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Cogo Group Inc. (COGO)

Q1 2013 Earnings Call

May 15, 2013 08:00 AM ET

Executives

Wanyee Ho - Director, IR

Jeffrey Kang - CEO

Analysts

J.D. Abouchar - GRT Capital

Brian Alger - Wedbush Equity Management

Nick Caputo - Kingdom Ridge Capital

Presentation

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Cogo Group Inc. First Quarter 2013 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today Wednesday, May 15, 2013.

And I would now like to turn the conference over to Wanyee Ho, Investor Relations Director. Please go ahead.

Wanyee Ho

Thank you Britney and good afternoon to everyone. I am Wanyee Ho, Cogo’s Investor Relations Director. And I would like to thank all of you for joining us today to participate in Cogo's 2013 first quarter earnings conference call.

After the market closed today, Cogo issued a press release reporting unaudited financial results for the quarter ended March 31, 2013. This release can be accessed in the Investor Relations section of Cogo's website at www.cogo.com.cn and on most other financial websites.

Today the discussion will be hosted by Jeffrey Kang, Chairman and CEO, who will discuss the Company’s business operations. Before we begin, I'd like to remind everyone that the call today may contain forward-looking statements regarding future events and financial performance of the company.

We wish to caution you that such statements are at present just predictions, and actual results may differ materially as a result of the risks and uncertainties inherent in the Company's business. We refer you to documents that the company files periodically with the SEC, specifically the most recently filed Forms 20-F and 6-K, as well as the Safe Harbor statement made in today’s Press Release.

These documents contain important risk factors that could cause actual results to differ materially from those contained in the Company's current predictions. Cogo assumes no obligation to revise the forward-looking information contained in today's call.

At this time, I'd like to turn the call over to Jeffrey. Jeffrey, the floor is yours.

Jeffrey Kang

Thank you, Wanyee, thanks to everyone for joining this call. I will keep my prepared comments brief to allow time for Q&A. Most of the key financial data is in the press release.

We continue to demonstrate solid top line growth across all the business segments and reported the highest first quarter revenue of approximately $182 million. The results excluded revenue generated from the subsidiary sold in November 2012.

Considering the revenues generated by those subsidiaries contributed approximately 30% of the revenue in the first quarter of 2012, the top line growth of the quarter would have been almost 54% year-over-year and. I am proud of our ability to produce the sustainable profit and then continue revenue growth in these uncertain economic times. As we have indicated many times, the credit situation for our SME customers in China has been tight and as it continue to negatively affect our gross margins. It’s impossible to predict when the situation will materially improve.

Gross margins in the first of quarter was in the range of 6.2% to 6.7% and the market such as smartphone are still growing strongly in China. While we can continue to increase our business scale, we also foresee that gross margin pressure is rising and the company may begin to keep increasing working capital to assist in growth.

In the face of this difficult macro conditions, we continue to drive authorizing profit and grow our tangible book value each and every quarter. The company had cash and pledge the bank's deposits totaling approximately $143.3 million at the end of the first quarter increased from $141.5 million at the end of 2012.

The company had a bank borrowing of $81.2 million as March 31, 2013 decreased from the $98.6 million at the end of 2012 and we reported net cash of $62 million at the end of the first quarter. The proceeds of that $78 million in cash received from the deal, not the year but many used and reserved for repaying banks borrowing and repurchasing stocks.

Safe authorization of the 10 million shares repurchase program in September 2012, today, we have repurchased more than 5.1 million shares. From the close to sales on November 15, 2012 to today, we fought back almost a 4.9 million shares. With the firm injected by the sales of the subsidiaries, we will continue to sweep execution of the buyback program.

While management is pleased with the Company's continuous business growth and a sustainable profitability, we are disappointed with our current stock performance which is trading far below our net asset value, despite continuous business growth and had been profitable every quarter.

Although end market is still growing, competition has intensified. We have to face the end market reality and make a decision on our long term strategy, while this market is huge and growing and Cogo has what it takes to continue growing our business scale. We are also facing growing gross profit pressure and arising working capital demand.

Although I believe it's good for Cogo to continue to expand our business scale and the market share, I also recognize that this strategy has not have been the most opportune among the capital market at this moment. In a matter of that, management has been contemplating on a long term balancing strategy. Among other negatives, our current focus is to develop video service business not to attain higher margin. It remains management's top priority to recover the recognition of the assets value and improve the shareholder value.

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