China Digital Sees Strong Earnings, Future Ahead
China Digital Communication Group [[CHID.OB]] announced higher-than-expected earnings that sent shares sharply higher this week. The Chinese battery-maker saw its shares soar more than 350 percent over the past few days, after it turned profitable on a huge growth in revenues.
China Digital reported net income of $4,451,072, or $0.08 per share, on revenues of $19,716,408 for fiscal 2008. This compares to a net loss of $11,525,852 on revenues of $2,696,267 a year earlier. Meanwhile, the company maintained a healthy cash position of $6,969,454, which was more than enough to cover its current liabilities of $6,241,943, according to the firm’s 10-K filing with the SEC.
The majority of China Digital’s success in 2008 was realized through its entry into the battery distribution business. The new segment generated approximately 75 percent of the company’s total sales, but the sales originated from just one customer that is contracted on a monthly basis. Shenzhen Hua Yin Tong Battery Electronic Tech. Co., Ltd. accounted for 74.8 percent of the firm’s revenues.
The reliance on a single customer is always troublesome for investors, particularly when that customer is on a month-to-month contract. However, the company stated in its 10-K that “although we do not have formal contracts with our customers, we have established long-term relationships.” While this doesn’t entirely negate the idea of a customer leaving, it does provide some comfort for investors.
The company also remains confident in being able to enter this market strongly with new customers in the future. Again, according to their 10-K filing:
“Having engaged in battery business for years, the management of the Company have accumulated abundant knowledge about the battery industry, established a strong network among many battery companies which are on both lower and upper position of the battery distribution flow, and gained a lot of experience of battery distributing; therefore, we believe that the Company is in a more favorable position than other companies in distributing finished battery. Distributing finished battery has a much higher profit margin than manufacturing battery accessories, so the management of the Company is very confident that the battery distribution business is profitable due to the outstanding battery quality and the strong distribution network that the Company has been building for years.”
Currently, China Digital is trading with a price-earnings ratio of just 1.8x with an exponential grow rate, which suggests that the stock may be undervalued, if it can keep up its growth rates. Given the reliance on a single customer for about three-quarters of its revenues, some of this discount may be warranted. However, investors have bid up the stock in response to the strong results and future prospects.
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com