Telestone Technologies (NASDAQ:TSTC)

	Recent 52-week high
	30% Earnings Per Share (EPS) growth rate
	10% revenue growth year over year
	Strong balance sheet
	15% minimum return on equity (ROE)
	8% minimum pre-tax margins
	Under 50 million shares outstanding
	High insider ownership
	Limited institutional ownership
	P/E at least 1/2 of EPS growth rate

¹Added to the GeoBargain list on September 24, 2009 @ $6.42
Removed from the GeoBargain list on January 6, 2010 @ $24.40
²Added to the GeoBargain list on February 8, 2010@ $15.36

Catalyst: Strong EPS growth was on the horizon; Account receivable position was improving; Bullish guidance.

¹Peak performance: Reached a high of $24.94 on January 1, 2010

²Peak performance: Reached a high of $22.20 on February 23, 2010

Current Price: $8.00

Current road block: Internal control issues; Weak account receivable position; Cash and operating cash flow position do not cover current liabilities; Dilution door is open; No net income or EPS guidance; Short investors have "attacked" TSTC.

TSTC shares have been on a wild ride within the last 12 months, eclipsing $20.00 in January 2010 and once again in February 2010 after a brief pull back. We are happy to see that TSTC has finally received analyst coverage from Roth Capital who is forecasting EPS to grow 41.1% to $1.70 in 2010 followed by 51.2% to $2.57 in 2011.

Investors must be keenly aware of a few issues:

1. Dilution: In March 2010, TSTC filed a form s-3 leaving the door open for an offering. This will weigh on investors minds and likely limit TSTC appreciation potential until more clarity on this issue is received. The fact that Roth Capital has picked up coverage also could lead some to believe that a raise may be imminent.

2. The high account receivable position is still present.  Part of the reason for the stock's initial rise was probably due to an improved AR position and comments from management of expectations of continued improvement. Management has informed investors that a high AR position is the nature of its business, where payment terms are determined by a few major customers:

"We experience a longer accounts receivable turnover period than our main competitors due to our revenue being generated from a higher mix of system integration projects, which are typically billed in phases throughout the life of the project. We believe that our main competitors are more focused on equipment sales, which tend to have shorter receivable turnover periods. Generally, we and our main competitors have traditionally experienced a longer receivable turnover period due to the fact that our main customers are the three state-owned telecommunications carriers, which tend to make payments slower. Additionally, approximately 10% of our professional services revenue are settled after 24 months of our warranty period. We have not experienced any significant bad debts in the past."

Still, a high AR standing is a psychological barrier for investors and could increase the need for a capital raise since it could be postulated that money would not be available in a timely manner to expand operations.

3.  "The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from this offering of our common stock into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. Any significant devaluation of Renminbi may reduce our operation costs in U.S. dollars but may also reduce our earnings in U.S. dollars. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets."

4. We have followed the TSTC story for sometime and have witnessed that the company has missed guidance in the past. This is possibly why the company may have stopped issuing net income guidance.

Riskier investors may be able to contend with the above issues, given the company’s low valuation. Investors need to inquire if the company is generating enough cash flow to satisfy an “increase in sizeable orders for new projects using our WFDS(TM) solutions, notably for two major installations in Inner Mongolia and Sichuan.”

"We will need to increase our investment in our technology infrastructure, facilities and other areas of operations, in particular our product development, in order to facilitate our growth. If we are unable to manage our growth and expansion effectively, the quality of our products and services, and in turn, our customer support, could deteriorate and our business and results of operations may suffer."

Liquidity:

We are unsure of TSTC's plan to tap the equity market as it did not adequately address capital needs in the 2010 first quarter filing. (Liquidity and Capital Resources section was scant). We find this unacceptable. Liquidity sections typically include a statement stating if the the company's capital position is adequate for the next twelve months.  We are speculating that the need to raise money may be a priority for the company.

Although its cash balance stands at $10.0 million, its cash flow from operations for the 2010 first quarter was negative $1.1 million. In order to derive a final conclusion on liquidity needs investors would need to gain clarity on TSTC's 2010 and 2011 capital expenditure plans.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

GeoTeam Note:

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.