Analyst Reports Rodman and Renshaw on CNIT 5/27/2011
CNIT: CFO Departure Triggers Selloff
CFO Resignation: CNIT announced that its CFO, Ms. Jackie Kazmerzak effective May 30, 2011 will resign from her post to pursue another career opportunity. The company’s current financial controller, Ms. Eva Liu, CPA will assume the interim CFO role until the company hires an official CFO. The press released stated that the company is currently in the process of vetting candidates to replace Ms. Kazmerzak.
Stock Reaction Likely Overdone: Following the news, CNIT shares were down ~25% in the morning trading. We believe investors may have over-reacted given that fundamentally the business operation has not changed. However, the over-reaction is not surprising given the extremely fragile investor sentiment on China small cap in an environment of auditor resignations and stock halts. We spoke to Ms. Kazmerzak and believe her departure is driven by a new opportunity rather than her concerns on the soundness of the company. This announcement is coming right before an extended weekend and investors may be reluctant to hold their positions. Recent history has shown that some stock halts have come into play post CFO resignations. We don’t believe today’s development should warrant such an action. However, the market will be looking to see a full time, qualified CFO assigned quickly and for stock support from the company and insiders.
Maintain Market Outperform Rating: At current levels CNIT is trading at P/E multiples of ~2.3x and ~2.0x to our FY11 and FY12 Non-GAAP earnings estimates. This is well below industry averages for similar players in the US and China. We believe CNIT should be trading, in line with industry averages given the growth opportunity associated with it. Our price target of $9.00 translates into a P/E multiple of ~11.3x and ~9.5x to our earnings estimates for FY11 and FY12. This compares to an average forward FY11 and FY12 P/E multiples of ~23x and ~18.2x for similar companies listed in China and ~20.6x and ~15.4x for those listed in the US. We maintain our Market Outperform rating.
Risks: 1) Technology Risk 2) Highly competitive industry 3) Geographic Concentration 4) Country Risk
Also agree with PutLovr the company is not worth $2.50, its either $0 or say $7-9 if not a fraud. Now, based on that it is priced to be with a 75% probability a fraud (eg 75%*0+25%*8=2). Not 25% chnace, not 50% chance but the price implies its with 75% probability a fraud.
The above only leaves us with the question is it a fraud or not?? After a major shock on Friday (thx for a nice weekend), went through all of the subidiaries websites, cross checking news, people and so on. Looks fine to me.
I also did the test the other way around of seeing if I can spot irregularities in companies that turned out fraud, and I am sorry and know it is obvious in hindsight, but there were signs. Unrealistic margins for the industry, substantially higher growth than industry, few or no third party articles, way too simple setups of websites or businesses and so on. Please help me as I can just not figure why the high attached probability that this is a scam apart from general sentiment.
Anyway, maybe of interest:
1) CFOs at other Chinese companies that were halted or delisted have either resigned at the same time the auditor resigned or an investigation by the SEC was announced, or later, not without any of these.
2) The company contrary to others has a long history, first OTC then NASDAQ. Different to others that were only listed or reverse merged in the quick money making hey days of other Chinese stocks.
3)Short sale restriction is on accrding to Bloomberg system since Friday 13.30 (uptick rule) should last through Monday.
4) Google NY times 2007 article "China Enacting a High-Tech Plan to Track People". Does it seem unreal or not in line with what CNIT claims??
5) If you add what they had paid for aquisitions of each subsidiary (in stock and cash) and add iASPEC, you are at a higher value than you are now based on this valuation, not incorporating any growth since then.
6) The people, most importantly or the man, google again NY times 2007 article "A Chinese Tycoon, Inspired to Create Police Technology".
Now compare this with companies like NEWN led by a bunch of twenty somethings, unrealisitc growth, margins and employee figures having setup a young magic company and trading at higher multiples!!
As always, do your own DD, dont rely on others either way. Do let me know if you come to different conclusions.