarter 2007 comparable-store sales data under a separate release in the next few weeks. The company intends to be listed on a major U.S. exchange by the end of 2007. “

This research is just preliminary, but I am intrigued enough to put China 3C on my short list of stocks to watch.

DISCLOSURE: No position.

1. China 3C Group: CHCG.OB shares dropped after the company announced that it had sold $11.74 M worth of common shares in a private placement at an enormous discount.  Although shares traded for over $8 as recently as yesterday morning, China 3C Group only charged the private investors $5.60 per share.  That’s a 30+% haircut!  CEO Zhenggang Wang said “We believe this new sale of China 3C’s equity will enhance shareholder value by providing the company with a cash infusion that will enable it to pursue certain business opportunities in China that are currently being considered by management. Although the sale price of the shares was at a discount to the current trading price of the company’s common stock, we believe that management’s ability to act swiftly to negotiate this transaction without the assistance and associated fees of a placement agent demonstrates the company’s desire to maximize the benefits of the capital investment in light of a discounted sale price.”  I disagree.  The action, in my opinion, can only mean one of three things: (1) that management was not savvy enough to negotiate a better deal; (2) that management feared it could not sustain the stock price long enough to lock in financing at a more reasonable discount; or (3) that management does not have shareholders’ best interests in mind.  I am currently long CHCG, and do not like this move at all.


2. Another ticker change — Air Industries is now: AIRI.OB.  Makes sense.  The archives on this site have been adjusted, so you can access all of the former Gales Industries articles under the AIRI.OB tag by clicking on the “Navigate” button above.


3. AIRI.OB and Paragon Technologies: PTG were both up big today.  I didn’t see any news or SEC filings to explain either move.  If you know why, please comment or drop me a note.


4. Paul Kedrosky is calling the Answers.com: ANSW purchase of Lexico a land grab for the generic domain names dictionary.com, reference.com and thesaurus.com.  I agree that the names have value, but by any metric Answers.com overpaid.

DISCLOSURE:  I am long CHCG.OB, AIRI.OB, and PTG.  I have no position in ANSW.

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