FUNTALK CHINA HOLDINGS (NASDAQ:FTLK)

Rodman and Renshaw on FTLK                    8/26/2011

FTLK: Going Private Transaction Completed

Terminating Coverage: Effective immediately, we are terminating coverage on Funtalk China Holdings (Nasdaq: FTLK) due to the closing of the company’s going private transaction that was announced on August 25, 2011. As a result, Funtalk China became a private company wholly owned by a consortium of investors backed by a private equity firm. Our last rating for the company was Market Outperform with a price target of $10.00.

Going Private Transaction Approved by Shareholders: FTLK announced on August 22, 2011 that its shareholders have voted in favor of the going-private transaction, in which the PE-backed consortium agreed on May 31, 2011 to buyout all of FTLK’s outstanding shares at $7.20 per share, implying 35.9% premium over 30-day average price on May 30, 2011. At the extraordinary general meeting on August 22, 2011, 91.9% of total outstanding ordinary shares voted to approve the transaction. The company has also requested Nasdaq for suspension of trading in its shares.

Valuation: At the purchase price of $7.20, FTLK would be getting a P/E multiple of ~6.6x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~12.7x to CY2011 consensus earnings for similar players listed in the US, and ~15.2x for peers listed in China.

3Q FY11 Financial Results: On March 11^th, 2011, FTLK announced its 3Q FY11 results (period ended on December 31, 2010) of $300.2 MM in revenues and $12.7 MM in net income, with diluted EPS of $0.22. For full year FY11, the company was guiding for $1.1 BB in revenue and $42 MM~$44 MM in net income.

Company Description: Funtalk China Holdings Ltd, headquartered in Beijing, China, is a leading mobile phone distributor and retailer in China. Currently the company operates under two major business segments: (1) mobile phone distribution and (2) mobile phone retail. Founded in 2003, Funtalk has now become one of largest distributors in China. Using the name “PYPO” as its distribution brand, FTLK is running a national network of branch offices and distribution centers covering over 9,500 outlets in 350 cities across 30 provinces of China. In the retail business segment, under the brand “Funtalk”, the company owns a nationwide retail chain network of over 718 stores in China as of March 2011. Through strategic acquisitions, the company now has become one of the largest mobile phone retailers in China.

HONG KONG, May 31, 2011 /PRNewswire-Asia/ -- Funtalk China Holdings Limited (the "Company" or "Funtalk"), a leading China-based retailer and wholesale distributor of wireless communications devices, accessories and content, announced today that it has entered into a definitive agreement with Fortress Group Limited ("Parent") and Fortress Merger Sub Limited ("Merger Sub") pursuant to which Parent will acquire Funtalk for US$7.20 per share (the "Transaction").  The Transaction values Funtalk's equity at approximately US$443 million on a fully diluted basis, and represents a 35.9% premium over the Company's 30 trading day average price as quoted by NASDAQ on March 24, 2011, the last trading day prior to the Company's announcement on March 25, 2011 that it had received a "going private" proposal.

Parent is a newly-formed entity jointly owned by ARCH Digital Holdings Ltd. ("ARCH"), Capital Ally Investments Limited ("Capital Ally"), GM Investment Company Limited ("GM"), Sinowill Holdings Limited ("Sinowill"), which is controlled by the chairman of the board of directors of the Company, Mr. Kuo Zhang, Huge Harvest Enterprises Limited ("Harvest"), which is wholly owned and controlled by the chief executive officer of the Company, Mr. Dongping Fei, Kingstate Group Limited ("Kingstate"), which is wholly owned and controlled by Mr. Hengyang Zhou, executive president of Beijing Funtalk Century Technology Group Company Limited, an indirect wholly owned subsidiary of the Company, and Trend Focus Limited, which is wholly owned and controlled by Mr. Francis Kwok Cheong Wan, senior vice president of corporate investor relations of the Company ("Trend Focus", together with ARCH, Capital Ally, GM, Sinowill, Harvest and Kingstate, the "Consortium Members" or the "Consortium").  Merger Sub is a newly-formed exempted company with limited liability incorporated under the laws of theCayman Islands and a direct wholly owned subsidiary of Parent.  The Consortium Members currently own, in the aggregate, 46,458,314 ordinary shares, or approximately 77.09% of the outstanding shares of the Company (excluding outstanding warrants and options of the Company).

In connection with the Transaction, PAG Asia Capital ("PAGAC"), Parent and the Consortium Members have entered into a subscription agreement pursuant to which PAGAC has agreed to subscribe for equity-linked securities of Parent, subject to certain conditions, the proceeds of which shall be used in part to provide financing for the Transaction.

Under the terms of the agreement, the Company will be the surviving entity in the Transaction as a wholly owned subsidiary of Parent.  In the Transaction, each ordinary share of the Company issued and outstanding immediately prior to the effective time of the Transaction will be cancelled in exchange for the right to receive US$7.20 per share in cash without interest, except for the ordinary shares beneficially owned by Parent, Merger Sub, the Consortium Members and any direct or indirect wholly owned subsidiary of the Company which will be cancelled without receiving any consideration.

The Company's Board of Directors, acting upon the unanimous recommendation of the Independent Committee formed by the Board of Directors, approved the definitive agreement and resolved to recommend that the Company's shareholders vote to approve the definitive agreement. The Independent Committee, which is composed solely of directors unrelated to any of Parent, Merger Sub, the Consortium Members or any of the management members of the Company, negotiated the terms of the definitive agreement with the assistance of its financial and legal advisors.

The Transaction, which is currently expected to close before the end of the third quarter 2011, is subject to the approval of the definitive agreement by an affirmative vote of shareholders representing two-thirds or more of the shares present and voting in person or by proxy at a meeting of the Company's shareholders which will be convened to consider the approval of the definitive agreement, as well as certain other customary closing conditions.  If completed, the Transaction will result in the Company becoming a privately-held company and its ordinary shares will no longer be listed on the NASDAQ Global Market.

Bank of America Merrill Lynch is serving as financial advisor to the Independent Committee. Skadden, Arps, Slate, Meagher & Flom LLP is serving as U.S. legal advisor to the Independent Committee, and Maples and Calder is serving as Cayman Islandslegal advisor to the Independent Committee. Latham & Watkins LLP is serving as U.S. legal advisor to the Company.  Shearman & Sterling LLP is serving as U.S. legal advisor to Bank of America Merrill Lynch.

Citigroup Global Markets Asia Limited is serving as financial advisor to the Consortium.  Cleary Gottlieb Steen & Hamilton LLP is serving as U.S. legal advisor to the Consortium, and Conyers Dill & Pearman is serving as Cayman Islands legal advisor to the Consortium. Weil, Gotshal & Manges LLP is serving as U.S. legal advisor to Citigroup Global Markets Asia Limited. Simpson Thacher & Bartlett LLP is serving as U.S. legal advisor to PAGAC. 

Rodman and Renshaw on FTLK                            05/31/2011

FTLK: Privatization Update

FTLK Going-Private Transaction Enters Into Phase II: FTLK announced that it has entered into a definitive agreement with Fortress Group, a newly formed entity owned by a consortium group of current large shareholders and senior management, upon which Fortress agreed to privatize the company with $7.20 per share in cash, representing 35.9% premium over 30-day average price. The consortium group that owns Fortress currently owns approximately 77.1% of FTLK’s common shares outstanding. Meanwhile, PAG Asia Capital, the private equity group, agreed to subscribe for equity-linked securities of Fortress Group to back the privatization deal. Management expects the deal to close by the end of the third quarter in 2011.

Key Takeaways

There has been a steady flow of MBO / privatization news in the small cap China space. The most recent ones being YONG, CSR, and CFSG. Private Equity shops with a presence in China appear to be taking a contrarian position to that of the general market at a time when these names are trading at the very low end of their historical valuation range. We believe ownership / management teams are looking for funding alternatives in an environment where meeting investor expectations as a US listed public entity has been a challenge. It now seems that several US listed Chinese names are on the verge of going private.

In regards to FTLK, with the capital, corporate structure and management approval in place the only significant hurdle, if one, is probably around regulatory approval. We still believe minority holders deserve a better valuation than is being reflected in the consortium’s offer.

Valuation: At current levels FTLK is trading at P/E multiples of ~6.1x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~12.7x to CY2011 consensus earnings for similar players listed in the US, and ~15.2x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~9.2x to our EPS estimate for CY2011, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Based on the financial position and results of Pypo HK as of and for the year ended March 31, 2009, Pypo HK failed to meet the financial covenants for maintaining the minimum EBITDA, adjusted net income threshold and margin, solvency ratio, leverage ratio and current ratio. Based on the financial position and results of Pypo HK as of and for the year ended March 31, 2010, Pypo HK also failed to meet the financial covenants for maintaining the solvency ratio, current ratio and net margin. Although we obtained an amendment and waiver of certain breaches and potential breaches from FMO, the waiver only covered HK Pypo's breaches of financial covenants for the period from March 31, 2009 to March 31, 2010. Pypo HK was also not in compliance with certain negative undertakings, including obtaining pre-approval for acquisitions and negative pledge in the same period. We cannot assure you that the prior amendment and waiver was effective against these breaches and other potential breaches. In addition, we have not complied with all of the conditions relating to our prior amendment and waiver and, although we have obtained written confirmation from FMO that the prior amendment and waiver remains effective, we cannot assure you that this confirmation has cured such non-compliance or that we will be able to meet the relevant conditions going forward.

Based on the financial position and results of Pypo HK as of and for the three months ended June 30, 2010, Pypo HK failed to meet the financial covenants for maintaining the solvency ratio, current ratio and net margin for which we have not obtained a waiver. Pypo HK may continue to be in breach of certain financial and other restrictive covenants for the quarters ending September 30, 2010, December 31, 2010 and March 31, 2011 and the year ending March 31, 2011. We are in discussions with FMO to obtain a waiver for these breaches and other potential breaches. If we breach any covenants, we cannot assure you that we would be able to obtain any amendments to or waivers of such covenants contained in the FMO Facility or obtain alternative financing on commercially viable terms. In addition, any amendment to or waiver of the covenants may involve upfront fees, higher annual interest costs and other terms less favorable to us than those currently offered by the FMO Facility

BEIJING, April 13, 2011 /PRNewswire-Asia/ -- Funtalk China Holdings Limited (the "Company" or "Funtalk") (Nasdaq: FTLK), a leading China-based retailer and wholesale distributor of wireless communications devices, accessories and content, announced today that ARCH Digital Holdings Ltd., Capital Ally Investments Limited, GM Investment Company Limited, Sinowill Holding Limited, Huge Harvest Enterprises Limited, Kingstate Group Limited and Trend Focus Limited (collectively, the "Consortium") have informed the Independent Committee of the Company's Board of Directors, formed to consider a proposal by the Consortium to acquire all of the outstanding ordinary shares of the Company not already owned by the Consortium in a "going-private" transaction (the "Proposed Transaction"), that they have entered discussions with PAG Asia Capital, which has agreed in principle to lead a group of investors who have expressed interest in providing the Consortium with financing in the form of equity or equity-linked securities in connection with the Proposed Transaction.  

The proceeds of such financing may be used for, among other purposes, paying consideration to the Company's shareholders, paying transaction-related expenses and funding potential future growth and ongoing working capital needs of the Company following the closing. The agreement in principle to provide any of the financing described herein is subject to, among other conditions, the satisfactory completion of due diligence by the investor group which will provide such financing, execution of mutually satisfactory definitive documentation regarding the Proposed Transaction involving the Company and such financing, and no material adverse change occurring with respect to the Company.

BEIJING, March 25, 2011 /PRNewswire-Asia/ -- Funtalk China Holdings Limited announced today that its Board of Directors has received a preliminary non-binding proposal letter dated March 25, 2011 from ARCH Digital Holdings Ltd. ("ARCH"), Capital Ally Investments Limited ("Capital Ally"), GM Investment Company Limited ("GM"), Sinowill Holding Limited ("Sinowill"), which is controlled by the Chairman of its Board of Directors, Mr. Kuo Zhang, Huge Harvest Enterprises Limited ("Harvest"), which is wholly owned and controlled by the Chief Executive Officer of the Company, Mr.Dongping Fei, Kingstate Group Limited ("Kingstate"), which is wholly owned and controlled by Mr. Hengyang Zhou, executive president of Beijing Funtalk Century Technology Group Company Limited, an indirect wholly owned subsidiary of the Company, and Trend Focus Limited, which is wholly owned and controlled by its senior vice president of corporate investor relations, Mr.Francis Kwok Cheong Wan ("Trend Focus", together with ARCH, Capital Ally, GM, Sinowill, Harvest and Kingstate, the "Consortium Members"), to acquire all of the outstanding ordinary shares of the Company not already owned by the Consortium Members in a "going-private" transaction (the "Transaction") for $7.10 per ordinary share in cash, subject to certain conditions, including, among other things, successful completion of due diligence to the satisfaction of the Consortium Members.  The Consortium Members currently own, in the aggregate, 46,458,314 ordinary shares, or approximately 77.13% of the outstanding shares of the Company (excluding outstanding warrants and options of the Company).  

Rodman and Renshaw on FTLK                                       3/25/2011

FTLK: Going Private Proposal; $10.00 per share Would Be Better

Receives Going Private Proposal: FTLK announced that a ‘Consortium’ of investors and insiders currently controlling 77.13% of the company’s outstanding shares have offered a proposal to acquire the remaining shares at a price of $7.10 per share in cash, pending due diligence and other relevant formalities.

Good Effort… We believe the ‘Consortium’ realizes the importance of a large wholesale / retail player in China’s mobile phone value chain (providing direct access to the domestic end consumer) and can appreciate the potentially undervalued market capitalization of the company as a US listed entity. We believe, at the proposed price the Consortium would have to raise approximately $96 MM to acquire the remaining shares and in addition would have to arrange additional funding (between $20 MM - $50 MM ) to continue pursuing its publicly stated growth strategy. We believe these sums should not pose as a barrier to this effort.

….But May Not Be Enough: In our opinion the two key hurdles in going private would be the exchange’s dislike for the ‘going dark’ effort and the current proposed price. In our opinion, if this Consortium is serious about this proposal the offered price should be above its all time high of ~$9.50 levels. We believe a $10.00 per share offer would provide a serious premium of 40%-50% to the current levels and yet would be in line with P/E multiples of 8x to 10x that management has been paying for its own acquisitions of private phone retailers in China. We believe an outcome on these lines would have a higher probability to be supported by all the parties concerned and leave room for the Consortium to unlock value.

Maintain Market Outperform: At current levels FTLK is trading at P/E multiples of ~6.3x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~11.9x to CY2011 consensus earnings for similar players listed in the US, and ~15.1x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~9.2x to our EPS estimate for CY2011, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on FTLK                                          3/24/2011

FTLK: 3Q FY11 Earnings Update

3Q Beat: FTLK announced its 3Q FY11 results (period ended on December 31, 2010) of $300.2 MM in revenues and $12.7 MM in net income, with diluted EPS of $0.22 beating our expectations of $279.2 MM, $10.9 MM, and $0.18, respectively.

Wholesale Distribution: FTLK reported $130.0 MM in wholesale segment revenue, growing by 90.0% y-o-y, largely driven by 76.7% y-o-y growth in shipment volume and 8.6% higher ASP. During the quarter, 3G products accounted for 54.9% of total wholesale volume, compared to 30.2% in the last quarter. However, a higher 3G volume and ASP did not help support the gross margin for the quarter due to the one-time lump-sum rebate from a vendor, which lowered the gross margin to 16.1% for this segment.

Retail Business: Retail segment continued to expand during 3Q FY11. The company is currently running a total of 718 retail stores under 11 subsidiaries across China, compared to 446 branches totally as of 3Q FY10. The company is targeting ~910 retail outlets by the end of 4Q FY11. FTLK acquired Hubei Feon with 14 stores in Hubei province, and will complete another acquisition of 65 stores in Shandong province (Shandong Jinan Dawo) by 4Q FY11. The company aims to add 450~550 new stores in each of the next three years.

4Q & Full Year FY11 Guidance: FTLK management is guiding for revenue and net income of $280 MM~$300 MM and $10 MM~$12 MM for the fourth quarter, with a revenue mix of 55% in retail and 45% in wholesale. Gross margin and EBIT margin are expected to be at a range of 15%~16% and 6.5%~7.5%. On a full year basis, the company is now expecting $1.1 BB in revenue and $42 MM~$44 MM in net income.

Revising Our Estimates: We are revising our estimates according to the updated guidance. Now we are projecting 4Q revenue and net income of $297.9 MM and $12.6 MM, with diluted EPS of $0.21. Our gross margin and EBIT margin expectations are in line with guidance, at 16% and 7.1%, respectively. Our full year projections are $1.1 BB in revenue and $44.6 MM in earnings with $0.80 in diluted EPS. For FY12, we are expecting revenue, net income, and diluted EPS of $1.56 BB, $70.9 MM, and $1.15, respectively.

Valuation: At current levels FTLK is trading at P/E multiples of ~5.7x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~11.9x to CY2011 consensus earnings for similar players listed in the US, and ~15.0x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~9.2x to our EPS estimate for CY2011, bringing it in line with comparable companies listed in China and the US.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Fiscal 2011 Third Quarter Earnings Recap:

• FLTK Beat EPS estimate of $0.18 by $0.04 and the revenue estimate of $275 million.

• EPS growth is not expected to be exciting anytime soon.

• March 2011 Fiscal fourth quarter EPS is expected to be on par with the 2010 comparable period of $0.27.
• Per Analyst data, 2012 EPS are only expected to grow to $0.83 from an estimated $0.81 in 2011.

Third Quarter Financial Results

• The Company reported consolidated net revenue of $300.2 million for 3Q FY2011, representing an 86.6% increase from the third fiscal quarter of 2010 ("3Q FY2010"). The Company currently generates revenues from two business segments, retail and wholesale distribution of mobile phones and related services and accessories.
• Retail revenue for 3Q FY2011 was $170.2 million, representing an 84.2% increase from 3Q FY2010. This growth in the retail segment was primarily driven by the increase in the number of retail subsidiaries, with a total of eleven retail subsidiaries covering 718 locations in 3Q FY2011 compared to seven retail subsidiaries covering 446 locations in 3Q FY2010. Newly acquired subsidiaries contributed approximately $14.3 million to the Company's retail segment revenue in 3Q FY2011.

• Income from operations increased by 35.5% to $22.1 million in 3Q FY2011 from $16.3 million in 3Q FY2010. Correspondingly, operating income margin, calculated based on income from operations as a percentage of net revenues, decreased to 7.4% in 3Q FY2011 from 10.1% in 3Q FY2010.

• Income tax expense was $5.9 million for 3Q FY2011 compared to a $4.6 million tax expense for 3Q FY2010. The effective tax rate was 31.5% for 3Q FY2011 compared to 30.8% in 3Q FY2010, as certain expenses were not tax deductible in 3Q FY2011.

• Net income attributable to the Company was $12.7 million, or 4.2% of total revenue, for 3Q FY2011, representing a 34.5% increase from $9.4 million, or 5.9% of total revenue for 3Q FY2010.

• 3Q FY2011 diluted earnings per share ("EPS") was $0.22 based on a diluted share count of 58.9 million shares compared to 3Q FY2010 diluted EPS of $0.19 based on a diluted share count of 50.4 million shares.

"We are very pleased with Funtalk's strong financial performance in the third quarter of fiscal year 2011 that clearly exceeded our previously stated guidance," commented Mr. Fei Dongping, chief executive officer of the Company. "Our total revenue grew more than 86% year-over-year, driven by the excellent growth in our retail business as we continued the strong momentum in our retail expansion. During the quarter, we added 56 locations to reach a total of 718 locations, from 662 locations in the previous quarter and only 446 locations a year ago. Riding on the strength of our retail business, our priorities remain focused on driving volume growth while steadily and sustainably improving operating profitability. Going forward, we will continue to leverage our strong competitive position to further expand self-built stores and co-branded stores with carriers, as we plan to add 450 to 550 net new locations per year."

Business Outlook for Fourth Quarter of FY2011

The Company expects its

• revenue for 4Q FY2011 to be in the range of $280 million to $300 million
• net income attributable to the Company to be in the range of $10.0 million to $12.0 million.

The Company expects a revenue split of approximately 55% for its retail business segment and 45% for its distribution business segment in 4Q FY2011. Gross margin and operating income margin are projected to be in the ranges of 15.0% to 16.0% and 6.5% to 7.5%, respectively.

Correspondingly, the Company expects FY2011

• revenue of approximately $1.1 billion
• net income attributable to the Company to be in the range of $42 million to $44 million,

as compared to its previous FY2011 outlook of $1.0 billion to $1.2 billion and $40 million to $45 million, respectively. Such projections are based on the Company's current views on operating and market conditions and are subject to change.

"Continuing on our consistent track record, Funtalk's third quarter FY2011 performance marks another quarter of sound execution of our business plans. We plan to continue with our core growth strategy to further deepen and strengthen our partnership with mobile carriers, and expand our multi-brand portfolio in our distribution business. At the same time, we remain nimble and will make both the strategic and necessary operational improvements in order to deliver superior financial results to our shareholders.  I'm confident that Funtalk is firmly on track to achieve another strong year in FY2011," concluded Mr. Fei.

"We are very pleased with our strong performance in the second quarter," commented Mr. Fei Dongping, chief executive officer of the Company.  "We once again exceeded our revenue guidance, as total revenue grew more than 25% year-over-year.  We also achieved the highest quarterly gross margin in our retail history, and as a result, our net income more than doubled year-over-year.  We continued the strong momentum in our retail business segment, and increased our retail network to 662 retail stores in 109 cities across 14 provinces and 3 municipalities.  Going forward, we will continue to leverage our strong competitive position to further expand self-built stores and co-branded stores with carriers, as we march towards our goal of 2,000 stores nationwide by the end of our fiscal year 2013."

Second Quarter Financial Results

• The Company reported consolidated net revenue of $260.4 million for 2Q FY2011, representing a 25.4% increase from the second fiscal quarter of 2010 ("2Q FY2010").  The Company currently generates revenues from two business segments, retail and wholesale distribution of mobile phones and related services and accessories.  

• Income from operations increased by 72.6% to $21.3 million in 2Q FY2011 from $12.4 million in 2Q FY2010. Correspondingly, operating income margin, calculated based on income from operations as a percentage of net revenues, increased to 8.2% in 2Q FY2011 from 6.0% in 2Q FY2010.

• Income tax expense was $4.8 million for 2Q FY2011 compared to a $2.9 million tax expense for 2Q FY2010. The effective tax rate was 32.0% for 2Q FY2011 compared to 31.3% in 2Q FY2010, as certain expenses were not tax deductible in 2Q FY2011.

• Net income attributable to the Company was $9.8 million, or 3.8% of total revenue, for 2Q FY2011, representing a 113.7% increase from $4.6 million, or 2.2% of total revenue for 2Q FY2010. 2Q FY2011 diluted earnings per share ("EPS") was $0.18 based on a diluted share count of 53.0 million shares compared to 2Q FY2010 diluted EPS of $0.09based on a diluted share count of 51.1 million shares.

Business Outlook for Third Quarter of FY2011

The Company expects its revenue for 3Q FY2011 to be in the range of $260 million to $280 million and its net income attributable to the Company to be in the range of $9.0 million to $11.0 million. The Company expects approximately a revenue split of approximately 55% for its retail business segment and approximately 45% for its distribution business segment in 3Q FY2011.  Gross margin and operating income margin are projected to be in the ranges of 15.0% to 16.0% and 6.5% to 7.5%, respectively.

For FY2011, the Company reaffirms its revenue outlook to be in the range of $1.0 billion to $1.2 billion and its net income attributable to the Company to be in the range of $40 million to $45 million. The Company expects a revenue split of approximately 55% for its retail business segment and approximately 45% for its distribution business segment in FY2011.  Gross margin and operating margin for the full fiscal year are projected to be in the range of 15.5% to 16.5% and 7.5% to 8.5%, respectively.  Such projections are based on the Company's current views on operating and market conditions and are subject to change.  

"Funtalk's second quarter FY2011 performance marks another quarter of sound execution of our business plans.  As part of our core growth strategy, we plan to further deepen and strengthen our partnership with mobile carriers, and expand our multi-brand portfolio in our distribution business.  We are convinced that the combination of Funtalk's strategic partnership with China's mobile carriers, established broad network, and superior operational expertise will continue to drive greater 3G mobile product sales," concluded Mr. Fei.  

Rodman & Renshaw on FTLK                                                                     December 1 2010 

FTLK: Lowering EPS Estimates Post Capital Raise; Maintain Outperform Rating & $10 PT 

Public Offering: On October 29, 2010 FTLK announced closing its public offering of 7 MM common stock at $7.00 per share. Net proceeds after underwriting cost were $46.6 MM, mainly to be directed towards acquiring and building new retail chains across China. As of August 31, 2010, FTLK operated approximately 612 retail stores, with a total space of 190,000 square meters in 108 cities, 13 provinces in China. Before the public offering, the company had $27.0 MM in cash with $18.8 MM of notes payable and $154.6 MM short-term borrowing as of June 30, 2010. 

Key Takeaway: With the new capital in place, we believe FTLK is well positioned to execute on its retail expansion strategy for 2011. The company plans to open 500 new stores each year in 2011 and 2012 and eventually reach 3,000 stores in China. With the retail expansion playing a key role in both top-line growth and margin enhancement, FTLK’s story should be expected to gain more traction from investors.

Lowering EPS Estimates Based On New Share Count: We are adjusting our financial model to account for the new 7 MM shares of common stock. We currently maintain our estimates for revenue and net income of ~$1.1 BB and $43.8 MM for FY11. With the new diluted share count of ~59.9 MM effective from 3Q FY11, we are lowering our diluted EPS estimates for 3Q FY11 and 4Q FY11 to $0.21 and $0.21, from $0.24 and $0.23. This leads to a full year diluted EPS of $0.78, down from our previous estimate of $0.83.                                             
Valuation: At current levels FTLK is trading at P/E multiples of ~8.4x to our revised CY11 earnings estimates. This compares to industry averages of ~13x to CY11 consensus earnings for similar players listed in the US, and ~19x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~12.6x to our EPS estimate for CY11, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on FTLK

Public Offering: On October 29, 2010 FTLK announced closing its public offering of 7 MM common stock at $7.00 per share. Net proceeds after underwriting cost were $46.6 MM, mainly to be directed towards acquiring and building new retail chains across China. As of August 31, 2010, FTLK operated approximately 612 retail stores, with a total space of 190,000 square meters in 108 cities, 13 provinces in China. Before the public offering, the company had $27.0 MM in cash with $18.8 MM of notes payable and $154.6 MM short-term borrowing as of June 30, 2010. 

Key Takeaway: With the new capital in place, we believe FTLK is well positioned to execute on its retail expansion strategy for 2011. The company plans to open 500 new stores each year in 2011 and 2012 and eventually reach 3,000 stores in China. With the retail expansion playing a key role in both top-line growth and margin enhancement, FTLK’s story should be expected to gain more traction from investors. 

Lowering EPS Estimates Based On New Share Count: We are adjusting our financial model to account for the new 7 MM shares of common stock. We currently maintain our estimates for revenue and net income of ~$1.1 BB and $43.8 MM for FY11. With the new diluted share count of ~59.9 MM effective from 3Q FY11, we are lowering our diluted EPS estimates for 3Q FY11 and 4Q FY11 to $0.21 and $0.21, from $0.24 and $0.23. This leads to a full year diluted EPS of $0.78, down from our previous estimate of $0.83

Valuation: At current levels FTLK is trading at P/E multiples of ~8.4x to our revised CY11 earnings estimates. This compares to industry averages of ~13x to CY11 consensus earnings for similar players listed in the US, and ~19x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~12.6x to our EPS estimate for CY11, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

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First Quarter Financial Results:

• The Company reported consolidated net revenue of $253.0 million for 1Q FY2011, representing a 28.0% increase from the first fiscal quarter of 2010 ("1Q FY2010).
  
• Net income attributable to the Company was $9.6 million, or 3.8% of total revenue, for 1Q FY2011, representing a 132.9% increase from $4.1 million, or 2.1% of total revenue for 1Q FY2010.
  
• 1Q FY2011 diluted earnings per share ("EPS") was $0.19 based on a diluted share count of 51.1 million shares compared to 1Q FY2010 diluted EPS of $0.09 based on a diluted share count of 45.0 million shares. 

Business Outlook: 

For 2Q FY2011:

• Revenue to be in the range of $240 million to $260 million.
  
• Its net income attributable to the Company to be in the range of $8.0 million to $10.0 million.
  
• The Company expects approximately even revenue split between its retail and distribution business segments in 2Q FY2011.

Gross margin and operating income margin are projected to be in the ranges of 13.5% to 14.5% and 5.8% to 6.8%, respectively.

For FY2011, the Company reaffirms its:

• Revenue outlook to be in the range of $1.0 billion to $1.2 billion.
  
• Its net income attributable to the Company to be in the range of $40 million to $45 million.
  
• The Company expects a revenue split of approximately 57% for its retail business segment and approximately 43% for its distribution business segment in FY2011. 
  
• Gross margin and operating margin for the full fiscal year are projected to be in the range of 15.0% to 16.0% and 8.5% to 9.5%, respectively.  Such projections are based on the Company's current views on operating and market conditions and are subject to change.  
     
  "Funtalk China's Fiscal Year 2011 is off to a strong start. With our leading nationwide distribution network for mobile communications products and services, we have gained strong momentum to help increase our market share in China's fast growing retail mobile phone market. Our strategically located retail outlets serve as a significant barrier to entry for prospective competitors, while our large scale enables us to gain favorable terms from handset manufacturers and mobile carriers. Moving forward, we will continue to expand our retail network in China and further increase our retail presence in existing covered areas, both organically and through acquisitions. Given the favorable trends and our strong competitive position, we aim to further enhance our brand awareness and significantly broaden to our value-added services. With our increased cash position and strong balance sheet, we are very confident in our ability to execute on our goal of reaching 2,000 retail stores within the next three years," concluded Mr. Fei.  
  

The Company's principal shareholders, Arch Digital Holdings Limited ("Arch") and Capital Ally Investments Limited waived their rights to receive up to an additional 23,000,000 earn-out shares in order to minimize potential dilution to Funtalk's other existing shareholders. In July 2009, pursuant to a merger agreement among the Company, Pypo Digital Company Limited, Arch, Capital Ally and certain other parties, the Company effected a business combination where Pypo Digital's then shareholders, Arch and Capital Ally, transferred all the issued and outstanding shares of Pypo Digital to the Company in exchange for 45,000,000 ordinary shares and 3,400,000 Class B warrants of the Company and the rights to receive up to an additional 23,000,000 ordinary shares under an earn-out provision in the merger agreement, based on the adjusted net income of the Company in the fiscal years 2010, 2011 and 2012. On June 30, 2010, Arch and Capital Ally signed a waiver letter to waive their rights to receive the earn-out shares under the merger agreement.

Mr. Fei Dongping, Chief Executive Officer of the Company, commented, "We greatly appreciate Arch and Capital Ally for their cooperation. By waiving their rights to receive the earn-out shares, Arch and Capital Ally removed a potential source of dilution for our other existing shareholders. We believe this also demonstrates Arch's and Capital Ally's increased confidence in our company's long-term outlook and their long-term support for our company's business plan."

The GeoTeam feels that more of these types of moves need to occur for investors to feel comfortable with the Chinese space again. Still this event was carried out by shareholders. The company needs to show further its commitment to shareholders by repurchasing stock.

In July 2009, pursuant to a merger agreement among the Company, Pypo Digital Company Limited ("Pypo Digital"), Arch, Capital Ally and certain other parties, the Company effected a business combination where Pypo Digital's then shareholders, Arch and Capital Ally, transferred all the issued and outstanding shares of Pypo Digital to the Company in exchange for 45,000,000 ordinary shares and 3,400,000 Class B warrants of the Company and the rights to receive up to an additional 23,000,000 ordinary shares under an earn-out provision in the merger agreement, based on the adjusted net income of the Company in the fiscal years 2010, 2011 and 2012. On June 30, 2010, Arch and Capital Ally signed a waiver letter to waive their rights to receive the earn-out shares under the merger agreement.

The 23,000,000 earn-out shares will be issued to the Pypo shareholders as follows:

10,000,000 earn-out shares will be issued to the Pypo shareholders if MK Cayman’s adjusted net income during either of the fiscal years ending March 31, 2010 or 2011 equals or exceeds $54,000,000; and

13,000,000 earn-out shares will be issued to the Pypo shareholders if MK Cayman’s adjusted net income during either of the fiscal years ending March 31, 2011 or 2012 equals or exceeds $67,000,000.

Note: The earn-out provision has been waived by Arch and Capital Ally.

Middle Kingdom has completed its share exchange with Pypo. Pypo is a leading distributor in China of Samsung mobile phones and other related products.  It appears that there will be about 49 million post merger shares out standing.

For more details on the transaction, including  (earn our net income targets), and more information on Pypo please refer to the 8K/A filed on January 20, 2009.

The GeoTeam® was unable to locate a full income statement, but the details thus far look initially compelling:

-For its fiscal year ended march 2008 the company's sales rose 29%  to $378.3 million.

-For its fiscal year ended march 2008 the company's net income rose 110% to $30.2 million. We are not sure if the company is paying taxes.

-Proforma EPS for 2008 is about $0.62, which would indicate a P/E of 9 using the latest ask price and assuming 2009 EPS, at the very minimum, stayed even with 2008.

We would anticipate that 2009 financials will be filed shortly at which time a better assessment can be made regarding the attractiveness of this story and the proper valuation multiples to assign to the company.  Also, a clarification of the incentive allocation terms needs to be addressed.

On May 23, 2008 Middle Kingdom Alliance Corp announced the that it has signed a letter of intent relating to a business combination.

 Source: PR Newswire (May 23, 2008)

The GeoTeam is awaiting further details.