TSTC piece I wrote up ...
Telestone not unlike all small cap China stocks has gotten annihilated, currently trading at $10.80 and a trailing 2010 P/E of 4X's earnings. After listening to Dec 6th Conference call seems TSTC's 2011 growth rate will be very high once again possibly putting them at 2 or 3X's 2011 earnings. This after last year's 100% growth & 2010 growth of over 80%. Let's look at TSTC's last earnings report on Nov. 15th which had estimates of 33 million in sales & .51 cents in Net Income, they announced Sales of 43 Million Dollars and Net Income of $1.14! First off unlike most China stocks getting attacked, all of them are young reverse merger companies, while Telestone has been doing business with the 3 largest Tier 1 Telco's in China namely China Mobile, China Unicom & China Telecom combined worth over 325 BILLION DOLLARS! For over 13 Years it has been a public company since 2004 with vetted products which has been recently adopted into the U.S.A. Telestone on December 6th gave some juicy tidbits of future growth information to those that listened like for example their Proprietary, WFDS product sales going from 23% to over 40% of total sales in 2011 that is staggering growth. Telestone will be installing WFDS in over 20 Provinces versus the 8 Provinces in 2010 and compared to only 4 Provinces in 2009, and stated that there will be at least 2 operators in every installed Province using WFDS. Telestone also stated that they would do over 10% from international sales up from the current 3% being in 29 different countries.
A brand new revenue stream coming from the installation of WFDS systems in Chinese Government buildings as part of their mandated directive to converge China's Wireless, Internet Broadband, Fixed line & Data services and TV in an all in 1 unit which currently Telestones Proprietary WFDS is the only compliant piece of equipment.
From 10Q
The Chinese government is committed to simplifying the telecommunications industry by standardizing the equipment used in order to create a more competitive market environment. In addition to standardization, there is a near unanimous government support of integration of high-speed Internet, Wi-Fi, television programming, and voice and data networks. In order to accelerate this integration, in January 2010, the State Council issued a directive for the consolidation of China's three primary communication networks (telecommunications, television & radio broadcasting, and the Internet) into one, within a five year window. As the number of products and applications that need to be transmitted continues to compound, this directive has opened up a great market opportunity for technology solutions capable of consolidating telecommunications, television and radio broadcasting, and the Internet into one simple form factor.
We believe our industry leading WFDS solution is the only commercially available solution that is fully compatible with the Big 3's respective technology requirements and can offer integrated services in a single platform. Our WFDS systems can be deployed in various types of properties. We currently have received 60 patents for WFDS, and have an additional 40 filed patent applications for WFDS under review. In September 2009, WFDS technology successfully passed all United States Federal Communications Commission, or FCC, testing procedures. The FCC certification will not only apply to the U.S. market, but also to our WFDS products in Central and South America. We expect to gain significant traction in the indoor wireless coverage market through our first mover advantage.
The only knock on Telestone is their high A/R's which hasn't been a problem until their growth rate went ballistic, and to be fair the terms that the Big 3 have forced upon the Last Mile Installers/Parts Producers is heavily biased in the Big 3's favor taking over 1 year to pay balances due to delayed inspections. It is a sector issue not a Telestone specific issue as 2 other public companies doing similar type business have the same exact A/R issues, Comba Telecom and Grentech (symbol GRRF) have much higher A/R's then Telestone. The credit worthiness of the Big 3 are undisputed & clearly have Tier 1 credit and have never beaten or caused any of the 3 public last mile installers to write off their sales as bad debts. Despite the high A/R's Telestone still boasts no long term debt and has throughout their existence sustained operations from cash flow from operations plus current Tangible assets after debt totaling over 103 million dollars almost their current market valuation. It would be foolish to believe that the big 3 will look to stiff Telestone, Comba or Grentech as they all need each other. For 13 Years the big 3 have honored their contracts with Telestone so again no reason to think that will change anytime soon. Telestone did recently get approved for a $44 million dollar line of credit for the next few years' working capital needs, if necessary.
TSTC's stock was mid $15's after blowout earnings Nov. 15th & the short raid ensued after a 1.675 million share offering was announced by Telestone on Nov. 23rd now again Unlike serial Chinese diluters Telestone had Never done an offering in their 7 Years as a public company NEVER, and the single time they did maybe the smallest offering I've ever seen coupled with the fact this raise was strictly for growth capital. Now Telestone has close to 1.7 million shares short (as of Nov. 30th) over 25% of the free float and growing rapidly. This timing of tremendous shorting at 4X's trailing earnings with great growth still to come for next few Years reminds me of another stock recently short raided CCME which had shorts doubling down instead of covering at $7.50 & at 4X's earnings a share and some 5 weeks later was touching 52 week highs of $22.30. We are at that same juncture where shorts should be covering & yet appear to be doubling down and despite the fact TSTC shares are near impossible to borrow, after checking with 6 brokers none had shares to short. TSTC also just spent the week on the Reg Sho list and as I recall the No borrow & Reg Sho list happened in CCME right before it took off. Some might remember TSTC stock from last December & January where TSTC went from $8.00 to over $25.00 a share & traded at 20X's earnings was an IBD top 100 stock and momentum low float stock favorite that hedge funds loved to play. The stock was ahead of its self then but would easily justify a trip back to 52 week highs with current fundamentals. At $25 a share TSTC would equate to 10X's 2010 Net Income. IBD has Telestones Telecom equipment sector ranked 5th out of 197 sectors and NO one can deny the Years & Years of continued growth just starting to be deployed in the Asia Wireless Telecom sector, Telestone is in the hottest sector in the hottest country on Earth.
In closing with an aggressive new IR firm looking to unleash positive news & Telestone working up 2011 guidance to be released sooner rather than later anyone that believes the China wireless story is in the early innings would have to believe that TSTC is a far better long then short when comparing the risk/reward and fundamentals . With their explosive moves, positive news like another record 4th quarter already guided and consistently under promised and over delivered for guiding for $2.17 which they should beat handily including non cash charges from 1rst Qtr they will do 25.5 Million in Net Income conservatively. New contracts & 2011 guidance leaving Telestone at 2 to 3X's EPS, Top 10 auditor which could lead to very unhappy shorts forced to buy shares back as brokers are forced to return shares to longs which recently happened to me on another hard to borrow stock.
