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Cogo Group Inc. (COGO)

Q2 2013 Earnings Call

August 15, 2013, 8:00 p.m. ET


Wanyee Ho – Director, IR

Jeffrey Kang – Chairman and CEO


J.D. Abouchar – SED

Brian Alger – Wedbush Equity Management

Nick Caputo – Kingdom Ridge Capital



Good evening ladies and gentlemen, thank you for standing by. Welcome to the COGO Group Inc. second 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 at August 15, 2013. I would now like to turn the conference to our host Ms. Wanyee Ho, Investor Relations Director. Please go ahead, ma’am.

Wanyee Ho

Thank you Liz, and good afternoon to everyone. I'm Wanyee Ho, Cogo’s Investor Relations Director, and I'd like to thank you all for joining us today to participate in Cogo's 2013 Second Quarter Earnings Conference Call.

After the market closed today, Cogo issued a press release reporting unaudited financial results for the quarter ended June 30, 2013. This release can be accessed in the investor relations section of Cogo's website at and on most other financial websites.

The discussion today 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 the 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 projections. 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, and thanks to everyone for joining the 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 business segments and reported the second quarter revenue of approximately $184.9 million. Taking into account that approximately 30% of Q2 2012 revenue was generated by the subsidiaries disposed in November 2012, the top line growth for the quarter would have been almost 37% year over year. We continue to demonstrate ability to produce sustainable profit and continuous revenue growth in these uncertain economic times but the condition of China is still very uncertain this year.

In the face of these difficult macro conditions, we continue to drive operating profit and grow our tangible book value each and every quarter. The Company had cash and pledged bank deposits totaling approximately $140.8 million at the end of the second quarter, down slightly from $141.5 million at the end of 2012. Bank borrowings stood at $90.1 million as of June 30, 2013, down from $98.6 million at the end of 2012. We had net cash of $50.7 million at the end of the second quarter.

Since the authorization of the 10-million-share-repurchase program in September 2012, we have to date repurchased more than 6.4 million shares. The Company used more than $4.3 million to repurchase approximately 2.2 million shares in the second quarter. From the close of the sales on Jan 2, 2013, to-date, we have bought back more than 2.8 million shares. With the funds injected by the sales of the subsidiaries, we will continue the swift execution of the buyback program.

While the Company has demonstrated its ability to sustain business growth and profitability in an adverse market environment, our current stock performance has been disappointing, trading far below net asset value. It remains management’s top priority to recover the recognition of asset value and improve shareholder value.

A month ago, I submitted my proposal to the Board of Directors for the purchase of approximately 30.5% of Cogo's net assets through a company I wholly own. Management has considered the end-market reality: that growing gross profit pressure and rising working capital demand will likely intensify if the company continues to operate its component business.[Audit End] 6:06 Although I still believe it’s good for Cogo to continue to expand business scale and market share in the component business, even though margin would be low, management also recognizes that this direction has not been supported by our shareholders.

My proposal aims at increasing Cogo’s cash position while letting go of low margin business to allow the company to focus on developing its higher margin services and technical solutions business, thus creating greater value for shareholders. If the transaction is approved, it is expected that Cogo would dispose most of the component businesses, while all remaining services and technical solutions business would become the core business.

The majority of Cogo’s accounts receivable, inventories, debts and bank loans would transfer to buyer under the proposal. Cogo and the departing companies would operate independently. Cogo would retain a lean structure to continue and develop technical services and solutions with approximately 50 staff, including the most senior management of technical services and solutions business.

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