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 It has been almost four months
since China Vesting Added China Shandong Industries (CSNH)
to the China Dragon Undervalued Index. Shares of CSNH promptly rose from
an April 15, 2010 closing price of $2.72 per share to an interim high of $3.29
the very next trading day on 99,700 shares of volume. That was by far China Shandong's
largest dollar volume day in its history. It seemed like this unknown gem of a company
was about to be discovered. Within a week of being added to the China Vesting Index,
CSNH announced on April 20, 2010 that investment banker Rodman & Renshaw
was helping the company raise $20 million in a public offering.
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CSNH was added to the Undervalued Index based on the following premise: |
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- 25,725,000 shares of common stock are issued and outstanding
- $2.72 per share resulting in a market capitalization of $69.972 million
- 2009 net income of $9.987 million resulting in a trailing 12 month PE of 7
- 2009 net income grew over 73% versus 2008
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Since then, share of China Shandong have fallen off a cliff like all Chinese and
U.S. listed companies. Based on Friday's closing price of $2.20 per share,
CSNH is down a dismal 19.11% since being added
to the China Vesting Index. This is clearly not the kind of performance expected
from a company that was recognized as being an "Undervalued Dragon". However,
at this point in time it is China Vesting's opinion that China Shandong Industries
is the most undervalued company in the entire China Vesting Index. Here
is why...
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When was the last time a Chinese company listed in the U.S. had to revise their
financials? The most glaring example is Fuqi International (FUQI),
which was kicked out of the China Vesting Index for stating that previous financials
had to be revised and that the company did not know how long it was going to take.
Shares of Fuqi dropped from $20 to around $6 and currently sit at $8.00 per share.
But what if a company revises earnings to the upside? Until CSNH, China Vesting
has never heard of such an occurrence.
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 Then on June 17, 2010, China Shandong
Industries, Inc. announced that the company's audited consolidated financial statements
for the fiscal year ended December 31, 2009 and the Company's unaudited consolidated
financial statements for the quarter ended March 31, 2010 could no longer be relied
upon. It turns out that in May 2010, upon the request of Rodman & Renshaw, underwriter
of the CSNH's proposed public offering, the Company and its independent accountant,
Bongiovanni & Associates, C.P.A.'s, conducted a review of the Company's audited
consolidated financial statements for the 2009 Year, and unaudited consolidated
financial statements for the 2010 1st Quarter.
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The Company believes that such restatement will result in an increase in revenues
to $69,435,044 from $59,549,572 for its 2009 Year and a decrease from
$19,461,568 to $19,406,737 for the 2010 1st Quarter, and its net income will
increase to $12,021,155 from $9,987,430 for the 2009 Year, and decrease
from $3,540,282 to $3,516,574 for the 2010 1st Quarter.
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The reason for the discrepancy in such financial statements was that the Company
was recognizing revenues on the date the Company "physically" received clearance
papers from the Chinese customs department, to permit the Company to ship its products
to purchasers of such products. However, there exists a time gap between the date
the Company receives the "physical" approval paper from Customs and the date Customs
actually approves the release of the Company's products to customers. The Company
believes the date that Customs actually approves the release of the Company's products
from Customs is the more appropriate and accurate date for the Company to recognize
revenues. As a result, the Company is restating its financial statements for (i)
the 2009 Year and (ii) the 2010 1st Quarter. The Company did not find any understatement
in revenues for the comparative year ended December 31, 2008 and the comparative
quarter ended March 31, 2009.
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China Shandong was actually being more conservative with their reporting of revenue
and earnings. As a result of the revision, shares of CSNH are currently valued at
a trailing 12 month PE ratio of 4.70. 25,725,000 shares outstanding
multiplied by Friday's close of $2.20 per share equates to a market capitalization
of $56.595 million. The 2009 restated earnings of $12.021 million results divided
by the total number of shares outstanding results in the trailing 12 month PE of
4.70.
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China Shandong Industries is a designer and contract manufacturer of household furniture
in China. CSNH produces a variety of indoor and outdoor residential furniture and
wicker products that are sold and exported to more than 30 countries. The products
are sold through well known domestic and international retailers such as Trade Point
A/S Direct Container, Zara-Home, Habitat UK Ltd., ABM Group Inc., and Fuji Boeki
Co. Ltd. CSNH believes that the product depth and extensive style selections we
offer allows us to be a strong resource for global furniture, retail chains and
retailers in the discounted price range.
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Operations are conducted through our subsidiary located in Shandong Province, PRC.
Through the subsidiary, the company manufactures over 20,000 different products.
CSNH focuses on providing high quality products at competitive prices. For the fiscal
year ended December 31, 2009, approximately 5% of products were sold in the PRC and
95% of our products were sold to companies in countries such as the United States,
Germany, England, Italy, Sweden, Canada, Taiwan. As of December 31, 2009,
CSNH had approximately 1,500 employees of which the majority is in manufacturing.
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The most amazing aspect of CSNH is that 95% of the company's business is outside
of China. Despite the terrible economic conditions in the world, net income for
fiscal 2009 was $12,021,155, an increase of $6,259,161, or 108.6% as compared to
$5,761,994 in 2008. Revenue for the fiscal year ended December 31, 2009 was $69,435,044,
increasing by $27,237,651, or 64.5%, from $42,197,393 for the comparable period
in 2008.
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In what was one of the worst years for the world's economy, CSNH produced blockbuster
results. This is despite having just 5% of its business in the domestic Chinese
market. Impressive is about the only word that comes to mind.
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Straight from SEC Filings: |
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During 2009, our main products, wood furniture, straw-wicker, and handicraft products,
generated sales of approximately $37.1 million, $31.2 million and $1.1 million ,
respectively, approximately 53.4%, 45.0% and 1.6% of our total revenues during the
2009 fiscal year. Sales of our wood furniture, straw-wicker and handicraft products
contributed approximately $20.1 million, $21.2 million and $0.9 million, respectively,
in the revenues of 2008, approximately 47.6%, 50.2%, and 2.1%, respectively, of
our total revenues in such period. Revenue for the fiscal year ended December 31,
2009 was $69,435,044, increasing by $27,237,651, or 64.5%, from $42,197,393 for
the comparable period in 2008.
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Revenue for the three months ended March 31, 2010 was $19,406,737, an increase of
$4,910,942, or 33.9%, from $14,495,795 for the comparable period in 2009. For the
three months ended March 31, 2010, our main products, wood furniture, straw-wicker,
and handicraft products, generated sales of approximately $10.9 million, $7.6 million,
and $0.9 million, respectively, or approximately 56.2%, 39.2% and 4.6% of our total
revenues for the three months ended March 31, 2010. Sales of our wood furniture,
straw-wicker and handicraft products generated sales of approximately $8.0 million,
$6.2 million and $0.3 million, respectively, for the three months ended March 31,
2009, or approximately 55.2%, 42.8% and 2.1%, respectively, of our total revenues
for such period.
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The increase in our revenues in three months ended March 31, 2010 compared to March
31, 2009 was primarily attributable to the increasing orders from our customers.
We have received orders of approximately $21 million for the three months ended
March 31, 2010, while receiving approximately $15 million for the comparable period
in 2009. We also believe the increase in our revenues for the three months ended
March 31, 2010 is a result of our increased selling price for our product, the average
price of which was $183 per unit in the three months ended March 31, 2010 and $164
per unit for the comparable period in 2009.
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Net income for three months ended March 31, 2010 was approximately $3,516,574, an
increase of $1,281,146, or 57.3% as compared to $2,235,428 for the comparable period
in 2009.
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Based on Friday's close of $2.20 shares of CSNH are down
19.11% since being added to the China Vesting Index. This is despite
earnings 2009 earnings being revised up to $12,021,155 from $9,987,43
for the year ended 2009. With a trailing 12 month PE ratio of just 4.70
China Vesting believes that CSNH is the most undervalued company in the entire Index.
It should be a matter of time before the company makes it move from the OTCBB to
the Nasdaq or NYSE AMEX exchange. How do we know?
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- On August 3, 2010, CSNH filed the Amendment to effect the Reverse Split with the
Secretary of State of the State of Delaware. Upon the approval of the Reverse Split
by FINRA, each two (2) shares of common stock outstanding prior to the Reverse Split
will be converted into one (1) share of common stock, and all options, warrants,
and any other similar instruments convertible into, or exchangeable or exercisable
for, shares of common stock will be proportionally adjusted.
- Effective July 1, 2010, the Board of Directors of China Shandong Industries, Inc.
appointed Fuhua Wu, Man Zhang and Yvonne Zhang to serve as independent directors.
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Based on the two items above CSNH should have all of the necessary requirements
needed to be approved for a senior listing. Couple that with the $20 million dollar
funding that Rodman & Renshaw is working on and it should not be hard to see
the writing on the wall. Once institutions are allowed to buy CSNH the company's
market value should climb to around 10-15 times trailing 12 months earnings. That
would imply a stock price of $4.67-$7.00 per share. Once the company
is approved and moves to a senior exchange, many of the ETFs and institutions that
buy stocks solely on valuations will bump the stock price up significantly. What
happens after the senior exchange is something that no one can predict.
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China Vesting believes CSNH would then no longer be undervalued but in the process
will have rewarded investors who own shares of the company at the current levels.
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