Chinese Retailer Poised for Expansion

What does this mean for the stock? First of all, I'm biased. I was there from the very beginning and I am proud to say I was one of the original shareholders when it listed its stock on the Nasdaq. I own it and continue to add to my position.

My reasoning for predicting success is gut instinct, buttressed by the numbers. At 38 stores (end of 2009), it generated $250 million in sales and a gross profit of about 5% or $12.5 million. There are 35 million shares outstanding, plus 11.4 million warrants, which have an average exercise price of $3.82 (when exercised, it will bring in another $43 million in cash).

Using the fully diluted number of 46.4 million shares, QKL should earn approximately $.27 cents per share for 2009. According to a research report from Roth Capital, QKL should garner a 20 PE on forward projections. I figure based on the growth rate, it should generate over $375 million in sales in 2010 and gross profit somewhere in the neighborhood of $17.5 million or about $.38 cents a share, fully diluted.

At a 20 PE, that puts the stock in the $7.50 range. Currently it trades below $6.50, so in my opinion, there is definite value now.

I believe the real action is going to be in two to three years. At 200 stores, it should generate over $1.25 billion in sales and bring $60 to 65 million to the bottom line. While it's a given that it will probably need to raise more capital to fuel this growth, remember it should get $43 million when the warrants are exercised (they expire within the next three years.)

And they have no debt, so they could theoretically leverage up without any further dilution. Using these assumptions, it is not inconceivable that in a couple of years, QKL could command a price north of $20 a share.

My partner likes to say, "Always bet on the jockey and not the horse." If you think like that, you can only come to one conclusion. Add QKLS to your portfolio.

At the time of publication, Sumicrast owned QKL Stores.

>To order reprints of this article, click here: Reprints