China 3C Group: Best Buy deal establishes legitimacy

• Buy CHCG.OB around 7.96

China 3C Group (OTC: CHCG.OB) is a Chinese company that distributes electronics to retailers and operates 200-300 ft. “stores within a store” in major electronic retailers. The company has a market cap of just over $200M.
I’ve been tracking CHCG for several months, impressed with its low valuation (projected 2007 PE of under 16), clean balance sheet (over $5M in net cash) and enormous group prospects. As the Chinese middle class grows dramatically, so too is the population’s desire for the luxury items such as cell phones and MP3 players. At a recent investor presentation, the company promised to have 4,000 stores and $1B in revenue in 2010. In 2006, CHCG had revenue of $148M and ended the year with 800 stores. Its growth story is already off to a good start- the company turned in revenue of $84.5M and profit of $6.5M in the 2007 first quarter while opening over 100 new stores.

Despite the impressive numbers and prospects, I’m reluctant to dip into an OTC-traded foreign microcap. The company primarily operates in such stores as Gome, Carrefour, and Suning - perhaps household names in China, but nothing you’d expect to see at your local mall. Before investing in a company like this, I need to see some evidence of legitimacy- a profile in a major U.S. publication or contract with a major American company.

On June 15, I got the validation I needed, as the company announced that it would supply products and services to Best Buy’s first branded store in China, which opened earlier this year in Shanghai’s upscale Xujiahui district. Best Buy Int’l CEO Robert Willet recently commented, “the store is doing incredibly well. To say that it exceeded our expectations would be an understatement.” Based on this success, Best Buy plans to open another 10 stores around Shanghai in the next 18 months, providing even more opportunities for CHCG.

Another positive catalyst could hit later this year, as CEO Zhenggang Wang intends to list the stock on a major U.S. exchange.

The stock immediately jumped following the Best Buy announcement, only to fall back the remainder of June. July has brought increased volume and what looks to be a renewed up-trend, and I recommend getting in now on a ride to the double-digits.

Disclosure: SmartGuyAB is long CHCG.OB