China Dongsheng International, Inc.

What they do

The company operates in China through Jilin Dongsheng Weiye Science & Technology Development Co., Ltd., which develops and manufactures nutritional supplements and personal care products for the domestic Chinese market. The legacy business, PaperClip Software, develops document management software, but the company has been pursuing a spin-off of that unit to shareholders. After the spin-off, operations will consist solely of the China-based nutritional supplements and personal care products business.

Revenue drivers

• Nutritional supplements and personal care products — The company's primary operations through Jilin Dongsheng Weiye Science & Technology Development Co., Ltd. involve the development and manufacture of nutritional supplements and personal care products sold domestically in China; this business generated all of the company's reported sales.

Recent performance

For the nine months ended March 31, 2008, sales were $22,932,944, down from $23,280,402 in the prior-year period. Cost of sales fell to $5,200,332 from $9,402,668, producing gross profit of $17,732,612, up from $13,877,734. For the three months ended March 31, 2008, sales were $4,543,223 compared with $4,544,019 a year earlier. Gross profit for that quarter was $3,791,652, up from $2,769,933, with cost of sales of $751,571 versus $1,774,086.

Strategy

The company is working to complete the spin-off of its legacy PaperClip software business to shareholders of record prior to the reverse merger. Management expects the spin-off to be complete by June 30, 2008. After the spin-off, the company will operate solely through its wholly owned PRC subsidiary, DWST, focusing on nutritional supplements and personal care products in China. The company has not completed the spin-off as of the filing date.

Risks

• Spin-off completion uncertainty — The spin-off of the PaperClip software business has been delayed, with a Form 10-SB withdrawn in January 2008 and no completion as of the filing, which may distract management and create uncertainty for shareholders.
• Customer concentration and China market risk — All of the company's sales come from its China-based nutritional supplements and personal care products business, exposing it to local competition, regulatory changes, and economic conditions in China.
• Gross margin volatility — Cost of sales declined significantly year-over-year, which boosted gross margin, but such fluctuations may not be sustainable and could affect future profitability.
• Corporate governance and control changes — Recent 8-K filings report a change in control and multiple accountant changes, which may raise concerns about internal controls and financial reporting reliability.

Outlook

Management expects the spin-off of the PaperClip software business to be complete by June 30, 2008. After the spin-off, the company will operate solely through DWST, its wholly owned PRC subsidiary engaged in nutritional supplements and personal care products. No other specific financial guidance is provided in the filing.