Rodman & Renshaw is downgrading Fuqi International (NASDAQ:FUQI) to Market Perform from Market Outperform:
Downgrade To Market Perform We are downgrading our rating onFUQI to a Market Perform from Market Outperform based on valuation.FUQI is currently trading at P/E multiples of ~16.5x and ~14.0x to our2009 and 2010 earnings estimates. We believe that current valuationbeing assigned to the stock fairly reflects earnings opportunities andrisks associated with the company’s near term growth strategy.
Near Term Drivers Priced In FUQI traded above our 12-month pricetarget of $32.00 yesterday (closing at $31.86). We believe that near termearnings and revenue growth from the roll-out of its retail strategy is nowreflected in this price. We continue to maintain that FUQI should beviewed as an opportunity to out-compete the fragmented Chinesejewelry market. However, given current levels we would refrain fromadding to our positions until there is more visibility into management’sexecution of its strategy and application of proceeds from the recentcapital infusion.
No Room For Higher Estimates We are not making any changes to ourfinancial model. We are maintaining 2009 revenue and EPS of $532 MMand $1.97 respectively. We are also maintaining our 2010 revenue andEPS estimates of $745 MM and $2.31. Our prior $32.00 price target andMarket Outperform rating were driven by estimates that are alreadyslightly aggressive compared to management’s guidance. Our higherestimates are partly driven by management’s history of providingconservative guidance. Investors should note, for 2009, managementexpects total revenues of ~$509 MM - $527 MM (wholesale and retail).Net income for the full year is expected to range between $44 MM to $47MM, or $1.83 - $1.94 in diluted EPS. We would like to see 1) thecompany perform towards these numbers or 2) any meaningful pull backin the stock before we revisit our rating and price target.
Action: While this is valuation call only, I expect it to provide a nice trading oppty. Rodman's positive calls sometimes tend to get viewed as biased at least by some, but when they're negative, investors seem to listen. Just take a look how ARNA sold off yesterday following Rodman's downgrade.
I expect to see some profit taking in FUQI today, sending shares below $31 and possible even $30 so shorting above $31.5 should be good. Don't overstay your welcome, though, this one is always willing to squeeze.
R&R rank 55th in terms of accuracy - worse than flipping a coin by wide margin. FUQI is inexpensive. the PEG ratio is .57 and the earnings being used to project F PE are 43 cents a share. They did 45 cents in Q1 and Q2. Just as the 45cents in Q2 trounced the estimates of 28-32, I believe the Nov 12ish report will be 57ish – at least 25% higher – as they ALWAYS are with FUQI. If there is a bigger trend serving a company than the emerging middle class in China – esp. as the world recovers with them China in the lead – what is it? The company is really well managed – and will OUTPERFORM for years to come
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