Sunday, January 21, 2007
Chinese reverse merger, March 2006. Sinosmart Group Inc. Live microbial food supplements [that's easy, just eat some street vendor food in a 3rd World country] which benefit the host by improving intestinal microbial balance.
We manufacture and sell priobiotics. Most probiotics are bacteria based and naturally exist in the human body in the lower intestinal tract. According to an article by Dr. Lori Kopp-Hoolihan in an article in The Journal of The American Dietetic Association published in February 2001, the beneficial effects of probiotic consumption can include: improvement of intestinal tract health, enhancement of the immune system, synthesized and enhanced bioavailability of nutrients, reduction of symptoms of lactose intolerance, decreased prevalence of allergy in susceptible individuals and reduction of risks of certain cancers. The introduction of “helpful” bacteria and other organisms may aid in preventative fights against infection and improve digestion, especially with respect to dairy products.First product, "Shining Essence". Approved by Chinese Ministry of Health in 2000, started selling in Shanghai in 2001. Currently 68% of revenues. 2 year shelf life (which apparently far exceeds competitors, which is important according to Scientific American). High concentration of germs. Originate from human sources [I don't want to know]. The effectiveness has been tested by "the Shanghai Preventive Medicine Research Institute" but the "effectiveness has not been conclusively established."
Sales are focused in the Shanghai area. They want to open 300 new stores in 2 years. 154 employees, most are in production and sales/marketing.
Opened their first pilot store March 2006.
10-K for 2006
Year ending March 31, 2006. 17 million shares on June 14, 2006.
For both 2005 and 2006
Gross margins: 69%
Sales expensese: 11%
Operating margin: 55%
Net margin: 38%
Unit volume shipped increased 33% in 2005 and 52% in 2006. The worst performing product in 2005 increased "only" 28%. The worst in 2006 increased "only" 26%.
25% return on assets.
big revenue growth + big margins + big return on assets = wonderful business
Selling prices increased in range of 11% (top seller) to 17% (everything else) in 2005. Selling prices were nearly the same in 2006.
Audited by BDO McCabe (they were CXTI's previous auditors).
2005 results were restated. "Other payables and accruals" were moved to "liquidating dividends". Seems minor, and I'll cover it in detail if this looks good.
Current assets are cash and AR. Not much PP&E. Current ratio is 1.5. No long term liabilities (typical). About 1/3 equity.
Net income for 2006 was $8.4 million (vs $5.5 million in 2005).
Cash flow from ops in 2005 was $10.5 million thanks to tax payable and accruals.
Cash flow from ops in 2006 was $7 million, hurt by AR and taxes paid.
Almost no capex in both years.
Lots of financing stuff going on. The reverse merger. Cash advances from shareholders (repaid in full). Cash advances from related parties. Convertible bond (check if it's toxic). Huge distribution to previous owners of the subsidiary (probably legit, but that's a potential massive red flag). Loan from shareholders. Distribution of liquidating dividends (that was the restatement thing).
Pfd stock is gone. 90 million common shares authorized.
CEO owns 30% of the company. He has a Chem Eng background, polymers.
Yan Li (who is this) owns 17%.
Various others (including funds) own 5% to 8%.
10-Q for 2nd quarter
period ends Sept 30, 2006
Exact same number of shares on Nov 13, 2006: 17,080,000
Compared to year end 3/31/06: Cash is up, AR is up slightly. PP&E is up. Current ratio is up to 1.64.
Equity is up by $4.64 million.
Revenues are screaming, up 34%, insanely higher for 6 months (Q1 10-Q shows nearly doubled revenues).
Gross margins are 69%
Operating margins are 45%.
Net margins are 29%.
These are dropping somewhat, but still amazing.
Net income is $1.6 million ($4.5 million for the first half).
Cash flow from ops is $5.2 million with capex of $1.3 million. About what I would expect. The capex is probably for actual investment. Depreciation is only about 1/5 of capex.
No financing (good).
Assuming this line of business is sustainable (and I'm not sure right now if it is), I'd say this company is worth at least $10 per share, probably more. The stock is selling for around $8.00. I'm hoping to either get better visibility into the value of the company (and possibly find that it's $15+ or else get a better price such as $6.
But for now, I'll just post it to the blog.