China 3C Group Research Report - Risks
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.- Standard industry risks:
- Electronics retail is highly competitive.
- Margins are historically tight in this business and pricing is consumer-driven.
- They must maintain favorable supplier agreements.
- Chinese economic growth may slow, reducing consumption and affecting sales levels.
- Company-specific risks:
- Company's business strategy is highly dependent on expansion to meet set goals (4,000 locations & $1B in revenue by 2010).
- While store-within-a-store template is relatively cheap (US$15,000/location to open), standalone locations are 33 times more expensive to open (US$500,000) and the company feels these are essential to develop the company's brand. The standalones may lower overall margins and profitability.
- China 3C's growth strategy includes expanding their geographical footprint towards the rest of China. This may require expensive acquisitions or brand-new excursions into unfamiliar territory which may not come off as well as planned.
- The equity issue is traded OTC with the company being based completely in China. Retail investors will not have access to the same detailed information as with other mainstream issues.
- With goodwill comprising 40% of total assets, the company has no tangible non-current assets to act as a backstop in the event of deterioration in business conditions. In other words, if business goes south and China 3C burn through their cash, our investment has little liquidation value.
- Sizable compensation for non-China-based directors (e.g. Kenneth Berents = US$75,000 + $2,500/$2,000 per meeting attended + annual stock option grants). The other non-China-based directors have similarly, if not more, generous terms.
- Operating results are reported rather opaquely. The company does not break out results for same-store comps and seem to be confused on stated targets and goals during conference calls.
- Very short operating history on which to evaluate business and future prospects.
- The company was a little late in filing its last 10Q SEC filing.
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