Wefe's comments on Q2 earnings:
Tuesday, November 9, 2010
quick CHBT earnings thoughts
Some quick thoughts on CHBT earnings.
- I think earnings and the cc went a long way towards proving the company's credibility. Citron's questions were answered right off the bat. The call went an hour and 45 minutes and there were some new names on the call, and some old ones including Pope. So maybe Pope is still considering converting their debt. Transparency was great. Management could have provided a clearer answer to the one caller who came on late, but they did explain earlier that they incurred around 4.5 million RMB in costs to terminate the leases for the closed stores (which if I recall correctly they said the penalty on most was 1 month's rent to terminate early). Still, they explained that reduced operating costs was worth it to incur the penalty.
- The company bought back around 220,000 shares at an average price around $12.46. Just about what I expected. Enough to show that the company has the ability to buy back shares should it decide to do so. However they explained they felt that investing in further growth may be the best use of cash.
- They maintained their 50% yoy revenue growth guidance for this fiscal year. Last FY they did $81.4 million, so guidance is for roughly $122 million. Since they did roughly $25 million in Q1 and $24 million in Q2, that's $73 million in the second half of the year. At Q2's 34% net income rate, that works out to almost $25 million in net income in the second half of the year, or around $1 in EPS for the remaining two quarters.
- Free cash flow was around $6 million this quarter. I think that is a safe baseline to assume for the run rate going forward from the retail side and Phase I of bulk as Q2 was a seasonally slow quarter on the retail side, costs were incurred in closing retail outlets, and on the bulk side sales are expected to ramp up in the second half. Annualized that's free cash flow of around $25 million just from retail and Phase I, and that should grow as Phase I continues to ramp. And then there is Phase II.
- ASPs on bulk were steady to slightly declining at around $660/kg.
- Overall, I do not see any compelling reasons for shorts to remain short. The company addressed outstanding questions. They have a strong cash balance. They closed most of the stores and are still significantly free cash flow positive. They maintained their 50% yoy revenue guidance. They demonstrated their willingness to buy back shares if the conditions are right, and did so in the past quarter at an average price of $12.46. I think we could finally start to see some meaningful short covering in the coming month.
- In conclusion the long term thesis is still intact. With the improved transparency and credibility, I think CHBT can return to at least 10x trailing twelve months earnings in the near term, so that's around $17. Longer term, I still like the potential for reaching near $30 as Phase II and Yangling come into focus and credibility and comfort with management continues to grow.
Posted by wefe5433 at 7:20 AM 0 comments
