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Sunday, October 28, 2007

Jpak Group (JPAK)

My new approach is paying off. After hitting about 50 bad companies, I ran into something that may turn out to be an investment (not JPAK). That will probably take some time before it gets posted and I like to post stuff at least once a week, so I figured that I'd take another company and do a quick blurb on it. But that company also looked like it could be too good to post yet. So I tried a third company, Composite Technology (CPTC), which was really too much to attempt in a quick blurb. Some people might find it interesting but I threw it on the "too difficult" pile.

So let me try one more time to find something that I can pick apart quickly. So let's take a look at Jpak Group (JPAK).

The first interesting thing I see is that QVT Financial LP accidentally filed a statement of ownership and then withdrew it because the company itself wasn't reporting.
Because the Issuer does not have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), the reporting persons do not have a reporting obligation under Section 13(d) of the Exchange Act.
In August they owned 15.9% of the stock.

JPAK filed a registration statement early in Oct.
The offices are in Shandong Province, China.
39 million shares (owned by existing stockholders) being registered.

They make aseptic cartons (aka juice boxes): milk, juices, soy milk, yogurt drinks, etc. They believe they're the largest domestic supplier in China. They plan to export to Southeast Asia.

They were a state owned business, started in 1958. Management bought out 88% of the company in 2004 and started development of aseptic liquid food and drink cartons, launched in 2005. Reverse merger in 2006.

I find this odd. The Asceptic Packaging Council claims that these packages have been in Asia for decades. JPAK just launched in 2005 and claim to be the biggest domestic supplier in China. Since they're a US company, they can't be excluding other US companies who make these things in China. I suppose this is possible, but seems very unlikely.

For the year ending June 30, 2007:
Revenue: $30 million, up from $22.6 million prior year due to new customers
gross margin: 20% (down from 23% prior year)
They have positive earnings of $1.5 million, which is actually down from $1.6 million prior year, largely due to minority interest in 2006 that became 100% owned in 2007.
Net margin: 5.6% (down from 6.9% prior year), killed by SG&A.

They added a sales force and related expenses. SG&A will increase in absolute terms going forward due to expansion efforts, public company expenses.

The China carton market is $1.4 billion and growing. Multinationals supply nearly 90% with the rest are domestic supplier like JPAK ($140 million). This would mean JPAK has 21% market share among domestic suppliers.

They believe they're the low cost provider, but don't provide any reasons why.

The officers have all sorts of experience and awards. Yijun Wang has been CEO since 1984. President has been with the company for 30+ years, starting as technical manager on a production line. CFO has Chinese experience only and has an engineering background.

Salaries are low, as usual for a Chinese company. CEO makes $55K, CFO makes $30K.

No stock options.

Joyrich Group Ltd (100% owned by Stewart Shiang Lor, one of the directors) owns 69.5% of the company. The same guy owns more stock through another fund, so it's massively controlled by one person. Executives and directors own 87.2%, much of it via preferred shares.

At the end of the offering, directors and executives will own a whole lot less of the company.

The preferred stock has some pretty serious dilution and may be toxic, I'm not sure. Each pfd share converts into a variable number of common shares, currently 11.2 million. Also three classes of warrants. 11 million dilutive shares for Series A and B, but Series J converts into preferred, so tack on another 11 million for this. Also about a million "placement" warrants.

The total registered accounts for all this for a grand total of 39 million shares.

Assets are mostly AR, PP&E, cash, and inventory. Current ratio is a bit over 1. 1/3 equity.

Ignoring currency translation, they've been earning about 3.8 cents per share.

Operating cash flow is seriously negative due to various payables and inventory. The prior year was very anemic due to a massive increase in AR.

Capex has been running very high. They acquired the remaining 11.77% portion of the subsidiary for $5.2 million (giving the business a value of $44 million or $1.13 per fully diluted share).

Bank loans, convertible notes, and capital contribution etc. added a net $12.3 million in cash.

In the notes, the advertising costs were claimed to be insignificant for the two prior years.

I'm not particularly interested in the company, but I'd guess it's probably worth a dollar or so. Now let's check the market price: the bid is $1.25 and the ask is $1.40. The price has ranged from 75 cents to $1.45.

What does it mean "too good to be posted"?
That means I might want to buy shares, in which case I don't post anything about it until after I buy shares. That's described in the disclosure.
How long does it take you to go through a company like JPAK and produce your quick analysis? I enjoy your blog and appreciate the thorough analysis you provide on the stocks you cover. I am just curious about your process.

Jack Straw
I forget exactly how long JPAK took, but it was around 2 or 3 hours. For a full investment, I usually spend perhaps 5 to 10 hours on it. It really varies.
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