To OTC Journal Members: 
 

Simply Irresistible

It's a smorgasbord- I'm like a kid in a candy shop- an embarrassment of riches. You name the cliché- it fits. There 700 China based companies trading with US listings, and there's a bunch in  that are fundamentally just stupid undervalued, but thanks to the route by which the came public, are completely unknown and under followed by investors.

Today's idea is taken for granted. Around my house, my wife will say she is taken for granted. However, there's something even more invisible in our homes. What is ever present in your house, in constant use, but never thought of? It's there, but you don't see it.

Here's a hint- look below your butt right now. Unless you read emails standing up, you're likely sitting on a piece of furniture. You don't think about your desk chair. You simply bought it, sit on it when you need to, and only notice it if something goes wrong.

In fact, furniture and furnishings are a big part of our lives, but becomes invisible once purchased. A lot like appliances (see my last and highly successful call: China Electronics Holdings- CEHD), furniture is a major part of your existence.

Enter China Shandong Industries (OTC BB: CSHN). In the business of manufacturing furniture and home furnishing which are in huge demand in China, and printing profits like the copy machines at Kinko's spitting out paper.

So- going straight to the heart of the matter- here's the deal. Furniture is a bit of a boring business. Profits are not boring, neither is growth. There's huge profits in fixing up homes. Consider Warren Buffett's purchase of Shaw Industries 10 years ago. There was a residential building boom going on in the US, and Shaw Industries made carpet.

You own this stock between $4 and $5 per share, and you are getting $87 Million in revenues this year and $14 million in net profits- over $1 per share in earnings. I keep referencing a "rational" market- but an "efficient" market is probably the better turn of a phrase. If CSHN traded efficiently, it would be no less that $10 today.

And- best of all- there's a catalytic event on the horizon that will put this stock on many investor radar screens. Stay tuned.

Let's start with who they are and what they do.
 

China Shandong Industries (OTC BB: CSHN): Seeing the Forest- With a Few Less Trees

CSHN manufactures household furniture and wicker products in China. The company has been around for 10 years, has 19 plants, and 1500 full time employees.
 

CSHN is geographically located in the best place it could be in China for both raw materials, labor pool, and access to shipping. Ever wonder where all the "put it together", really nice low priced stuff you get at Ikea comes from? You guessed it- CSHN.

There's a few less trees in their area to make the stuff you see pictured above. Hence- they are one of China's low cost producers- but they are an equal opportunity producer. They sell both domestically and internationally, and Ikea is indeed one of their biggest customers.
 

The Numbers

Ultimately, we mostly care about what we might pay for the stock vs what it might be worth. Let's look at the numbers:
 

Breaking this down, it's pretty simple. Strong growth, good margins, and Earnings Per Share estimate for 2010 that suggests the stock is worth 10X '10 EPS- rounding down, about $10 per share. Friday's close- $4.40.
 

The Catalyst

While this is a low volume, under followed situation, there is a catalytic event looming, and you can figure it out by studying the SEC filings- if you know how to do it. I do.

The numbers you are looking at- the 2010 estimates- will be the most CSHN can achieve with its existing infrastructure. They have far more demand than supply as the company exists today. They need a capital injection to take this company to the next level.

The 3rd amendment of a registration statement was recently filed with the SEC with middle tier underwriter Rodman Renshaw. Rodman is the most active investment banking firms in the China sector.

There are shares being registered, but none of them are issued. This means CSHN is probably going to get 1.- an nice injection of capital to fund their growth, 2. an upgraded listing to the NASDAQ simultaneously, and 3. a whole new institutional audience that has a reason to care.

I suspect Rodman will fund this company with an injection of capital known as a "Registered Direct Offering". The pricing will almost certainly have to be over $4 per share plus in order for the company to make the jump to the NASDAQ in conjunction with the financing.

With the funding will come the upgraded listing, recognition, activity, and volume. To be clear- I have just figured all this out on my own from the Registration Statement, and surmised the rest.

If I'm right, this stock will likely be trading volume and cruising through $6 on its way North before the end of the year. If I'm off a bit, you still own over $1 in EPS in the low $4 range. Seems like a great speculation to me.

Disclosure: I don't own it yet, and I haven't been paid anything.

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