Opinion on  China Expert Technology Inc. (CXTI)
China Expert Technology (CXTI.OB) Chief Financial Officer suddenly quits

Shares of China Expert Technology : CXTI.OB are getting slammed today on news that CFO Simon Fu has resigned suddenly “for personal reasons and to pursue other interests.” As recently as a month ago, Fu was the public face of CXTI for U.S. investors . Yet, with no successor named and no legitimate reason given for the move, the company asks investors to believe that Fu decided he just had to do something new and different right before a quarterly earnings report. Anyone know the Mandarin word for “bullshit”?

The press release suggests that the problem isn’t in the numbers this quarter:

“Management expects to report second quarter revenues of $16.3 million, an increase of approximately 16 percent from $14.1 million reported in the second quarter of 2006 and an increase of approximately 23 percent from the first quarter of 2007. Gross profit is expected to be $9.1 million, an increase of approximately 25 and 21 percent from the second quarter last year and first quarter of 2007 respectively. Gross margins for the second quarter of 2007 are expected to be approximately 55.8 percent, compared to margins of 51.6 percent in the year ago period, and 56.9 percent reported in the first quarter of this year. Net income is expected to be approximately $5.1 million which includes all related non cash items. A conference call to supplement the pending earnings release will take place prior to August 15 and specific details will be forthcoming.”

Still, its too early to know whether financial improprieties caused Fu’s resignation. The risks are very high, and I don’t see any upside to owning shares until the company reports and we find out more about this situation.

DISCLOSURE: No position.

I know, I know. Only five days ago I said that I didn’t see any reason to buy China Expert Technology: CXTI.OB until the smoke clears. I found one today: a very low price. Investors absolutely crushed the stock following the announcement of CFO Simon Fu’s sudden departure, lopping off almost half of the company’s valuation.

Don’t get me wrong — I still think CXTI is very risky. I expect that the story behind Fu’s resignation will take some time to unfold, and whatever comes out will not be positive. But that doesn’t mean the stock is worth zero, or that investors like me who have a high tolerance for risk need avoid it at any price. When the stock dropped below $3.50 today, I got interested. Unfortunately I wasn’t quick enough to get filled at that level, but I did build a full position between $3.55-$3.71.

We’ll find out Friday whether the move was prescient or foolish. At 9:00am ET, the company will host an investor conference call with Mr. Huang (Michael) Tao, the Company’s Chairman and acting CFO “to discuss recent corporate events, the Company’s plan to relocate its headquarters to Shenzhen, PRC and search for a new CFO.”

DISCLOSURE: Long CXTI.OB

Every stock has some price that adequately compensates for a scandal of uncertain extent.