Chinese small caps… many questions have arisen regarding their eligibility, or as some argue, lack thereof. In particular we speak of Chinese Reverse Mergers that go on to trade on U.S. stock exchanges. As you may already be aware, some RTO’s were proven to be backed by fraudulent firms, others are standing trial and defending their innocence. And this is precisely what led up to the fall of just about every Chinese RTO you can think of. Certainly, a few bad apples don’t mean a bad bunch. For that reason some china stocks that stood tyranny have rebounded from 52-week lows, or as some might phrase it, “lows”. If you’re a believer in buying low and selling high, this is probably the time to take advantage of stocks that were victim of prejudice and deserve a higher valuation. We believe there is a high probability that changes to the Chinese RTO space will be positive for these said firms. For example, officials from the SEC and PCAOB met with Chinese officials to open dialog and draw up the framework to allow for joint audits of US-listed Chinese companies. For your reference, we’ve provided the original source:
This marks a significant stride in the direction of accounting oversight cooperation between the China and the U.S., in particular, of course, concerning Chinese U.S.-listed entities. This is step one of many, which implies a great deal of work lies ahead. As such, we expect to hear more on this issue, which, in our opinions, will support firms that prove legitimacy.
In our research, we came across a China RTO that we feel was victim to the prejudice of faulty Chinese reverse mergers. The company is called Kingold Jewelry, and trades on the NASDAQ as ‘KGJI’. We think this could be one of the better performing RTOs here on out. Provided, below, for your convenience, is more on this company.
On August 12th Kingold Jewelry (KGJI) raised their 12-month sales and profit guidance for 2011:
“On August 8, 2011, the Company increased its full year 2011 revenue guidance to a range of between $800 million and $850 million, up from prior guidance of between $720 million and $780 million. The Company also raised its full year 2011 net income guidance to a range of between $32 million and $34 million, up from prior guidance of between of $30 million and $32 million. Based on management’s estimate of weighted average diluted share count for 2011, the guidance corresponds to earnings per diluted share of $0.63 to $0.67.”
We had KGJI on high-alert on Twitter & Facebook since Friday morning when shares went for $1.68 (something we considered freakishly opportunistic) KGJI reached a high of $1.91 (13.6% from our alert) that day, closing the session at $1.83.
To remain impartial on our decision to be bullish at the firm, we looked at the “pros” and “cons” of putting some money behind this firm.
On January 10th, 2011 Kingold Jewelry announced public offering for 6.9M of its common shares, effective January 14th. More shares were added on January 20th & one of the directors resigned due to a disagreement over Kingold’s equity offering.
Results of the offering were obvious – KGJI stock fell over 70%.
Now, take a look at the bottom portion of a press release dated August 12th:
“The Company’s guidance assumes, among other things, relatively stable gold prices for the remainder of the year, no additional capital raises in 2011, and meaningful contribution from its new line of investment-oriented gold products in the second half of 2011.”
No more capital raises in 2011 – that we like to hear!
Adding to the “pros” – HONG JIA ZHI, Kingold Jewelry’s CEO and Chairman, bought 270,000 shares of KGJI on the open market beginning on June 8 through to July 15 2011.
Yet, KGJI wasn’t without its share of critics with one “short seller” leaning heavily the other way. Of course we would encourage his research be interpreted with a high degree of caution and as some of our associates have put it, “with a grain of salt”. For that scandalous piece see this link.
In sum, we’re bullish on KGJI. We think the “pros” heavily outweigh the “cons” or risks associated with this trade. If you were to ask us, KGJI would be fairly valued closer to $4, not the $1.83 a share some investors coming off the china RTO scare were valuing the company at on Friday.
Kingold Jewelry, Inc.
15 Huangpu Science & Technology Park
Jiangan District, Wuhan,
430023 Hubei Province, PRC
Kingold Jewelry, Inc.
Bin Liu, Chief Financial Officer
40 Wall Street, 58 Floor
New York, NY 10005
Kingold is a leading designer and manufacturer of 24-karat jewelry in China.
Founded in 2002, with state-of-the-art manufacturing facilities in Wuhan, China, Kingold supplies leading national wholesalers and retailers.
As an established premium brand in this category, Kingold is recognized by customers for its impeccable quality and superior design.
The company is now poised for the next stage of growth, with the production expertise, established distribution network, brand recognition and management team to expand production, and become the dominant company in this market.