China Growth Stocks

[$pooky]

CNTF update 3/7/2010 (nice read imo)

http://pacificclub.sauropol.com/an-update-on-cntf-372010/

It has been one year since we recommended and many of us had purchased the stock. The stock price moved up from where we recommended around $1.30 area to the current $3.0 area. We feel the company is still very much undervalued if you consider the company’s cash asset and business. We feel CNTF will give shareholder a big return due to a good growth and profit this year. I am not surprised if the stock goes above $10 eventually. Here is why we think the stock still has big potential:



1. The company has $128 million cash and $16 million convertible debt. The current market cap is only $131 million, which means the enterprise value of the company is only $(131-128+16)=$19 million. The company’s revenue is more than $200 million and the business is profitable while the street views the company’s business worth at only $19 million. Thus, the company is still very much undervalued. Ironically, the stock price was around $15 few year ago when the revenue and profit were much worse/lower than they are right now. The difference is that the street saw CNTF as a high growth company at that time; they do not see CNTF as a high growth now. Well, unnoticed by many investors and analysts, the company is starting to grow again. The company is waiting for the street to discover this hidden gem and it is also time for the company IR to put effort to get the street to notice its growth and potentional.

2. According to our estimation, the company could generate almost $0.40 per share profit for 2010. CNTF is a high tech company with good profit and Valueline has a valuation model for this type of company. If we use the formula to value CNTF, it will be $(2.5*R+C-D)=$(2.5*210+128-16) million=$637 million=$14.81 per share. Thus, $10 price target would be still only a conservative estimation.

3. The company’s online gaming business will start to generate revenue and be profitable this year. The online gaming business should help CNTF’s business’s bottom line in future. The company offers games in two main platforms. One is for mobile platform and the other is for PC platform. The following two links are their websites: www.798uu.com and www.798game.com.

4. The company continues to have operational profit for more than a year now and we believe the company will continue this trend of operational profit in the future. We thought the company should maintain net profit without any charges when we recommended the stock one year ago. But, you might have noticed the company had a net loss of $3.4 million in the third quarter of 2009 which was a big surprise for many investors, including us. The loss included a one time US$9.2 million non-cash charge as a result of change in fair value of the derivatives associated with a convertible debt. If you take that out, the company would have an income of $5.6 million for the revenue of $52.8 million. We do not believe the company will have this type of charge again in future.

5. The company will announce fourth quarter 2009 earning on 3/15/2010. We believe the company had a great quarter. During the third conference call, the company gave the revenue guidance of $52 to $55 million. We expect the revenue will be at the high end of the guidance at around $55 million and profit will be at $8 million level. If the company can achieve the revenue and profit as we estimate, the stock price should get above $4, a new high for the year.

6. There are still no analysts and investment banks officially recommending the stock yet, but some signs of institution attraction and institutional investors quietly buying in the stock were observed in the recent conference calls and the institution filing data from SEC:

Institution activities information:

Total Shares Held: 28 9,266,015

New Positions: 10 1,625,647

Increased Positions: 16 1,922,010

Decreased Positions: 8 1,702,324

Holders with Activity: 24 3,624,334

Sold Out Positions: 4 709,951

Worth to mention is that one of the biggest investment banker Morgan Stanley has started a new position and has quietly accumulated 1.4 million shares recently.

The company has started investment road shows recently. We see this as a very positive sign. We believe the company will conduct the road shows more aggressively in the future. With better earnings and more road shows ahead, more investors will invest in this stock. When the stock price hits above $5, the analysts will start to cover the stock.

7. 800,00 shares short positions were covered recently. I see this as good and bad. Good part is that the people who shorted the stock saw what we saw now. They recognized the stock price will go higher in future so they covered their positions. The bad part is that they were able to cover their position but it did not cause the price move much higher due to short squeeze. Nevertheless, the stock price will go higher and that is what these people saw. Otherwise they will not cover their short positions.

8. Technically, the stock was in very bearish mode recently. The price even drop under 200 day moving average at the end of Feb, which was considered as long term bearish, but you know the technical signal can be easily manipulated. The fundamental of the company did not become worse (actually became better), but stock price went down from the recent high of $3.5 to $2.56 two week ago. Many investors who bought the stock due to the price movement without knowing (conduct great research) CNTF well were shaken out by this recent downward trend. The gain from the manipulation was able to lead the shorter covered and institution investors bought CNTF at bargain prices. Here is the one year chart:

The chart shows the price has moved above the 200 day and 21 day moving average now. The price also touched 50 day moving day. The pattern becomes bullish now. You know what will happen next. The price should move higher. The stock will become very bullish if the price moves higher next few days. This could happen if you believe the earning will be good. The earning will be released on 3/15/2010, which is only one week from now.



Thus, we are very bullish CNTF stock now. The price could pop up 10% easily from here in short term and it would not surprise us the price will go to new higher after the earning release.