Well, this is a bit of a mess….
We wondered for a long time why these shares are so cheap. We went over the latest analyst reports in a most meticulous fashion, and there was nothing. Absolutely nothing. We revisited the situation last week, and we still couldn’t find much reason for the low price. We therefore concluded, considering the rise in retail sales in China that earnings upgrades were likely (2010 earnings estimates were the same as 2009 ones).
But Fuqi has just come out with a rather unpleasant news. Q4 earnings per share are half that of the original guidance ($0.24 to $0.28 per share compared to $0.55-$0.60). For the reasons, we quote the PR:
- “We estimate slightly lower sales in the fourth quarter as some of our customers delayed orders to coincide more closely with the Chinese New Year holiday which occurred in mid-February. We also estimate that our gross margin was impacted by a higher product mix of lower margin wholesale products such as commemorative Chinese New Year gold bars which we estimate resulted in wholesale gross margin performance below our historic range. Fulfilling such orders can increase our market share and enhance brand awareness with new and existing customers, both of which are important for the long-term development of our wholesale business.”
Potentially more damaging are the accounting deficiencies and necessary restatements, assessment of which are ongoing.
- thus far, the Company identified certain accounting errors that are expected to have a material impact on the previously issued quarterly financial statements for the first three quarters of 2009
So FUQI shares are likely to receive more normal valuation, but not in the way we imagined. After the close, the shares are down a whopping 27% (at the time of writing), and that is understandable. Confidence has been badly shaken here and it remains to be seen how large the restatements are going to be, and when confidence returns.
We apologize for any loss you might have suffered as a result, but this is not something we could have reasonably foreseen. It’s possible to make some preliminary calculations on valuation:
- The overstatement for the first 9 months were 15-19 cents.
- These have to be detracted from the $1.66 the company said it earned so far in that period, to arrive at $1.47-$1.51
- Add the 24-28 cents for Q4, and one arrives at $1.71-$1.79 per share for 2009.
While the shares are now going for $13.7 or so in after hours trading. The company also has some $6 in cash per share (and less than $2 in debt per share). While there will be a bloodbath tomorrow (which is already ongoing in after hours trading), these metrics are very cheap.
For the time being, that is deservedly so, but once the company manages to get all the skeletons out of the closet by filing all it’s restatements, and getting it’s accounting process in order, confidence will return.
And selling jewellery in China still seems a pretty good business to us.