By: ispeculatornew
Date posted: 02.26.2007 (12:00 am) | Write a Comment  (1 Comment)

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CHINA – CDC Corp (Nasdaq) (Closing Price – $10.31)

There are quite a few analysts that are currently touting CDC Corp. (CHINA) and the stock has been on quite a run recently. However, after doing some research I have found there is not much to like about (especially its valuation).

CDC Corp. provides software, mobile applications, and online games. The company has growth potential and has shown some improvement over the past year, but in my opinion the company is way overvalued.

Before I dig into the financials let me point out the first thing that troubles me about CHINA. In their quarterly earnings reports they report “adjusted” net income before they report their GAAP earnings. This is similar to the pro forma earnings and EBITDA that companies used to report in the late 90s to hide their poor or nonexistent GAAP earnings. I didn’t know companies were still allowed to do this because it can be misleading to investors. Any company can have better “adjusted” earnings if they can arbitrarily deduct certain expenses.

The GAAP earnings for CHINA don’t look impressive. Over the past four quarters they have posted GAAP earnings of 0.07. This gives a CHINA a trailing PE of 147 with today’s closing price of $10.31. To say that is ridiculously high would be an understatement. However, the market is forward looking so let’s find the forward PE. This is a little tricky because the numbers I have seen from analysts are based on the aforementioned “adjusted” numbers. China’s best quarter over the past year has been GAAP earnings of 0.07. I am going to be generous and say they make that every quarter next year (0.28 full year). That gives them a forward PE of 37. That pretty expensive, especially considering it’s factoring in future improvement. From a PE standpoint CHINA is definitely not a bargain.

Another positive that analysts are touting is the possibility that CHINA is going to spin off its software or gaming unit, or both. One analyst even said the share price could rise as high as $16.00 if there is a spinoff. I don’t think there would be much interest in a spinoff of the software unit and a spinoff of the gaming unit would by no means merit a six dollar increase in share price. The gaming unit had revenues of 8.43 million last quarter. I don’t think a spinoff of that unit would warrant a 673.5 million increase in market cap.

In my opinion, CHINA, like most Chinese stocks is way overpriced. The only reason to buy it at these levels would be to hope for a potential spinoff. However, I don’t think a spinoff would increase the stock price much from the already lofty levels.

Disclosure: I don’t own shares of CHINA and I am not shorting CHINA.

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1 Comment

  1. Comment by RA S — May 8, 2008 @ 9:42 am

    Do you think CHINA is a a point for entry? $3.43 Its earnings call on the 21st.

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