I remain excited about the long term prospects for the XFML.

Feb.25, 2008 in U.S Hot Stocks

Xinhua Finance considerations

I remain excited about the long term prospects for the company, and believe they will continue to grow in value. I believe their understandings of the Chinese financial, media, and advertising environments are deep and the strategic direction from their Board Of Directors is critical.

I also realize that the share price may languish for awhile, the recent extended decline has surprised me. I committed a six digit investment since September 2007, and remain supportive.

I have visited the XFML office in Shanghai XuJiaHui, Gateway Plaza, and spoke directly to Evan Shao and Jennifer Chan Lyman, their IR officers, who were very gracious to my wife and I. My impression is that the company is extremely dedicated and busy, busy, busy. It was 5:30pm but meetings were still going full tilt. The corporate office was tastefully decorated, but small, and rent on the 39th floor must be steep.

My other impressions are that the company is warm and friendly, and that Ms Fredy Bush is quite engaging and inspirational to those under her command. I believe she is broad in her outlook, and deliberate in her actions as she builds the company’s foundations, network, and acquisitions.

Perhaps Ms Bush is not so flashy as to whip up investment fever, but neither is she a shrinking violet, witness her determined defense of the company’s integrity as she assembled a fine Board of Directors with famous names, changed the CFO, dumped Glass Lewis, and reminds the media that the company’s compliance with strict SEC regulations is ahead of schedule. Do not underestimate her, a few of her accomplishments:

1) Left Utah to live in Taiwan, 1985
- didn’t speak Chinese
- eventually started her own commodities consulting firm
2) One of four investors providing seed money to Xinhua News Agency to launch the Xinhua Financial Network, predecessor to XFL, parent company of XFML.
3) Founded XFL in 1999
4) First non Japanese company to issue an IPO in Japan, 2004
5) Named entrepreneur of the year by both the American chamber of commerce and CNBC Asia Pacific Television, 2006

I have a few company concerns as well:
a) I sensed frustration within XFML at the financial analysis posted on Yahoo and Google, perhaps mistakes such as RMB conversion, but also other more serious neglect.
b) The company was unprepared for fielding the intense and ravenous investor business culture in America, understandable due to decades in Asia with different styles and environment.
c) Xinhua News Agency has distanced themselves from XFL and XFML, fairly predictable given their usual preocupation with controlling their name. So far, I do not think this has resulted in less access and more obstacles to XFML. I think XFML makes China look good.

Entirely conjecture on my part, but the CFO, Glass Lewis thing was overblown. The old XFML CFO appeared to have a conflict of interest between his security firm and his officer position, but it was managed fairly. He was replaced but two Glass Lewis directors quit, maybe they feared potential repuation tarnish more than persevering the mini storm. To me, XFML is guilty of naivete at the worst. I think Fredy Bush is a big picture person, and overlooked the potential conflict as she navigates Japanese regulations for XFL, Chinese regulations for the businesses, and American regulations for XFML.

Other things you may not know about Xinhua Finance
a) Internal quarterly newsletter called X.F. Connect, with various business segments, six pages devoted to Xinhua people, which celbrate personal events and team outings.
Downloadable at XFL English pages.
b) Xinhua Finance has completed building three libraries in Ningxia province. Two more are planned for 2008, one location undecided, the other Inner Mongolia
c) Fredy Bush is CEO of XFL as well as XFML. XFL 2007 revenue was $257M, 47% over 2006.
d) XFL has 2426 employees, XFML has 1490
e) XFL has 50M of 140M XFML shares, but 84.8% voting interest

Financial positives for XFML:

Yearly revenue growth, 2006-2007: 129%, 134.8M vs. 59.0M
- excluding acquisitions: 78% growth

2008 revenue guidance: $190-200M
- this represents about a 44.6% yearly revenue growth

Three analysts now covering the stock, Jason at Oppenheimer, Andrew at Jennison Associates, and also Steve at Mosaic Investments.

Jason estimated 30% organic growth for 2008.

Financial Concerns

The new Reuters estimates for Q1 2008 reflect a consensus of -0.02 EPS, down from 0.05 EPS a week ago, what’s new?

The new Reuters estimates for 2008 EPS is 0.33, down from 0.63 a month ago, what’s new?

If Q1 2008 EPS is low, due to fixed costs and normal low seasonal revenue, then unlikely stock price will receive a catalyst anytime before Q2 earnings report. There may be an acquisition or two, but since the price does not jump when a savvy billionaire throws 30 million on top of the 25 million earlier, what would make it jump?

On the other hand, investment bankers run in herds, and since they have run after questionable Chinese equities, how much more should they jump at this real media empire in the making.

The credit crisis may knock us all down anyway.

Therefore, I believe the stock price will rise significantly by 2009, but violatile between now and then, with little downside risk.

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