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Comtech Group Inc. Reports Operating Results (10-Q)

August 07, 2009 | About:

Comtech Group Inc. (COGO) filed Quarterly Report for the period ended 2009-06-30.

COGO GROUP INC. is a leading provider of customized module and subsystem design solutions in China. The Company believes it acts as a proxy to China\'s technology industry as it works with virtually all the major ODMs and OEMs in China. Cogo leverages these relationships and combines their IP to create designs that Cogo then sells to electronic manufacturers. These designs allow manufacturers to reduce their time to market for new products and ultimately increase sales. Cogo Group focuses on the digital media mobile handset and telecommunications equipment end-markets for its customized design modules while also offering business and engineering services to its large telecom equipment vendor customers. Comtech Group Inc. has a market cap of $261.3 million; its shares were traded at around $6.6 with a P/E ratio of 15 and P/S ratio of 0.9.

Highlight of Business Operations:

Growth by entering new end-markets, strengthening in-house capabilities and leveraging our customer base. In 2005, we began targeting the digital media end-market and, over time, we intend to develop integrated circuit and application software design capabilities and provide solutions based on our own proprietary technology. In the first quarter of 2005, we began generating sales from customized module design solutions for digital home entertainment products, primarily for digital set-top boxes, through sales to our existing end-customers Haier, Konka, Lenovo and TCL. We have since then grown our revenues generated from this market from constituting 10.8% of our 2005 revenue to 28.9% of our first half of 2009 revenue. We anticipate that sales related to the digital media end-markets will generally have higher profit margins than our mobile handset and telecom equipment modules related sales, though such higher margins may decline over time as this industry matures. We will also look for opportunities to expand into new end markets that we believe represent significant growth opportunities.

On March 16, 2007, the National Peoples Congress passed the new Corporate Income Tax law (the new CIT law) which sets the income tax rate to 25% for all companies. The new CIT law was effective as of January 1, 2008. The new CIT law provides a five-year transition period from its effective date for those companies which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax holidays. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively. For the Shenzhen Subsidiaries that were entitled to a tax holiday such as the two-year tax exemption followed by a three-year 50% tax reduction shall be entitled to the tax holiday.

As a result of the PRC tax incentives above, our operations have been subject to relatively low tax liabilities. Our effective tax rate was 10.7% and 6.3% in the six months ended June 30, 2009 and 2008, respectively. The increase in our effective tax rate was mostly due to the expiry of tax holiday for certain subsidiaries in Shenzhen, as compared to the corresponding period in 2008.

Noncontrolling interest (previously referred to as minority interest) consists of an interest of 30% of the outstanding equity interest in Long Rise Holdings Limited (Long Rise) that is held by a third party. For the quarter ended June 30, 2009, approximately 10.8% of our total net revenue was generated through this subsidiary.

Gross Profit. Gross profit was RMB71,626 thousand (USD10,487 thousand) in the three months ended June 30, 2009, a decrease of RMB12,551 thousand (USD1,838 thousand), or 14.6% when compared to RMB84,177 thousand in the corresponding period in 2008. Gross margin was 14.3% in the three months ended June 30, 2009, compared to 18% in the corresponding period in 2008. The decrease in both gross profit and gross profit margin was primarily attributable to the intense market competition in the mobile handset and digital media end markets resulted in the reduced selling price strategy adopted by the Group since late 2008.

Income Tax Expense. The effective tax rate for the three months ended June 30, 2009 was 10.4% compared to 4.7% for the comparable period in 2008. The increase in the effective tax rate was primarily due to the expiring of tax holiday for certain subsidiaries in Shenzhen.

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