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Your Weekly Short

October 29, 2009 – Comments (0) | RELATED TICKERS: GRRF

With the market having risen so far so fast this year, we've found that most our free CAPS Champion of the World contest ideas for you are shorts. And they tend to be working.

How can it be that so many sorry companies have increased so much in value? Noodle on that as the Snake exposes another:

Short China GrenTech (Nasdaq: GRRF) I’m pretty sure there is a running game at investment banks for finding the best marketing name for Chinese companies listing in America. China GrenTech might not seem to score that highly at first, but when you see it misspelled GreenTech repeatedly, it starts to make some sense. Despite the environmentally friendly confusion, supplying the picks and shovels for mobile networks in China is still something that strikes a chord with investors just looking for the quick growth stories. However, looking a little deeper reveals flaws. 

Thesis:
Being tied into the nuts and bolts of China’s mobile phone expansion may sound like a sweet spot, but even as the market leader, GrenTech holds very little sway (pricing power). Having to work with three massive government supported players also means GrenTech has a tough time collecting on receivables, putting pressure on cash generation. In the end, most of GrenTech’s products appear to be commodities and this is playing out in the rapidly eroding margins.

Company Description:
China GrenTech provides the technology to boost the performance of transmission equipment used in/on mobile phone towers. It is a major supplier to China’s big three: China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), and China Telecom (NYSE: CHA). 

The company is also building out its radio frequency (RF) base stations. These components are used by Huawei and ZTE to build the backbones of mobile networks.

Valuation:
This stock has ridden up on the hype of Chinese infrastructure stimulus and the general consensus that China will be leading the world out of the recession. While the boost to infrastructure investment directly helps GrenTech, the company is still struggling to see the profitability from two years ago. Despite this, the stock has climbed nearly 300% in the past year. Even with the improved mobile market, the trailing twelve month EPS remains negative and operating cash flow remains negative (as has been the case three of the past five years). Despite the precipitous drop yesterday, I am still convinced this stock will lag the S&P. Red thumb it and look for value-add Chinese companies to pin your portfolio’s hopes on.