May 15, 2013 8:00pm ET

Management
Jeffrey Kang – CEO & Chairman
Wanyee Ho – Investor Relations Director

Analysts/ Shareholders
J.D. Abouchar – GRT Capital
Brian Alger – Wedbush Equity Management

Operator: (Operator instructions)

Wanyee Ho: Thank you Britney, and good afternoon to everyone. I’m Wanyee Ho, Cogo’s Investor Relations Director, and I’d like to thank you all for joining us today to participate in Cogo’s 2013 First Quarter Earnings Conference Call.  

After the market closed today, Cogo issued a press release reporting unaudited financial results for the quarter ended March 31, 2013. This release can be accessed in the investor relations section of Cogo’s website at www.cogo.com.cn and on most other financial websites.

Today, the discussion will be hosted by Jeffrey Kang, Chairman and CEO, who will discuss the Company’s business operations.

Before we begin, I’d like to remind everyone that the call today may contain forward-looking statements regarding future events and the financial performance of the Company. We wish to caution you that such statements are at present just predictions, and actual results may differ materially as a result of the risks and uncertainties inherent in the Company’s business. We refer you to documents that the Company files periodically with the SEC, specifically the most recently filed Forms 20-F and 6-K, as well as the Safe Harbor statement made in today’s press release. These documents contain important risk factors that could cause actual results to differ materially from those contained in the Company’s current projections. Cogo assumes no obligation to revise the forward-looking information contained in today’s call.

At this time, I’d like to turn the call over to Jeffrey. Jeffrey, the floor is yours.

Jeffrey Kang: Thank you, Wanyee, and thanks to everyone for joining the call.  I will keep my prepared comments brief to allow time for Q&A.  Most of the key financial data is in the press release.

We continue to demonstrate solid top line growth across all business segments and reported the highest first quarter revenue of approximately $182.4 million. The results excluded revenue generated from the subsidiaries sold in November 2012. Considering the revenue generated by those subsidiaries contributed approximately 30% of the revenue in the first quarter of 2012, the top line growth for the quarter would have been almost 54% year over year. I am proud with our ability to produce sustainable profit and continuous revenue growth in these uncertain economic times.

As we have indicated many times, the credit situation for our SME customers in China has been tight and that continues to negatively affect our gross margins. It’s impossible to predict when that situation will materially improve.  Gross Margins in the first quarter was in the range of 6.2%-6.7%. End-markets, such as smart phone, are still growing strongly in China. While we can continue to increase our business scale, we also foresee that gross margin pressure is rising and the Company may need to keep increasing working capital to sustain growth.

In the face of these difficult macro conditions, we continue to drive operating profit and grow our tangible book value each and every quarter. The Company had cash and pledged bank deposits totaling approximately $143.3 million at the end of the first quarter, increased from $141.5 million at the end of 2012. The Company had bank borrowings of $81.2 million as of March 31, 2013, decreased from $98.6 million at the end of 2012, and we recorded Net Cash of $62 million at the end of the first quarter. The proceeds of the $78 million in cash received from the deal last year were mainly used and reserved for repaying bank borrowings and repurchasing stocks.

Since the authorization of the 10-million-share-repurchase program in September 2012, to-date we have repurchased more than 5.1 million shares. From the close of the sales on November 15, 2012 to-date, we bought back almost 4.9 million shares. With the funds injected by the sales of the subsidiaries, we will continue [the] swift execution of the buyback program.

While Management is pleased with the Company’s continuous business growth and sustainable profitability, we are disappointed with our current stock performance, which is trading far below our net asset value, despite continuous business growth and being profitable every quarter. Although end-market is still growing, competition has intensified.

We have to face the end-market reality and make a decision on our long-term strategy. While this market is huge and growing, and Cogo has what it takes to continue growing our business scale, we are also facing growing gross profit pressure and rising working capital demand. Although I believe it’s good for Cogo to continue to expand our business scale and market share, I also recognize that this strategy has not been the most popular among the capital markets at this moment. In light of that, Management has been contemplating on a long-term balanced strategy. Among other initiatives, our current focus is to develop new service business that would attain higher margins. It remains management’s top priority to recover the recognition of asset value and improve shareholder value.

This concludes my remarks. Thank you everyone for joining this call.  And now let’s turn the call to the operator to open up the floor for questions.  We will look to end this call at around 9. Operator?

-Q&A-

Operator: (Operator Instructions). Our first question comes from the line of J.D. Abouchar with GRT Capital. Please go ahead.

J.D. Abouchar – GRT Capital: Hi Jeffrey. First a couple of questions, can you give us an idea – you said the company was profitable in the quarter. What were the operating profits or margins for the company?

Jeffrey Kang: We have quite a consistent operating margin. So, the reason why we don’t have it released in this press release because our KPMG hasn’t finally signed off the audit yet because we just has finished annual report two weeks ago. KPMG needs a little more time. (inaudible) But in general the operating margin, because of our cost is quite consistent and so we have the operating gross margin around the 6.2% to 6.5%.
So, I think that’s our operating margin, it would definitely be a lot profitable and we have that pro forma EPS available there. So, in terms that the detailed number, I think maybe we might take a few days longer and to file our quarterly results with the detailed financial data included.

J.D. Abouchar – GRT Capital: You mentioned that, while painfully aware that the stock is turning below net asset value. And it looks like you did a very good job on the working capital front getting debt down and looks like it’s what guess you collected on some receivables. Can you give us any more details on what working capital is or net asset value at this point?

Jeffrey Kang: We actually talked about this in our public press release. We have intangible, even tangible book value that’s kind of over $5 and now we are trading only around $2. So, technically and people didn’t give any evaluation to our business, operation, even give minus valuation, to the business operations.

So, I think as management we’ve fully recognized it’s very important for us to maximize the shareholder value. So, I think our first step of strategy is to show the people, how we have the very solid financial assets available and which is at least $5 or plus. I think that’s still management team’s near term priority is to show investors we have the real financial assets on hand which is over $5.

J.D. Abouchar – GRT Capital: You don’t have working capital number for us for the end of the quarter?

Jeffrey Kang: Do you mean working capital number, you mean how much working capital we used in the operating end of the July?

J.D. Abouchar – GRT Capital: I’m looking for balance sheet information. What were current assets and what were current liabilities at the end of March 31st?

Jeffrey Kang: Okay. I got your point. Again, could you just wait for a few, another day until our final financial number comes out. But also the number I have for you here is net cash which is over $60 million.

J.D. Abouchar – GRT Capital: Just one final comment, it would certainly help the valuation of your company and the perception by Wall Street if you communicated with shareholders. I tried to communicate with you for six months all through last year and through the Q1 of this year. I sent multiple emails and phone calls and didn’t any get responses. So, if you want shareholders to care you do have to communicate with them. Thank you.

Jeffrey Kang: Thanks J.D. actually the company, we always communicate with investors. So it’s just because of over the last couple of months, we have a lot of transactions there. So that’s why the Board set up a rule to me, don’t allow me to take any private call unless I’m speaking in front of the public.

That’s why and I couldn’t take any private call as I usually did even in the past. But we have the IR channels available there so if any investors have any specific questions, the management is waiting and we’re happy to answer all kinds of question as long as it does not involves potential selective disclosure.

That’s why we encourage our investor if you have any questions, just connect with our IR so we can prepare our answer and all this answer will be reviewed by our legal counsel before we release to any investors.

I really hope our investors can understand why we’re doing this because we actually and we don’t want to cause any trouble from SEC perspective to have any selective disclosure because that’s the reason why the board don’t allow me to take any private call and in last couple of months because we have deals there. Thanks.

Operator: Thank you. Our next question is from the line of Brian Alger with Wedbush Equity Management. Please go ahead.

Brian Alger – Wedbush Equity Management: Good evening. Jeffrey. I would like to echo J.D.s commentary in that communicating with us is vitally important than and thank you for hosting this conference call, especially in light of not even having the full numbers put together yet. So, thank you. I think as much information as you can communicate to us is certainly welcome with the assets far exceeding the stock price right now.

One quick question with regards to your commentary that’s in the press release and was in your prepared remarks. You talked about potentially needing to increase working capital and what I infer from that is that you may need to increase your inventories and potentially need to increase your bank borrowings in order to support your customers because they can’t get financing. Number one, is that the correct inference and number two, how is that going to help Cogo in the long run and/or in the short run?



Jeffrey Kang: What I’m trying to express is as you say we achieved $184 million revenue in the first quarter, which we use, this business is already excluded and the business we sold at end of the last year. So, if we use apple-to-apple comparison, this business alone grows over 50% year-over-year. So, what I’m trying to express is we have 2 ways to think about how we run this business.

One way is say, we never grow any new business. We just focus on existing business. So in doing this way, as an investor we can say the results could be in the same situation, no working capital increasing. But if we want to continue to grow the business from $180 million to $200 million, $250 million or next year $300 million, so, if we want to keep growing the business, we’ll definitely need more working capital support. That’s what I’m trying to say.

In the long run, what I believe is the bigger is better because you have the scale, you have been running a profitable business but I also recognize the Wall Street capital market may not have the same attitude as what I have. That’s why I’m trying to express my strategies that management team will consider, will have the balance strategy, consider the both the business demand as well as the investor’s capital perception to decide on what the long term balance strategy which is the best for the business as well as our stock price. So that’s what I am trying to say.

Brian Alger – Wedbush Equity Management: I think I understand the sentiment of the investors here in the United States, being one for as long as I have been, in that there is a lot of skepticism as it pertains to company’s operating in China. Whether it’s deserved or not, there is a significant discount being assigned to reasonably good companies in China much like Cogo. And because of that I wonder what is the value to Cogo’s operations from a business standpoint to being publically traded in the United States given that deep discounts to the asset value that’s on the balance sheet. What does being listed in the United States do to help your business in China?

Jeffrey Kang: You actually raised a question, I even myself, I don’t have a clear answer at this moment. So if we look back in the past in 10 years history and we list on NASDAQ since 2005. So from 2005 to 2007, 2008 so we actually, I think being a public company, it really helps to this company expand our business significantly year over year and that’s where it’s really helped the business. But you are right. Now particularly after ’08 financial crises, particularly in this past two or three years, so it’s kind of [frustrating] as well for the management team.

We are saying that we are growing our business, we think we are doing well at the moment, no matter in good situation or bad situation, but it seems like from the capital market perspectives, we have been categorized into another special group in which we have a significant discount with the Company’s value. So that’s why I am saying we have to be realistic to face this reality we have. What we can do, on the one hand we keep our compliance which I think all investor should recognize Cogo being a public company. We have a very good compliance [practice] and to follow SEC rules. We have a very good auditor, we have a very clean book and everything we do properly in the past, probably many-many years.

We cannot change too many things for the capital market. What we can do is that, the first thing we have to the transparent accounting and the stuff and we can show to the investor what are we used to do. And the second, we just to think about how to continue to run this business. I hope it takes time. May be this week or when the auditing is over, investor will eventually realize the true value of this business. That’s my hope and so that’s why, if we have to do this we are going to step by step. I think the management team also expressed our priority. So, I think the priority at this moment, so our job is to show the investor at least we have over five dollars real asset in our hand. So that’s our priority to make the people to think about it. This company is making money, we still have $5 real asset on our book but the company is only trading for $1 to $2. So that’s our image and the perception we want to communicate to the investors.

Brian Alger – Wedbush Equity Management: And I appreciate that and I think the communication is critical and this call certainly helps in that endeavor. I guess I would plead to the Board of the Directors who I presume they are listening to the call that they don’t need to be a strict as they appear to be with communications to the street. Certainly, there are number of other publicly-traded companies that have executives communicating with institutional investors throughout their quite period and those executives are trusted to know where the lines are in terms of communicating appropriately. I would encourage you to communicate as best as you can because I do believe that this lack of communication over the past several months, whether it’s due to a lack of period or restrictions has hurt the stock considerably. Just simply knowing for instance right now what was the ending share count at the end of March 31st, do we have that number? That doesn’t seem like it should be something that would require an auditor to sign off on?

Jeffrey Kang: I think we have over 30 million something share count but again the reason why we don’t have direct numbers there is because we have that number in the December, in our 20-F filing in end of last year. So I think right now from end of December to now we already repurchased over like one point something million something shares, in fact over 1 million shares. That’s with the share [count] as of today. Again I apologize we don’t have the full scale number available usually but we have that one because this Q1 we just finished the 20-F auditing and KMPG want to take a little longer time to have the Q1 number reviewed. So I pre-set up this call today, I don’t want just to take longer time for my communication with investors so that’s why I don’t have the full scale number available. I think wait for another a few days or a week. We will have the quarterly filing available and will allow the investors to have all the detailed numbers full scale.

Brian Alger – Wedbush Equity Management: I look forward to seeing the full filing and reviewing it. I mean from what we have received today that it looks as though the company is doing relatively well in trying market so say the least. I guess the last thing I would like to ask is how far is the management and the board willing to go in order to realize shareholder value. And I guess I will be a bit more specific in that. When I penciled out what I think the balance sheet look like, you have described that has been over $5 a share in terms of net assets. I think it’s actually quite a bit higher than that, even discounting for the inventory levels. It seems like it would be pretty difficult to realize a return on investment equal to the asset value, unless we are able to change the multiple that the street is assigning and I guess do we get to a point where we consider a different capitalization structure and may be taking the company private?

Jeffrey Kang: Again I don’t have this, I’m not the person who can just give you any comment on this kind of questions because again for this kind of questions we have to go through like an independent directors or decision. So that’s another point where I’m not allowed to comment if our company go private or not. Technically it’s not my decision yet. But definitely I will pass the investors this voice to our board meeting. I think generally it’s the board’s decision what’s the best for the shareholders’ value. I am pretty much sure it’s every one of our board members, their obligation to maximize the shareholder value, they will think about what is that the best for the long term shareholder value. So I’m pretty much sure of that, but in terms of the way to capitalize the asset values, we might consider the different way. If we have any solid ideas, we will communicate with investors in the public front.

Brian Alger – Wedbush Equity Management: Jeffery again I want to thank you for having the conference call tonight. It’s immensely helpful and I think it’s important to communicate with the street as best as you are allowed to, and if I may I would encourage you to after the numbers are released and we get the information public, perhaps getting out on the street with any analysts that are still covering the stock. I believe Cannacord is still putting out research. Perhaps they can assist in getting, getting you out on the street to maybe evangelize and help people be aware of the hidden asset value. Thanks again.

Operator: (Operator Instructions) And I am showing no further questions in the queue at this time. I would like to turn the call back over for closing remarks.

Jeffrey Kang:  Thank you for your continuous commitment to Cogo.  The final closing of my acquisition and the Company’s receipt of the $78 million in proceed, not only validated Cogo at nearly $8 per share but also fuel the company’s repurchase program and allow Cogo to develop new business strategies. I have every confidence in our management team to steer the Company in the right direction and we are hopeful that we will soon be able to launch a new strategy to recover the recognition of asset value. Thank you again and we look forward to talking to you next time. Thanks.

-End-

About Cogo Group, Inc.:
Cogo Group, Inc. (Nasdaq: COGO) is one of the leading gateways for global semiconductor companies to access the rapidly growing Industrial and Technology sectors in China. Through its unique business-to-business services platform, Cogo designs customized embedded solutions using technology from suppliers including Broadcom, Xilinx, Atmel and others for a customer base of over 2,100 Chinese OEMs/ODMs. Cogo’s customer list includes approximately 100 blue-chip companies, including ZTE, BYD and NARI, as well as over 2,000 Small and Medium Enterprises (SMEs). The Company serves a broad list of rapidly growing end-markets in China, including 3G Smart phones, Tablets, Automotives, High-Speed Railway, Smart Meter/Smart Grid, Healthcare and High Definition Television (“HDTV”).

For further information contact:
Investor Relations
www.viewtran.com
ir@viewtran.com.cn
H.K.: +852 2730 1518
U.S.: +1 (646) 291 8998