10Q ABC

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_C/threadview?m=tm&bn=76810&tid=1473&mid=1474&tof=3&rt=2&frt=3&off=1

Re: Simple Explanation of 10Q/A 25-Dec-09 04:56 am (cont.)

But the loss that offsets the earnings is not a real loss. It is an illusion, a quirk of how the accounting is being done.

A more accurate--and also more conservative--way to evaluate the earnings of a company with oustanding CPS and warrants would be to add the them to the diluted shares (basically, assume that they have already been converted or exercised, because let's be honest, eventually they will be). You recalculate the diluted EPS using that number.

If you do that, you get about 24M outsanding shares. Obviously, we haven't accounted for the cash that CKGT will eventually get if the warrants are exercised (upwards of $2M), but we can be extra conservative and ignore that cash for now.

Here is their quarterly net income for the past two years:

4Q09 - TBD / 3Q09 - $3M / 2Q09 - $1.42M / 1Q09 - $0.69M

4Q08 - $2.3M / 3Q08 - $1.77M / 2Q08 - $1.04M / 1Q08 - $0.61M

The YOY growth rate has been increasing at a higher rate every quarter of this year. If you assume the same YOY growth rate for 4Q as for 3Q (69%), you get a 4Q net income of $3.89M, an annual net income of $9M, and an annual EPS (using 24M shares--the maximum shares assuming total conversion of everything into common stock) of .375. That's a P/E of 6.9 using today's closing price.

If you assume no growth from 3Q to 4Q, you get an annual net income of $8.11M and an annual EPS (using 24M shares) of .337. That's a P/E of 7.69.

Those are the EPS and P/E numbers that smart money will use to evaluate CKGT, not the numbers in the 10Q/A, which are deceptive and misleading because of the way the accounting is done.

Considering the rapid growth rate (in excess of 50%) and the low P/E, the stock is underpriced now matter how you choose to look at it. It is probably the fastest growing china small cap out there. It deserves a higher P/E than 7.

On a final note, all of the information about the CPS and warrants and their eventual effects has been readily available for more than a year. Smart money already knows about it--and has for a long time. Today's pullback was kneejerk, not well thought out, and that's why the stock rallied at the end of the day. I don't anticipate much weakness going forward, the market is quite used to this--it's applicable to CADC, CBPO, YONG, CAGC, and so on--but if there is weakness, you want to use it as an opportunity, particularly if you missed the train on the prior runup. This stock is a $6 stock, on the cusp of an uplisting. If you can get it on the cheap (you may not be able to), take it.