Jade Art Group Inc (OTC:JADA)

2010 Third Quarter Financial Highlights

• Revenue was $2.3 million in the third quarter, down from $10.7 million of revenue recorded in the third quarter of 2009.

• Gross profit was $1.4 million, compared to $9.2 million in the third quarter of 2009.

• Net income in the third quarter of 2010 was $235,576, a decrease of 96% compared to net income of $6.3 million in the third quarter of 2009.

• Basic and diluted earnings per share in the third quarter of 2010 were $0.00 as compared to $0.08 per basic and diluted share in the third quarter of 2009.

Bad debt expense for the third quarter was $767,691. This bad debt expense results from delayed payments from our five major customers. As a result of these delayed payments, the Company has suspended shipments of raw jade to two of our customers. The Company will continue to monitor this situation and periodically reevaluate the adequacy of the bad debt reserve.

"The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2010, the Company’s controls and procedures were not effective."

 

 

Added to the GeoSpecial list on March 2, 2010 @ 0.38

Catalyst: Stock was selling below book; We postulated that the company should be a direct beneficiary of the housing recovery in China.  
Peak performance: Reached a high of $1.09 on April 5 2010 
Current Price: $0.43

Current road block:  With  80 million shares, the company has well over our preferred maximum share count of 50 million shares; We are not totally convinced that EPS consistency will me maintained; ; could remain out of favor due to negative publicity on the Chinese government's efforts to tame economic expansion; We are slightly perplexed by the contradictory statements in the 2009 year end release and the 201 first quarter  just  days apart:

Fourth quarter 2009 excerpt:

Commenting on the Company’s financial results for 2009, Hua-Cai Song, Chief Executive Officer of the Company, said, “The inclement weather occurred in China during the year caused conditions unfavorable to mining and transporting Jade Art’s raw materials. Moreover, we feel that the global economic downturn has temporarily reduced the demand of luxury goods, which directly impacted the Company’s commercial and residential construction material markets and the high-end jade jewelry market. Although we have not yet seen a rebound in the luxury goods market, we are well positioned to take advantage of opportunities when economic conditions improve.”

2010 First quarter Excerpt:

“Our improved first quarter performance was primarily driven by the sales growth realized during the quarter,” said Mr. Hua-Cai Song, Chief Executive Officer of the Company. “This growth in sales from our existing customers reflects the improvement on the economic environment which has had a positive impact on the activity in the high-end commercial and residential construction markets and the jade jewelry market.”

Remains on the GeoSpecial list.  JADA has now quietly reported three consecutive straight quarters of EPS growth. Despite this, the stock is still selling below its book value per share of $1.00.

The company needs to: 

• Execute a reverse split to improve investor psychology
• Provide guidance
• Express an opinion on whether the Chinese government’s attempt to tame the real estate expansion may effect near-term growth prospects.
• Finally, JADA needs to attract new customers and if possible solidify contracts commitments:

"The Company has continued to receive orders from, and make sales to, its existing customers through the quarter ended March 31, 2010. However, the Company has not obtained new customers since the second quarter ended June 30, 2008. The Company and its existing customers agreed to have future sales orders based on verbal contracts."

This stock is likely only suited for risk tolerant investors.

2010 First Quarter Financial Highlights

• Revenue of $5.9 million represents a 19% increase over revenue of $5.0 million recorded in the first quarter of 2009.
• Gross profit was $4.8 million, compared to $3.9 million in the first quarter of 2009.
• Net income in the first quarter of 2010 was $3.2 million, an increase of 32% compared to net income of $2.4 million in the first quarter of 2009.
• Fully diluted earnings per share in the first quarter of 2010 increased to $0.04 from $0.03 in the first quarter of 2009.

“Our improved first quarter performance was primarily driven by the sales growth realized during the quarter,” said Mr. Hua-Cai Song, Chief Executive Officer of the Company. “This growth in sales from our existing customers reflects the improvement on the economic environment which has had a positive impact on the activity in the high-end commercial and residential construction markets and the jade jewelry market.”

Commenting on the Company’s financial results for 2009, Hua-Cai Song, Chief Executive Officer of the Company, said, “The inclement weather occurred in China during the year caused conditions unfavorable to mining and transporting Jade Art’s raw materials. Moreover, we feel that the global economic downturn has temporarily reduced the demand of luxury goods, which directly impacted the Company’s commercial and residential construction material markets and the high-end jade jewelry market. Although we have not yet seen a rebound in the luxury goods market, we are well positioned to take advantage of opportunities when economic conditions improve.”

"...Chinese economy is recovering and showing great improvement. This has a positive impact on the commercial and residential construction markets and the high-end jewelry market into which the company sells raw jade. The new sales policy, reduction on the rate of sales advances on new orders from 30% to 10%, is another factor that contributes improving the revenue JADA indicates that is not in need of capital."

Source: SEC Third Quarter 10Q filing.

We stumbled upon the Jade Art Group GeoMessage board today where a member has inquired about the company.  We were actually watching this story closely before the 2008 global crisis. However, the  company's dependency on high end consumer demand and the construction industry hit the company hard. The escalation of the global recession resulted in the company missing its 2008 financial guidance and a commensurate drop in its share price.

Points to Ponder

• Negative excerpts from the 2009 third quarter filing:
  
  
  • "The Chinese economy has experienced a slowing growth rate due to a number of factors, including the global economic crisis, the appreciation of the RMB and economic and monetary policies adopted by the Chinese government aimed at preventing overheating of the Chinese economy and inflation. This has had a negative impact on the commercial and residential construction markets and the high-end jewelry markets into which the Company sells raw jade. As demand has declined, our customers have been negatively affected which, in turn, has resulted in a slowdown in customer orders and the inability of the Company to obtain new customers in the second half of 2008, and the first half of 2009. The Company cannot predict how long the downturn in the Chinese economy will last, the continuing impact of the downturn on its business and operating results and the timing of any subsequent recovery."
    
  • "The Company has continued to receive orders from, and make sales to, its existing customers through its quarter ended September 30, 2009. However, the Company has not obtained new customers since the second quarter ended June 30, 2008. Four of the Company's nine customers have fulfilled their purchase obligations under their respective contracts with the Company. Two of the Company's customers remain obligated to purchase a total of 3,750 metric tons of raw jade, for a total purchase price of $11.5 million. However, as a result of the adverse impact of the downturn in the Chinese economy on these customers, the Company has informally agreed to extend the period in which the customers must fulfill their purchase obligations to a date to be mutually agreed upon in the future."
    
• The current outstanding share count of 80 million is also another mitigating factor that dampened our enthusiasm.
  
• The chart has been pretty erratic.

So, that is the half glass empty perspective.

Some investors may be able to find a silver lining in this story:

• Jade reported strong third quarter 2009 results where EPS rose 60% to $0.08 on a 41.0% increase in revenues.
  
• Jade reported strong results from its existing customer base leaving room for improvement if it can attract new customers.
  
• I think we can all agree that the markets that JADA targets have drastically improved and could pave the way for more EPS growth.  This could also offer hope that some of its  customers past due purchase obligations may be satisfied.
  
  
  • The increase in revenue resulted from an increase in orders of raw jade received by the Company from our customers due to better economic environment and the new sales policy of our company. Having experienced a slowing growth rate, Chinese economy is recovering and showing great improvement. This has a positive impact on the commercial and residential construction markets and the high-end jewelry market into which the company sells raw jade. The new sales policy, reduction on the rate of sales advances on new orders from 30% to 10%, is another factor that contributes improving the revenueJADA indicates that is not in need of capital

Without an interview,it's tough to make a definitive investment decision.  However, the stock is selling substantially below its book value per share of $0.90 despite Armageddon being in the rear view mirror. Risky investors may want to consider JADA now, while conservative minds may want to wait for the release of year end results.

Investors should be aware of one more wrinkle:

• The Company is obligated to pay the remaining balance of $903,074 owed to former GHL shareholders in connection with the Merger Transaction on or before March 31, 2010, together with interest at the rate of 4% per year.