Cheap, fast growing, in the best market in the world, and getting a boost from rising gold prices. But the shares are not taking off. Again we have a whole research report in PDF, and it provides a few more answers…

Fuqi-by-Merriman Curhan Ford-9nov09

We found a couple more reasons for the stagnant shares:

1. ODM orders provided the quarterly boost. FUQI generated $19.0M in wholesale revenues from original design manufacturing (ODM) orders vs. only $1.0M in 3Q09. Excluding these orders, wholesale growth slowed to around 10%. In addition, management noted that the gross margin on the ODM revenues are at least 2x the margins on traditional wholesale revenues (although by our calculations the benefit had to be much greater than that). Concerned about lower-quality revenues. We view these ODM orders as lower quality than core jewelry sales and need to monitor the trend to make sure this does not continue. At a minimum, FUQI management made good use of extra capacity to land high-margin business, but this is not the core jewelry business for which investors are involved in FUQI shares.
2. Retail margins below expectations. Retail margins of 22.6% came in below our 31.5% estimate and the 38.0% margin last year. Management attributed this to product mix with more lower-margin platinum products (investing) instead of gold/gemstone products (gift-giving). We expect margins to rebound in 4Q with more gift-giving holidays vs. none in 3Q.

This is somewhat curious though. Why does Merriman argue that these ODM sales are lower quality while they generate (at least) twice the margins on traditional wholesale revenues..

Nevertheless, despite the lower per share profits estimation for next year ($2.31), Merriman has FUQI as a buy. And why not, that’s a p/e of 9.

So although we at least have some arguments for the stagnation in the share price, we still think they’re damn cheap…