I'd like to post some thoughts on TBYH. As some of us are painfully aware, the stock has collapsed after reporting its y/e fiscal report. Was there anything fundamentally wrong with the company that warrants such a sell-off?
A few have speculated that its engineering prowess isn't well advanced in 3G, which could push out its transition to 3G into FY08. Others have said that the A/R are an issue, and point to the creation of a note receivable as an indicator that one or more customers are in danger of not paying their bills to TBYH.
All of this could be legitimate, but with the Q4 numbers that were posted, and with guidance for a minimum of 10% growth on existing products, I really doubt that these issues were cause for most of the selling.
Here's my theory on what's happening. After tearing apart the 10k again, I believe that a big part of the problem is the issuance of shares in the past to "consultants" who helped put together the reverse merger and acquisition of Shangai Sunplus. Here's what I've found:
<snip from 10K>
Changes in Securities
Unless otherwise noted all securities were issued to accredited investors in private transactions, without registration in reliance on the exemption provided by Section 4(2) of the Securities Act. Furthermore, all investors had access to all material information pertaining to our company and financial condition, and no broker was involved and no commissions were paid in the transactions.
During the eight months ended August 31, 2003 we issued 6,003,000 restricted common shares to 29 investors for payment of $60,030 in debt that was due on December 31, 2002.
[My NOTE]: split adjusted: 300k shares
During the eight months ended August 31, 2003 we issued 1,151,000 restricted common shares to four investors as payment for services valued at $11,510. 57k split adjusted
***Share issuances prior to 2004 have not been adjusted for the 20 to one reverse split effective in November 2004. Share issuances listed below were issued after the reverse split was effective.***
In November 2004, we sold 1,440,000 post 20 to one reverse split restricted common shares to seven individuals for $50,000. This sale resulted in a change of control of the Company as described in Form 8-K filed with the Securities and Exchange Commission on November 15, 2004.
Also in November 2004, we issued 50,000 restricted common shares to an individual for services of a consultant.
In January 2005, we established a non-Qualified Stock Option Plan to encourage stock ownership by officers, directors, employees and consultants. The aggregate number of shares subject to stock grants and options are not to exceed 6,5000,000 shares of our common stock and may be granted pursuant to the Plan for up to ten years. In March 2005, we issued 6,336,189 common shares were issued to eleven individuals for services rendered pursuant to the Plan.
In July 2005, we issued 3,100,000 restricted common shares to 5 individuals and corporations for services rendered to the Company as payment for services valued at $3,100.
In August 2005, we issued 18,550,000 restricted common shares pursuant to the terms of our Reorganization Agreement stock in exchange for all of the issued and outstanding shares of Wise Target and Amber Link.
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The rules on restricted shares are usually Form 144 restrictions. They are the following (quickly summarized):
Restricted shares may only be sold after a one year holding period, subject to certain restrictions. First, sales cannot exceed 1% of outstanding shares. Second, notice must be filed with the SEC. If shares have been held for 2 years or more, than they can be sold without regard to the above restrictions.
The SEC Form 144 rule (for those interested in reading more):
http://www.sec.gov/investor/pubs/rule144.htm
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What does that mean for TBYH? Note that 3.1MM restricted shares just passed the 1 year mark. That means that 1%, or 310k shares, could have been sold at some point during July. My guess is that we had a Form 144 seller at work once the numbers were officially released, AND the one year anniversary in July passed. Nothing has been filed yet with the SEC, but my guess is we might see something in the next few weeks.
Second point on restricted shares being sold in TBYH. Notice that there is another block of original shell shares (1.4MM) that are due to reach the 2 year anniversary in November 2006. Those can be sold free of any restriction, included filing with the SEC. That is a lot of low basis shares that may be coming on to the market very soon and savvy buyers are perhaps waiting for this time period to go by and see how far the stock can fall.
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So.....there are some very good reasons to avoid TBYH at present. However, if you want to look at this as an aggressive speculator, this may be a fantastic opportunity to buy in at a cheap price assuming the fundamentals remain solid. TBYH has set out to configure and engineer a 3G phone by Q4 FY07. They may be late on this, but guidance of 10% growth in sales and net income from existing phones indicates that they should have at least a good fighting chance of achieving that minimum guidance.
Financials:
1. TTM PE of 4.4x
2. Cash of 4.7MM on the balance sheet, no debt. A Note receivable of 7.8MM, which may not be all collectable.
3. Generated positive cash flow from operations (FY07): +3.9MM
4. Guidance (from y/e PR):
"Xiaofeng Li continued, "The Chinese market is the largest in the world, with about 50 million new phones currently sold each year. Sales and royalties on our 2006 products alone should create earnings growth of at least 10% in fiscal 2007 but emerging catalysts suggest that an earnings growth rate approaching 30% is entirely possible for 2007."
"Through investments in R&D and a planned increase in capital expenditures, we are on track to market up to 35 total design solutions in fiscal 2007, a 40% increase in new products, including two 3G phones. In addition to offering new products, we are also continuing to add new customers and plan to aggressively enter additional markets in Eastern European and South America in fiscal 2007," stated Xiaofeng Li."
5. Earnings growth of 10% = 0.37. Forward PE: 4x; Growth rate: 10%; PEG ratio: 0.40
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I don't know when the sellers will be exhausted or what their game plan is for maximizing their exit price. It just seems amazing to me that TBYH is hovering near 52 week lows given its financials and recent guidance.
Bottom line: restricted shares could be creating an overhang of supply, but with the passage of time and a successful Q1 and Q2 under its belt, I think the stock can eventually get back up to the 3s again. May take a while though....
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