We have always viewed China America Holdings (CAAH) as
the little penny
stock with huge upside potential It is not everyday a stock
literally trading for pennies has a business with such a large revenue
base. In
the past three years CAAH
has generated over $100MM in revenues
BUT...net income was no where to be found with losses tallying to about
a million dollars. Investors
have hoped the company could just muster together some positive net
margins..it didn't have to be much...just 10% would've meant 2010 net
income of $5MM. Finally...the
wait is over.
Yesterday the China America Holdings announced it has entered into a
definitive share exchange agreement to acquire a 100% equity stake in
China Ziyang Technology Company, Limited for a combination of a
convertible promissory note and common stock valued at approximately
$16MM. Upon completion of the transaction and assuming full
conversion of the note, the acquisition will own approximately 79.6% of
the then issued and outstanding shares of China America Holdings.
Shares of CAAH traded over
32
million shares for the day with the stock hitting a high of
$0.0299 cents. The stock ended the day at
$0.018
per share and was
the
sixth highest volume stock on the entire OTCBB exchange
yesterday. This new acquisition of China Ziyang has clearly
changed the entire complexion of the company. Let's examine
Ziyang a little more closely.
Based in Zhucheng City, Shandong Province, China. Ziyang Ceramics was
established on January 26, 2006, with $7.7MM registered capital
and had total assets of approximately $26.5MM as of March 31,
2011. Ziyang Ceramics is engaged in the manufacturing and distribution
of porcelain tiles used for interior residential and commercial
flooring primarily in Eastern and Central China. Ziyang Ceramics
operates its production and distribution facility on approximately 1.8
million square feet of land that includes facilities covering an area
of 775,000 square feet. Ziyang Ceramics has 492 employees and operates
two production lines which produce three main ceramic product types in
more than 50 different size and color combinations. The company sells
its products through a distribution network of more than 150
distributors across 10 provinces concentrating on major second and
third tier cities.
In
2010, on a pro forma basis, Ziyang Ceramics generated revenue of
$31.1MM with net income of approximately $7.3MM and
experienced top and bottom line growth in excess of 44% compared to
2009. Management expects to grow its internal operations at a rate of
at least 20% annually for the foreseeable future.
 |
Dissecting
The
Deal |
|
As of May
20, 2011 China America had 200,710,792 shares
of common stock are issued and outstanding. Based on yesterday's
press release China Ziyang will represent 79.6% of the new company.
By our calculations, 783,165,639 shares will be issued to China
Ziyang bringing the total number of shares to around 983,876,431.
Based
on yesterday's closing price of $0.018 the market cap of the combined
entity is presently $17,709,775MM.
With net income of approximately
$7.3MM for 2010 and 2011 expected to be at least 20% higher
which would be
$8.76MM the current valuation of China Ziyang...
is a
trailing 2010 PE of 2.42 and a 2011 forward PE of 2.02. That
folks..is very inexpensive and we will tell you why.
For the past six months we have seen numerous Chinese companies being
outted as frauds. The level and sophistication of fraud has
ranged from elementary to institutionally sophisticated. For
China America to make an acquisition during this market environment
means that they are completely confident China Ziyang is
legitimate.
If
everything checks out then the current valuation is indeed CHEAP!
Companies does that are real don't sell for TWO TIMES EARNINGS!
This is an extremely
exciting development and we await the 8k SEC Filing to get more details.
