Thursday, August 30, 2012

Exceed Company - Take a Risk on China

While we focus more and more on the economic slowdown in China, let us pause and take a moment to see where we can make some money on the attempted soft landing in the Far East. Exceed Company Ltd (EDS) is a Chinese footwear and apparel company – based in Hong Kong – offering products under its flagship Xidelong brand name. Exceed produces the types of sports and leisure products targeting young adults, which you are used to seeing in a company like Dick’s Sporting Goods (DKS) – shoes, socks, pants, coats, etc.

Exceed, like many other Chinese stocks, has been a beat up stock in the past year – down nearly 70% from its 52-week high of $5.45 last fall. The chart looks like a "house of pain" if you were in at $5. Now is a chance to ride a potential reversal. EDS is trading up slightly today to $1.70 on nearly 10 times volume. 

Highlights of the most recent 2nd Quarter, reported on August 13th, include strong revenue:

Revenue – $88.3 million
Net Income – 4.7 million
Net Cash – $124.3 million
Debt - $1.6 million

Cash on hand has never been a problem – while the stock price has plummeted – leaving net cash per share (29.31 million shares outstanding) at around $4.24 today. Net Receivables increased 43% - something I would like them to use for a stock buyback in the near future. 

Founder and CEO, Shuipan Lin, commented after the quarter: “As anticipated, our results in the second quarter were impacted by weakening consumer demand in China, which was largely attributable to the domestic and global economic slowdown. As a result, overall sales volume across our main footwear and apparel product lines decreased, resulting in a decline in revenue.  In response to the prevailing market conditions, we began in the second quarter to proactively limit production and delivery of products to better manage inventory levels at our distributors. Despite the unfavorable operating environment, we managed to outperform our revenue guidance for the quarter, supported by our ongoing brand building and marketing initiatives which have continued to raise the degree of market recognition of the Xidelong brand name and the average selling prices of our products, especially in our footwear segment.”

Lin added that strategies are in place to manage inventory levels and strengthen brand awareness, a proactive strategy already implemented by slowing down deliveries to third-party merchants last quarter. Inventory turnover levels decreased year-over-year from 9 days to 7 days. He added they will continue their “Fitness for All” campaign sponsorship. Third quarter guidance of the net revenue range of $95.8 million to $102.1 million should be manageable and I expect to see a profitable year-end close.

Although overall demand for the product is slowing in China, take a look at comments from this 2010 article:

“According to UBS Securities, sports shoes priced between 170 and 250 Yuan (between $25 and 36.8) are best sellers in China's second- and third-tier cities.
Currently, most Nike sports shoes cost between 500 and 1,500 Yuan in China. They sell to mid- to high-end consumers in large cities. For an ordinary white-collar employee in Beijing, one pair of Nike shoes costing 1,500 Yuan would account for nearly half of his monthly wages.”
HALF his monthly wages! Exceed’s target market could very well be invading not just the white collar workers in second and third tier Chinese cities, but making its way up the income bracket as the economy slows and demand for high-end brands like Nike (NKE) and Adidas AG (ADDYY) decreases. Chinese population growth is not slowing down, and with more and more families struggling to make ends meet, they will turn to lower priced alternatives, especially for their children, who seem to outgrow everything in a few months anyway.

I was able to find some Xidelong shoes here, priced at a reasonable 239 Yuan (a bit over $40 dollars). Take a look for yourself:

Along with the fundamentals, I want to confirm with some technical indicators:

The RSI (14) of 35 indicates we are approaching oversold territory. I believe this has some to do with how thinly traded this stock is – along with the typical low-volume August we have seen in the broader market. Also, look for EDS to break out from touching its lower Bolligner Band and trend upwards from the $1.69 closing low. Remember to use limit orders here, the bid/ask spread on this small-cap company is often large- and one trading block could push the bid down over 10%. Stay patient.With Jackson Hole already priced in, I think we have seen the bottom in EDS and we are in store for a double in the next year.

Facebook Longs Getting Zuckered

Already down over 47% since the IPO, shares of Facebook (FB) had been trading lower ahead of the August 16th lockup expiration - and that trend continued on expiration day itself.
As Jon Najarian (who is even long the stock and looking for mid-twenties short-term) of pointed out: "The single biggest thing it might do is make it less expensive to be short Facebook."
I agree in the sense that many of the shorts were way ahead of the lockout and held short all the way down into the teens - so they'll cover now and on the way up as longs jump in on perceived value. So, yes, we could see a short term bump, but I worry about the rest of the year. The market doesn't care what your IPO was or what percentage hair-cut your stock has taken already - it will find a home. Take a look at the November at the money ($20) put options below:
A lot of volume. November options are extremely important because:
  1. Oct. 25th earnings are reported right after October options expiration. Yes, Zuckerberg says he does not manage to please the street every quarter. But, the market does react to quarterly reporting. For example, Facebook's first quarter seemed OK on the surface: They met estimates, sure, but once investors combed over the details and language, the stock sold off 10%. An important issue raised in guidance was the outlook on mobile advertising strategy and revenue. I use the iPhone and have never used FB's mobile app. It is so important that by November, there is some sort of guidance about mobile. Who is going to click on ads? Probably the same people that buy eCoins on DrawSomething - no one!
  2. The second lockup expiration of 1.2B shares is November 14th. Will Mark Zuckerberg sell any portion of his shares? Will other big institutions and partners like Zynga (ZNGA) sell? Their cost basis is plenty low enough to. I realize Microsoft (MSFT) already says they are holding their 25M shares here - but how long will Ballmer be content?
  3. Some other obvious answers - The macroeconomic picture and general market sentiment, including QE3 prospects and the presidential election. I would say to simply look at the social media "sector" as a whole in the last three months, around the time of Facebook's IPO. Stocks like the aforementioned Zynga is down over 63% in the last three months, Groupon (GRPN) is off around 61% while Pandora (P) shrugged off about 14%. Each of these are now trading in single-digits. To avoid a similar fate, Facebook will have to figure out what LinkedIn (LNKD) is doing right and try to emulate certain things.
Are you truly bullish and contrarian? If you are willing to buy here, why not start writing those Nov $17 puts and collect a nice $1.25. What about the bears? You could definitely try a Bear-Put spread in a nice little range should FB not break $26-$27 on the upside, in my opinion.
My sentiment is slightly bearish, but with little conviction: I found today's news really interesting, but have no plans on going either way with this. Maybe if we fall below $10, Zuckerberg will use his own money and take it private again. Sidelines are OK for me and many others for the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.