by Lanny Chiu

A prior version of this article contained reference to a sale to a Taiwanese buyer, which with the help of the social internet venue showed may be problematic.  I have asked Geoinvesting to look into this further for me.  I still find the company to be a compelling risk/reward proposition at this price and remain long the stock

Opportunity in Jade Art Group

The Jade Art Group (OOTC:JADA) is a micro-cap Chinese company that presents a compelling risk-reward opportunity with a seemingly large catalyst in a potential huge 4th quarter sale.

At 15 cents per share, the stock is incredibly cheap at under 2 times trailing earnings.  The company also has $16.3 million in cash (20 cents a share) in cash and no debt on its balance sheet.  Because the macro-environment surrounding all Chinese RTO stocks and a particularly poor Q3 2010 earnings report has depressed stock prices, there is an opportunity to purchase JADA shares at this very attractive price.

The firm is engaged in the distribution and sales of a particular brand of raw jade, SheTai Jade, in China.  SheTai Jade is harvested by the Wulateqianqi Mining Limited in Inner Mongolia and then sold by the Jade Art Group’s subsidiary, the JiangXi SheTai Jade Industrial Company Limited.

Who is Jade Art Group?

They got into the business by swapping out a woodcarving business the CEO Hui Cai Song previously operated with Zhang Guoxi (one of the richest guys in China) for the distribution rights to 90% of the output of the mine.  As the branding and distribution arm, they have very little overhead and a basic business model.  They simply find customers to purchase the jade, acquire it from the mine at a fixed price and pocket the spread.  They pay $2,000 RMB (about $301 USD) per ton for the raw jade which is subject to a price re-adjustment of no more than 10% every 5 years starting in 2013.  As inflation has hit China, the price of their wholesale jade has risen, increasing the profit potential of the firm.

2009        Q1         $3,323.54
2009        Q2         $3,419.00
2009        Q3         $3,472.00
2009        Q4         $3,473.78
2010        Q1         $3,491.61
2010        Q2         $3,518.00
2010        Q3         $3,559.00

Jade's overhead is extremely low, recording only $353,157 dollars in SG&A cost for the first nine months of 2010 with no other major fixed costs.

On the downside, although the firm still generated over $1.5 million in cash in Q3 2010, sales slipped by over 70% from Q3 2009, calling into question the firm’s long-term business plan.  This was also reflected in the company’s increase in bad debt expense of $767,791 for the quarter and suspended shipments to 2 customers. 

For downside protection you have the fact that the firm runs on extremely low overhead, and is sitting on over $16.3 million in cash.   While there are many great opportunities available in the market today JADA appears to be a particularly attractive investment for those interested in Chinese equities.

Note: Financial analyses contained herein were performed based on the SEC filings, not the SAIC or SAT filings.

Disclosure: At time of article, author was long JADA

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