China Linen Textile (OTC BB:CTXIF)

• Price = $1.10
• Trailing EPS = $0.23
• 2010 EPS Guidance = $0.39
• Trailing P/E= 4.78
• Forward P/E= $2.82

1. CTXIF meets 9 out of 10 GeoBargain® Requirements
   
   

   	Requirement	Comments
   	Recent 52-week High (generally within 3 months)	Reached $1.89 on 11/16/09
   	30% EPS Growth Rate a	Nine Months 2009 EPS increased 31.3%
   	10% Revenue Growth	Nine Months 2009 revenue increased 14.7%.
   	Strong Balance Sheet/Cash Flow	As of 3rd Qtr 2009
   No	Debt to Equity Ratio less than 20%	20.3% Short-Term Debt to Equity
   No	Current Ratio is at least 2:1	1.64:1
   Yes	Positive Cash Flow	$2.3 Million as of 3rd Qtr. 2009
   	Return on Equity is at least 15%	>15%
   	Minimum Pre-tax Operating Margins of 8%	27.6% as of 3rd Qtr. 2009
   	Preferably Under 50 Million Shares	20.1 Million shares as of 3rd Qtr. 2009
   	High Insider Ownership (generally greater than 15%)	90%
   	Limited Institutional Ownership (generally less than 20%)	<20%
   	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1.	0.15

   
   
2. China Linen has exhibited consistent growth
   
   

   	2004	2005	2006	2007	2008
   Revenues	$8.4 M	$13.2 M	$14.5 M	$20.8 M	$22.9 M
   Income from Operations	$549 T	$982 T	$3.5 M	$4.4 M	$4.0 M
   Net Income	$364 T	$834 T	$2.7 M	$3.4 M	$3.7 M
   Total Assets	$15.4 M	$17.5 M	$26.4 M	$31.5 M	$36.2 M
   Total Current Liabilities	$13.0 M	$14.0 M	$18.9 M	$18.7 M	$18.2 M
   Net Current Assets	$2.4 M	$3.5 M	$612 T	$3.5 M	$6.2 M
   Stockholder Equity	$2.4 M	$3.5 M	$6.9 M	$11.1 M	$15.6 M

   
   

   Although operating earnings were down, China Linen was still able to increase sales in a challenged economy while maintaining profitability. This is due to the company's high margin emphasis.

3. There is room for growth domestically. As the Chinese consumer standard of living improves so to will the demand for higher quality linen. Thus, China Linen's plans to increase domestic penetration. This strategic move allows the company to target a growing niche segment in a mature market. The company also has significant opportunities to grow via greater province coverage. Currently, China Linen covers 11 provinces, up from 9 provinces in 2008. In 2010, the company hopes to have market presence in 15 provinces.
   
   
4. Acceleration of growth due to greater involvement in the linen industry chain.

   "The linen industry chain involves a 5-step process including (i) raw material planting; (ii) fiber production; (iii) yarn spinning; (iv) fabric weaving and (v) dyeing and finishing. The company’s current operations are focused on only two of the steps in this process, yarn spinning and fabric weaving. In the future, the company plans to expand its operations to include other aspects of the industry chain including particularly dyeing and finishing."
   

   In our conversation with company management, they indicated that higher profit margins are the impetus for targeting the dyeing and finishing segments of the industry chain. The goal to cover the enitre industry chain may afford China Linen many years of growth. Margin and sales may also improve as it gains a competitive advantage through quicker customer delivery with a broader high quality product offering
   

5. The company has issued 2010 EPS guidance of $0.39 giving it a meager forward P/E of 2.82. The stock is also selling near its book value per share of $0.99. (Please note that the company's guidance is predicated upon the completion of a financing transaction. Normally we would wait for the financing to occur before coding as a GeoBargain. But the low relative valuation combined with confidence that the market will afford CTXIF a funding opportunity has prompted us to step outside the box.)

Note:

We are still awaiting management's response to a few questions including why operating cash flow was down from 2008 and if the company has any plans on paying down $4 million in short term debt.

Potential Valuation Scenarios if the company can achieve its EPS growth goals:

**Short-Term Potential value based on trailing EPS

P/E 15 * $0.23 = $3.45
P/E 20 * $0.23= $4.60

**Short-term Potential value based on 2009 EPS Guidance

P/E 10 * $0.39 = $3.90
P/E 15 * $0.39 = $5.85


These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.