Top Stock: Orsus Xelent Technologies Inc. (ORS)

By: Smallcaps.us - Date: January 10, 2009

Introduction

After the successful launch of our "3 stocks for 2009"-series last week, we are announcing our medium risk stock for 2009: Orsus Xelent Technologies Inc. (ORS).

I selected Orsus as medium-risk stock because the Company is highly profitable, management has projected 15% revenue growth for 2009 and the stock is trading at a P/E of 1.3. I didn't pick Orsus as low-risk stock however, because there are some uncertainties that are described in this report.

Orsus Xelent, which is based in Beijing, is engaged in the business of designing, manufacturing and distributing economically priced cellular phones for retail and wholesale distribution in China. Since its establishment in 2003, the company has grown rapidly as both the Chinese and the cell phone market have expanded significantly.

Part of the early acceptance of Orsus products came from their lower prices and the quality of the phones. Since their initial launch, ORS has introduced more than 20 different models, with the latest developments being incorporated into them.

Manufacturing

The manufacturers that ORS employs to produce cell-phones and accessories are the same OEM utilized by global brands such as Motorola, Nokia or Ericsson. However, in an effort to reduce its reliance on third-party manufacturers, the Company is seeking financing to complete its acquisition of Dalian Daxian Investment Development Co. (DDID). In July of 2008, ORS announced it had signed a Letter of Intent to acquire 60% of the outstanding shares of DDID for RMB 99 million (US $14,433,747) in cash.

Selling

For the nine months ended September 30, 2008, more than 90% of the Company's sales were derived from Beijing Xingwang Shidai Tech & Trading Co., Ltd. (XWSD), one of the largest distributors and dealers in mainland China with sales networks in major cities in the PRC.

Although this may hold a threat, XWSD has been Orsus' most important customer for a long period of time, which indicates stability. Furthermore, in August 2008, the two Companies signed a two-year Master Distributorship Agreement. The agreement formally appoints Xingwang as a national level distributor for the handset products produced by Orsus.

Financials

Mid November 2008, third quarter and nine months results ended September 30, were announced. In the third quarter, revenues soared 33% to $29,240,000 and net income increased nearly 14% to $2,925,000 compared with the same period last year.

For the first nine months of 2008, revenues grew 35% to $78,853,000 and net income rose 21% to $6,348,000, again compared with results for the same period in the prior year.

Earnings per share in the third quarter of 2008 increased to $0.10 compared with $0.09 in the prior year period and grew to $0.21 in the first nine months of 2008, compared with $0.18 in the first nine months of 2007.

	Third Quarter 2008	Third Quarter 2007	Nine Months 2008	Nine Months 2007
Revenues (000)	29,240	22,046	78,853	58,411
Earnings (000)	2,889	2,570	7,828	5,266
Earnings/Share	0.10	0.09	0.21	0.18
Shares_Outstanding	29,756,000

Balance Sheet

Orsus Xelent's balance sheet looks pretty solid. More than $8.5 million dollars in cash, no long term debt and a current ration of 1.9. Yet, at the end of the third quarter of 2008 it had more than $78 million in accounts receivable.

In the same above mentioned August contract with Xingwang, Orsus agreed that the term of the trade account receivables credit from Orsus to Xingwang is 120 days. Further, payments of all accounts are jointly guaranteed by Xingwang and government-licensed third-party guarantee company Zhong Hui Guarantee Corporation, with which Xingwang has signed a credit guarantee contract for the full amount of all trade accounts receivable for Orsus products that are more than 45 days overdue, up to $300 million RMB, or the equivalent of approximately US $43 million.

Although this agreement in somehow reassuring, we would to see the accounts receivable number come down.

Outlook For Q4 2008 and FY 2009

At the annual meeting, held on December 30th 2008, Mr. Wang Xin, the Company's CEO said: "I'm pleased to report that for the full year of 2008, our revenues are estimated to exceed $104.3 million, or approximately 16% ahead of results in 2007."

He added that "the Company expects to achieve a profit in 2008, however, it is too early to disclose a specific number."

In fiscal year 2009, the Company continues to seek the financing to complete its acquisition of DDID, which is currently on hold.

The Company also sees many business opportunities which indicate enormous potential for sales in the Chinese cell phone market. These opportunities include: the 3G products development, the entry of new markets such as CMMB (China Multimedia Mobile Broadcasting), the collaboration with telecom operators and professional customers and also the emphases of traditional strengths like GSM products.

Based on these expected developments, the company's management projects gross revenues to grow by about 15%.

Our Opinion:

Again, like Hemispherx Biopharma last week, this is not a Company to bank your house on. ORS is trading at an extremely low P/E of 1.6 and the forecast looks sunny. However, it has some issues it needs to take care of, like the very high accounts receivable number.

This is why Orsus is our medium-risk stock for 2009. It can become a big winner, but it has some sharp edges. I guess if there weren't any uncertainties, this wouldn't be a bargain at 47 cents, would it?

General information

Market	AMEX
Symbol	ORS
Price	$0.47
Contact	12th Floor Tower B Chaowai Men Office Building - 26 Chaowai Street Chaoyang Disc - Beijing, 100020
Telephone	86 10 8565 3777
Website	www.orsus-xelent.com

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