Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

Geong International - now that's what I call an AGM statement

GEONG International the Beijing based, provider of content management software and solutions came out with a cracking AGM statement yesterday.

As a shareholder and big fan of this business I admit to being a little biased but it really was a good one with the sort of clarity that is so often absent from the old stagers of the market.

Naturally the house broker came out all guns blazing (quite right too!) upgrading their profit forecast for 2008, 2009 and 2010 by 20%.

Trading at 16x March 2008 earnings, they commented that GEONG’s almost 20% discount to the Technology sector is undeserved considering the potential market available to the company in China-the problem seems to be that we sceptical Brits don’t generally appear to entirely trust what’s going on in China! Anyway the good old broker is upgrading their recommendation from Outperform (18 May 2007) to BUY with a price target of 90p.

Revised broker estimates now indicate forecast sales of US$17.6m for the year end March 2008 with earnings per share of 7.3 cents resulting in a PER of c16.5x based on a 60p share price and sales of US$20.8m for 2009 with earnings of 10.0 cents a share resulting in a PER of 12x. By now you should know me well enough to realise that I’m not bothering about 2010-pure fiction!

It was an excellent announcement that surely justifies a material uplift in the share price even in the current market. I’m not being paid to say this but as a shareholder you might be inclined to dismiss this as sales waffle in an attempt to push the stock! However, in its defence this little group hasn’t disappointed and the staff and management have just forked out a load of hard earned money to buy shares in the placing.

They have (or had a few weeks ago) £3.4m of net cash to help realise their dreams and with the projected earnings growth of over 25% per annum over the next 3 years the valuation surely doesn’t look very demanding.

The house broker considers their forecasts beyond 2009 are prudent (come on chaps, you always do!) and cautious with margins (55% last year), forecast to decline to around 45% this year as GEONG increases sales and marketing spend to expand its geographical coverage in China. They are also assuming that, in 2007/2008, the group will increase selling and distribution costs almost three-fold (that sounds reasonable) to establish its presence nationally.

While PortalAge remains the key revenue earner for the time being (c80% of turnover) SmartBox and SmartExpress, aimed at medium and very small businesses respectively is where the future lies. GEONG is steadily making significant inroads into SMEs and very small businesses where competition is apparently almost non-existent.

I will be interested to see if they can keep on top of the increased working capital demands. The Loyalty Program model that they are now adopting for very small companies alters the cash flow profile somewhat-we know what the Chinese high growth merchants are like at credit control!

The China risk is ever present to rein back the share price and in the current market Geong will have to keep coming out with positive news to really satisfy the doubters! However, little Geong has delivered of late and surely merits a great deal more attention.


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