China Tracker - Details for Cogo Group (COGO)

 Cogo Group
 Analyst Coverage
2011-08-05Roth CapitalDowngradeNeutral$5.00
2011-08-05CanaccordReiterationBuy$6.00
2011-07-27Merriman Curhan FordReiterationBuyn/a
2011-06-09Capstone InvestmentsReiterationBuy$12.00
2011-06-08Ticonderoga SecuritiesDowngradeHoldn/a
 

Downgrading Cogo to Neutral. Over the years, we have been among Cogo's biggest fans, as we believed in the long-term opportunity to capitalize on China's growth prospects; however, recent changes at the company, slowing trends in China and our growing concerns surrounding earnings quality is testing our patience. As such, we are downgrading Cogo to Hold.

Change Isn't Always Good, Especially When Domiciling in the Cayman. Over the past couple of months, Cogo announced plans to change the company's domicile to the Cayman Islands from Maryland, while unveiling an online strategy dubbed COGO 3.0. The change in domicile is aimed at allowing the company to list its shares in Hong Kong, which we believe is a mistake because the market valuations are lower than in the U.S. and supply chain companies generally get bigger discounts. Also, certain U.S. investors will no longer be able to hold the shares. Regarding COGO 3.0, we believe investors walked away thinking the current SME model isn't working, and this announcement largely confused the market.

Poor Earnings Quality and Free Cash Flow Generation. Given the growing concerns regarding earnings quality and accounting in China, we believe investors will increasingly grow more skeptical around valuing China-based companies on pro forma EPS. Across our coverage universe, Cogo has the largest gap between pro forma EPS and GAAP EPS. For example, GAAP EPS was 47% lower than pro forma EPS in 1Q11, and we estimate 45% lower in 2011. As investors focus more on GAAP EPS, we believe this will reduced the valuation around Cogo's stock price. Additionally, Cogo's free cash flow generation over the past nine years has been shockingly poor. For example, we calculate only $15 million in total free cash flow generation between 2002-2010, and the past two years were negative.

Growth Is Slowing in China and COGO Gets the Summertime Blues. During our recent trip to Taiwan, we highlighted weakening trends across certain parts of the handset and consumer electronics market in China. During 1Q11, Cogo generated 55% of sales from the digital media market that includes both handsets and consumer electronics, while we estimate 70% of total revenue is consumed in China. Also, there has been weakness in Cogo's stock price during the summer. For example, Cogo's stock has historically experienced the greatest weakness during the month of June, with an average decline of nearly 15% M/M over the past six years, while July has fallen by nearly 10%.

Less Face Time by Senior Management = Lower Multiple. Finally, we believe less frequent travels to visit U.S. investors by Cogo senior management based in China is another reason investors will continue to pay less for the shares. In our view, the company's strategy of relying on a U.S.-based investor relations team has proven misguided and the stock price has clearly suffered.

2011-06-02Merriman Curhan FordReiterationBuyn/a
2011-05-25CanaccordReiterationBuy$13.00
2011-05-19Capstone InvestmentsReiterationBuy$12.00
2011-05-06Roth CapitalReiterationBuy$11.00
2011-05-06BarclaysReiterationOverweight$11.00
2011-05-06CanaccordReiterationBuy$13.00
2011-05-05Ticonderoga SecuritiesReiterationBuy$14.25
2011-04-07Capstone InvestmentsInitiationBuy$12.00
2011-04-07CanaccordReiterationBuy$13.00
2011-03-29Ticonderoga SecuritiesReiterationBuy$14.25
2011-03-28Roth CapitalReiterationBuy$11.00
 

We are updating our model to reflect audited 4Q10 and full year 2010 results included in COGO's recently-filed 10-K. Results were in-line with those preannounced on February 1 (see ROTH noted dated 2/2/2011 for detailed analysis and key quarterly metrics). 4Q10 revenue equaled $113.5M and non-GAAP income, adjusted for stock comp and $3.3M ($0.09) in one-time items associated with a previous acquisition (Long Rise), equaled $10.9M, or $0.28 per share.

2011-03-07Ticonderoga SecuritiesReiterationBuy$14.25
2011-03-03Merriman Curhan FordReiterationBuy$12.00
2011-03-02BarclaysReiterationOverweight$11.00
2011-02-02Ticonderoga SecuritiesReiterationBuy$14.25
 

Last night, Cogo reported 4Q10 preliminary revenue of $113.5 million (up 13% Q/Q) that exceeded our estimate of $107.7 million, while pro forma EPS of $0.24 beat our $0.23 estimate (Street was also at $0.23). We expect 2011 to be a strong year as Cogo benefits from its aggressive industrial expansion initiative that now includes a healthcare vertical through the MDC acquisition, combined with entry into the tablet market and growth from the global mobile Internet buildout. Cogo remains confident in reaching $1 billion in revenue over the next few years. With Cogo showing continued signs of consistent performance, new market expansion opportunities and continued high growth rates, we believe the market will increasingly be willing to pay a higher valuation for the stock (now at just 8x our 2011 EPS, ex-cash) and we are raising our 12-month price target to $14.25 from $12.50.

2011-02-02Needham & Co.ReiterationStrong Buy$12.00
2011-02-02CanaccordReiterationBuy$13.00
2011-02-02BarclaysReiterationOverweight$11.00
2011-01-28Roth CapitalReiterationBuy$10.00
 

Our $10 price target is based on a 11.0x multiple applied to our FY11 EPS estimate of $0.91.

2011-01-12Ticonderoga SecuritiesReiterationBuy$12.50
 

Cogo Gets Bulled Up on Tablets this Morning. This morning, Cogo announced that its tablet revenue is "accelerating faster than expected" due to the combination of an increase in Cogo's tablet customer base and a faster rate of growth in China's tablet market. With the ramp of China's mobile Internet expected to accelerate in 2011 in light of a more robust 3G infrastructure, more attractive price points on 3G phones and a growing app ecosystem, we believe tablets will increasingly become popular in China in 2011 and beyond. Additionally, most of the leading China-based smartphone, notebook/PC and consumer electronics companies have developed tablets that we expect will also enjoy strong export demand in the coming years.

Computex and HK Shows Previewed Tablet Mania, CES Supports. We began to highlight tablet mania in Asia during the Taipei Computex Show last June, with most of the leading players showing off tablet prototypes, while dozens of China-based vendors introduced tablets during our visit to tech shows in Hong Kong last Autumn. Last week, the tablet was ubiquitous at the Consumer Electronics Show, and even leading China-based companies (and Cogo customers) such as BYD (1211 HK, HK$42.75, NR) Huawei, Lenovo (992 HK, HK$4.83, NR), Skyworth (751 HK, HK$4.48, NR) and ZTE (763 HK, HK$31.45, NR) had tablets on display. Huawei's tablet is sold at Best Buy (BBY, $35.79, NR).

Cogo Well Positioned for China's Tablet Rush. Cogo began highlighting tablet design wins last October and revenue generation began in November. Similar to features and functionality on a smartphone, we believe Cogo is well positioned to provide modules into the tablet market. Examples of Cogo's embedded solutions for touch-screen tablets include a micro-controller unit, memory, wireless communication access protocols (Wi-FI/3G), motion sensing GPS and gaming functionality. Cogo has previously highlighted over 20 tablet/e-reader customers and had estimated the China tablet market will grow to more than a few million units in 2011. By comparison, we are estimating the global tablet market to grow from 15.5 million units in 2010 to 61 million units in 2011. The ASP per module for Cogo is estimated at approximately $5-$20 with an above-average margin profile. We have highlighted expectations for $5-$10 million in revenue for Cogo in 2011.

Cogo Highlights Strong Demand Trends. With Cogo presenting at an investor conference today, the company highlighted strong demand trends in this morning's release. Specifically, Jeffrey Kang, CEO of Cogo indicated, "Overall, we continue to see broad-based order strength across all of our end markets and we look forward to another year of strong revenue growth." Recall, Cogo's 4Q10 outlook calls for revenue of $107-$108 million and pro forma EPS of $0.22 to $0.23. Given the robust trends at leading China-based OEMs during our recent China trip, we believe our 4Q10 revenue estimate of $107.7 million and pro forma EPS estimate of $0.23 is conservative.

2011-01-12BarclaysReiterationOverweight$10.00
2011-01-10Needham & Co.ReiterationStrong Buy$12.00
 

We are introducing 2012 revenue and non-GAAP EPS estimates of $460MM/$1.00, representing 9.5% and 11.1% growth over 2011, respectively.

2010-12-29Roth CapitalReiterationBuy$10.00
2010-12-15Roth CapitalInitiationBuy$10.00
 

We are resuming research coverage on shares of COGO with a BUY rating and $10 price target. Cogo Group provides customized module design solutions for the digital media, telecommunications, and industrial markets in China. It has supply relationships with over 30 component manufacturers, including Broadcom, Intel, Matsushita, and Freescale, and serves a customer base of blue chip and SME companies.

We believe COGO's successful entry into industrial end-markets (est. >17% of 2010 revenue vs <5% in 2008) mark a positive transformation. We believe its industrial business will drive double-digit total revenue growth through 2012 (est. ~25% industrial growth), sustain mid-teen-% blended gross margins (est. 20%+ industrial gross margins), and provide a basis for multiple expansion (~20x PE for comparable industrial companies).

COGO's industrial end-markets are aligned with positive secular trends associated with China's electric grid upgrades, high-speed railway build-out, and automotive market expansion. We believe M&A presents an opportunity for the company to enter additional verticals within the industrial segment. Digital media and telecom segments to maintain stable growth. We expect COGO's core digital media (mobile handsets, set-top boxes, mobile internet devices) and telecom (network infrastructure) segments will continue to leverage established customer/supplier relationships.

Adding SME customers and increasing penetration. While COGO maintains a core base of blue-chip customers, we believe its sustainable growth is contingent upon adding small and medium customers and increasing revenue per customer. Both metrics have demonstrated steady growth for the past two years, which we expect will continue.

Industrial exposure warrants multiple expansion. We believe COGO's expansion into industrial verticals warrants multiple expansion, with Chinese industrial electronics companies trading at nearly 20x earnings versus 9.8x for industrial component manufacturers/distributors. Our $10 price target is based on an 11.0x multiple applied to our 2011 EPS estimate, reflecting a slight premium to electronic component companies.

2010-12-13CanaccordReiterationBuy$10.00
2010-11-05Ticonderoga SecuritiesReiterationBuy$12.50
 

Solid Execution Leads to Another Quarter of Upside. Last night, Cogo reported 3Q10 revenue of $100.2 million (up 10% Q/Q) that exceeded our estimate of $95.5 million, while pro forma EPS of $0.21 beat our $0.20 estimate (Street was also at $0.20). The sales upside was driven by better than expected trends across all module segments. Cogo's operating margin rose 30 basis points sequentially to 8.7% and exceeded our 8.5% projection.

Many Irons in China's Fire to Open New Doors for Tomorrow. Cogo delivered another quarter of consistent performance and strong growth, while demonstrating the industrial strategy is working, new market opportunities continue to present themselves (e.g., tablets, medical, security), another strategic M&A is expected to be announced in 4Q10 and Cogo continues to pursue an expanded service offering. We continue to view Cogo as an attractive play on the rise of the consumer class in China, the buildout of China's mobile Internet and a beneficiary of the country's massive industrial investment that we expect will continue for many years.

All Segments Beat Our Estimates; Further Growth Expected in 4Q10. During the September quarter, Cogo benefited from better than expected demand across all three module markets with the biggest upside versus our projections coming from the telecommunications equipment market (up 14% vs. our up 3% estimate) on the back of the ramp of PTN and EPON programs. Industrial delivered another quarter of strong sequential sales growth (up 11% vs. our up 7%) as Cogo continues to ramp new programs in this nascent market, while digital media rose by 8% Q/Q (vs. our up 5%) on stronger than expected demand trends in HDTV set-top boxes and 3G smartphones. Looking into 4Q10, Cogo expects all three module markets to grow sequentially.

Cogo Delivers a Strong 4Q Outlook; Raising Estimates and PT. Looking into 4Q10, Cogo expects revenues of $107-$108 million with a pro forma EPS of $0.22 to $0.23. We are increasing our 4Q10 revenue estimate to $107.7 million from $101 million, while raising our pro forma EPS estimate to $0.23 from $0.22. We are increasing our 2011 sales estimate to $424.5 million from $405.5 million, while raising our pro forma EPS estimate to $0.89 from $0.86. We are raising our 12-month price target to $12.50 from $10.50 based on higher estimates, combined with an expanded multiple given another quarter of solid execution, new growth opportunities and the market's more constructive view on China. 

2010-11-05BarclaysReiterationOverweight$9.00
2010-11-05JefferiesReiterationBuy$9.00
2010-11-04Ticonderoga SecuritiesReiterationBuy$10.50
2010-09-21Ticonderoga SecuritiesReiterationBuy$10.50
 

Cogo is Well Aligned to Capitalize on China's Future Growth. China's economy has slowed in light of government initiatives to reign in real estate speculation, however, we believe the country can still deliver growth well above the developed world and maintain its strong balance sheet. During Cisco's (CSCO, $21.75, Buy) analyst meeting last week, the company highlighted strong trends across Asia. With approximately 70% of Cogo's sales generated from the domestic market, we believe the company is well positioned to capitalize on the growth of the consumer class, the buildout of the country's mobile Internet and the continued infrastructure investment across the country. Keep in mind, Cogo was one of the few companies in the tech world that managed to grow sales during the downturn (i.e., up 7% in 2009).

2010-08-03Ticonderoga SecuritiesReiterationBuy$10.50
 

We Expect Another Quarter of Upside From Cogo. We believe Cogo will exceed our 2Q10 revenue estimate of $86.5 million (up 7% Q/Q), while our pro forma EPS projection of $0.18 (Street is also at $0.18) appears conservative. The average sequential June quarter sales growth for Cogo between 2004 and 2009 has been over 15% versus our up 7% estimate for 2Q10. We believe our gross margin projection of 14.2% and operating margin estimate of 8.5% are achievable. Recall, the company's outlook for the June quarter calls for revenue in the range of $85 million to $87 million and pro forma EPS of $0.17 to $0.18.

2010-05-19Ticonderoga SecuritiesReiterationBuy$10.50
 

A China Knowledge article on Bloomberg (based on a Shanghai Daily story) mentioned that China Mobile (CHL, $47.57, NR) plans to increase 3G base stations to 200,000 this year from 80,000 in 2009, based on stronger demand for 3G services on the company's TD-SCDMA network. Recall, China Mobile grew its 3G subscribers by 80% month-over-month to ~7.7 million during March. We view this news as most positive for Cogo Group that is well positioned in the telecom market (24% of 1Q10 sales) with leading vendors such as ZTE (763 HK, HK$25.20, NR) and Huawei, while we believe the company will also benefit from the 3G handset ramp in the country (~25-30% of sales from handsets).

2010-05-07Ticonderoga SecuritiesReiterationBuy$10.50
 

Looking into 2Q10, Cogo expects revenues between $85 million and $87 million with a pro forma EPS of $0.17 to $0.18, which we believe is laced with conservatism. We are increasing our 2Q10 revenue estimate to $86.5 million from $80.5 million and our 2Q10 pro forma EPS estimate to $0.18 from $0.17. We are also increasing our 2010 revenue estimate to $358.5 million from $337 million, while raising our 2010 pro forma EPS estimate to $0.76 from $0.70. We are also increasing our 2011 projections. We are raising our 12-month price target to $10.50 from $9.25.

2010-05-05Ticonderoga SecuritiesReiterationBuy$9.25
 

Our 12-month price target of $9.25 is based on just 10x our CY10 adjusted pro forma EPS estimate when excluding interest income plus $2.77 in net cash per share.

2010-03-19Ticonderoga SecuritiesReiterationBuyn/a
2010-02-05Ticonderoga SecuritiesReiterationBuyn/a
 

We are increasing our 2010 revenue estimate to $337.0 million from $323.0 million, while raising our 2010 pro forma EPS estimate to $0.70 from $0.66. We are initiating a 2011 projection that calls for sales of $370.5 million and pro forma EPS of $0.78

2010-02-05Piper JaffrayReiterationOutperform$9.50
 

Based on Cogo's improving 2010 visibility and growth catalysts, we are increasing our 2010 pro-forma EPS estimate from $0.71 to $0.74 and introducing our 2011 pro forma EPS estimate of $0.80.

2010-02-01Merriman Curhan & FordInitiationBuy$10.00
COGO
Electronics
SCORE
5
READ: Score Cards Explained
SAFETY/RISK SCORE
HIGH SAFETY
DETAILS: Safety/Risk Model for COGO
Current Price:  n/a
F10k Day (2005-01-31): -100.00%$6.05
2009 Close: -100.00%$7.37
2010 Close: -100.00%$8.85
2011 Close: -100.00%$1.80
High (2012-03-16): -100.00%$3.67
Low (2012-07-02): -100.00%$1.63
Exchange:
Market Capitalization: n/a
Total Shares: 38.19 mill
Float: n/a
Avg Volume: 215.80 k
Short Interest: 904.30 k
Short Ratio: 4.47%4.2 d
Last Quarter: 2010-12-31
Revenue (MRQ): 117.31 mill
Net Income (MRQ): 9.30 mill
Op. Cash Flow (MRQ): -3.37 mill
all financial data provided without warranty