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Article by DailyStocks_admin    (01-08-08 03:21 AM)

The Daily Magic Formula Stock for 01/07/2008 is China 3C Group. According to the Magic Formula Investing Web Site, the ebit yield is 22% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

China 3C Group (formerly Sun Oil & Gas Corp.) (the “Company”, “we”, “us”) was incorporated on August 20, 1998 under the laws of the State of Nevada as Editworks, Ltd. In 2001, the Company changed its name to Trilucent Technologies Corp. The Company changed its name to Anza Innovations, Inc. in 2003. In 2004, the Company changed its name to Gaofeng Gold Corp. and then later in 2004 to Sun Oil & Gas Corporation. In December 2005, we changed our name to China 3C Group, to more accurately reflect the business of the Company.

Due to the strategic change to the new business operation model “stores in stores”, sales increased substantially in 2006. We continued to establish more “stores in stores” in Eastern China. More than 800 “stores in stores” were established or acquired by the end of 2006. This new business model results expanded marketing channels thus positively stimulating the growth of sales.

During 2006 we acquired two companies whose main products are digital products and small home electronics in 2006. These acquisitions further brought in considerable sales and profit to the Company.

Capital Future Development Limited (“CFDL”)

On December 21, 2005, we entered into a Merger Agreement with CFDL, pursuant to which we acquired CFDL, thus making CFDL a wholly owned subsidiary of the Company. CFDL was incorporated on July 22, 2004 under the laws of the British Virgin Island and a holding company that owns all of the issued and outstanding stock of Zhejiang Yong Xin Digital Technology Company Limited (“ZYXD”), Hangzhou Sanhe Electronic Technology Limited (see further discussion below), and Shanghai Joy & Harmony Electronics Company Limited (see further discussion below).

ZYXD is a holding company organized under the laws of China, and it owns 90% of the issued and outstanding capital stock of each of Hangzhou Wang Da Electronics Company, Limited (“HWDA”) and Yiwu Yong Xin Telecommunication Company, Limited (“YYXC”), both of which are organized under the laws of China. HWDA and YYXC each own the remaining 10% of other’s issued and outstanding capital stock. HWDA and YYXC are operating companies, thereby indirectly acquired the Chinese holding company ZYXD and its Chinese operating company subsidiaries, HWDA and YYXC. CFDL shareholders received stock consideration consisting of 35,000,000 newly issued shares of Company common stock, which were divided proportionally among the CFDL shareholders in accordance with their respective ownership interests in CFDL immediately before the completion of this transaction, and aggregate cash consideration of $500,000, again divided proportionally among the CFDL shareholders in accordance with their respective ownership interests in CFDL immediately before the completion of this transaction and payable no later than the first anniversary of the closing of this transaction pursuant to nine interest-free promissory notes.

Zhejiang Yong Xin Digital Technology Company Limited (“ZYXD”)

ZYXD is located in Mainland China, and was incorporated on July 11, 2005 under the laws of the Peoples Republic of China. ZYXD owns 90% of the issued and outstanding capital stock of each of Hangzhou Wang Da Electronics Company, Limited (“ HWDA ”) and Yiwu Yong Xin Telecommunication Company, Limited (“ YYXC ”). In 2001, ZYXD started its fax machine distribution business and is currently an authorized agent for many well known brand fax machines. ZYXD entered into the cell phone market in 2003, and is currently authorized agent for Chinese brands like Sang Da, Da Xian, and Jin Zhen cell phones. The internal structure of ZYXD includes CEO office, financial department, audit department, human resource department and marketing department.

Business Description

ZYXD is a large-scale enterprise integrating the selling, circulation and modern logistics of 3C products (communication products, information technology (“IT”) products and digital products) in China. ZYXD distributes products to both first and second tier retailers in China. First tier retailers are defined as large retailing business centers and second tier retailers are defined as small individual retail stores. ZYXD allocates its distribution channels according to the size and population of the cities in which the retailers are located, thus distributing products mainly to second tier retailers in bigger Chinese cities that have larger populations and distributing products to first tier retailers in smaller Chinese cities that have relatively smaller populations.

ZYXD does not have a research and development department and does not initiate any advertising or promotion activities on the products because it is not the manufacturer. However, ZYXD coordinates with the promotional activities initiated or planned by the product manufacturers. ZYXD prefers to focus on circulation and distribution activity and thereby eliminate unnecessary expenses.

ZYXD manages credit risk by having its own credit system with the retailer customers. ZYXD provides different policies or benefits on the payment and credit period according to different credit level of the customers.

ZYXD’s strategy is to combine the distribution channel with the chain stores, selling telecommunication products, digital products, and IT products. The sales of ZYXD are primarily focusing in East China. ZYXD’s plan is to move out from the cord telephones market, focus on fax machines, cell phones and other digital and IT products throughout China.

ZYXD strictly follows all China state regulations regarding after sales services, including policies allowing products to be returned and exchanged within seven days, providing a one-year repair guarantee, and having specialists focus on after sales services.

Competition

The main competitors of ZYXD include Hangzhou Guang Tong Company, Hangzhou Yin Dun Company, Hangzhou Qing Teng Company, Hangzhou Si Tong Company, and Zhejiang Shen You Electrical Appliance Company.

Distribution Channel Management

Distribution Channel Management is the integration of key business processes from end user through to original suppliers that provide products, services and information that add value for customers and other stakeholders. In the fax machine industry, ZYXD distributes to both first and second tier retailer businesses. ZYXD allocates the channel according to the size of the cities, for example, in some areas like Jinhua, Zhaoxing, Hangzhou, etc, ZYXD will distribute to small retailers. In other areas, the distribution will go to big retailer business center, thus cutting the cost of shipping and enables the products to reach all areas.

Hangzhou Wang Da Electronics Company, Limited (“HWDA”)

HWDA was incorporated on March 30, 1998 under the laws of the Peoples Republic of China. HWDA is an authorized sales agent focusing on the selling, circulation and modern logistics of cell phones, cell phones products, IT products (including notebook or laptop computers), and digital products (including digital cameras, digital camcorders, MP3 players, PDAs, flash disks, and removable hard disks) in China.

Competition

The main competitors of HWDA include Telephone World, Hangzhou Yindun, Shanghai Guangda, Changjiang Tianyin and Hangzhou Zhenghua.

Suppliers and Customers

The five largest suppliers for HWDA are Shenzhen Sang Da Hui Tong Electronics Company Limited, Shenzhen Yang Guang Xin Ke Digital Technology Company Limited, Shenzhen Jie Pu Lin Holding Company Limited, Shenzhen Lian Sheng (Shi Dai) Technology Company Limited, and Hangzhou Wei Hua Communication Equipment Company Limited. The five largest customers for HWDA are Tai Zhou Yi Tong Communication Equipment Company Limited, Wen Zhou Heng Da Electronics Company Limited, Shao Xing Yin Hai Cell Phones Market, Shao Xing Peng Fei Communication Equipment Company Limited, and Ci Xi Guang Da Communication Equipment Company Limited.


Yiwu Yong Xin Telecommunication Company, Limited (“YYXC”)

YYXC was incorporated on July 18, 1997 under the laws of the Peoples Republic of China. YYXC is an authorized sales agent, focusing on the selling, circulation and modern logistics of fax machines and cord phone products in China. YYXC mainly focuses in Philips fax machines and China’s number one local brand Feng Da and CJT fax machines.

Suppliers and Customers

The five largest suppliers for YYXC are Guangdong Feng Da High Technology Company Limited, Hangzhou Sen Rui Da Trading Company Limited, Shanghai Rong Duo Trading Company Limited, Shanghai Zhong Fang Electronics Company Limited, and Ningbo Zhong Xun Electronics Company Limited. The five largest customers for YYXC are Shanghai Guo Mei Electrical Appliance Company Limited, Shanghai Jin Jiang Mai De Long Shopping Mall Company Limited, Tai Zhou Shi Road Qiao Bo Xiong Electrical Appliance Company Limited, Ningbo Hao You Duo Department Store Company Limited (Ningbo Branch), and An Qing Mei Sheng Communication (An Qing Heng Da Technology Company Limited).

Competition

The main competitors of YYXC include Zhongyou Huahai, Changshu Jinlong, Nanjing Jialian, Nanjing Tianshuo, Hangzhou Qingteng and Hangzhou Baolong.

Hangzhou Sanhe Electronic Technology Ltd .

On August 3, 2006, we entered into a Share Exchange Agreement (the “HSET Share Exchange Agreement”) with CFDL, Hangzhou Sanhe Electronic Technology Limited (“HSET”), and the shareholders of HSET (the “HSET Shareholders”), pursuant to which CFDL acquired 100% of HSET in a cash and stock transaction valued at approximately US$8.75 million (the “HSET Share Exchange Transaction”).

Under the HSET Share Exchange Agreement, in exchange of surrendering all their ownership in HSET, the HSET Shareholders received both stock consideration and cash consideration. The stock consideration consisted of 915,751 newly issued shares of our common stock, which were divided proportionally among the HSET Shareholders in accordance with their respective ownership interests in HSET immediately before the closing of the HSET Share Exchange Transaction. The cash consideration consisted of $5,000,000 in cash, again divided proportionally among the HSET Shareholders in accordance with their respective ownership interests in HSET immediately before the completion of the HSET Share Exchange Transaction and payable no later than the first anniversary of the closing of the HSET Share Exchange Transaction. The obligation to pay the cash consideration is evidenced by two interest-free promissory notes by us to each of the HSET Shareholders.

Business Description

HSET is a home electronics retail chain in Eastern China. It has 200 retail outlets in Shanghai City, Zhejiang Province and Jiangsu Province. HSET specializes in the sale of home electronics, including air conditioners, audio systems, speakers (92 different types of models), DVD players (272 different types of models). In 2006, the company expanded its business to televisions industry, and it already got sales agent licenses from TCL, Chuangwei and Haier. HSET’s is headquartered in Hangzhou city, China. Its major markets are Zhejiang, Jiangsu and Shanghai.

Competition

The main competitors of HSET include Hangzhou Meidi, Hangzhou Danong, Nanjing Mingci, Shanghai Feitong and Jiangshu Huayi.

Shanghai Joy & Harmony Electronics Company Limited

On November 28, 2006, we entered into a Share Exchange Agreement (the “Shanghai Share Exchange Agreement”), with CFDL, Shanghai Joy & Harmony Electronics Company Limited (“Shanghai”), and the shareholders of Shanghai (the “Shanghai Shareholders”), pursuant to which CFDL, acquired 100% of CFDL in a cash and stock transaction valued at approximately US$18.5 million (the “Shanghai Share Exchange Transaction”).

Under the Shanghai Share Exchange Agreement, in exchange of surrendering all their ownership in Shanghai, the Shanghai Shareholders received both stock consideration and cash consideration. The stock consideration consisted of 2,723,110 shares of our common stock, which were divided proportionally among the Shanghai Shareholders in accordance with their respective ownership interests in Shanghai immediately before the closing of the Shanghai Share Exchange Transaction. The cash consideration consisted of $7,500,000 in cash, divided proportionally among the Shanghai Shareholders in accordance with their respective ownership interests in Shanghai immediately before the completion of the Shanghai Share Exchange Transaction, is payable as follows: $3,000,000 within 10 business days after the closing of the Shanghai Share Exchange Transaction, and $4,500,000 payable six months after the closing of the Shanghai Share Exchange Transaction as evidenced by promissory notes issued by us to the Shanghai Shareholders.

Business Description

Shanghai is a consumer electronics retail chain in Eastern China. It has 180 retail outlets in Shanghai City and Jiangsu Province. The company specializes in the sale of consumer electronics, including MP3 players, MP4 players, iPod, electronic dictionary, CD players, radios, Walkman, audio systems and speakers. The company is the authorized sales agent for well-known manufacturers in China like Tecsun Radio and Changhong ZARVA.

Competition

The main competitors of Shanghai include Shanghai Huaning, Shanghai Juexiang, Shanghai Wansi and Shanghai Feitong.

Employees

The Company currently has 777 employees, all of which are full time employees located in China. ZYXD has 30 employees, YYXC has 175 employees, HWDA has 204 employees, Hangzhou has 154 employees, and Shanghai has 214 employees.


CEO BACKGROUND
Zhenggang Wang, Chairman of the Board, Chief Executive Officer, Chairman of the Board

Mr. Wang, has been the Company’s chairman and chief executive officer and a member of its Board of Directors since December 2005. He is also the founder, chairman and chief executive officer of Zhejiang Yong Xin Digital Technology Company Limited , a holding company for the purpose of holding interests in Hangzhou Wang Da Electronics Company, Limited and Yiwu Yong Xin Telecommunication Company, Limited , both of which are based in China. Mr. Wang established Yiwu Yong Xin Telecommunication Company, Limited in 1997, and he serves as its chairman and chief executive officer. In 1998, Mr. Wang established Hangzhou Wang Da Electronics Company, Limited , which is in the business of distributing cellular telephone phones. Mr. Wang is the chairman and chief executive officer of Hangzhou Wang Da Electronics Company, Limited .

Mr. Wang does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Wang and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Wang (or any member of his immediate family) had a direct or indirect material interest.

Jian Liu, Chief Financial Officer

Mr. Liu has been the chief financial officer of the Company since December 2005. He is also the chief financial officer of Zhejiang Yong Xin Digital Technology Company Limited , a position he has held since 2002. Prior to that, from 1998 to 2002, Mr. Liu was the chief financial officer of Beijing Liao Hua Group, a Chinese company that produces steel products.

Mr. Liu does not hold any directorships with reporting companies in the United States. There are no family relationships between Mr. Liu and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Liu (or any member of his immediate family) had a direct or indirect material interest.

Xiang Ma, President

Mr. Ma was President of Yiwu Yong Xin Telecommunication Company Limited, China 3C's largest subsidiary, from 1999 to the present. During the past six years, Mr. Ma's expertise in marketing and management have contributed significantly to the company's rapid growth, where it has gone from a small business in the distribution of 3C products, particularly fax machines, in Eastern China to being a major presence in that market. Prior to that, from 1996 to 1999, Mr. Ma was the manager of Zhejiang Transfar Company Limited, a high-tech publicly traded company in China. During his time at Zhejiang Transfar, Mr. Ma was also responsible for the company's corporate communications. Mr. Ma received his Bachelor degree from Zhejiang University with a concentration in business management.

Mr. Ma does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Ma and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Ma (or any member of his immediate family) had a direct or indirect material interest.

Chenghua Zhu, Director

Ms. Zhu, 31, is a senior project manager of Shanghai Shengzhang, a certified public accounting firm. She was project manager at two CPA firms prior to joining Shanghai Shengzhang, Shanghai Jiarui and Hubei Dahua.

Ms. Zhu does not hold any other directorships with reporting companies in the United States. There are no family relationships between Ms. Zhu and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Ms. Zhu (or any member of his immediate family) had a direct or indirect material interest.

Mingjun Zhu, Director

Mr. Zhu, 38, is General Manager of Zhejiang Mingda, a certified public accounting firm. He was General Manager of Zhejiang Mingda Management Consulting Company. From 1993 to 2004, he was Deputy Director of Yiwu Zhicheng, a CPA firm.

Mr. Zhu does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Zhu and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Zhu (or any member of his immediate family) had a direct or indirect material interest.

Rongjin Weng, Director

Mr. Weng is Chairman of Langsha Group. He established Langsha Knitting Company Limited in 1995, and has served as its chairman and chief executive officer since that time. The company has experienced a 500,000% growth in assets during the past 11 years. Currently, Langsha is the largest sock manufacturer in China with annual revenue of $100 million. Mr. Weng holds a Master degree in Business Administration.

Mr. Weng does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Weng and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Weng (or any member of his immediate family) had a direct or indirect material interest.

Wei Kang Gu, Director

Mr. Gu is a Professor of Electronic Engineering at Zhejiang University. Founded in 1897, the University has always been ranked among the few top universities in China and is today the third most recognized university in China. It is a major research university comprised of 22 colleges. Mr. Gu also serves on the Board of Bird Ningbo Company. Founded in 1992, Bird Ningbo has grown to be China's leading domestic manufacturer of mobile phones. He is also Vice Chairman of Zhejiang Electronic Association.

Mr. Gu does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Gu and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Gu (or any member of his immediate family) had a direct or indirect material interest.

Kenneth T. Berents, Director, Chairman Audit Committee

Mr. Berents is a former managing director and senior portfolio manager for Goldman Sachs Asset Management in Tampa, Fla., which manages $30 billion in growth stocks. Before joining Goldman Sachs, he was the managing director and director of equity research for First Union Securities, now Wachovia Securities, from 1993 to 2000. He holds a bachelor's in history from Villanova University and a master's degree in journalism from the University of Missouri-Columbia. He also was an Alfred P. Sloan Fellow in economics at Princeton University. He has appeared on ABC's Nightline, CNN, CNBC and is widely quoted in national and trade publications.

Mr. Berents does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Berents and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Berents (or any member of his immediate family) had a direct or indirect material interest.

Todd L. Mavis, Director, Member Audit Committee

Mr. Mavis most recently served as president and CEO of Danka Business Systems, a Nasdaq-listed company, where he generated $80 million in incremental revenue and led a company-wide turnaround. Danka is a $1.3 billion office imaging services and solutions provider headquartered in St. Petersburg, Fla. Prior to Danka, Mr. Mavis was executive vice president and general manager at Mitchell International, a privately held software developer in San Diego, California. Mr. Mavis also served as senior vice president at Checkmate Electronics, a publicly held software and services provider for the retail point-of-sale industry. There he developed and deployed a worldwide distributions strategy, created a sales and marketing program and negotiated three of the company's largest contracts.

Mr. Mavis does not hold any other directorships with reporting companies in the United States. There are no family relationships between Mr. Mavis and the directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers. Other than the Merger Transaction, during the last two years, there have been no transactions to which the Company was a party in which Mr. Mavis (or any member of his immediate family) had a direct or indirect material interest.

SHARE OWNERSHIP

(1) Unless otherwise indicated in the footnotes to the table, each shareholder shown on the table has sole voting and investment power with respect to the shares beneficially owned by him or it. Unless otherwise indicated in the footnotes to the table, the address for each shareholder is c/o: 368 HuShu Nan Road, HangZhou City, Zhejiang Province, China 310014. Percentages of less than one percent have been omitted from the table.

(2) Represents shares of common stock held jointly by Wen-An Chen and Huoqing Yang.

(3) Calculated on the basis of 52,489,055 shares of common stock issued and outstanding as of February 22, 2007 except that shares of common stock underlying options and warrants exercisable within 60 days of the date hereof are deemed to be outstanding for purposes of calculating the beneficial ownership of securities of the holder of such options or warrants.

(4) Represents shares of common stock issuable upon exercise of outstanding stock options (as described above).

COMPENSATION

Except for the following, the directors of the Company have not received compensation for their services as directors nor have they been reimbursed for expenses incurred in attending board meetings:

Kenneth T. Berents

On December 8, 2006, t he Company entered into an agreement with Mr. Berents whereby Mr. Berents will receive the following compensation for so long as he remains a member of the Board of Directors of the Company:

(a) Annual salary of Seventy Five Thousand ($75,000) Dollars payable monthly at the beginning of each month that Mr. Berents is a member of the Board of Directors.

(b) An option grant to purchase 50,000 shares of common stock of the Company upon execution of this Agreement and 30,000 shares on each anniversary of such date thereafter, provided Mr. Berents is a member of the Board of Directors at such time. The exercise price of the initial grant of 50,000 shares was be based on the closing price of the common stock of the Company on December 7, 2006 ($4.16) and for each future option grant the closing price of the Company common stock on the anniversary of such date. All option grants vest upon issuance and will have an exercise period of ten years from date of issuance so long as Mr. Berents is a member of the Board of Directors at such time. In the event that Mr. Berents is no longer a member of the Board of Directors, his exercise period for all vested options will be twenty-four months from the anniversary date of his departure from the Board of Directors.

(c) $2,500 for each meeting of the board of Directors that Mr. Berents attends.

(d) $2,000 for each meeting of a committee of the Board of Directors that Mr. Berents attends.

(e) $5,000 for being named the Chairman of the Audit Committee of the Company.

Todd Mavis

The Company entered into an agreement with Mr. Mavis whereby Mr. Mavis will receive the following compensation for so long as he remains a member of the Board of Directors of the Company:

(a) Annual salary of Seventy Five Thousand ($75,000) Dollars payable monthly at the beginning of each month that Mr. Mavis is a member of the Board of Directors.

(b) An option grant to purchase 50,000 shares of common stock of the Company upon execution of the Agreement and 30,000 shares on each anniversary of such date thereafter, provided Mr. Mavis is a member of the Board of Directors at such time. The exercise price of the initial grant of 50,000 shares was $3.46, and for each future option grant the closing price of the Company common stock on the anniversary of such date. All option grants will vest upon issuance and will have an exercise period of ten years from date of issuance so long as Mr. Mavis is a member of the Board of Directors at such time. In the event that Mr. Mavis is no longer a member of the Board of Directors, his exercise period for all vested options will be twenty-four months from the anniversary date of his departure from the Board of Directors.

(c) $2,500 for each meeting of the Board of Directors that Mr. Mavis attends.

(d) $2,000 for each meeting of a committee of the board of Directors that Mr. Mavis attends.

(e) $5,000 if he is named the Chairman of any committee of the Board of Directors of the Company, at the time he named Chairman.

(f) $4,500 as a one-time bonus upon joining the Board of Directors.

Due to a clerical error in the Company’s Stock Option Plan by the Company both Mr. Mavis and Mr. Berents have agreed that the options which were issued will be held in escrow (not exercisable) until the clerical error has been rectified.

Employment contracts and termination of employment and change-in-control arrangements

Except as stated above, we do not have any employment contracts with any of our directors and officers.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

China 3C Group was incorporated on August, 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital Technology Co., Ltd. (“ZYXD”), Yiwu Yong Xin Communication Ltd. (“YYXC”), Hangzhou Wandga Electronics Co., Ltd. (“HWDA”), Hangzhou Sanhe Electronic Technology, Limited (HSET), and Shanghai Joy & Harmony Electronic Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25 2003 respectively. China 3C Group owns 100% of CFDL and CFDL owns 100% of the capital stock of ZYXD. ZYXD owns 90% and YYXC owns 10% of HWDA. ZYXD owns 90% and HWDA owns 10% of YYXC. Collectively the six corporations are referred to herein as the Company.

On December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group through a merger with a wholly owned subsidiary of the Company. China 3C Group acquired all of the issued and outstanding capital stock of CFDL pursuant to a Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned subsidiary of China 3C Group and, in exchange for the CFDL shares, China 3C Group issued 35,000,000 shares of its common stock to the shareholders of CFDL, representing 93% of the issued and outstanding capital stock of China 3C Group at that time and a cash consideration of $500,000.

As a result of the Merger Agreement, the reorganization was treated as an acquisition by the accounting acquiree that is being accounted for as a recapitalization and as a reverse merger by the legal acquirer for accounting purposes. Pursuant to the recapitalization, all capital stock shares and amounts and per share data have been retroactively restated. Accordingly, the financial statements include the following:

(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the legal acquirer at historical cost.

(2) The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the merger.

The Company is now engaged in the business of mobile phone, facsimile machines, DVD players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries, CD players, radios, Walkman, and audio systems distribution. We sell and distribute products through retail stores and secondary distributors.

Pursuant to A share exchange agreement, dated August 3, 2006, we issued 915,751 shares of restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic Technology Ltd. The shares were valued at $3,750,000, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

Pursuant to a share exchange agreement, dated November 28, 2006, we issued 2,723,110 shares of newly issued shares of Common Stock to the former shareholders of Shanghai Joy & Harmony Electronics Company Limited. The shares were valued at $11,000,000, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

Net sales

Net sales for 2006 totaled $148,218,848 compared to $32,588,634 for 2005. The increase was partially due to the inclusion of $35,133,964 of revenue from two newly acquired subsidiaries (HSET and Shanghai) during 2006. The increase was also due to the organic growth of YYXC and HWDA. In 2006, the revenue of YYXC and HWDA were approximately $51 million and $62 million respectively, an increase of 122% and 480% respectively compared with 2005.

Cost of Sales

Cost of sales for 2006 totaled $125,411,758 or approximately 84.61% of net sales compared to $28,325,532 or approximately 86.90% for 2005. The cost of sales as a percentage decreased during 2006 due to the introduction of new product models with higher gross profit margin. Also, we were able to obtain the maximum discount privilege from our suppliers because of the substantial increase of sales.

Gross Profit Margin

Gross profit margin for 2006 was 15.39% compared to 13.08% for 2005. The increase was partially due to the inclusion of the newly acquired subsidiaries. The average profit margin for the newly acquired companies is approximately 18%. The increase was also due to the increase in consumer demand and improvement in product mix.

Operating Expense

General and administrative expense for 2006 totaled $5,544,924 or approximately 3.74% of net sales, compared to $1,706,869 or approximately 5.2% for 2005. The decrease of 1.46% was due to the inclusion of the newly acquired subsidiaries.

Income from Operations

Income from operations for 2006 was $17,262,166 or 11.65% of net sales as compared to income from operations of $2,556,433 for 2005 or 7.84% of net sales. The increase was due to our acquisitions during 2006, an increase in consumer demand and improvement in product mix.

Interest Expense

Interest expense for 2006 totaled $7,565 compared to $2,954 for 2005. The increase was due to the inclusion in our financial statements of our newly acquired subsidiary Shanghai Joy & Harmony Electronics Company Limited.

Net Income

Net income was $11,277,126 or 7.61% of net Sales for 2006 compared to $1,458,250 or 4.47% of net Sales for 2005. The increase in percentage was due to the factors stated above, including lower cost of goods, lower operating expenses and high profit margin from the newly acquired companies.

Liquidity and Capital Resources

Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. Cash and cash equivalents were $6,498,450 at December 31, 2006 and current assets totaled $39,987,575 at December 31, 2006. The Company’s total current liabilities were $9,061,180 at December 31, 2006. Working capital at December 31, 2006 was $10,512,314. During 2006, net cash provided by operating activities was $11,968,616.

Under the Shanghai Share Exchange Agreement, dated November 28, 2006, in exchange of surrendering all their ownership in Shanghai, the Shanghai Shareholders received both stock consideration and cash consideration. The cash consideration consisted of $7,500,000 in cash is payable as follows: $3,000,000 within 10 business days after the closing of the transaction, and $4,500,000 payable six months after the closing of the transaction as evidenced by promissory notes issued by us to the Shanghai Shareholders. The due date of the $4,500,000 payment is May 27, 2007.

Capital expenditures

Total capital expenditures during 2006 were $30,591 for purchase of fixed assets. We have no plans for material capital expenditures during 2007.

Working Capital Requirements

Historically operations and short term financing have been sufficient to meet our cash needs. We believe that we will be able to generate revenues from sales and raise capital through private placement offerings of our equity securities to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

China 3C Group was incorporated on August, 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital Technology Co., Ltd. (“ZYXD”), Yiwu Yong Xin Communication Ltd. (“YYXC”), Hangzhou Wandga Electronics Co., Ltd. (“HWDA”), Hangzhou Sanhe Electronic Technology, Limited (HSET), and Shanghai Joy & Harmony Electronic Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25 2003 respectively. China 3C Group owns 100% of CFDL and CFDL own 100% of the capital stock of ZYXD. ZYXD owns 90% and YYXC owns 10% of HWDA. ZYXD owns 90% and HWDA owns 10% of YYXC. Collectively the six corporations are referred to herein as the Company.

On December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group through a merger with a wholly owned subsidiary of the Company. China 3C Group acquired all of the issued and outstanding capital stock of CFDL pursuant to a Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned subsidiary of China 3C Group and, in exchange for the CFDL shares, China 3C Group issued 35,000,000 shares of its common stock to the shareholders of CFDL, representing 93% of the issued and outstanding capital stock of China 3C Group at that time and a cash consideration of $500,000.

As a result of the Merger Agreement, the reorganization was treated as an acquisition by the accounting acquiree that is being accounted for as a recapitalization and as a reverse merger by the legal acquirer for accounting purposes. Pursuant to the recapitalization, all capital stock shares and amounts and per share data have been retroactively restated. Accordingly, the financial statements include the following:

(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the legal acquirer at historical cost.

(2) The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the merger.

The Company is now engaged in the business of mobile phone, facsimile machines, DVD players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries, CD players, radios, Walkman, and audio systems distribution. We sell and distribute products through retail stores and secondary distributors.


2

Pursuant to a share exchange agreement, dated August 3, 2006, we issued 915,751 shares of restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic Technology Ltd. The shares were valued at $3,750,000, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

Pursuant to a share exchange agreement, dated November 28, 2006, we issued 2,723,110 shares of newly issued shares of Common Stock to the former shareholders of Shanghai Joy & Harmony Electronics Company Limited. The shares were valued at $11,000,000, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.


Net sales

Net sales for the six months ended on June 30, 2007 increased exponentially by 254%, to $149,021,667 compared with $42,068,945 for the six months ended June 30, 2006. Net sales for the three months ended June 30, 2007 was $64,498,473 compared to $28,618,196 for the three months ended June 30, 2006, an increase of 125%. The large increase amount was due to a combination of both organic growth and contribution from subsidiaries acquired in the second half of 2006. Higher sales volume and an new product lines were also factors.

Cost of Sales

Cost of sales for the six months ended on June 30, 2007 totaled $123,651,187 compared to $35,867,624 for the six months ended on June 30, 2006, an increase of 245%. Cost of sales for the three months ended on June 30, 2007 totaled $53,060,275 compared to $23,347,343 for the three months ended on June 30, 2006, an increase of 127%. The increased cost of sales was a direct result of the large increase in net sales.

Gross Profit Margin

Gross profit margin for the six months ending June 30, 2007 was 17.0% compared to 14.7% for the six months ending June 30, 2006. Gross margin was 17.7% for the three months ended June 30, 2007 as compared to 19.9% for the three months ended June 30, 2006. The gross profit margin increased as we benefited from increasing economies of scale as we grew in size and scale. Increased sales of higher margin products such as MP3s and DVD players were also critical factors.

General and Administrative Expenses

General and administrative expenses for the six months ending June 30, 2007 totaled $6,740,935 or approximately 4.5% of net sales, compared to $1,408,990 or approximately 3.3% of net sales for the six months ended June 30, 2006, an increase of 378%. General and administrative expenses for the three months ending June 30, 2007 totaled $3,014,233 or approximately 4.7% of net sales, compared to $505,052 or approximately 3.8% of net sales for the three months ended June 30, 2006, an increase of 497%. The increase was primarily due to the costs of managing a larger operation as we integrated its newly acquired subsidiaries.


Income from Operations

Income from operations for the six months ended June 30, 2007 was $18,630,085 or 12.5% of net sales as compared to income from operations of $4,792,331 or 11.4% of net sales for the six months ending June 30, 2006, an increase of 289%. Income from operations was 8,423,965 for the three months ended June 30, 2007 an increase of 150% from June 30, 2006. Increasing economies of scale were a critical factor for the larger margins, as were a higher margin product mix.

Net Income

Net income was $11,965,315 or 8.02% of net sales for the six months ended on June 30, 2007 compared to $3,176,244 or 7.55% of net sales for the six months ended on June 30, 2006, an increase of 277%. Increasing economies of scale, a higher margin product mix and significant larger store were all key factors for the large increase in net income.

LIQUIDITY AND CAPITAL RESOURCES

Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. Cash and cash equivalents were $15,230,508 at June 30, 2007, as compared to $3,274,231 at June 30, 2006, and compared to $3,274,231 of December 31, 2006.

Under the Shanghai Share Exchange Agreement, dated November 28, 2006, in exchange of surrendering all their ownership in Shanghai, the Shanghai Shareholders received both stock consideration and cash consideration. The cash consideration consisted of $7,500,000 in cash is payable as follows: $3,000,000 within 10 business days after the closing of the transaction, and $4,500,000 payable six months after the closing of the transaction as evidenced by promissory notes issued by us to the Shanghai Shareholders. The $4,500,000 loan was repaid in the second quarter of 2007.

We believe that the funds available to us are adequate to meet our operating needs for the remainder of 2007.

Capital expenditures

Total capital expenditures for the first six months of 2007 were $62,253 for purchase of fixed assets as compared to $3,860 for the first six months of 2006.

Working Capital Requirements

Historically operations and short term financing have been sufficient to meet our cash needs. We believe that we will be able to generate revenues from sales and raise capital through private placement offerings of our equity securities to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Recent Developments

On July 13, 2007, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 2,095,714 shares of our common stock (the “Shares”) and at a purchase price of $5.60 per Share for an aggregate purchase price equal to approximately $11.74 million in a transaction exempt from registration under the Securities Act of 1933, as amended. In connection with the Transaction, we agreed to provide the Investors rights to register the Shares pursuant to the terms of a registration rights agreement (the “Registration Rights Agreement”) to be entered into upon the closing of the Transaction. As of the date of the filing of this 10-Q, the transaction had not closed.

On August 16, 2007, one of the Investors notified us that it was terminating its commitment, pursuant to the Purchase Agreement, to participate in the transaction. This investor previously agreed to invest $5,000,000 to subscribe for 892,857 Shares.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to various market risks arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and interest rates, which could impact our results of operations and financial position. We do not currently engage in any hedging or other market risk management tools, and we do not enter into derivatives or other financial instruments for trading or speculative purposes.

Foreign Currency Exchange Rate Risk.

Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Chinese Renminbi, could adversely affect our financial results. During the quarter ended June 30, 2007, approximately all of our sales are denominated in foreign currencies. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same respective currency, thereby mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not substantial. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in US. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency. All of our sales denominated in foreign currencies are denominated in the the Chinese Renminbi. Our principal exchange rate risk therefore exists between the U.S. dollar and this currency. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our foreign currency-denominated receivables and payables, generating currency transaction gains or losses that impact our non-operating income/expense levels in the respective period and are reported in other (income) expense, net in our combined consolidated financial statements. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

All of our sales denominated in foreign currencies are denominated in the Chinese Renminbi. Our principal exchange rate risk therefore exists between the U.S. dollar and this currency. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our foreign currency-denominated receivables and payables, generating currency transaction gains or losses that impact our non-operating income/expense levels in the respective period and are reported in other (income) expense, net in our combined consolidated financial statements. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

Interest Rate Risk.

Changes in interest rates may affect the interest paid (or earned) and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant.

Inflation.

Inflation has not had a material impact on the Company's business in recent years.

Currency Exchange Fluctuations.

All of the Company's revenues are denominated in Chinese Renminbi, while its expenses are denominated primarily in Chinese renminbi ("RMB"). The value of the RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China, which are set daily based on the previous day's inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of renminbi to U.S. dollars had generally been stable and the renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese renminbi to the U.S. dollar. Under the new policy, Chinese renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the renminbi from the United States dollar. At the recent quarterly regular meeting of People's Bank of China, its Currency Policy Committee affirmed the effects of the reform on Chinese renminbi exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of renminbi has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. The Company has never engaged in currency hedging operations and has no present intention to do so.


Concentration of Credit Risk.

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:


• The Company's business is characterized by rapid technological change, new product and service development, and evolving industry standards and regulations. Inherent in the Company's business are various risks and uncertainties, including the impact from the volatility of the stock market, limited operating history, uncertain profitability and the ability to raise additional capital.

• All of the Company's revenue is derived from Asia and Greater China. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.


• If the Company is unable to derive any revenues from Greater China, it would have a significant, financially disruptive effect on the normal operations of the Company.

Seasonality and Quarterly Fluctuations.

Our businesses experience fluctuations in quarterly performance. Traditionally, the first quarter from January to March has a higher number of sales reflected by our electronics business due to the New Year holidays in China occuring during that period.

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