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Drama at Fuqi International

March 17th, 2010 · 4 Comments

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.

Tags: FUQI

4 responses so far ↓

  • 1 // Mar 17, 2010 at 5:50 am

    I am surprise with your speed on responding to the matter in a fast and honest way. Most other people will not take responsible for their recommendation. For them, if their pick is correct, is it all because of them. And if it is not, they there are 1,000 excuses. You give no excuses, that’s something I respect very much.

    It happens that I researched Fuqi yesterday, read everything you wrote and everything can be found on seekingalpha. There are a few more recommendations from a few authors and would like to see how they comment.

  • 2 admin // Mar 17, 2010 at 8:29 pm

    Thanks. We have to say that buying now, with so much still unknown, is more like pure gambling. We can’t advice that as we do not know whether all the skeletons are out. It could be high reward, but it certainly is high-risk..

  • 3 Kurt // Mar 17, 2010 at 10:04 pm

    Oh well, it happened to me before and with enough patience, this too will correct itself. Keep posting on the progress of cleaning out the closet and we’ll know when to buy more to lower our average purchasing price.

    Great honesty, highly appreciated!

  • 4 Raj // Mar 23, 2010 at 5:04 am

    Thanks for the info.I got this stock with an avg price of $23 and i heard that lot of law firms are setting up fraud cases against FUQI. I am thinking to approach any one of them to cover my losses .Do you think any thing can be done if we approach them or can i buy some more to reduce my avg price and to cover my own losses myself. Your help will be highly appreciated.