March 31, 2006, 4:22 pm


Frankly I was dumbfounded that this GRRF priced $2 above range and actually had initial aftermarket prints in the $22 area. I've been analyzing ipos for a long time now and GRRF really lacked any 'above range' characteristics. For starters they've a receivables issue and are not nearly as profitable as their official numbers state. Fact is in 2005 GRRF lost nearly $1 a share in cash flow. Lost not gained.

This week's free blog piece is GRRF. I usually wait a month or so before posting an analysis piece on the blog but this one has fallen quite a bit in the aftermarket. I recommending passing on this deal pre-ipo and as I often tell subscribers, one goal of the site is to not only assist people in making money, but to help them not lose it on overpriced/overhyped deals.

Full analysis for all five of next week's deals as always will be available to subscribers well before they price/open:

the site really is a bargain, as the analysis pieces on this blog are indicative of the pieces I put together pre-ipo for every offering every week of the year.

GRRF - China GrenTech

GRRF - China GrenTech, based in Shenzhen, China, plans on offering 6.25 million ADS (1.25 million by insiders) at a price range of $14- $16. Bear Stearns is lead managing the offering, co-managers are Piper Jaffray and WR Hambrecht + Co. Post-offering GRRF will have 25 million ADS outstanding for a market cap mid-range of $375 million. Although not mentioned, it does appear as if close to 1/2 the proceeds from this offering will be going to repay outstanding debt. Additional IPO proceeds are being utilized for R&D, to expand production, sales and marketing and for general corporate purposes.

From the F-1:

“We are a leading provider of wireless coverage products and services in China. We also believe we are a leading developer of radio frequency, or RF, technology in China.”

RF is the fundamental technology that enables wireless communication products to transmit and receive signals. We saw a number of similar US based offerings here in the late '90s and early 2000s. A number eventually went out of business due to the massive overcapacity build that took place in the US communications sector at the time.

GRRF derives much of its revenue from wireless coverage products and services. These products and equipment are utilized to improve and extend the coverage of wireless communication signals beyond the range of base stations in both indoor and outdoor network environments -- Communications companies utilize these products instead of installing additional more expensive base stations. Think of GRRF's main business line than as adding capacity/ distance to existing base stations, allowing the construction of fewer higher cost wireless base stations. GRRF believes they were the #2 wireless coverage products and services provider in China the past 3 years.

In China telecom/ wireless capital expenditures have grown high single digit %'s in the 2000's but are projected to be flat going forward the next 3- 5 years. In spite of flat forecasts GRRF believes 2 developments will drive their revenue growth:

1) Coverage area is expected to increase quite a bit the next 3 years as China focuses on building out wireless communications into more rural areas. Along with the build out to rural areas, GRRF feels the demand for their increased coverage products will be strong.

2) The PRC government is expected to issue 3G licenses in 2006. GRRF believes this will heighten the need for wireless coverage products and services as 3G base stations are more expensive to build and need to be grouped closer together than 2G. GRRF feels communications companies will opt for their products to assist in limiting the number of new 3G base stations. Note that it appears a 3G license announcement will now not be made until the end of 2006, pushing 3G build-out in China into 2007 at the earliest. This is not the first 3G licensing delay. The delays appear to be due to China's attempts to develop it's own home-grown version of 3G, called TDS-CDMA.

Should be noted that currently there are only two licensed wireless operators in China which operate CDMA and GSM networks , the China Mobile group and the China Unicom group. That is pretty much GRRF's entire customer base at the moment. It is possible that an additional company may receive a 3G license, but for now China Mobile (CHL) and China Unicom (CHU) are it. Appropriately in 2005 CHU accounted for roughly 45% of GRRF's, CHL roughly 35%.

In addition to its revenue driver 'wireless coverage products and services', GRRF also derives revenues from RF parts and components and RF-based wireless access products. This segment accounted for less than 5% of 2005 revenues.


75 cents a share in cash post- offering.

Because GRRF is very dependent on 2 customers whom essentially own a duopoly on wireless access, GRRF has had a very difficult time collecting revenue on a timely basis. GRRF estimates they compete with up to 150 other companies for contracts with CHU/CHL. As such they've little leverage and it is common for CHU/CHL to substantially delay actual payment for products and services. This shows up in GRRF's accounts receivables line. Accounts receivables of 12 months or less more doubled in 2005 from $31 million to $66.5 million. Total accounts receivables from 0- 24 months totaled $85 million.

Note that this is revenue that has been officially booked the past 2 years. As GRRF notes in the F-1, “However, our sale and purchase contracts, in line with industry practice, generally permit our customers to pay their purchase price in installments even though the revenue for that contract has already been recognized.”

Total revenue booked in '04/'05 was a shade under $160 million meaning they've yet to collect 1/2 the revenue recognized in this period.

Some of this is attributable to the lumpy quarterly earnings in which a substantial portion of revenues were recognized in 4Q '05. However 4Q '04 was GRRF's 2nd best revenue quarter in history it would stand to reason that GRRF would have received a significant amount of that revenue throughout 2005 to even out the disparity a bit.

That accounts receivable is growing far faster than booked revenue is an issue. It is serious enough that GRRF notes that, “From time to time, we sell a portion of our accounts receivable to third parties to meet our working capital needs.” In other words it appears to be business as usual for GRRF to never receive revenues from CHU/ CHL for work completed. The result is that a significant portion of these revenues in the financials are currently 'phantom' numbers and do not reflect actual monies received. GRRF has sold less receivables to 3rd parties in 2005, which has in part been to blame for the rise in overall receivables. Still, very difficult to invest in an operation that has a severe and apparently growing revenue collection issue.

This issue shows itself in GRRF's cash flows. While the company's official numbers make it appear to have been a profitable 2005, cash flows tell a different story. GRRF lost nearly $1 per share in cash flow in 2005. While some of this is attributable to the large % of revenue recognized in the 4th quarter as well as selling off fewer receivables to 3rd parties as mentioned above, there does appear to be a very tangible receivables issue here. Why? Again since the 12/04 quarter was the 2nd best quarter in company history it would stand to reason that cash flows from that quarter would filter into 2005 and buoy cash flows. Does not appear to have happened however as GRRF recognized nearly $1 per share in earnings in 2005, while on cash flow they lost nearly $1 per share.

As alluded just prior GRRF's revenue recognition is very cyclical with nearly all annual revenue reported in the 2nd/4th quarters. Note that in past 3 years the first quarter of each year GRRF reported essentially no revenues. Expect this to occur again in 2006. I'm pretty certain that most holders of GRRF will not be prepared for the company reporting essentially zero revenues on their next quarterly report.

Actual booked revenue has been steadily growing: $45 million in 2003, $70 million in 2004 and $88.5 million in 2005. Keep in mind again that over 1/2 the revenue booked in 2004/2005 has yet to be collected. This makes the rest of the official earnings statements difficult. Just remember that while GRRF is showing strong bottom line gains in 2005, they actually lost quite a bit of money in actual operations. You can play with the balance sheet and recognized revenues, but you cannot really hide from the cash flows and cash flows here for 2005 were quite negative.

GRRF can improve the receivables line by either collecting revenues from CHU/ CHL or by selling off a greater portion of that line item to 3rd parties. I would expect them to pick up the latter the first 1/2 of 2006 which should improve both cash flows and that receivables number a bit. However GRRF has so little leverage with CHU/ CHL on collections that they note numerous times their revenue collections cycle can run to nearly 3 years.

Conclusion - GRRF could very well be positioned for nice reported revenue growth due to the geographic expansion of wireless access to China's rural areas coupled with the sometime to come Chinese 3G build- out. However one has to be very, very careful with small companies showing rapid accounts receivable growth. Receivables here are far outpacing reported revenues. The reason is GRRF has no collections leverage with China's wireless duopoly. This has left GRRF cash strapped enough to sell-off receivables to third parties in order to sustain operations. This situation makes it difficult to recommend GRRF at this point. I do expect cash flows and that receivables line to improve the first 1/2 of 2006, but I think this is a case in which one is better off to wait to see if/when that occurs before considering GRRF. A confirming factor to this wait/see approach is what appears to be a delay in Chinese 3G licenses, which will most likely push that build-out into 2007.

I'd pass here initially and track this one the next few quarters to see if they're able to improve the noted problem areas. Also I would anticipate a lackluster reaction to first quarter earnings report. 1st Q is by far the weakest revenue recognition quarter for GRRF and they will be reporting negligible revenue. Most likely holders of GRRF will not be aware of this. If one is interested in GRRF reaction to that report could allow an entry lower.

Page :  1