JADE ART GROUP: Q2 UPDATE

Jade Art Operations Halted by Earthquake.
Revenue Down 37% from Q1’08. Downgraded
to Neutral Until Operations Regain Traction.

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The earthquake that shook Inner Mongolia, China in June forced Jade Art Group to suspend operations at its jade mine due to the destruction of the road leading to the mine. As a result, the company reported a disappointing Q2 ’08 with revenues contracting 37% to $6.7 million.

Jade Art’s gross margins remain robust at 82%; however they slid by 350 basis points, owing to the company’s inability to leverage fixed costs. Strong demand for jade remains the major argument for positive future prospects; however what we believe is the temporary closure of the mine, Jade Art’s single supplier, leaves the company with a near term large risk to business continuity.

Given the uncertain time frame for recommencing normal operations, management has withdrawn its 2008 guidance and says it expects to generate little or no revenue in Q3 ‘08. We believe existing sales contracts will provide a strong catalyst to restart the company’s revenue stream and regain momentum once normal operations resume. Until then we are downgrading our rating to NEUTRAL—near term pessimistic scenario—until the company’s operations gain traction, thereby enhancing earnings.