Searching for treasures in China - TBYH.OB

[Michael]

There are three stock picks on 3SOF that I have very high expectations to: AOB, XING and CHID. There are several reasons that I like them:

• They are growing very fast
• They are Chinese (Chinese economy is booming and Chinese stocks are hot!)
• They have a solid profitable business
• Their PE ratio is very low
• They were discovered by 3SOF before the general market took notice

Now these are stocks that can create great returns for our members of 3SOF. In the relentless search for great stocks with the same great fundamentals T-BAY showed up. From a fundamental point of view this stock has all the characteristics to be a huge winner.

We have decided not to pick TBYH for 3SOF yet  as it does not have enough volume at this point in time for us to enter and exit the stock without causing major fluctuations in the stock price. Now that shall obviously not stop us from giving our members a prewarning because T-BAY is certainly on our radar screen and when we have the necessary volume it might also be in our portfolio.

TBYH.OB - T-BAY Holdings, Inc.

Profile: T-BAY Holdings, Inc. owns 95% of Shanghai Sunplus Communication Technology Co. Established in October 2002, Shanghai Sunplus Communication Technology Co., Ltd. is a Sino-foreign joint venture providing total solution and full- range design services to leading mobile handset brand owners in China. The broad spectrum of services that Sunplus provides includes product overall design, mechanical design, module architecture design, software design, prototype production, product testing, manufacturing and after-sale technical support. The Company currently has 160 staff, mostly engineers and software programmers.

Sunplus develops its mobile phone modules mainly based on the chipset platform provided by Skyworks. The first module developed by Sunplus was used by Panda Electronics for making 150,000 units of their mobile phones. Currently major customers of Sunplus include CECT, Panda Electronics and Siemens Mobile.

Sunplus Communication website

T-BAY profile

--------------------------------
Fundamentals

T-BAY through their subsidiary Sunplus is benefiting from the explosion in the manufacturing of electronic goods in China. Sunplus decided in early 2005 to focus on designing phones rather than selling products. This business features a higher profit margin and requires less working capital compared to income from sales of products. As a result of this shift TBYH's net profit more than doubled in the nine month ended December 31, 2005 compared to the same period last year despite a drop in revenue and they generated 3.7 million in free cash flow.

The Company released preliminary figures for the full year of 2005 in April, which disappointed the market. It seems like they had a loss in Q4 05 as the full year net income came in at around 6 million.  They have still not filled the annual report with SEC but I think there might be a positive surprise there as well. They posted a positive cash flow of $2 million  in Q4 05 so the loss can most likely be contributed to a once off event. In the same release they guided Net Income for 2006 of between 8 and 10 million USD which gives a forward PE around 6.5.

TBYH derives its income from:

• Design fees.
• Royalty charged for each unit of mobile handset the customers produce based on the volume of production.
• Sale of complete mobile handsets.

The royalty income means that TBYH's income and profitability partly depends on the success of the handsets they design. They receive between $6 and $8 in royalty per handsets in addition to the design fees and their handsets are flying of the shelves. They issued the following press release on April 5: T-BAY's New Designs Selling Quickly

T-BAY Holdings, Inc. a leading mobile device designer, announced today that it has completed three newly designed cell phone products numbered: 9701, 9702 and 9109/9110. The products' sales and market response have been excellent. Total sales have already reached 225,000 sets, with another 350,000 units expected to be sold during the next two months.

These phones include cutting-edge video and audio applications like FM radio, TV compatibility and MP3 applications.

These handsets are really cutting edge and have won several awards. The 9109 has a 2mega pixel camera, handwriting recognition, MPEG 4 Video, MP3 player etc.:



China

China's economy is booming. The World Bank forecasts GDP to grow 9.5 this year. China is fast becoming the manufacturing center of the world. The opening of China for trade combined with cheap labor and an undervalued currency has caused a huge influx of foreign direct investment. US$6 billion in private-equity investments is expected to pour into China this year. The result has been a soaring stock market. The chart below compares the Shanghai Composite index with Dow Jones:



One of the sectors that are growing fastest is the manufacturing of Electronics Products benefiting companies like CHID, XING and TBYH. All of them are growing at a breath-taking rate. Handset producers and mobile operators are increasingly not only producing handsets in China but also asking design houses to develop them. The latest example of this is the (little known) fact that Vodafone's new 3G handsets are designed in China by a little known company called Comtech.

When the world largest operator select a Chinese design house to develop their most advanced handset the handsets suppliers listen and we have only seen the start of this. Their competitiveness is simply too compelling to be ignored. Not only is Chinese engineers being paid a fraction of their western counterparts but it also makes sense to have the design done close to the production which more and more often will be located in China. (the same reason why pharmaceutical companies will start to move development of vaccines etc to companies like SVA!)

TBYH is fully aware of this competitive advantage and has recently participated in a number of international conventions like CeBIT and the GSM world Congress. According to the company they are adding new partners and customers every month.  These are some of the best-known technology suppliers and providers in the world.

TBYH is also developing two 3G handsets which will be ready for launch next year. The total number of 3G mobile communication subscribers in China is expected to reach 100 million within five years. With a royalty fee of at least $8 for these more advanced for handsets The 3G market represents a huge opportunity for a small company like BTYH and the company will most likely get a significant market share. The technology behind 3G in China is proprietary for this country. This means that foreign handset suppliers either have to develop their own Chinese 3G handsets or depend on designs from companies like TBYH. This has been a point for discussion in the wireless industry for years because China is doing the same as EU did with GSM. The result in Europe was giants like Ericsson, Nokia, Siemens and Alcatel.

AMEX listing

TBYH largest problem is the lack of coverage from the investment world. That might change when they get listed on AMEX.  According to the conference call on April 11 they anticipate AMEX listing later this year and it seems like they are fulfilling all criteria for an AMEX listing. Some of the old timers might remember what AMEX listing did for AOB!

Technicals

Now let me give a word of caution here. Don't rush out and buy this stock on Monday. The reason why we didn't select TBYH to 3SOF is that the volume is appalling. If you like the fundamentals of TBYH I would recommend to put in small orders over a couple of weeks. I have personally accumulated TBYH over the last two weeks with orders of 2000 shares. Even with these small orders I was once responsible for 80% of the volume!



You probably have to be fundamentalist to love this chart. So lets make a fundamental chart reading: There was a huge run up to February when the company reported Record earnings. The share price has drifted lower since then. Basically long-term holders are slowly loosing patience with holding a share that has great fundamentals but are going nowhere. We are now approaching oversold levels and the support at 2.25. I believe this is an excellent entry point.

Summary

So the investment case is this:

• Oversold chart
• More than 100% earning growth
• Forward PE around 6.5
• Chinese stock benefiting from the boom in Chinese economy
• Anticipated AMEX listing

If you like the story start accumulating the stock sloooooowly.

[chinaman711]

Do you follow CHDT another chinese company? Do you know when XING reports? Thanks

[Michael]

Do you follow CHDT another chinese company? Do you know when XING reports? Thanks

Hi Chinaman

I am afraid that I don't follow CHDT. It seems to be a highly speculative stock. I can see the market is excited about the 2100% increase in revenue in Q1 but I would like to see earnings as well before I commit cash.

I prefer to invest in OTCBB stocks that have solid earnings and low PE's like CHID and TBYH. Now that doesn't mean that CHDT can't be a great investment but be aware that it comes with a huge risk as well.

[Terliso]

Michael,

That is not a 50(SMA) actually that is a 200(SMA)

50(SMA) is there above the price..

[Terliso]

We have decided not to pick TBYH for 3SOF yet  as it does not have enough volume at this point in time for us to enter and exit the stock without causing major fluctuations in the stock price. Now that shall obviously not stop us from giving our members a prewarning because T-BAY is certainly on our radar screen and when we have the necessary volume it might also be in our portfolio.

TBYH is walking down in the price channel.
50(SMA) weekly scale is currently @ $1.94 lets see if TBYH bounce from that moving average

[Michael]

Michael,

That is not a 50(SMA) actually that is a 200(SMA)

50(SMA) is there above the price..

Thanks Terliso. Corrected by now.

I don't think the weekly chart is better to determine whether a stock is oversold or not. On the positive side both MA50 and MA200 is pointing upwards on the weekly chart so the loooong term trend is positive 

But let me make this clear this is not a stock pick based on the technicals but on the fundemantals. The technical signals will come and then 3SOF will be there 

[Terliso]

Summary

So the investment case is this:

[li]Oversold chart[/li]
[li]More than 100% earning growth[/li]
[li]Forward PE around 6.5[/li]
[li]Chinese stock benefiting from the boom in Chinese economy[/li]
[li]Anticipated AMEX listing[/li]
[/list]

If you like the story start accumulating the stock sloooooowly.

I have to admit that I like the story .... You've done your Fundamental Ananlysis, great job
but the technicals still bearish, & volume still low....
I'll stay in the sideline for now waitin'

[Michael]

I have to admit that I like the story .... You've done your Fundamental Ananlysis, great job
but the technicals still bearish, & volume still low....

Thanks Terliso - as said you probably have to be fundamentalist to love the Chart. It is not the first time I have been betting against what might appear to be a bearish chart and I really believe in the short and long-term fundamentals of this company. If I am right it will show through on the chart sooner or later  .

I like in general the long term potential of Chinsee handset manufacturers and design houses like COGO, XING and TBYH. The development of a Chinese 3G standard has been heavily promoted by the Chinese government to help establish a strong domestic IT industry and the first companies to harvest the financial benefits from this policy are the domestic handset suppliers and designers.

There are already countless examples of the fruits of this policy

• Vodafon is using a COGO/Huawei to design their 3G handset
• Siemens are using TBYH as one of their design houses
• Microsoft and Palm have teamed up with CECT to produce handsets for the Chinese market
• Ericsson has teamed with ZTE corp. to develop Chinese 3G handsets

From Reuters:

China 3G standard makes buzz on foreign shores

"A China-developed standard for third-generation (3G) mobile phones (TD-SCDMA) is creating buzz in the West, winning the ears of carriers and equipment makers who want cheaper technology and an inside line to the world's biggest telecoms market."

"The standard, TD-SCDMA, has already picked up varying degrees of interest over the last year from top equipment makers, including Motorola, Nortel Networks, Siemens, Nokia and Alcatel .
Sweden's Ericsson, the world's biggest producer of mobile networks, jumped on the bandwagon last week when it announced a strategic alliance with ZTE Corp., China's second-largest telecoms equipment maker, to develop the technology."

"The focus in 3G remains on the world's two tested standards, WCDMA and CDMA 2000, although pricey 3G technology has been slow to catch on in the marketplace, despite its promise of fast Internet connections, videoconferencing and online gaming."

"Europe has finally begun moving in earnest to build WCDMA-based networks, but analysts said TD-SCDMA is attracting attention from companies eager to please Beijing, as it gears up to build 3G systems, and to find lower-cost alternatives."

I am quite confident that TBYH will meet or beat their guidance for this year but I am even more bullish about next year when they release their two new designs for 3G phones. The potential for partnerships are immense and so can the financial benefits be for a small company like TBYH.

[Michael]

Excellent news from T-bay today:

T-BAY Holdings Announces Its Product Development Plan

May 16, 2006 10:30:57 (ET)

EAGLE, Idaho, May 16, 2006 /PRNewswire-FirstCall via COMTEX/ -- T-BAY Holdings, Inc. (TBYH, Trade) today announced its complete Product Development Plan for FY2007 (year ending March 31, 2007). T-BAY is on track to bring to market 35 total design solutions based on seven mainboards, including two 3G phones, a 40 percent increase over the previous fiscal year. T-BAY, through its subsidiary Shanghai SunPlus Communication Technology Co., Ltd., provided 25 design solution products based on five mainboards during FY2006 (year ending March 31, 2006).

Mr. Xiaofeng Li, CEO of T-BAY Holdings, stated: "I look forward to another successful year for T-BAY with over 1.6 million units of T-BAY designed products expected to be sold in the fiscal year ended March 31, 2007. This would be a 33 percent increase over the previous year where T-BAY sold approximately 1.2 million units."

The announcement by the Chinese government approving agreements with Chinese companies regarding 3G technology puts T-BAY in a prime position to provide solutions to those companies immediately upon their ability to utilize them. Mr. Li responded to this announcement that "this is another example of T-Bay's forward-looking design strategy."

Mr. Li noted that "with T-BAY's chipsets solutions being provided by SKYWORKS, this enables us to take advantage of extremely flexible design solutions, something that is highly appreciated by our customers." The functions included: PC camera, SMS, MMS, Email, FM Radio, Handwriting, T- Flash/USB port 3GPP/H.263, MPEG-4, MP3, Dictionary, WAP, and 2.0 Mega Pixel camera.

In FY 2007, T-BAY will base its design solutions on mainboards of its very successful 9501, 7101, 7102, 7501, 7502, 7701 and 7702 product lines which have been so profitable in FY2006. Additionally, the upgraded plus-version of the original 9701, 9702 and 9501 product lines, which continue to sell very well in the market, are in design completion process, in order to be released within 30 days. The #71 and #77 series (cited above) are expected to be released in the 2nd Quarter, with the #75 series to follow in the 3rd Quarter.

Mr. Li specifically pointed out that "the first 3G phone solution is set to be in the market in the 4th Quarter. This means that we continue to be right on schedule. It is gratifying that our professional team is achieving the goals we have previously announced - particularly in our most forward- looking advanced designs." New functions such as TV Output, 3D game engines and Mobile TV will be added in different designs.

Mr. Li emphasized that "the flexibility that we have added into our designs allows us to rapidly adjust to changes in market conditions and trends and incorporate the latest technology. T-BAY's constant market research provides essential and timely feedback from its many partners and customers."

Yet another confirmation of the potential in the small gem 

The fundamentals are in place for this stock to move higher. Now we just need some volume!

[Michael]

We still don't have volume but we are certainly showing strength in an otherwise depressed market.

This is one of those hidden gems that you can pick up slowly if you are willing to sit on a stock for 3 to 6 month without much action. We ended today at 2.65. It will  go down again unless they release some news so if you like the fundamentals try to pick it up between 2.3 and 2.4.

[Ramsburg]

Hi M !

Great finding

Today we got a confirmed breakout of the resistance after a double bottom near 2.20
Maybe the stock is starting to be discovered... this breakouts means «free» exposure at least to the technical filters

It's a pity the volume is still not big enough to add it on our Portfolios... Nevertheless, great (unofficial) call ! ;-)

Regards !

[lovethebag]

wow ! didnt saw this before 
what a great call at the bottom !

i bought it yesterday too, i'm looking forward to double up on this one.

[Michael]

Cesar (AKA David) picked TBYH up on Friday with a bullish opinion. His analysis is as usual great reading:

http://www.otcbbcoverage.com/stocks/index.php?topic=153.msg925#msg925

Unfortunately I was probably too conservative when I recommended to buy between 2.3 and 2.4 but I hope some members picked up shares at 2.25 when I mentioned TBYH the first time. There were amble opportunities to do this.

I start to really like this chart. We have a double bottom, bullish MACD and break out from the descending trend line.

Volume is still not great but compared to the last break out the volume has more than doubled and that is a good start. Last time the stock had a 300% bullish run!

We will see if there is enough power behind this move to make that kind of run but fundamentally fair value for this stock is significantly higher than $3

[Terliso]

Michael,

Your TBYH is gaining some strength, It looks good now

[Michael]

I better tell it as it is. I have done an unforgivable mistake in the fundamental analysis of TBYH 

You see TBYH's fiscal year does not follow the calendar year. So when TBYH said that their net income in fiscal year 2005 was 5.7 million USD it was the year ending in march 2005. Net income for this fiscal year, which ended March 2006, is expected to be 10 million USD or 0.35 EPS.

To my defense the company actually mixed up the fiscal years and calendar year in their releases: T-Bay Holdings Projects EBITDA of $10.5 Million for Fiscal Year 2005  Now this is not the fiscal year 2005 but 2006. They corrected this in their next release where they specifically stated when the Fiscal years ended. (I am wondering if I am the only one who have done this mistake and if that is why the stock went down when they released their full year expectations  )

Anyhow I am guilty as charged and I can only hope the judgment will be lenient. After all it makes the fundamental case so much stronger.

I was always puzzled why they had a loss in Q4 06 (fiscal year) and could only contribute it to a once off event (now you can contribute it to my stupidity - of course they didn't have a loss). In fact they had a profit of 2.1 million USD.

Now this changes the whole evaluation of TBYH. They expect to grow revenue next year with around 30% and earnings will presumably grow with at least the same percentage. So we will most likely see earnings in the area of 13 million USD and not 8 to 10 million as I said in my first message.

Trailing PE is now 8.6 and a conservative forward PE is 6.5.

No wonder this stock has been on the run. You guy's probably realized my mistake and bought the stock at any price  . Congratulation - you were right, it is an absolutely steal at 3.00!