To OTC Journal Members: 
 

China Education Alliance (NYSE AMEX: CEU): World Class Performance

I predicted CEU's Q3 numbers would be market moving, and the company cooperated by delivering an awesome quarter. This is truly a world class company. If you have a China growth portfolio, this one has to be a part of it. In my view, this stock is going to do extremely well over the coming months and years.

Here's the numbers: Revenue for the quarter was $10.23 million, up 43.3% over the $7.15 million the company delivered in the same quarter of '08. Now, here's the really astounding news: Net profits were $4.17 million, up 51.4% over the $2.76 million CEU delivered in Q3 '08.

Just take a moment to think about those results. Here's a couple of eye openers to consider. First, consider a company that delivers $10.23 million in revs, and $4.17 million of that money goes to the bottom line. Those are absolutely amazing margins. 40% of revenues become profits. You don't see that outside of pharma.

Secondly- consider the margin growth. As the revenues go up, the company's profits as a percentage of sales are going up. Revenues were up 43.3%, but profits were up 51.4%. The higher their revenues go, the better their profit margins. That's amazing.

Fully diluted EPS for the quarter were $.16- annualized it's $.64 in EPS- and the stock is still around $6. What a bargain.

Diving a little deeper into the numbers on the 10Q, there's more to get excited about. The company breaks its revenues out into 3 categories- Online services, Training Center or Class Room services, and Advertising. The advertising revenues were under $1 million, but with huge margins.

The other two categories- Online which was $5.7 million, and Training Center which was $3.8 million, boasted an average of whopping 80% margins. Another big Wow. There were $8.2 million in gross profits on $10.2 million in sales.

The top line was also up 20% from Q2- that's 20% growth in just 3 months.

On the balance sheet side- at the end of September, the company had $35 million in cash and $2 million in payables, and no long term debt of any kind. A great balance sheet.

In addition, they did a financing led by Rodman Renshaw that closed in early October. This will add another roughly $15 million in cash, and about 3 million shares of dilution priced at $5.50.

I don't know what they plan to do with all that cash. However, they operate primarily in the North of China, and their business model is very scalable- they can expand very easily. With the online services, they only have to start advertising in other areas. With the class room environment, they can expand rapidly as well. Their real asset is the vast library of curriculum they have developed.

Education is a huge and growing field in China. CEU offers specialized training for standardized testing in grades 5 through 12. Then, vocational training for all ages above the high school level.

If the company can continue growing at 20% per quarter, I believe they could deliver about $.95 in EPS over the next 4 quarters. There's no way this is less than a $10 to $12 stock if the company can achieve a continuation of past growth. Considering the demographic fueled demand and the amount of cash they have to invest, I see no reason the growth can't continue.

Here's a recurring theme I've begun to notice. Rodman Renshaw has become the defacto underwriter in the small cap world. If they've done a financing, the stocks seem to be very sloppy on the trading side over the first few months. This suggests their institutional participation is more the hot money looking for a quick trade, and it takes some time to eat through their supply.

A break out over the previous high of about $6.50 would be just what the doctor ordered here for higher levels. If CEU can continue on their torrid growth pace, and continue pouring money to the bottom line, this will be one fantastic stock to own. 

My price target for the next year remains $15. Could go to $20. A world class company, and a must own for a China growth portfolio. The next step- watch for some analyst coverage to start popping up on this one. The genius analyst at Rodman had a forecast of $.11 EPS for the September quarter- they delivered $.16. Watch for more credible analyst coverage to really put some life into this one. We're only up 7% from my entry level of $5.60. Lots of room for more money to be made.

On any sort of pullback this is one to pile into. I own 4,000 shares so far at an average cost of $5.49. I'll pick up more if it pulls back.

CGYV is the last Q3 to report on, and they have filed for an extension.  I suspect we'll have those numbers before the end of the week.

Home Page : www.otcjournal.com
Email Questions or Comments To: editor@otcjournal.com