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.

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.

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.

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.

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.