Zst Digital Networks (PINK:ZSTN)

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Friday, March 4, 2011

2011 Fourth Quarter Review:

ZSTN crushed estimates. Based on guidance and current share count, 2011 EPS would come in at $2.48. All segments of business were strong. We will take the implied 2011 estimate with a grain of salt, since a raise appears likely. SAIC filings do not match SEC. we also need to keep in mind that numbers have not been audited yet.

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Tuesday, July 20, 2010

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)

-Is the company's auditor ranked in the top 100?
-Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm. Short sellers have been using this information as a tool to validate their opinions.
-Are the company's internal controls satisfactory?
-Are their any outstanding legal issues?
-Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?
- Chinese filings match respective SEC filings.(In process)

Criteria	Meets Criteria	Notes
Top 100 Auditor	Yes, Top 10	China Li Xin Da Hua CPA Co., Ltd; BDO Member Firm
Auditor Located in U.S.A	No	Shenzhen
Satisfactory Internal Controls	Yes	CEO and CFO have concluded that our disclosure controls and procedures were effective as of March 31, 2010.
No Legal issues	Yes	None Found
Customer Concentration	No	Five customers accounted for 25% of revenues in 2009. (Not not one single customer accounted for more than 7%).
Cash Flow Ratio is Greater than 1	Yes	19.93 (Significantly helped by Accounts Receivables collections).
Cash Ratio is Greater than 1	Yes	10.34
Buying Back Stock/Insider Buying	No	n/a

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 and enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

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