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Article by DailyStocks_admin    (06-21-08 08:21 AM)

The Daily Magic Formula Stock for 06/21/2008 is China 3C Group. According to the Magic Formula Investing Web Site, the ebit yield is 63% 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

Overview

China 3C Group (formerly Sun Oil & Gas Corp.) (referred to herein as the “Company”, “we” or “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. We are engaged in the business of the sale and distribution of mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players, radio Walkmans and audio systems.

Due to our change to a new “stores in stores” business operation model, our number of sales increased substantially during 2007. 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 operation model results in 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. These acquisitions further brought in considerable sales and profit to the Company.

Organizational Structure

On December 21, 2005, we entered into a merger agreement with Capital Future Development Limited, or “CFD,” and its shareholders pursuant to which we acquired all of the issued and outstanding capital stock of CFD, thus making it a wholly owned subsidiary of the Company. CFD shareholders received and aggregate of 35,000,000 newly issued shares of our common stock and cash consideration of $500,000, divided proportionally among the CFD shareholders in accordance with their respective ownership interests in CFD immediately before the completion of the transaction. The cash portion of the consideration was paid on the first anniversary of the closing of this transaction pursuant to nine interest-free promissory notes.

CFD was incorporated on July 22, 2004 under the laws of the British Virgin Island and is a holding company that owns all of the issued and outstanding stock of Hangzhou Sanhe Electronic Technology Limited, or “HSE,” and Shanghai Joy & Harmony Electronics Company Limited, or “SJ&H.”

CFD acquired all of the issued and outstanding capital shares of HSE pursuant to a share exchange agreement with HSE and its shareholders in exchange for an aggregate of 915,751 shares of the Company’s common stock and $5,000,000, divided proportionally among the HSE shareholders in accordance with their respective ownership interests in immediately before the completion of the transaction.

CFD acquired all of the issued and outstanding capital shares of SJ&H pursuant to a share exchange agreement with SJ&H and its shareholders in exchange for an aggregate of 2,723,110 shares of the Company’s common stock and $7,500,000, divided proportionally among the SJ&H shareholders in accordance with their respective ownership interests in immediately before the completion of the transaction.

On August 15, 2007, in order to comply with the requirements of PRC law, we recapitalized our ownership structure. As a result, instead of CFDL owning 100% of ZYXD, as previously was the case, CFDL entered into contractual arrangements with ZYXD whereby CFDL owns a 100% interest in the revenues of ZYXD. CFDL does not have an equity interest in ZYXD but is deemed to have all the economic benefits and liabilities by contract. Under this structure, ZYXD is now a wholly foreign owned enterprise (WOFE) of CFDL. The contractual agreements give CFDL and its equity owners an obligation to absorb any losses and rights to receive revenue. CFDL will be unable to make significant decisions about the activities of ZYXD and cannot carry out its principal activities without financial support. These characteristics as defined in Financial Accounting Standards Board (FASB) Interpretation 46, Consolidation of Variable Interests Entities, qualifies the business operations of ZYXD to be consolidated with CFDL.

ZYX is a 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, or “HWD,” and Yiwu Yong Xin Telecommunication Company, Limited, or “YYX,” both of which are organized under the laws of China. HWD and YYX each own the remaining 10% of other’s issued and outstanding capital stock, and each are operating companies.

Our Business
Zhejiang Yong Xin Digital Technology Company Limited (“ZYX”)

In 2001, ZYX 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.

ZYX is a large-scale distribution channel manager integrating the selling, circulation and modern logistics of 3C products (communication products, information technology (“IT”) products and digital products) in China. 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, ZYX 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. ZYX allocates its distribution channels according to the size and population of the cities in which the retailers are located. Accordingly, ZYX distributes products mainly to second tier retailers in bigger Chinese cities that have larger populations and to first tier retailers in smaller Chinese cities that have relatively smaller populations, which results in cutting the cost of shipping and enables the products to reach all areas.

As a retailer with hundreds of locations, the company is not reliant on any one customer or on a few customers. The loss of any one customer would not likely have an adverse effect on the company’s sales.

As a retailer of electronics products with thousands of customers who pay at point of sale, the Company does not have any material backlog of orders.

ZYX 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, ZYX coordinates with the promotional activities initiated or planned by the product manufacturers. ZYX focuses on circulation and distribution activity and thereby eliminate unnecessary expenses. In addition, ZYX manages credit risk by having its own credit system with the retailer customers, and provides different policies or benefits on the payment and credit period according to different credit level of the customers. ZYX 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.

The Company relies on rapid, just-in-time delivery of inventory and therefore does not rely on a significant amount of inventory in its retail locations.

ZYX’s strategy is to establish distribution channels with chain stores selling telecommunication products, digital products, and IT products, primarily focusing in East China. ZYX plans to transition from the cord telephone market and focus on fax machines, cell phones and other digital and IT products throughout China.

The main competitors of ZYX include Hangzhou Guang Tong Company, Hangzhou Yin Dun Company, Hangzhou Qing Teng Company, Hangzhou Si Tong Company, and Zhejiang Shen You Electrical Appliance Company. Nevertheless, none of these competitors reach the size of ZYX.

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

HWD was incorporated on March 30, 1998 under the laws of the Peoples Republic of China. HWD is an authorized sales agent focusing on the selling, circulation and modern logistics of cell phones, cell phone 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.

The five largest suppliers for HWD 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.

Given the wide diversity of HWD’s customer base, the loss of any single customer is not expected to have a material adverse affect on the Company’s business and operations.

HWD mainly distributes its products through retail “stores within stores” located in major department stores throughout the “Huadong” region of China (consisting of the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not spend a material amount of money on research and development, and did not have a significant backlog for 2007.

As a retailer with hundreds of locations, the Company is not reliant on any one customer or on a few customers. The loss of any one customer would not likely have an adverse effect on the Company’s sales. As a retailer of electronics products with thousands of customers who pay at point of sale, HWD does not have any material backlog of orders. The Company did not spend a material amount of money on research and development in 2007. HWD contributed approximately 30% of revenue to the Company in 2007.

There are no material effects from compliance with environmental laws.

The main competitors of HWD include Telephone World, Hangzhou Yindun, Shanghai Guangda, Changjiang Tianyin and Hangzhou Zhenghua. Additionally, there are Ningbo Haishu, and Zhongyu. These competitors typically have only a fraction of our sales.

YYX was incorporated on July 18, 1997 under the laws of the Peoples Republic of China. YYX 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 top local brands Feng Da and CJT fax machines.

The five largest suppliers for YYX 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 YYX 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).

Given the wide diversity of YYX’s customer base, the loss of any single customer is not expected to have a material adverse affect on the Company’s business and operations.

YYX mainly distributes its products through retail “stores within stores” located in major department stores throughout the “Huadong” region of China (consisting of the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not spend a material amount of money on research and development., and did not have a significant backlog for 2007.

As a retailer with hundreds of locations, the Company is not reliant on any one customer or on a few customers. The loss of any one customer would not likely have an adverse effect on the Company’s sales. As a retailer of electronics products with thousands of customers who pay at point of sale, the Company does not have any material backlog of orders. The Company did not spend a material amount of money on research and development in 2007. YYX contributed approximately 22% of revenue to the Company in 2007.

There are no material effects from compliance with environmental laws.

On the retail side we distribute mainly via so-called concessionaire agreements with larger department stores, supermarkets, large electronics retail stores, and other retailers. The retail distribution of many products in China, including those that we sell, is conducted via the concessionaire model. Under this model, companies such as China 3C own their own outlets within the larger stores and in so doing assume responsibility for most financial and operational aspects of those outlets including capital cost, inventory, wages, selection, pricing, and general management. Our retail partners are then compensated via margin they earn on the products we sell. This model is similar to that employed by many department stores in the US. On the other hand, this model is also different from that found at large electronic retailers like Best Buy and general retailers like Wal-Mart. We have found that many investors are curious as to why the model in China differs from that found in the US. From our point of view, the main reasons are as follows:


We decrease the financial risk for our retail partners by assuming responsibility for the inventory and capital expense associated with distributing our products.


We decrease operational risk for our retail partners by hiring and managing employees and handling logistics issues such as wholesale purchase and delivery and returns and after-sales service.


We decrease merchandising risk for our retail partners by bringing product expertise and specific market knowledge that is difficult for large retailers to develop on their own across a broad range of product categories.


China’s size, regional differences, logistical difficulties, managerial challenges, underdeveloped credit markets, and rapid growth rate increases risk for all retailers and drive the need to mitigate risk which is why our retail partners rely on us.

It is interesting to note that even foreign retailers such as Carrefour and Wal-Mart have to a certain degree adopted the concessionaire model in China which is an indication as to how conditions in China make the concessionaire model a virtual necessity for retailers.

Hangzhou Sanhe Electronic Technology Ltd. (“HSE”)

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

Given the wide diversity of HSE’s customer base, the loss of any single customer is not expected to have a material adverse affect on the Company’s business and operations.

HSE mainly distributes its products through retail “stores within stores” located in major department stores throughout the “Huadong” region of China (consisting of the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not spend a material amount of money on research and development., and did not have a significant backlog for 2007.

As a retailer with hundreds of locations, the Company is not reliant on any one customer or on a few customers. The loss of any one customer would not likely have an adverse effect on the Company’s sales. As a retailer of electronics products with thousands of customers who pay at point of sale, the HSE does not have any material backlog of orders. HSE did not spend a material amount of money on research and development. HSE contributed approximately 25% of revenue to the Company in 2007.

There are no material effects from compliance with environmental laws.

The main competitors of HSE include Hangzhou Meidi, Hangzhou Danong, Nanjing Mingci, Shanghai Feitong and Jiangshu Huayi. Additionally, there is Baicheng Group with sales of approximately $30 million per year and Shanghai Feiteng with sales of approximately $30-40 million per year.

Shanghai Joy & Harmony Electronics Company Limited (“SJ&H”)

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

As a retailer with hundreds of locations, the Company is not reliant on any one customer or on a few customers. The loss of any one customer would not likely have an adverse effect on the Company’s sales. As a retailer of electronics products with thousands of customers who pay at point of sale, SJ&H did not have any material backlog of orders. The Company did not spend a material amount of money on research and development in 2007. SJ&H contributed approximately 25% of revenue to the Company in 2007.

There are no material effects from compliance with environmental laws.

The main competitors of SJ&H include Shanghai Huaning, Shanghai Juexiang, Shanghai Wansi and Shanghai Feitong. SJ&H’s competitors are a combination of a large number of very small stores who lack the Company’s economies and scale, as well as a small number of large players such as large department stores. Additional competitors include Shanghai Yonguan Digital with sales of approximately $45 million per year, Shanghai Dongqi with sales of approximately of $7-8 million per year, and Shanghai Yidunj of sales of $4-5 million per year.

Customers

No customer contributed more than 10% of the Company’s revenue.

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 occurring during that period. Nevertheless, at times, China can experience particularly inclement weather in January and February which can serious disrupt the Company’s supply chain management systems. As our business model is to operate only on several days of inventory, the effects of such weather disruptions can be severe in certain years.

Additionally, during summer month we can experience a slowdown in sales. We therefore generally use the summer months to concentrate on opening additional stores to offset the decline in sales per store.

Employees

The Company currently has 1051 employees, all of which are full time employees located in China. ZYX has 250 employees, YYX has 45 employees, HWD has 280 employees, HSE has 257 employees, and SJ&H has 189 employees.

The Company has no collective bargaining agreements with any unions.

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. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”), Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic Technology, Limited (“Sanhe”), 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 SJHE and HSET. Until August 14, 2007, when it made the change to its ownership structure described in the next paragraph in order to comply with certain requirements of PRC law, CFDL owned 100% of the capital stock of Zhenjiang.. Zhejiang owns 90% and Yiwu owns 10% of HWDA. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. 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. On August 15, 2007, in order to comply with the requirements of PRC law, the Company recapitalized its ownership structure. As a result, instead of CFDL owning 100% of Zhejiang as previously was the case, CFDL entered into contractual agreements with Zhejiang whereby CFDL owns a 100% interest in the revenues of Zhejiang. CFDL does not have an equity interest in Zhejiang, but is deemed to have all the economic benefits and liabilities by contract. Under this structure, Zhejiang is now a wholly foreign owned enterprise (WOFE) of CFDL. The contractual agreements give CFDL and its’ equity owners an obligation to absorb, any losses, and rights to receive revenue. CFDL will be unable to make significant decisions about the activities of Zhejiang and can not carry out its principal activities without financial support. These characteristics as defined in Financial Accounting Standards Board (FASB) interpretation 46, Consolidation of Variable Interest Entities (VIEs), qualifies the business operations of (Zhejiang) to be consolidated with (CFDL) and ultimately with China 3C Group.

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.

We operate substantially all of our retail operations through our “store-in-store” model. Under this model, the Company leases space in major department stores and retailers. Leasing costs can vary based on a percentage of sales, or can be fixed. For the year ended 2007, approximately one-half of the Company’s leases were variable based on sales, and the other half were fixed rents.

Results of Operations

Year Ended December 31, 2007 compared to Year Ended December 31, 2006

The following table presents certain consolidated statement of operations information stated as a percentage of total revenues. All financial information is presented for the 12 months ended December 31, 2007 and 2006.

Net sales

Net sales for 2007 totaled $276,026,673 compared to $148,218,848 for 2006. 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 the addition of new product lines were also factors. 2007 was a year in which inflation sharply increased in China and we believe inflation had an effect on our sales in 2007.

Percentage of sales

The Company earned approximately 65% of its sales from its retail operations, and the remaining 35% from wholesale operations.

Cost of Sales

Cost of sales for 2007 totaled $226,656,242 or approximately 82.11% of net sales compared to $125,411,758 or approximately 84.61% for 2006. The cost of sales as a percentage decreased during 2007 due to the introduction of new product models with higher gross profit margin. The increased cost of sales was a direct result of the large increase in purchases required to meet our sales levels.

Gross Profit Margin

Gross profit margin for 2007 increased to 17.9% compared to 15.4% for 2006. The increase was partially due to the inclusion of the newly acquired subsidiaries. The gross profit margin increased as we benefited from increasing economies of scale as the Company grew in size and scale. Higher sales of higher margin products such as MP3 and DVD players were also critical factors.

Operating Expense

General and administrative expense for 2007 totaled $13,614,500 or approximately 4.93% of net sales, compared to $5,544,924 or approximately 3.74% for 2006. The increase was primarily due to the costs of managing a larger operation as the Company integrated its newly acquired subsidiaries.

Income from Operations

Income from operations for 2007 was $35,755,931 or 12.95% of net sales as compared to income from operations of $17,262,166 for 2006 or 11.65% of net sales. Increasing economies of scale were a critical factor for the larger margins, as were a higher margin product mix. 2007 was a year in which inflation sharply increased in China and we believe inflation had an effect on our sales in 2007.

Net Income

Net income was $22,919,700 or 8.30% of net sales for 2007 compared to $11,277,126 or 7.61% of net sales for 2006. Increasing economies of scale, a higher margin product mix and significant larger store were all key factors for the large increase in net income.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Result of Operations

For the Three Months Ended March 31, 2008 and 2007

Net Sales

Net sales for the three months ended on March 31, 2008 decreased by 19%, to $68,153,455 compared with $84,523,194 for the three months ended March 31, 2007. The decrease was due to fact that we had fewer sales which management believes was contributed to by many factors including the slowdown in the retail markets in general, a significant snowstorm in China during the first two months of the year which created a backlog in our distribution channels, and the pressure of increased competition within the markets in which we operate.

Cost of Sales

Cost of sales for the three months ended on March 31, 2008 totaled $57,607,075 compared to $70,590,912 for the three months ended on March 31, 2007, a decrease of 18%. The decreased cost of sales was a direct result of the decrease in expenditures required to meet fewer customers’ requests during this period than last year.

Gross Profit Margin

Gross profit margin for the three months ending March 31, 2008 was 15.5% compared to 16.5% for the three months ending March 31, 2007. The lower gross profit margin was due to increasing unit purchase prices and unit sales prices that did not increase as much as purchases.

General and Administrative Expenses

General and administrative expenses for the three months ending March 31, 2008 totaled $2,986,044 or approximately 4% of net sales, compared to $3,726,162 or approximately 4% of net sales for the three months ended March 31, 2007, an decrease of 20%. The decrease was primarily due to strengthening cost controls such as rationalizing of management structure and increasing sophistication of computerized systems.

I ncome from Operations

Income from operations for the three months ended March 31, 2008 was $7,560,336 or 11% of net sales as compared to income from operations of $10,206,120 or 12% of net sales for the three months ending March 31, 2007, a decrease of 26%. Lower sales, higher product costs, and logistic costs such as higher distribution costs were the key factors for the decrease in income from operations.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2008 was $1,810,573 as compared with $3,749,259 for the three months ended March 31, 2007. The decrease was mainly attributed to the decrease in both taxable income and lower statutory tax rates effective for 2008 in China.

Net Income

Net income was $5,773,045 or 8.5% of net sales for the three months ended on March 31, 2008 compared to $6,463,788 or 7.6% of net sales for the three months ended on March 31, 2007, an decrease of 11%. The pressure of competition on retail price and continued rising prices on product unit costs were the critical factors which contributed to the decrease in net income.

Liquidity and Capital Resources

Operations and liquidity needs are funded primarily through cash flows from operations. Cash and cash equivalents were $23,421,645 at March 31, 2008, as compared to $9,085,186 at March 31, 2007, and compared to $24,952,614 at December 31, 2007.

Under the SJHE share exchange agreement, dated November 28, 2006, in exchange of surrendering all their ownership in SJHE, the SJHE 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 2008.

Capital Expenditures

Total capital expenditures for the first three months of 2008 were $6,581 for purchase of fixed assets as compared to $34,897 for the first three months of 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 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.



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