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

May 07, 2010 | About:

Comtech Group Inc. (COGO) filed Quarterly Report for the period ended 2010-03-31.

Comtech Group Inc. has a market cap of $229.7 million; its shares were traded at around $6.36 with a P/E ratio of 15.5 and P/S ratio of 0.8. COGO is in the portfolios of Jim Simons of Renaissance Technologies LLC, Chuck Royce of Royce& Associates.

Highlight of Business Operations:

Noncontrolling interest consisted of 30% and 40% of the outstanding equity interest in Long Rise and Comtech Digital Technology (Hong Kong) Limited (Comtech Digital), respectively. For the quarter ended March 31, 2010, approximately 5.8% of our total net revenue was generated through Long Rise. Comtech Digital was established in March 2010 and no revenue was generated for the first quarter of 2010.

Prior to January 1, 2008, the PRCs statutory income tax rate was 33%. In addition, Shenzhen Comtech, Comtech Communication, Comtech Software, Comloca Technology (Shenzhen) Company Limited (Comloca), Epcot Multimedia Technology (SZ) Co. Ltd. (Epcot), Shenzhen Huameng Software Company Limited (Huameng PRC) and Viewtran Technology (Shenzhen) Co., Limited (Viewtran PRC) (collectively the Shenzhen Subsidiaries), being located in the Shenzhen Special Economic Zone in the PRC, were subject to a reduced tax rate of 15%. Since the Shenzhen Subsidiaries agreed to operate for a minimum of 10 years in the PRC, the Shenzhen Subsidiaries were each entitled to a tax holiday of two-year tax exemption followed by three-year 50% tax reduction from the first profit making year after offsetting accumulated tax losses of the respective Shenzhen Subsidiaries.

The CIT law and its relevant regulations provide a five-year transition period from January 1, 2008 for those companies which were established before March 16, 2007 and which were entitled to preferential lower tax rates under the then effective tax laws or regulations, as well as grandfathering certain 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 two-year tax exemption followed by a three-year 50% tax reduction from the first profit making year after offsetting accumulated tax losses, and they are entitled to continue the tax holidays until they expire. For Comloca and Huameng PRC which had not commenced their respective tax holiday as of December 31, 2007, the CIT law and its relevant regulations require the tax exemption period to begin on January 1, 2008.

As a result of the above incentives, our operations have historically been subject to relatively low tax liabilities, which increase in the near future. Our effective tax rate was 10.0% and 11.3% in the quarter ended March 31, 2010 and 2009, respectively. Included in the income tax expense for the quarter ended March 31, 2010 was deferred income tax benefit of RMB899 thousand (USD132 thousand) as a result of the amortization of intangible assets of RMB5,451 thousand (USD799 thousand).

Product sales for the three months ended March 31, 2010 was RMB546,846 thousand (USD80,115 thousand), or RMB119,341 thousand, or 27.9% higher than the corresponding period in 2009. Digital media sales increased by RMB51,102 thousand (USD7,487 thousand), or 18.9%; telecommunications equipment related sales increased by RMB23,087 thousand (USD3,382 thousand), or 20.9%; and industrial business related sales increased by RMB45,152 thousand (USD6,615 thousand), or 96.2%. The increase in product sales was mainly attributable to the Groups continued effort and strategic focus in the expansion of the industrial business end-market, the increased sales volume as a result of growing demand and the promising new lines of business such as automotive, HDTV, smart meters, smart grid and 3G handset assess.

Gross Profit. Gross profit was RMB78,078 thousand (USD11,439 thousand) in the three months ended March 31, 2010, an increase of RMB16,638 thousand (USD2,447 thousand), or 27.1% when compared to RMB61,440 thousand in the corresponding period in 2009. Gross margin was 14.1% in the three months ended March 31, 2010, compared to 14.2% in the corresponding period in 2009. The increase in gross profit was primarily attributable to the increased sales volume in all end-markets. The decreased gross margin was mainly due to the change in revenue mix, of which the digital meda and telecommunications equipment related sales had a relatively lower margin.

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