Telestone Technologies Corp (NASDAQ:TSTC)

Chinese reverse merger fraud.

Growth in the range of 100% and better for Revenue...only problem is guidance suggests DSO will be in the 300+ range at the end of next year(2012). It is a long hold, but at these prices a buy now

Tracking portfolio for China based companies that gained listings on US exchanges (Nasdaq, NYSE, or Amex) after conducting reverse mergers. Stocks that have been delisted have been omitted. Start date: Jun 24, average P/E of these companies: 3.

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problably already overly beaten up

This is a tracking portfolio of all CAPS-ratable tickers in the Chinese RTO/SPAC space (i.e., companies that listed without filing an IPO).

Telestone Technologies Corp. went public via a reverse merger in 2004. The company is based in China.

technology with a high gear.

Technology and small cap Longshots:Future stars fall'en out of the sky. Can we get it cheaper? I don't know. You flip the coin.

Nothing to see here folks, just another fraud out of China. See RINO, ONP, NEP, DJSP, NIV, FUQI, should I go on or do you get the point?

Many small-cap Chinese stocks have investors skittish because of reporting ill-regularities. The quickest way to hedge against this problem is to look at the accounting firms they employ. Telestone Technologies has retained QC CPA Group, LLC as its independent registered
public accounting firm since 2009. It is my understand that this is a well established and trusted firm.

The accounts receivable just look too fishy....standing at over 80% of total company asset.

Their Proprietary WFDS product is just starting to take off & coming off 100% growth rate last year & 80% this year with 3 new products rolling out next year & trading at 5X's this years net income is insanely cheap

This is a brief outline of how and why I selected TSTC to outperform:

(1) I am starting by following "Top Fools", a principle one of which is UltraLong. He selected TSTC to outperform on 7.7.10 at $7.40.

(2) TSTC has been held by $10 resistance for several weeks and clearly broke through that to peak at $10.88 (about two weeks ago).

(3) Otherwise, with the exception of June 2010, TSTC been well over $10 every month in the last year, peaking at $25.

(4) TSTC clearly hit a bottom in July 2010 at about $6.

(5) At about $10, TSTC has a relatively low P/E ratio of about 10.50.

(6) TSTC has developed high value, high margin Wireless / Fiberoptic Distribution System (WFDS) technology that is used to carry all type of cellular, wireless, telephone and TV signals. TSTC has contracts with the "Big 3" Chinese cellular phone service providers and the technology is being to used to solve the "last mile" problem.

(7) TSTC's extremely flexible WFDS technology also is used inside buildings to, among other things, boost cell phone signals. This type of WFDS system by TSTC is being installed in a Houston hospital and will have broad international demand.

(8) TSTC gross profit is up 50% for the latest quarter, they fully expect to meet their 2010 guidance and have a "solid" backlog of both 3G and WFDS contracts.

In short, given potential international demand for TSTC's highly profitable WFDS technology a significantly higher P/E is warranted. Furthermore, TSTC is very stable at about $10 and should approach $15 within two months at most.

If TSTC has reflected its 2010 earnings estimates accurately, 2H 2010 is going to yield revenues of $106.0m vs 1H 2010 of $27.8m. Full year net income is estimated at $22.9 m, or $2.18 / share. At TSTC's present share price of $11, it trades at a 2010 PE of only 5x. For a company that is steadily expanding revenues and in an economy (China) that offers emerging market growth rates, TSTC is an absolute steal.

The primary risks are that TSTC will i) dilute its (small) equity capital base through share issuance and ii) fail to reduce its astronomically high days receivable book.

In terms of a prospective issuance of new shares, the good news is that its Chairman / CEO and founder, Han Daqing, is very long shares himself so should see incentive to balance capital needs with growth in market capitalization, which at present is only just over $100m. The fact that Han Daqing takes an annual salary of less than $100,000 offers some confidence that he's doing what is right for shareholders.

The days receivable issue sounds worse than it is. TSTC's clients are China's Big 3 mobile networks - delinquency is far less an issue than expediency. TSTC's management would be well served to balance its revenue growth ambitions against good payment from these important customers (who are implicitly state backed given the significant state ownership held in each). The faster TSTC draws in its receipts, the less pressing the capital raise will be. One must also remember that business in China is different than in the west. Relationships are paramount, meaning providers work very hard to keep their clients happy and perhaps in this case to a fault. Chinese are also notoriously loose on matters of time - delays are the norm, be it a case of flying out of Beijing or Shanghai, issuance of financial reports or unfortunately so it seems, remitting payment for products and services rendered. Perhaps TSTC could use a tough new senior account manager who can isolate the sales team from that aspect of the job.

Assuming that TSTC grows its bottom line by 50% over the next 2 years, which represents a significant slowdown from present, and that TSTC raises additional share capital of $50m, I see TSTC trading up to $28.50 at a PE of 10. My 12 month target, which I expect to be reached by end of Q2 / 11, is half the distance, or $19.75. Recent price stability suggests that the aggressive shorting of past months has subsided - short covering should drive the price up a few dollars as TSTC moves up to and beyond $14.

A final note is that TSTC is Sarbanes Oxley compliant. While financial reporting in China, not to mention in developed markets, can always be subject to fraud if not some fiddling at the margins, investors should hold a higher degree of confidence that TSTC issues properly audited accounts.

ultralong

I like the long term prospects are good for TSTC to take advantage of the wireless and telecom buildout of China's infrastructure. TSTC has unique WFDS products that are in high demand by China's "big 3" wireless carriers.

Fundamentals look strong to include: Trailing P/E of 11, PEG of only .17, Price to Book of 1.82 (low for tech company), ROE of 17%, current ratio of 2.25, and long term debt to equity of less than 10%, to name a few.

Some of the short term risks may include potential share dilution to help with cashflow and A/R and to finance the high growth (less than 7M share float). Low float will also lead to high volatiity.

Great time to buy

Good growth and earnings.

ultralong