THE GUN: SHARES OF CIS ARE A LOW RISK/HIGH REWARD OPPORTUNITY BASED ON THIS ANALYSIS
Chinese stocks were decimated and banished from the vocabulary of all speculative investors in 2011. The mere mention of Chinese companies trading on US exchanges is still associated with reverse mergers, frauds and lack of transparency. Entire research firms were built around dismantling Chinese stocks. Hedge fund managers that fell for some of the better known names, such as Sino Forest, were decimated.
The ravaging that took place in these stocks last year has led to a dead period in many of these names in 2012. By dead period I mean a period of sideways trading with very low volume and a general disinterest by nearly every class of investor. These dead periods are a prerequisite to the better established names - call them survivors if you wish - carving out trading bottoms that allow for the companies to experience substantial upside gains.
There is a baby with the bath water mentality that takes place during these types of blanket panics. It is only natural that there will be value to be had in companies that potentially have exponential upside once sanity returns.
One such company with the potential for substantial gains in the future is CIS. One of the largest IT companies in China, they provide services to everything from the financial services sector to energy and media.
I purchased shares of the company today with plans of holding for the long-term. Reasons are as follows:
Fundamental picture
Key Points:
- Price per share was $16 exactly one year ago. Currently trading at an 80% discount at a little over $3 per share.
- Share decline was exacerbated by numerous factors that were reinforced by the panic surrounding Chinese stocks in the second half of 2011.
- One such factor was the forced liquidation of shares held by management that were pledged as collateral for margin loans. These forced liquidation represented nearly 10% of total outstanding shares.
- Another factor was the departure of the CFO from the company during the second half of 2011.
- Another factor was that the CIS used the same auditor as another embattled Chinese stock VIT. Vanceinfo's (VIT) auditor was issued a subpoena by the SEC during Q3 2011.
- Following these events the company restructured their management team during Q4 2011.
- The company is currently trading at less than 2 times NET CASH and less than 1 times NET LIQUIDATION VALUE.
- The company balance sheet is as clean as a whistle. Debt free.
- Top and bottom line took a hit during the second half of 2011 due to the turmoil within the company, as well as turbulence within the sector.
- The restructuring of the company should begin to positively influence top and bottom line in 2012, allowing for a return to normal valuations for the company.
- For 2012 Camelot expects net revenues of approximately $266 million, representing a 17.1% increase from the prior year. In addition, Camelot expects full-year 2012 adjusted net income attributable to Camelot to be approximately $18 million, representing a 17.6% increase from the prior year.
- Based on estimates the company is currently trading at 5 times 2012 earnings. Average industry P/E for similar companies within China is 20.
- The float is roughly 30 million shares with a market cap of 150 million.
Bottomline: Unless the bottom falls out of the market I don't see how CIS will trade anywhere near NET CASH value again. The panic that was the second half of 2011 allowed for the company to trade at NET CASH for a period of months. Given that net cash is roughly $2 per share, I am risking approximately $1.30 per share to gain $9 per share based on the average industry valuation which puts the price per share price at over $12 based on 2012 estimates.
Technical picture
click chart to enlarge
CIS
