http://www.rcg.tv

.

RCG does look undervalued, however, there are other things to consider which may effect the SP. I put this on AFN, so will share it here too.


The bear case is not so simplistic and its not just the Wang issue it is a combination of :

a/ Wang issue - this will be highly off putting to any potential buyer of large quantity.

b/ Sentiment - its in a clear downtrend.

c/ Visibility of earnings - basically non-existant, most earnings are derived from new products and its a continuous process, which leaves the door open at any time for a problem (although so far none have happened).

d/ Expansion into China - those who know China know the only way you expand into China is spend spend spend, and offer very good promotional payment and commission deals to agents. China also has many local companies producing lots of (but not all) the same goods, which means margins are not going to be impressive to start with once China becomes a larger chunk of revenue.

e/ Tax rising, whilst they are trying their best to evade full tax by moving around here there and everywhere with different subsidiaries etc.., at some stage it will catch up with them and tax rates will keep on rising upwards until they are at full tax rate.

f/ Throw away comment in the last results about having spent 70% of the placing money to date (30th August) on various things, but with no details.

g/ HK$ weakness, owing to the "weighted average" system that RCG use, their last results have not reflected the full HK$ weakness, and this weighting system will mean their results will continue to use a weaker and weaker HK$ even 6 months after the currency itself has done an about turn. Weighting might help now, but it kicks you in the teeth once later.

h/ Weighted average number of shares in issue, again RCG report EPS based on "weighted average" - so again with the placing this year, the full force of that will only be represented in 2008 figures, but for sure the 2008 FY figures will see the weighting move to a higher number of shares in issue.


For example, if you put interims into prelims, then the interim 5.6p EPS after putting in a weaker HK$, and putting in higher tax, and putting in more shares in issue - it might only contribute for example 4.9p to FY figures........may be less than that.

If you go to the extreme, and use non-weighted values but actual values then re-working the interim figures you get :

PreTP 185.739m HK$
Tax @ 7% = 13m HK$
Post Tax Profit = 172.8m HK$

Shares in issue 232,267,677

EPS in HK$ = 74.4 cents
X rate = 15.89
EPS in pence = 4.68p


Will there be any exceptionals on the prelims ? Whats the outlook for 2008 ? Will there be a big push into China which may prove disasterous on margins ? How high is the R&D spend in H2 ? How much cash has been spent ? How much of the revenue is recurring ? Why has the company maintained silence since interims ? Who has been selling in such volume since 150p downwards ? Why did the directors sell so much stock in this years placing if they knew that 2007 and 2008 would be good years ? If a new shareholder acquires a majority stake (as in the Wang issue) must they launch a bid for the company, or sell their stock holding downwards ? (Not the same rules as an IPO large holder).


There are many questions that can be asked, but the key event is H2 performance, for more reasons that just one. Way back in my TMF post of March this year I drew attention to H2 as a possible "hiccup" event for RCG, so will H2 be a hiccup or not ?

Many thanks for the above, PP. I've been keeping an eye on RCG for some time: did very well with this, having bought shares last year and then sold when Ms Wang died earlier this year. Will need to do some more research.

What has RCG got to do to move there SP, there only seems to be good news , last results were fab, loads of cash and great products.
I,ve topped up with 20k @68p am holding 50k in total

RNS re acquisition today.


For full text click here


Includes the following paragraph:
"With upcoming large-scale events such as the 2008 Beijing Olympics Games and the
2010 World Expo in Shanghai together with the booming sports and entertainment
industries, China is entering an exciting phase of rapid growth and increasing
demand for stadium security, ticket anti-counterfeiting, crowd handling and
point-of-sale automation. The opening of this vertical industry provides RCG
with significant opportunities for value creation."

Toya, quite expensive, given the price paid. It was a good thing to do though. However, the cash burn rate is going to be a concern come prelims imv, the question being just how much cash will have reduced from interims to prelims. If people sense a placing coming in say 18 months time, its going to limit the performance of the shares, imv.

PP: I agree and just keep this one on my watchlist. Haven't (yet) got back into RCG since it plummeted below 130p as it seems to lack the will to head back up there. Pity really - I was very excited about the company this time last year. Just goes to illustrate that holding on long-term regardless is not always the best policy.

Just put this post on AFN, so a copy here for info :


"""""""""""p0lzeath, thats questionable.

Did they put a foot wrong ? I would say yes in moving nearly all their production into China.

Earlier this year China made changes to the tax laws, this affected low tech items in the most, and a hit was seen on numerous items, particularly export. Just last week China has introduced new tax laws again, particularly for export. This time it will effect Hi Tech items. It could therefore be that in 2008 you'll see RCG take a big hit in terms of increasing tax levels from all their China subisdiaries. Certainly in 2008 their margins will get hit due to these China tax changes imv.

Perhaps this now known impending change is the reason why they have done an acquisition at that price. It was said they would not pay over price, and yet they have paid a very high price for this company. Why ?

The coming 1st Jan 2008 China Labour Law changes are also going to hit operating costs in China, and certainly going to hit margins of many many companies.

If China continues on this "normalisation" process to bring everything into line with 1st world countries, then a China that is presently no longer cheap, will become even less cheap. Its going to happen, everyone knows that.

The pending effects of the Labour Law changes was a known item going forward and would have been budgeted for, however these new tax changes will not have been. Their implications for 2008 and 2009 is what you should be looking out for.

In terms of cash, if 75% of the placing money was spent by 30th August 2007 it looks like nearly 100% will be spent by now. They have their cash apart from those placing funds, but it looks like "cash" will take a whopping great hit in H2.

You can dress that up with vast revenue growth and earnings of 13p - but if cash goes down by a big lump, then fear will grow that a placing is getting nearer, no need for "12 to 18 months" two months ago starts wearing thin should by March 08 people see a big drop in cash.

Fast growth needs cash, lots of it, and that is not a story the markets presently want to hear, which is obvious by the way many shares are reacting presently. Are many feeling confused as to why this share is doing this, but that share is doing that.............thats because the rules of the game in the present market have changed, and if you don't change with sentiment you'll be sat on falling shares.

However its good to see them finally admit to doing something with the cash and telling everyone what it is, as opposed to the 30th Aug statement saying they have spent 75% of the placing funds to that date and not giving any detail as to what it was spent on apart from a "broad array of things".

Might be a good day for a trading update, so those looking for a spike to sell into will be hoping its released later today no doubt :) """"""

Thanks PP - good analysis, as always :)

RCG announce trading update:

"RCG's business activities during the second six months period ending 31 December
2007 remain robust and strong, and accordingly, the Group expects to report full
year figures that are significantly ahead of market expectations. The Group
expects to release its full year audited numbers on or before the final week of
February 2008.

The Group is pleased to announce that its ongoing organic growth remains strong.
In the Group's 2007 interim report, RCG announced its intention to strengthen
its technological innovation, to penetrate new and high value vertical
industries and to sustain its geographical expansion. The Company is pleased to
report that all three strategies remain on track."

Full RNS here:

RCG Trading Update

A post I put on AFN, for reference here :



TTB - a valid point, and for those who want facts then please revert to the interims statement.

http://www.investegate.co.uk/Article.aspx?id=200708300701129730C

\"..........In March 2007, RCG successfully placed a total of 33,333,333 Ordinary Shares of par HK$0.01 each at 131 pence per share, raising £41.7 million (net). The net proceeds will be used for mergers and acquisitions, joint ventures, research and development, establishment of regional headquarters in Malaysia as well as for working capital purposes. To date, a total of 65-70% has already been spent on various intended purposes........

So they have been (up to 30th August) aggresively spending the placing cash, this cannot be denied by any bull, as the company, as quoted above, have eagerly told everyone they have spent up to 70% of it, and on \"various items\".

They have now also spent money on the latest acquisition, another near 10m GBP. Therefore are all the placing monies now spent when you take the acquisition in together with the interim statement that up to the date the statement was made (being 30th Aug having spent 70% - not to be confused with the cash reported at interims which was up to 30th June only and did not reflect any spend from 30th June to 30th Aug interim release date).


What it all boils down to perhaps is a simple question :

1/ Are RCG all about delivering shareholder value ?

OR

2/ Are RCG all about growing the company up and up at massive, but highly cash consuming, rates.


If Dr Chu and co are going to try to expand like crazy for 5 years, then they are going to needs lots of dilutive cash, and this is not going to deliver shareholder value in this term, its going to deliver lots of growth, but shareholders will be playing a supporting role. Then in a few years time, the shareholders will benefit from ending the supporting role and state to have the end prize delivered to them, provided the money is well spent, the markets of RCG do not collapse etc...

Therefore, there could be plenty of people who are selling down their holdings, simply as the time frames are too long now, and the company is going to go through a period of massive growth, but one that is going to consume lots of cash.

We all know Chu is looking at many acquisitions, this is going to need more and more money.


So perhaps cash is a key issue, and the question is, are RCG going to needs lots of it to grow repidly (eg no short to mid term deliverance of value to shareholders due to continual dilution of the growing earnings) - or will RCG and Chu slow the growth and start to deliver big divi\'s ?

I think the massive director selling into the recent placing gives the answer, and its why since then there has been lots and lots of selling since, and why the SP has crashed down from 150p levels.

Most people, apart from the blind bulls, and the short term traders ramping to get their quick profit and then sell, can see this, and those looking ahead can see a growing company, one going to grow very quickly, but one that is going to perhaps keep coming back for more and more cash.

All imo of course.



---------------

TaurusTheBear - 12 Dec\'07 - 13:15 - 13514 of 13554

Wowzers - read my lips: I own shares in RCG, ergo I am a BULL. The point about the cash is that no-one really knows:-

(1) How fast it is being used
(2) How long it will last
(3) What exactly it is earmarked for
(4) Whether RCG just goes to the market for cash every year

Above all, it has assumed a status amongst the twittering classes far beyond it\'s relative importance! :0)

Interesting points PP - thanks.

Since I've been bearish on RCG of late (and correctly down from the 150's), here is a post I put on ADVFN, as the results near.


"""It will be interesting to see if the "half on half" reduction in growth is continuing.

Lets not forget, this is not a business with loads of recurring revenues, its a business which needs to spend buckets on R&D, and have an ever new list of products to sell. Comparing annual figures is very misleading, imv, and you can only, in a case of a company like this, compare consecutive half years, and not annual half years, or Year on Year figures.........the business is about continual change and evolution of the product range, and must be judged on "Half Year on consecutive Half Year" figures.

EG, H2 07 compare to H1 08 and then H1 08 compareto H2 08.

Do not IMV compare H1 07 to H1 08, or FY 07 to FY 08, that can mislead. There is no mistake when you compare the consecutive half years.

The interest therefore ahead of us all is what are the H2 08 figures like on their own.

As a reminder the growth had stopped last half year, (the comparison done at the exchange rates at that time, not updated to todays rates) :


Turnover

2006 H2 = M 39.2

2007 H1 = M 38.6

Profit after Tax

2006 H2 = M 13.4

2007 H1 = M 12.1


Obviously the "spin" merchants were pumping the growth on H1 06 - but thats not really relative in the case of a company like RCG. So, the interest with the RCG results (apart from cash levels and cash spend) will be not the FY06 figures compared to FY 07 (as H1 06 was crap in relative terms), but what is H2 07 like compared to H1 07. Thats the key, and hopefully for RCG holders they will at least show some growth again, and not declines in both turnover and PBT."""

PP As a shareholder the important stats are earnings per share and dividend per share on a annualised basis not half yearly. Lets hope to see a significant increase in final dividend as they dion't seem inclined to pay an interim.

As results near, need to keep an eye on certain metrics with RCG, we have already seen for H2 06 compared to H1 07 a fall in revenue and profit after tax.

Just some rough calcs so if any mistakes please accept my apologies......

Will have to quickly work out what the H2 07 split is from the Preliminary figures.

RCG is "allegedly" very weighted to H2, and so there has to be growth over H1. Any failing to see a substantial positive difference over H1 would be quite bad imv, and I seriously cannot see them not putting in another half of negative growth (as was from H2 06 to H1 07), there has to be growth this time around, but the question is, is it big ?

If their talk of substantial outperformance is correct, you'd expect them to do at over 100M turnover in H2 alone, and 19.1M Profit After Tax for H2 alone. That would be considered line with the gains acheived in 2006 H1 to H2........lets see if they do "in line with 2006" come prelims, or are "significantly ahead".



Turnover

2006 H2 ...........................M 39.2 Goes DOWN to

2007 H1............................M 38.6

2007 H2............................M ?????? (Target 100M)


Profit after Tax

2006 H2............................M 13.4 Goes DOWN to

2007 H1............................M 12.1

2007 H2............................M ?????? (Target 19.1M)


After their fund raising lets see cash in bank too :

2007 H1............................M 56.8

2007 H2............................M ??????




(Reference H1 06 to H2 06 saw growth of revenue by a factor of 2.8, and growth in Profit After Tax by a factor of 1.58. These have been factored in above, to see if they can match 2006 H1 to H2 ratios).

The Profit After Tax figures are skewed, this is due to taxation in various countries, which means that interims look weird, but prelims tell the true story as then all tax from all regions for the whole period is taken into account (Its why you'll see big revenue gains from prelims to interim, but smaller After Tax Profit gains).

Should they perform "in line with 2006 HY to FY gains" you should see 12.1M + 19.1M = FY Profit After Tax of 31.2M, equating to EPS of 13.4p.

With such performance, you'd expect, so many say, cash in the bank to be going upwards - so lets see if it rises, or falls come full year end reporting.

PP as I said earlier all that matters for shareholders is a significant increase in earnings per share and a substantial increase in dividend. If these don't materalise then the shares should be dumped.

Tipped by SCSW it seems, according to posts on AFN. That explains to me the rise in price over the last week does it not.

Funny how each of the buy tips for RCG is preceeded by some buying and a rise in the SP. The SP chart says it all really.....up it goes...must be a buy tip coming up...........

Those that "just happened to purchase" in ahead of the SCSW buy tip, will no doubt be the ones dumping out just before or just after the results, provided the price spikes up enough to make them a trading profit.

Good results... market drop, will never fully understand this market, slight drop in dividend, but acquisitions on the way...!

Shareholders expect to share in the profits ,reduction in dividend very negative move suggests cash problems. Overhang of shares following death of Madam Wang not resolved. Further acquisitions may place more stress on cash resources in the short term.imho.

Euhhh, you could be right halifax, Kyoto says the market cap is 190 million, with the profits made and one or two possible acquisitions to be made on the agenda, this could still be undervalued, this does seem to be a good company though, those shareholders like myself will need a little more patience I presume !