Soko Fitness & Spa (OTC BB:SOKF)

Soko Fitness & Spa Group just announced the completion of a financing deal.  We are not too crazy about the pricing terms:

SOKO Fitness & Spa Group, Inc. announced the completion of a non-brokered private placement of 3,125,000 shares of common stock at a purchase price of $3.20 per share, yielding gross proceeds of $10 million to SOKO. 

The good news is that no warrants were issued and The shares issued to the investors will be required to be registered with the SEC for resale, but only beginning on the 14 month anniversary of the closing and under certain other circumstances.

I believe investors, including the GeoTeam would have accepted higher price terms.  Regardless, we have said that in the case of SOKF, we would welcome a capital raise.  The company can accelerate its it growth tract by acquiring operations that will be accretive EPS to supplement facilities that it will build from the ground up which generally take about 18 months to contribute to the bottom line.

Tong Liu, Chief Executive Officer of SOKO said, "We pursued this financing in order to accelerate the execution of our already aggressive growth plan. We are developing our business rapidly, but are still in the initial stages of our growth. This cash infusion, our first since going public two years ago, significantly augments our balance sheet and offers us the near-term flexibility to capitalize on strategic opportunities to develop and acquire additional facilities. We are constantly working to identify new opening and acquisition targets that fit well within our model of penetrating underserved markets, enabling us to quickly capture market share and achieve positive returns on our investments in new or acquired facilities. We expect that this transaction will allow us to accelerate our pursuit of these opportunities, helping us drive additional growth and enhancing long-term shareholder value."

As a result of the financing, SOKO now expects to open more facilities in calendar 2010 than its previous guidance of 7 to 9 new facilities planned for the calendar year.

Be prepared for a pullback where we plan to pick up additional shares.

• Price = $4.15
• Trailing EPS = $0.52
• Fully-Taxed Trailing non- GAAP EPS = $0.39 ^a
• P/E based on Fully-Taxed Trailing EPS = 10.64

1. SOKF meets 8 out of 10 GeoBargain® Requirements
   
   

   	Requirement	Comments
   	Recent 52-week High(generally within 3 months)	Reached high of $4.45 on 1/15/2010
   	30% EPS Growth Rate	2nd Qtr. 2010 EPS increased 70.0%
   	10% Revenue Growth	2nd Qtr. revenue increased 40.0%.
   	Strong Cash Flow/Balance Sheet	As of 2nd Qtr. 2010
   YES	Positive Cash Flow	$7.75M
   YES	Debt to Equity Ratio less than 20%	11.09%
   NO	Current Ratio is at least 2:1	0.86:1
   	Return on Equity is at least 15%	>15.0%
   	Minimum Pre-tax Operating Margins of 8%	42.8% as of 2nd Qtr. 2010
   	Preferably Under 50 Million Shares	18.2 M shares as of 2nd Qtr.
   	High Insider Ownership (generally greater than 15%)	53.3% as of 2009 10K
   	Limited Institutional Ownership (generally less than 20%)	TBA
   	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1.	0.15

   
   
2. Half of Soko's clubs are new or within the first year of operations which could lead to an acceleration of EPS growth.
   
3. The company has selectively penetrated and expanded its target markets. Historically, Soko has operated in smaller cities that attract less competition. It has recently embarked on a plan to enter larger cities where it intends to compete, using a proven business model that boasts an 81% member retention rate helping to drive practicable recurring revenue streams.
   
4. Management seems very cognizant about increasing shareholder value and intends to use equity mainly as a means to pursue acquisitions that would be immediately accretive to EPS. We actually believe an equity raise to complete some acquisitions would not be such a bad idea. It would help alleviate the short-term drain on operations from the facilities it constructs from scratch. Generally, a brand new fitness center can take up to 18 months before it contributes to the bottom line. Right now, the company can internally fund its current expansion plans to add 7 to 9 beauty and fitness centers by the end of 2010. (The company currently has 6 fitness centers)
   
   Management has also shown that they are opportunistic by entering high growth and margin markets that have tough barriers to entry, such as the non-surgical medical beauty salon market.
   
5. Soko has been more proactive on the investor relations front.

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

Short-Term Potential value based on fully taxed adjusted trailing EPS

P/E 20 * $0.39 = $7.80
P/E 25 * $0.39 = $9.75

^a All EPS numbers have been adjusted by the GeoTeam to reflect a Chinese tax rate of 25%.

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

Position: Long SOKF as of date of this note.  GeoTeam generally uses disciplines when investing, and urges others to do the same.