To OTC Journal Members: 
 

China Media (NASDAQ: CCME) Tips Hand

My #1 China pick is, and continues to be China Media Express (NASDAQ: CCME). If you recall my Top 10 list, numbers 1 and 2 are must owns. CCME is #1, and LPH is #2. Longwei Petroleum (LPH) won't be delivering Q2 earnings this month- their fiscal year ends in June. Therefore, their next filing will be the audited 10K numbers, and we won't see it until the end of September.

CCME had some interesting and eye opening news for the markets yesterday just after the close. The company filed an NT-10Q with the SEC- this means the company expects to file its Q2 numbers a little late. At the same time, CCME announced it will issue its Q2 numbers this Friday before the market opens, followed by a conference call at 10AM Eastern. I don't get it. 

Nevertheless, in the SEC filing there was a little nugget that has the market buzzing, and put an after hours charge in the stock. Here's the line from the NT-10Q: "Based on currently available information, we anticipate reporting net income will be in the range of $27 million to $29 million for the quarter ended June 30, 2010."

If this number is accurate, it's astounding. It equates to $.835 in Earnings Per Share for the quarter alone. I had predicted $2 in EPS this year for the company. Last quarter the company made $9 million, or $.27 per share.

It's not clear to me why the company would file the late notification, and then come out with its numbers on Friday. I'm not fully prepared to believe these numbers, but there it was in the SEC filing. Seems like that's more likely the six month number.

If that number is right, it puts the company closer to $3 in EPS this year. Under $15 this stock is an absolute steal if that turns out to be the case. I own it at $12.75, and some longer term call options as well.
 

China Education Alliance (NYSE: CEU): Heading In the Right Direction

A very smart CEO once told me his three rules of corporate finance. Rule 1- take the money. Rule 2- take all the money. Rule 3- take all the money and ask for more.

Clearly, the CEOs of my two education companies have been following the 3 rules, but it's back firing on them- a least as far as share price is concerned. Both of these companies- CAST and CEU specifically, have more cash than they can put to work, and the dilution associated with raising that capital is dampening their EPS number.

CEU, one of my favorite China ideas, was out with Q2 numbers after the close yesterday. Their Q1 numbers were frankly terrible- the company only delivered 5% top line growth, which is anemic by China standards. It's not worth getting out of bed for 5% growth in China.

CEU got it back in track in Q2, delivering $10.8 million in revs, up from $8.1 million in Q2 '09. That's 33% growth, and puts the company back in my good graces. Profits came in at $4.257 million, up from $3.276 in '09.

Consider this company makes over $4 million in net profits on about $11 million in sales- that's a mega profit margin. This is a cash generating machine.

CEU also sports $75 million in cash against basically zero debt- this means CEU has nearly double its annual revenue rate in cash- a major positive and a major negative at the same time.

On the plus side, this equates to $2.37 in cash for a $4 stock. Value, value, value. On the negative side, the company is not putting the cash to work to fuel expansion, and just gave up a lot of shares for a bunch of cash it really doesn't need.

Let's say the company only had $25 million in cash. The profits would be the same, but the EPS would be considerably higher. Each share would represent a lot more profit. As cribbage players like to say: there's the rub.

In the case of CEU, the EPS for Q2 '10 was $.14- the EPS for the same quarter in '09 was $.13. Despite profits growing from $3.27 million to $4.57 million, the EPS was about the same. Why? Because the number of shares went from 25 million to 31.35 million. Hence, more shares to share the profits. As I said- over financed. They swapped cash they don't need for shares they shouldn't have given up.

The good news? No more dilution in sight as all shares are now in, and therefore EPS should grow nicely from here. And, this company is positioned beautifully for acquisitions. My message to management: go shopping and get this baby cranking.

A great long term hold destined for $10 in my view. EPS for the first 6 months is at $.25 and should accelerate from here. CEU will likely deliver no less than $.60 in EPS this year- $10 in a healthier market environment. It's coming for China stocks.

Disclosure: Long CCME and CEU

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