Cogo (COGO) 10-Q 2010 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010.

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to              .

Commission File Number 000-02642

COGO GROUP, INC.

(Exact name of registrant as specified in its charter)

Maryland	52-0466460
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

Room 1001, Tower C, Skyworth Building

High-Tech Industrial Park

Nanshan, Shenzhen 518057, PRC

(Address of Principal Executive Offices including zip code)

011-86-755-267-43210

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company

Large Accelerated Filer	¨	Accelerated Filer	x
Non-Accelerated Filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes  ¨    No  x

On November 5, 2010 the Registrant had 40,552,178 shares of Common Stock issued and 35,326,447 shares of Common Stock issued and outstanding.

Cogo Group, Inc.

Index to Form 10-Q

PART I – FINANCIAL INFORMATION		1
Item 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	1
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27
Item 4.	CONTROLS AND PROCEDURES	28
PART II – OTHER INFORMATION		29
Item 1.	LEGAL PROCEEDINGS	29
Item 1A.	RISK FACTORS	29
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	29
Item 3.	DEFAULTS UPON SENIOR SECURITIES	29
Item 4.	(REMOVED AND RESERVED)	29
Item 5.	OTHER INFORMATION	29
Item 6.	EXHIBITS	29
SIGNATURES		30

i

PART I- FINANCIAL INFORMATION

Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COGO GROUP, INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

	September 30, 2010						December 31, 2009
	USD’000			RMB’000			RMB’000
Assets
Current assets:
Cash		137,100			917,265			667,320
Pledged bank deposits		20,000			133,810			116,040
Accounts receivable, net		89,442			598,411			617,613
Bills receivable		3,800			25,425			17,592
Inventories		44,250			296,052			146,132
Income taxes receivable		180			1,207			1,263
Prepaid expenses and other receivables		5,846			39,118			28,083
Total current assets		300,618			2,011,288			1,594,043
Property and equipment, net		2,235			14,955			14,406
Goodwill and intangible assets, less accumulated amortization, RMB117,187 thousand (USD17,515 thousand) in 2010 and RMB100,834 thousand in 2009		44,288			296,309			312,662
Other assets		234			1,563			416
Total Assets		347,375			2,324,115			1,921,527
Liabilities and equity
Current liabilities:
Accounts payable		11,767			78,725			81,140
Bank borrowings		76,434			511,379			119,402
Income taxes payable		2,339			15,652			11,847
Accrued expenses and other liabilities		9,661			64,635			138,008
Total current liabilities		100,201			670,391			350,397
Deferred tax liabilities		2,452			16,409			19,108
Total liabilities		102,653			686,800			369,505
Equity
Common stock:
Par value: USD0.01
Authorized: 200,000,000 shares
Issued: 40,552,178 shares in 2010 and 40,079,336 shares in 2009
Outstanding: 35,326,447 shares in 2010
35,770,025 shares in 2009		492			3,290			3,258
Additional paid in capital		190,242			1,272,816			1,221,538
Retained earnings		102,605			686,479			604,464
Accumulated other comprehensive loss		(16,907	)		(113,115	)		(107,384	)
					��
		276,432			1,849,470			1,721,876
Less cost of common stock in treasury, 5,225,731 shares in 2010 and 4,309,311 shares in 2009.		(33,044	)		(221,080	)		(178,309	)
Total Cogo Group, Inc. equity		243,388			1,628,390			1,543,567
Noncontrolling interest		1,334			8,925			8,455
Total equity		244,722			1,637,315			1,552,022
Total liabilities and equity		347,375			2,324,115			1,921,527

See accompanying notes to unaudited condensed consolidated financial statements.

1

COGO GROUP, INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months

ended September 30, 2010 and 2009

	Three Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Net revenue
Product sales		98,855			661,392			551,063
Services revenue		1,345			8,997			8,970
		100,200			670,389			560,033
Cost of sales
Cost of goods sold		(84,915	)		(568,120	)		(472,010	)
Cost of services		(1,089	)		(7,287	)		(7,194	)
		(86,004	)		(575,407	)		(479,204	)
Gross profit		14,196			94,982			80,829
Selling, general and administrative expenses		(6,017	)		(40,255	)		(47,437	)
Research and development expenses		(2,973	)		(19,893	)		(15,756	)
Other operating income		28			188			349
Income from operations		5,234			35,022			17,985
Interest expense		(513	)		(3,435	)		(572	)
Interest income		594			3,971			3,716
Earnings before income taxes		5,315			35,558			21,129
Income tax expense		(621	)		(4,156	)		(2,731	)
Income before extraordinary item		4,694			31,402			18,398
Extraordinary item, net of nil tax		—			—			6,737
Net income		4,694			31,402			25,135
Less net income attributable to noncontrolling interest		(46	)		(306	)		(2,175	)
Net income attributable to Cogo Group, Inc.		4,648			31,096			22,960

2

	Three Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
	USD			RMB			RMB
Earnings per share attributable to Cogo Group, Inc.
Income before extraordinary item		0.12			0.83			0.44
Extraordinary item		—			—			0.18
- Basic		0.12			0.83			0.62
Income before extraordinary item		0.12			0.82			0.43
Extraordinary item		—			—			0.18
- Diluted		0.12			0.82			0.61
Weighted average number of common shares outstanding
- Basic					37,244,589			36,809,304
- Diluted					37,853,878			37,745,926
Amounts attributable to Cogo Group, Inc.
Income before extraordinary item		4,648			31,096			16,223
Extraordinary item		—			—			6,737
Net income attributable to Cogo Group, Inc.		4,648			31,096			22,960
	Three Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Comprehensive income:
Net income		4,694			31,402			25,135
Other comprehensive income
Foreign currency translation adjustments		(579	)		(3,876	)		(165	)
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest		(31	)		(206	)		(2,171	)
Comprehensive income attributable to Cogo Group, Inc.		4,084			27,320			22,799

See accompanying notes to unaudited condensed consolidated financial statements.

3

COGO GROUP, INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended

September 30, 2010 and 2009

	Nine Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Net revenue
Product sales		271,538			1,816,723			1,473,934
Services revenue		3,504			23,446			21,030
		275,042			1,840,169			1,494,964
Cost of sales
Cost of goods sold		(233,299	)		(1,560,886	)		(1,264,065	)
Cost of services		(2,831	)		(18,942	)		(17,004	)
		(236,130	)		(1,579,828	)		(1,281,069	)
Gross profit		38,912			260,341			213,895
Selling, general and administrative expenses		(17,579	)		(117,611	)		(123,252	)
Research and development expenses		(8,208	)		(54,915	)		(47,876	)
Other operating income		34			224			668
Income from operations		13,159			88,039			43,435
Interest expense		(929	)		(6,216	)		(1,081	)
Interest income		1,608			10,758			10,688
Earnings before income taxes		13,838			92,581			53,042
Income tax expense		(1,473	)		(9,855	)		(6,153	)
Income before extraordinary item		12,365			82,726			46,889
Extraordinary item, net of nil tax		—			—			6,737
Net income		12,365			82,726			53,626
Less net income attributable to noncontrolling interest		(106	)		(711	)		(2,745	)
Net income attributable to Cogo Group, Inc.		12,259			82,015			50,881

4

	Nine Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
	USD			RMB			RMB
Earnings per share attributable to Cogo Group, Inc.
Income before extraordinary item		0.33			2.21			1.22
Extraordinary item		—			—			0.18
- Basic		0.33			2.21			1.40
Income before extraordinary item		0.32			2.16			1.17
Extraordinary item		—			—			0.18
- Diluted		0.32			2.16			1.35
Weighted average number of common shares outstanding
- Basic					37,149,639			36,357,237
- Diluted					38,006,683			37,566,258
Amounts attributable to Cogo Group, Inc.
Income before extraordinary item		12,259			82,015			44,144
Extraordinary item		—			—			6,737
Net income attributable to Cogo Group, Inc.		12,259			82,015			50,881
	Nine Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Comprehensive income:
Net income		12,365			82,726			53,626
Other comprehensive income
Foreign currency translation adjustments		(893	)		(5,972	)		329
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest		(70	)		(470	)		(2,747	)
Comprehensive income attributable to Cogo Group, Inc.		11,402			76,284			51,208

See accompanying notes to unaudited condensed consolidated financial statements.

5

COGO GROUP, INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

	Nine Months ended September 30,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Cash flows from operating activities:
Net income		12,365			82,726			53,626
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		692			4,627			4,339
Amortization of intangible assets		2,444			16,353			22,574
Deferred income taxes		(403	)		(2,699	)		(3,564	)
Loss on disposal of property and equipment		66			441			168
Share-based compensation		7,669			51,310			44,092
Extraordinary item		—			—			(6,737	)
Change in current assets and liabilities, net of effects from acquisition of Mega Smart in 2009:
Accounts receivable, net		1,694			11,335			(82,485	)
Bills receivable		(1,171	)		(7,833	)		2,897
Inventories		(22,961	)		(153,622	)		(43,693	)
Prepaid expenses and other receivables		(1,855	)		(12,413	)		877
Accounts payable		(166	)		(1,110	)		(18,443	)
Income taxes payable		583			3,899			3,647
Accrued expenses and other liabilities		(1,019	)		(6,817	)		(1,580	)
Net cash used in operating activities		(2,062	)		(13,803	)		(24,282	)
Cash flows used in investing activities:
Increase in pledged bank deposits		(3,052	)		(20,417	)		—
Payment for acquisitions of subsidiaries		(9,734	)		(65,127	)		(65,327	)
Purchases of property and equipment		(848	)		(5,675	)		(1,802	)
Net cash used in investing activities		(13,634	)		(91,219	)		(67,129	)
Cash flows provided by financing activities:
Proceeds from bank borrowings		59,958			401,150			95,644
Proceeds from exercise of stock options		—			—			2,049
Purchase of treasury stock		(6,393	)		(42,771	)		—
Net cash provided by financing activities		53,565			358,379			97,693
Effect of exchange rate changes on cash		(510	)		(3,412	)		92
Net increase in cash		37,359			249,945			6,374
Cash at beginning of the period		99,741			667,320			686,379
Cash at end of the period		137,100			917,265			692,753
Supplementary cash flow information:
Interest paid		(929	)		(6,216	)		(1,081	)
Income tax paid		(1,293	)		(8,649	)		(6,069	)
Non-cash investing activities:
Stock issued for acquisition consideration payable, included in other liabilities		—			—			13,666
Acquisition of Mega Smart include in accrued expenses and other liabilities		—			—			122,415
Reduction of intangible assets upon reversal of contingent consideration payable in respect of Keen Awards		—			—			26,803

See accompanying notes to unaudited condensed consolidated financial statements.

6

COGO GROUP, INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2010

	Cogo Group, Inc. Stockholders
	Common stock					Additional paid in capital RMB’000			Retained earnings RMB’000		Accumulated other comprehensive loss RMB’000			Treasury stock RMB’000			Noncontrolling interest RMB’000			Total  equity RMB’000
	No. of shares outstanding			RMB’000
Balance as of January 1, 2010		35,770,025			3,258		1,221,538			604,464		(107,384	)		(178,309	)		8,455			1,552,022
Net income		—			—		—			82,015		—			—			711			82,726
Foreign currency translation adjustments		—			—		—			—		(5,731	)		—			(241	)		(5,972	)
Issuance of common stock pursuant to share-based compensation		472,842			32		(32	)		—		—			—			—			—
Share-based compensation		—			—		51,310			—		—			—			—			51,310
Purchase of treasury stock		(916,420	)		—		—			—		—			(42,771	)		—			(42,771	)
Balance as of September 30, 2010		35,326,447			3,290		1,272,816			686,479		(113,115	)		(221,080	)		8,925			1,637,315
Balance as of September 30, 2010 (in USD)					492		190,242			102,605		(16,907	)		(33,044	)		1,334			244,722

See accompanying notes to unaudited condensed consolidated financial statements.

7

COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited condensed consolidated financial statements of Cogo Group, Inc. (the “Company”) and its subsidiaries (the “Group”), include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Group’s consolidated financial position, results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2009.

The Group has experienced, and expects to continue to experience, seasonal fluctuations in net revenue, which have historically been lowest in the first quarter of the year due to the Chinese New Year holiday season period and are typically highest in the fourth quarter of the year due to the desire by original equipment manufacturers (“OEMs”) to spend remaining allocated annual budgets. Consequently, the Group’s financial position, operating results, cash flows and trends in these unaudited condensed consolidated financial statements are not necessarily indicative of future results that may be expected for any other interim period or for the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements are expressed in Renminbi (“RMB”), the national currency of the People’s Republic of China (the “PRC”). For the convenience of the reader, the September 30, 2010 RMB amounts, included in the accompanying unaudited condensed consolidated financial statements have been translated into United States dollars (“USD”) at the rate of USD1.00 = RMB6.6905. No representation is made that the RMB could have been, or could be, converted into USD at that rate or at any particular rate or at all.

Note 2 – Summary of Significant Accounting Policies

ASU 2009-13, Revenue Recognition (ASC 605) – Multiple-Deliverable Revenue Arrangements and ASU 2009-14, Software (ASC 985) – Certain Revenue Arrangements That Include Software Elements

In September 2009, the FASB reached a consensus on ASU 2009-13, Revenue Recognition (ASC 605) – Multiple-Deliverable Revenue Arrangements and ASU 2009-14, Software (ASC 985) – Certain Revenue Arrangements That Include Software Elements. ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: i) vendor-specific objective evidence (“VSOE”) or ii) third-party evidence (“TPE”), before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. These new updates are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of the two ASUs should not have a significant impact on the consolidated financial statements of the Company.

8

COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

EITF Issue No. 08-9- Milestone Method of Revenue Recognition

EITF 08-9 provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. Under the Consensus, entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met. The scope of this issue is limited to transactions involving research or development. The milestone method should not be applied to transactions within the scope of other authoritative literature on revenue recognition (i.e., construction contract accounting under ASC Subtopic 605-35). EITF 08-9 is effective for interim and annual periods beginning on or after June 15, 2010 with early adoption permitted. The Company has evaluated this ASU and determined that there is no significant impact from the adoption of this ASU on the consolidated financial statements of the Company.

Note 3 – Accounts Receivable, Net

	September 30,						December 31,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Accounts receivable		100,397			671,703			690,919
Less: allowance for doubtful accounts		(10,955	)		(73,292	)		(73,306	)
Accounts receivable, net		89,442			598,411			617,613

An analysis of the allowance for doubtful accounts is as follows:

	Three Months ended September 30,					Nine Months ended September 30,
	2010			2009		2010			2009
	RMB’000			RMB’000		RMB’000			RMB’000
Beginning balance		73,308			54,650		73,306			37,314
Addition charged to allowance for doubtful accounts		—			16,506		324			33,842
Write back on allowance for doubtful accounts		(16	)		—		(338	)		—
Ending balance		73,292			71,156		73,292			71,156

Note 4 – Bills Receivable

To reduce the Group’s credit risk, the Group requires certain customers to pay for the sale of the Group’s products by bills receivable. Bills receivable are short-term notes receivable that are issued by a financial institution that entitles the Group to receive the full face amount from the financial institution at maturity, which generally ranges from 3 to 6 months from the date of issuance. Historically, the Group has experienced no losses on bills receivable.

In certain circumstances, the Group has arranged to transfer with recourse certain of its bills receivable to banks. Under this discounting arrangement, the bank pays a discounted amount to the Group and collects the amounts owed from the customers’ banks. The discount costs 4.9% of the balance transferred, which is recorded as interest expense.

For the three months ended September 30, 2010 and 2009, the Group received proceeds from the sale of bills receivable amounting to RMB3,455 thousand (USD516 thousand), and RMB20,641 thousand, respectively. In addition, the Group recorded discounts amounting to RMB45 thousand (USD7 thousand), and RMB159 thousand in respect of the bills receivable sold for the three months ended September 30, 2010 and 2009, respectively, which have been included in interest expense.

For the nine months ended September 30, 2010 and 2009, the Group received proceeds from the sale of bills receivable amounting to RMB22,043 thousand (USD3,295 thousand) and RMB49,708 thousand, respectively. In addition, the Group recorded discounts amounting to RMB190 thousand (USD28 thousand) and RMB260 thousand in respect of the bills receivable sold for the nine months ended September 30, 2010 and 2009, respectively, which have been included in interest expense.

9

COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

For bills receivable sold to banks that the Group has surrendered control, the Group derecognized the discounted bills receivable pursuant to the provisions of ASC 860,Transfers and Servicing. As of September 30, 2010 and December 31, 2009, the Group has derecognized discounted bills receivable amounting to RMB18,387 thousand (USD2,748 thousand) and RMB33,871 thousand, respectively in accordance with ASC 860.

Note 5 – Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Cost of inventories comprises direct materials. Inventories by major categories are as follows:

	September 30,				December 31,
	2010		2010		2009
	USD’000		RMB’000		RMB’000
Raw materials		73		488		1,792
Finished goods		44,177		295,564		144,340
Total inventories		44,250		296,052		146,132

Inventories amounting to RMB7,000 thousand (USD1,046 thousand) and RMB9,600 thousand (USD1,435 thousand) were written off during the three months and nine months ended September 30, 2010, respectively. Inventories amounting to RMB365 thousand and RMB3,065 thousand were written off during the three months and nine months ended September 30, 2009, respectively.

Note 6 – Property and Equipment, Net

Property and equipment is stated at cost less depreciation and if applicable, impairment. Property and equipment consists of the following:

	September 30,						December 31,
	2010			2010			2009
	USD’000			RMB’000			RMB’000
Property and equipment, at cost		6,209			41,539			37,984
Less: accumulated depreciation		(3,974	)		(26,584	)		(23,578	)
Property and equipment, net		2,235			14,955			14,406

Note 7 – Goodwill and Intangible Assets

The changes in the carrying amount of goodwill and intangible assets for the period ended September 30, 2010 is as follows:

	Goodwill		Intangible Assets			Total
	RMB’000		RMB’000			RMB’000
Balance as of January 1, 2010		196,858		115,804			312,662
Amortization of intangible assets		—		(16,353	)		(16,353	)
Balance as of September 30, 2010		196,858		99,451			296,309
Balance as of September 30, 2010 (in USD)		29,424		14,864			44,288

Note 8 – Bank Borrowings and Banking Facilities

On October 7, 2005, the Group entered into a credit facility with Standard Chartered Bank (Hong Kong) Limited (“SCB”). On July 6, 2010, the facility is revised into a general banking facility. The facility is secured by funds on deposit of not less than USD5,000 thousand. The facility of the current account overdraft bears interests rate of 0.5% per annum above the HKD Prime for HKD overdraft or 0.5% per annum above the USD Prime for USD overdraft, payable monthly in arrears. The facility of trade finance bears interest at 2% per annum above HIBOR for the import/export facilities denominated in foreign countries. The outstanding loan balance under the SCB facility was RMB110,166 thousand (USD16,466 thousand) and RMB31,040 thousand respectively, as of September 30, 2010 and December 31, 2009.

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COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

On October 7, 2005, the Group entered into a USD9,000 thousand credit facility with the Bank of China (Hong Kong) Limited (“BOC”). On April 23, 2010 the facility with the BOC was USD31,000 thousand. The facility is secured by funds on deposit in an amount not less than USD15,000 thousand and bears interest from LIBOR/HIBOR +2% per annum, depending on the different kinds of borrowings made and is used to settle foreign exchange obligations to the extent needed. The BOC facility is repayable on demand and the BOC may increase, reduce and/or cancel the facility by providing written notice to the Group. Interest on this facility accrues until payment is demanded by the BOC and no commitment fee is required for this facility. As of September 30, 2010 and December 31, 2009, the outstanding loan balances under the BOC facility were RMB165,391 thousand (USD24,721 thousand) and RMB33,957 thousand, respectively.

On April 28, 2010, the Group entered into a factoring agreement (the “Factoring Agreement”) with the BOC. Pursuant to the Factoring Agreement, BOC granted the Group a line of credit of up to USD30,000 thousand or its equivalent amount in HKD, secured by funds on deposit in an amount not less than USD15,000 thousand, being the aggregate amount with other facilities with BOC, if any. The facility bears an interest rate of 2% per annum above HIBOR or LIBOR, depending on the currency in which the borrowings are denominated. As of September 30, 2010, the outstanding loan balance under the Factoring Agreement was RMB8,512 thousand (USD1,272 thousand).

On November 18, 2009, the Group entered into a credit facility with Guangdong Development Bank Shenzhen Branch (“GDB Shenzhen”). The facility is valid for 12 months commencing November 18, 2009 and terminates on November 17, 2010, and loans under the facility bear interest at 1.5% per annum above the 3-month LIBOR and no commitment fee is required for this facility. GDB Shenzhen may terminate the facility if the Group does not regain its ability to perform its repayment obligations and cannot provide guarantees acceptable to GDB Shenzhen within 30 days after it ceases performing its repayment obligations. No minimum guarantee deposits are required. On January 22, 2010, the Group entered into a Credit Extension Agreement with Guangdong Development Bank Macau Branch (“GDB Macau”) which established a revolving secured trade finance term. The credit extension is valid for 12 months commencing January 22, 2010, and loans under the Credit Extension Agreement bear an interest rate of 3-month LIBOR or HIBOR rate plus 1.5% per annum, depending on the drawdown currency. As of September 30, 2010 and December 31, 2009, the total outstanding loan balance under both GDB Shenzhen facility and GDB Macau facility was RMB227,310 thousand (USD33,975 thousand) and RMB54,405 thousand, respectively.

On October 8, 2010, the Group entered into general banking facilities (“Facility I” and “Facility II”) with the Hong Kong Branch of China Merchants Bank (“CMB”). Facility I consists of a revolving loan facility of up to the lesser of (i) USD20,000 thousand or (ii) the amount of the bank guarantee (“Bank Guarantee”) issued by Shenzhen Branch of China Merchants Bank. The maturity date of Facility I is the earlier of (i) December 30, 2010 or (ii) five banking days prior to the expiration date of the Bank Guarantee. Facility I bears interest at a rate equal to the greater of LIBOR at the rate of one or two month periods or the cost of funds of CMB, plus 1.3% per annum. Facility II consists of an irrevocable letters of credit (“LC”), loans against a trust receipt (up to 180 days) (“TR”) and an invoice financing loan (up to 180 days) (“IFL”) up to a total amount of the lesser of USD20,000 thousand or the aggregate amount of the Bank Guarantee (“Facility II”). Facility II commences on January 1, 2011 and matures on the earlier of (i) October 8, 2011 or (ii) five banking days prior to the expiration date of the Bank Guarantee. Commissions and interest on the facilities and loans under the Facility II are as follows:

(1) LC opening commission: first USD50 thousand at 0.25% and at 0.3125% thereafter.

(2) Acceptance commission: first USD50 thousand at 0.25% and at 0.3125% thereafter.

(3) TR loan interest rate: at 1.3% per annum. above the greater of (i) LIBOR or (ii) the cost of funds of CMB.

(4) Commission in lieu of exchange: first USD50 thousand at 0.25% and at 0.3125% thereafter.

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COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

(5) Invoice Financing loan interest rate: at 1.3% per annum above the greater of (i) LIBOR or (ii) the cost of funds of CMB.

The Facilities are secured by a bank guarantee up to the amount of RMB140 million issued by Shenzhen Branch of China Merchants Bank. In the event of default, the Facilities provide for interest of 5% above interest otherwise payable.

As of September 30, 2010, the weighted average interest rate on the outstanding bank borrowings was 2.3% (2009: 2.0%).

Note 9 – Accrued Expenses and Other Liabilities, and Other Non-Current Liabilities

Accrued expenses and other liabilities, and other non-current liabilities consist of the following:

	September 30,				December 31,
	2010		2010		2009
	USD’000		RMB’000		RMB’000
Legal and professional fees		710		4,747		4,305
Accrued staff related costs		112		749		7,967
Payables for acquisitions (Note a)		8,209		54,921		121,453
Other accruals		630		4,218		4,283
Accrued expenses and other liabilities		9,661		64,635		138,008

Note a: The balance at September 30, 2010 represents amounts payable in relation to the Group’s acquisitions of Long Rise Holdings Limited (“Long Rise”) amounting to RMB54,921 thousand (USD8,209 thousand) and is non-interest bearing.

Note 10 – Share-Based Compensation

During the three months ended September 30, 2010 and 2009, the Company recognized share-based compensation expense for awards issued under the 2006 Incentive Plan and the 2009 Omnibus Securities and Incentive Plan (the “2009 Incentive Plan”) of RMB17,619 thousand (USD2,633 thousand) and RMB14,954 thousand, respectively. During the nine months ended September 30, 2010 and 2009, the Company recognized share-based compensation expense for awards issued under the 2006 Incentive Plan and the 2009 Incentive Plan of RMB51,310 thousand (USD7,856 thousand) and RMB44,092 thousand, respectively. No options and stock warrants were issued during the three months and nine months ended September 30, 2010 and 2009.

(a) Options under the 2004 Incentive Plan

Under the Company’s 2004 Incentive Plan, the Company issued options to purchase shares of the Company’s common stock. The options granted under the 2004 Incentive Plan had a weighted average exercise price per option of USD4.08 and weighted average remaining contractual term of approximately 4 years. During the three and nine months ended September 30, 2010, nil and 7,500 options under the 2004 Incentive Plan were exercised. During the three and nine months ended September 30, 2009, 85,000 and 100,000 options were exercised, respectively. As of September 30, 2010, 1,184,769 options were outstanding under the 2004 Incentive Plan.

12

COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

(b) Non-vested share units

A summary of non-vested share units activity is as follows:

	2006 Incentive Plan					2009 Incentive Plan
	Shares			Weighted average grant-date fair value		Shares			Weighted average grant-date fair value
				USD					USD
Balance as of January 1, 2010		1,309,164			5.70		—			—
Granted on January 29, 2010		932,763			6.36		1,167,237			6.36
Granted on September 23, 2010		—			—		750,000			6.04
Vested		(1,103,413	)		5.55		(194,540	)		6.36
Balance as of September 30, 2010		1,138,514			6.39		1,722,697			6.22

Note 11 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

	Three Months ended September 30,				Nine Months ended September 30,
	2010		2009		2010		2009
	RMB’000		RMB’000		RMB’000		RMB’000
Numerator for basic and diluted earnings per share:
Income before extraordinary item		31,096		16,223		82,015		44,144
Extraordinary item		—		6,737		—		6,737
Net income attributable to Cogo Group, Inc.		31,096		22,960		82,015		50,881
Denominator:
Basic weighted average shares		37,244,589		36,809,304		37,149,639		36,357,237
Effect of dilutive non-vested equity share units, performance shares, options and warrants		609,289		936,622		857,044		1,209,021
Diluted weighted average shares		37,853,878		37,745,926		38,006,683		37,566,258
	RMB		RMB		RMB		RMB
Income before extraordinary item		0.83		0.44		2.21		1.22
Extraordinary item		—		0.18		—		0.18
Basic earnings per share:		0.83		0.62		2.21		1.40
Income before extraordinary item		0.82		0.43		2.16		1.17
Extraordinary item		—		0.18		—		0.18
Diluted earnings per share:		0.82		0.61		2.16		1.35

Non-vested equity share units, performance shares, and options and warrants amounting to approximately 474 thousand shares and 614 thousand shares are excluded from the Company’s dilutive computation as their effect would be anti-dilutive for the three months ended September 30, 2010 and 2009. For the nine months ended September 30, 2010 and 2009, approximately 474 thousand shares and 709 thousand shares are excluded from the Company’s dilutive computation as their effect would be anti-dilutive.

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COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

Note 12 – Operating Segment Information

Segment information is as follows:

	Three Months ended September 30,						Nine Months ended September 30,
	2010			2009			2010			2009
	RMB’000			RMB’000			RMB’000			RMB’000
Net revenue
Product sales
Segment revenue from external customers
Digital media		377,961			337,110			1,053,188			917,098
Telecommunications equipment		165,975			138,335			446,773			375,675
Industrial business		117,456			75,618			316,762			181,161
		661,392			551,063			1,816,723			1,473,934
Service revenue
Segment revenue from external customers		8,997			8,970			23,446			21,030
Inter-segment revenue		—			—			—			5,125
		8,997			8,970			23,446			26,155
Inter-company elimination		—			—			—			(5,125	)
Total net revenue		670,389			560,033			1,840,169			1,494,964
Income from operations
Product sales		45,960			27,779			117,866			70,760
Services revenue		1,260			855			3,363			1,651
Unallocated (note i)		(12,198	)		(10,649	)		(33,190	)		(28,976	)
Total income from operations		35,022			17,985			88,039			43,435
Interest expense		(3,435	)		(572	)		(6,216	)		(1,081	)
Interest income		3,971			3,716			10,758			10,688
Earnings before income taxes		35,558			21,129			92,581			53,042

	September 30, 2010		December 31, 2009
	RMB’000		RMB’000
Total assets
Product sales		2,248,988		1,851,356
Service revenue		72,579		66,444
Unallocated (note ii)		2,548		3,727
		2,324,115		1,921,527

Note i: Unallocated income from operations includes items such as corporate staff and overheads.

Note ii: Unallocated assets mainly includes cash for corporate use.

Note 13 – Comprehensive Income

The following table reconciles equity attributable to noncontrolling interest:

	Three Months ended September 30,						Nine Months ended September 30,
	2010			2009			2010			2009
	RMB’000			RMB’000			RMB’000			RMB’000
Beginning balance		8,719			6,087			8,455			5,511
Net income attributable to noncontrolling interest		306			2,175			711			2,745
Foreign currency translation adjustments		(100	)		(4	)		(241	)		2
Ending balance		8,925			8,258			8,925			8,258

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COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

Note 14 – Fair Value Measurement

The fair values of pledged bank deposits, accounts receivable, accounts payable, bank borrowings and accrued expenses and other liabilities approximated the respective carrying amounts because of the short maturity of these instruments. The Group adopted ASC 820-10, for the nonfinancial assets and liabilities that are remeasured at fair value on a nonrecurring basis, prospectively effective January 1, 2009. The nonfinancial assets and liabilities that are remeasured at fair value on a nonrecurring basis did not impact our financial position or results of operations; however, it could have an impact in future periods. In addition, the Group may have additional disclosure requirements in the event we incur impairment of our assets in future periods.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This commentary should be read in conjunction with Cogo Group, Inc. (the “Company”) and its subsidiaries’ (together, “we,” “us,” “our” or the “Group”) unaudited condensed consolidated financial statements for the period ended September 30, 2010 and 2009 as well as the Group’s consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in the Group’s Form 10-K for the year ended December 31, 2009.

Portions of the discussion and analysis below contain certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our plans and objectives for future expansion, including into our new digital consumer electronic and storage solution products; expectations for the domestic wireless handset, telecommunications equipment, consumer electronic and storage solution end-markets in the People’s Republic of China (the “PRC”); anticipated margins for our solutions; general and cyclical economic and business conditions, and, in particular, those in the PRC’s wireless handset, telecommunications equipment and consumer electronics industries; our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers; changes in the favorable tax incentives enjoyed by our PRC operating companies; and other statements containing forward looking terminology such as “may,” “expects,” “believes,” “anticipates,” “intends,” “projects,” “looking forward” or similar terms, variations of such terms or the negative of such terms. Such information is based upon various assumptions made by, and expectations of, our management that were reasonable when made but may prove to be incorrect. All of such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions which are subject to change. Accordingly, there can be no assurance that actual results will meet expectations and actual results may vary (perhaps materially) from certain of the results anticipated herein. For a further description of these and other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (“SEC”) on Form 10-K, and our subsequent SEC filings.

Overview

We provide customized module design solutions for a diverse set of applications and end markets, serving as a gateway for our technology component suppliers to access leading electronics manufacturers in the PRC. Our customized module design solutions allow our customers to take advantage of technology components from reputable suppliers in an efficient and cost-effective manner, effectively reducing their time-to-market and lowering their overall costs. Our close collaboration with our customers’ product development teams provides us with a unique understanding of their needs, enabling us to customize our suppliers’ technology components with module designs that meet our customers’ requirements. In addition, in 2006, we began offering technology and engineering services in the PRC, and in 2007, we began offering software design services in the PRC.

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We focus on the digital media, telecommunications equipment and industrial business end-markets in the PRC. In the digital media end-market, we provide mobile handset and module solutions for functionalities such as CMMB mobile TV, motion sensor, camera, power supply and Bluetooth as well as solutions for high definition digital set-top box, GPS applications and solutions for Smartbook. In the telecommunications equipment end-market, we provide solutions for PSTN switching, optical transmitters, electrical signal processing and optical signal amplification; in the industrial business end-market, which commenced in the beginning of 2008, we provide industrial solutions for the green energy, smart meter, smart grid, railways and auto-electronics sectors. Currently, we have over 1,500 customers, including many of the most established manufacturers in the digital media, telecommunications equipment and industrial business end-markets in the PRC, such as ZTE, TCL and BYD. We work with original equipment manufacturers, or OEMs, as well as subsystem designers and contract manufacturers to provide solutions to support industry leaders like Huawei. In developing customized module design solutions for use in our customers’ products, we collaborate closely with over 30 suppliers of technology components, including many large multinational companies such as Broadcom, Sandisk, Freescale and Atmel. In addition, in October 2006, we became one of the first PRC-based companies to license software technology and have access to selected source codes directly from Microsoft.

We have two reportable operating segments: product sales consisting of revenues generated by providing customized module design solutions focusing primarily in the digital media, telecommunications equipment and industrial business end-markets, and services revenue, generated by providing technology and engineering services, network system integration and related training and maintenance services.

Principal Factors Affecting Our Results of Operations

The major factors affecting our results of operations and financial condition include:

Revenue mix. Our net revenue and gross profit are affected by our product mix. Over the third quarter of 2010, industrial business related sales, which have generally higher profit margins than our digital module related sales and our telecommunications equipment module related sales, constituted a greater portion of our total net revenue as compared to the previous quarters.

Growth in end-market industries. The rapid growth of the domestic telecommunications equipment, industrial business and digital media end-markets have been important growth drivers for China’s electronics manufacturing industries. Specific markets that we expect to experience growth are the new lines of business in the automotive, HDTV, smart meters, smart grid and 3G handset areas. Steady demand on the historical markets such as the data communications market, consisting of asymmetric digital subscriber line (ADSL) modems and Voice over Internet Protocol (VoIP) equipment; the routers and network security equipment markets; the optical transmission systems market; the fixed line telecommunications network market, as well as the digital media market particularly relating to digital TV and GPS applications is also expected. Increased domestic consumer spending power has contributed to rapid growth in these markets. This growth in domestic consumer spending power in turn has driven, and we believe will continue to drive, growth in the electronics manufacturing businesses supporting hardware OEMs, including those engaged in the customized design of module solutions such as ourselves. However, these industries and the respective domestic manufacturers that operate in these industries may not continue to grow their sales at historical levels, if at all. The stagnation or reduction in overall demand for telecommunications equipment, industrial business and digital media products could materially affect our results of operations.

Increase in exports. We believe that the development of a highly-skilled, low-cost manufacturing base has also enabled China’s domestic telecommunications equipment and digital consumer electronics manufacturers to be competitive in the global marketplace. As an example, ZTE, a major manufacturer of mobile handset and telecommunications equipment in China, as well as other telecommunications equipment and mobile handset manufacturers, have also begun to expand overseas. We believe that growth in the export market will likely have a positive effect on our results of operations and financial condition, as it should increase the demand for our solutions, particularly among our digital media clients.

Growth by entering new end-markets, strengthening in-house capabilities and leveraging our customer base. In 2008, we began targeting the industrial business end-market by providing industrial solutions for the green energy and auto-electronics sectors. Since then the revenues generated from this market have grown from 13.5% of our revenue in the third quarter of 2009 to 17.5% of our revenue in the third quarter of 2010. We anticipate that sales related to the industrial business end-markets will generally have higher profit margins than our digital media and telecom equipment modules related sales, though such higher margins may decline over time as this industry matures. We will also look for opportunities to expand into new end markets that we believe represent significant growth opportunities.

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Our success in the industrial business end-market will depend, in significant part, on our ability to leverage our existing customer base. We expect to continue to incur additional research and development expenses, through hiring additional engineering personnel to develop new solutions and expanding our intellectual property and technological capabilities, to meet the needs of our customers that have expanded into or are expected to expand into the industrial business end-market.

General economic and market conditions. Due to market conditions, the level of consumer and information technology spending has declined and reduced the demand for our mobile handsets since the third quarter of 2008. Furthermore, our profit margins have been reduced since we strategically lowered our pricing in order to grow the business in a slowing economic environment. Over the third quarter of 2010 our profit margin have been stabalized and our other businesses, such as industrial business and digital media products, continue to show solid growth, driven by stable infrastructure investments in the PRC.

Net Revenue

Product sales

For our product sales segment, we do not charge our customers an independent design fee. Instead, our business model is to generate revenue by reselling a limited number of specific components required in our module reference design. The difference between the purchase price we pay our suppliers for these components and our sales price to the customer for these components compensates us for our design, technical support and distribution services. Our net revenue is net of a 17% value-added tax, or VAT. Costs incurred for the design of modules are expensed as incurred and recorded as research and development expense in the Company’s consolidated statements of income and comprehensive income.

Our broad and diversified customer base includes many of the major telecommunications equipment, industrial business and digital consumer electronics manufacturers in the PRC. In addition, our customers include industry participants supporting these OEMs, such as subsystem designers and contract manufacturers in the PRC, as well as international manufacturers who have begun to manufacture end-products in the PRC for the domestic and international market.

Our net revenue is subject to seasonal fluctuation and periods of increased demand. All product module sales are typically highest in the fourth quarter of the year due to desire by OEMs to spend remaining budgets allocated for a given period, usually on an annual basis. Net revenue has historically been lowest in the first quarter of the year due to the Chinese New Year holiday and the general reduction in sales following the holiday season. The digital media industry also experiences cyclical fluctuations, as well as fluctuations in how quickly certain new digital media products and technologies are adopted by the market. These sales patterns may not be indicative of future sales performance.

Services Revenue

We provide technology and engineering services, and related training and maintenance services to our customers. We generate revenue when our services are rendered and acknowledged by our customers. Our service revenue is net of business tax.

Cost of Sales

Our cost of sales comprises cost of goods sold and cost of services.

Cost of Goods Sold

Cost of goods sold primarily consists of the purchase of components from suppliers. We develop our customized module design solutions based on specific technology components purchased from suppliers in our target end-markets. Our list of over 30 key suppliers includes Broadcom (integrated circuit and Bluetooth), Matsushita (switches), Freescale Semiconductor (automotive solutions) and Xilinx (industrial solutions). We typically issue purchase orders to our suppliers only after we receive customer orders, enabling us to maintain sustainable inventory levels and, in turn, minimize risks typically associated with holding inventory. If we lose a key supplier, or a supplier reduces the quantity of products it sells to us, does not maintain a sufficient inventory level of products required by us or is otherwise unable to meet our demands for its components, we may have to expend significant time, effort and other resources to locate a suitable alternative supplier and secure replacement components. Even if we are able to find a replacement supplier, we may be required to redevelop the customized module design solution to effectively incorporate the replacement components.

17

Cost of Services

Cost of services consists of direct staff costs and other direct related costs for providing engineering and technology services including training and materials.

Operating Expenses

Selling, General and Administrative Expenses

Our selling expenses include expenditures to promote our new module solutions and gain a larger customer base, personnel expenses and travel and entertainment costs related to sales and marketing activities, and freight charges. We expense all these expenditures as they are incurred. Selling expenses are expected to continue to grow in the future as we diversify by developing and acquiring new design capabilities and expanding into new end-markets. Also included in selling expenses is allowance for doubtful accounts.

General and administrative expenses include compensation and benefits for our general and administrative staff, professional fees, amortization of intangible assets, foreign exchange losses and general travel and entertainment costs. We expense all general and administrative expenses as they are incurred. We expect that general and administrative expenses will continue to increase for the foreseeable future as a result of our expected continued growth and the continuing costs of complying with U.S. rules and regulations necessary to maintain our listing in the United States.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related costs of the employees engaged in research, design and development activities; the costs for design and testing; the cost of parts for prototypes; equipment depreciation; and third party development expenses. We expense research and development expenses as they are incurred. As of September 30, 2010, we had approximately 280 engineers and other technical employees engaged in research and development related activities to develop new customized module design solutions targeted at the telecommunications equipment, industrial business and digital media industries.

Noncontrolling Interest

Noncontrolling interest consisted of 30% and 40% of the outstanding equity interest in Long Rise and Comtech Digital Technology (Hong Kong) Limited (“Comtech Digital”), respectively. For the quarter ended September 30, 2010, approximately 1.7% of our total net revenue was generated through Long Rise. Comtech Digital was established in March 2010 and 1.1% of our total net revenue was generated for the third quarter of 2010.

Taxation

The Company and its subsidiaries file separate income tax returns.

USA

We are a holding company incorporated in the State of Maryland and conduct substantially all our operations through our PRC operating companies. Although we are subject to United States taxation, we do not anticipate incurring significant United States income tax liability for the foreseeable future because:

• we do not conduct any material business in the United States,

18

• the earnings generated from our non-U.S. operating companies are generally eligible for a deferral from United States taxation until such earnings are repatriated to the United States, and

• we believe that we will not generate any significant amount of income inclusions under the income imputation rules applicable to a United States company that owns “controlled foreign corporations” for United States federal income tax purposes.

Cayman Islands and British Virgin Islands

Under the current laws of the Cayman Islands and British Virgin Islands, the Company’s subsidiaries that are incorporated in the Cayman Islands and the British Virgin Islands are not subject to tax on income or capital gains. In addition, upon payments of dividends by these companies, no Cayman Islands or British Virgin Islands withholding tax will be imposed.

Hong Kong

The Company’s subsidiaries that are incorporated in Hong Kong are subject to a Hong Kong Profits Tax. The applicable profits tax rate is 16.5% for 2009 and 2010. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

PRC

Prior to January 1, 2008, the PRC’s statutory income tax rate was 33%. In addition, Shenzhen Comtech, Comtech Communication, Comtech Software, Comloca Technology (Shenzhen) Company Limited (“Comloca”), Epcot Multimedia Technology (SZ) Co. Ltd. (“Epcot”), Shenzhen Huameng Software Company Limited (“Huameng PRC”) and Viewtran Technology (Shenzhen) Co., Limited (“Viewtran PRC”) (collectively the “Shenzhen Subsidiaries), being located in the Shenzhen Special Economic Zone in the PRC, were subject to a reduced tax rate of 15%. Since the Shenzhen Subsidiaries agreed to operate for a minimum of 10 years in the PRC, the Shenzhen Subsidiaries were each entitled to a tax holiday of two-year tax exemption followed by three-year 50% tax reduction from the first profit making year after offsetting accumulated tax losses of the respective Shenzhen Subsidiaries.

Also prior to January 1, 2008, Shanghai E&T which is located in Shanghai Qingpu Zone, was taxed on a deemed basis at 2.31% of its turnover in accordance with the tax guidelines issued by the local tax authority in Qingpu Zone in 2007.

On March 16, 2007, the National People’s Congress passed the Corporate Income Tax law (the “CIT law”) which unified the income tax rate to 25% for all companies. The CIT law was effective as of January 1, 2008. Accordingly, the Company’s PRC subsidiaries are subject to income tax at 25% effective from January 1, 2008 unless otherwise specified.

The CIT law and its relevant regulations provide a five-year transition period from January 1, 2008 for those companies which were established before March 16, 2007 and which were entitled to preferential lower tax rates under the then effective tax laws or regulations, as well as grandfathering certain tax holidays. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively. For the Shenzhen Subsidiaries that were entitled to the tax holidays of two-year tax exemption followed by a three-year 50% tax reduction from the first profit making year after offsetting accumulated tax losses, and they are entitled to continue the tax holidays until they expire. For Comloca and Huameng PRC which had not commenced their respective tax holiday as of December 31, 2007, the CIT law and its relevant regulations require the tax exemption period to begin on January 1, 2008.

Based on the above, the Shenzhen Subsidiaries are subject to the following tax rates:

• Shenzhen Comtech is subject to income tax at rates of 15%, 18%, 20%, 22%, 24% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012 onwards respectively.

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• Comtech Communications is subject to income tax at rates of 7.5%, 18%, 20%, 22%, 24% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012 onwards, respectively.

• Comtech Software is subject to income tax at rates of 7.5%, 9%, 10%, 22%, 24% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012 onwards, respectively.

• Comloca and Huameng PRC had no assessable profits up to 2007 and were tax exempt for 2008 and 2009. They are subject to income tax at rates of 11%, 12%, 12.5% and 25% for 2010, 2011, 2012 and 2013 onwards, respectively.

• Viewtran PRC and Epcot were tax exempt for 2007 and 2008 and are subject to income tax at rates of 10%, 11%, 12% and 25% for 2009, 2010, 2011 and 2012 onwards, respectively.

In 2010, Mega Smart (Shenzhen), Mega Sky (Shenzhen) and Industrial (Shenzen) were each entitled to a two-year tax exemption followed by a three-year 50% tax reduction from the first profit making year. In addition, Shanghai E&T, Shanghai Comtech, Keen Awards Beijing (“Keen Awards”), R&E Microelectronics, Comtech Digital (Shenzhen) and Chengdu Comtech are subject to the corporate income tax rate of 25% under the CIT law.

As a result of the above incentives, our operations have historically been subject to relatively low tax liabilities, which will increase in the near future. Our effective tax rate was 10.6% and 11.6% in the nine months ended September 30, 2010 and 2009, respectively. Included in the income tax expense for the nine months ended September 30, 2010 was a deferred income tax benefit of RMB2,699 thousand (USD403 thousand) as a result of the amortization of intangible assets of RMB16,353 thousand (USD2,444 thousand).

Three months ended September 30, 2010 compared to three months ended September 30, 2009

Overview

The following table sets forth information regarding the breakdown of revenues and income from operations between our product sales segment and service revenue segment:

	Three Months ended September 30,
	2010		2009
	RMB’000		RMB’000
Net revenue
Product sales
Digital media		377,961		337,110
Telecommunications equipment		165,975		138,335
Industrial business		117,456		75,618
Services revenue		8,997		8,970
Total net revenue		670,389		560,033

Net Revenue.Total net revenue increased by RMB110,356 thousand (USD16,494 thousand), or 19.7% in the three months ended September 30, 2010 when compared to the corresponding period in 2009. The increase was mainly due to the continued expansion in all end-markets.

Product Sales

Details of product sales by market type are as follows:

	Three Months ended September 30,
	2010							2009
	Amount				% of Net Revenue			Amount		% of Net Revenue			% Change
	USD’000		RMB’000					RMB’000
Digital media		56,491		377,961		56.4	%		337,110		60.2	%		12.1	%
Telecommunications equipment		24,808		165,975		24.8	%		138,335		24.7	%		20.0	%
Industrial business		17,556		117,456		17.5	%		75,618		13.5	%		55.3	%
Total product sales		98,855		661,392		98.7	%		551,063		98.4	%		20.0	%

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Product sales for the three months ended September 30, 2010 was RMB661,392 thousand (USD98,855 thousand), or RMB10,329 thousand, or 20.0% higher than the corresponding period in 2009. Digital media sales increased by RMB40,851 thousand (USD6,106 thousand), or 12.1%; telecommunications equipment related sales increased by RMB27,640 thousand (USD4,131 thousand), or 20.0%; and industrial business related sales increased by RMB41,838 thousand (USD6,253 thousand), or 55.3%. The increase in product sales was mainly attributable to the Group’s continued effort and strategic focus in the expansion of the industrial business end-market, the increased sales volume as a result of growing demand and the promising new lines of business such as automotive, HDTV, smart meters, smart grid and 3G handset access.

Services Revenue.

Services revenue is as follows:

	Three Months ended September 30,
	2010							2009
	Amount				% of Net Revenue			Amount		% of Net Revenue			% Change
	USD’000		RMB’000					RMB’000
Services revenue		1,345		8,997		1.3	%		8,970		1.6	%		0.3	%

Services revenue was derived from the provision of technology and engineering services, network system integration and related training and maintenance services. The increase of RMB27 thousand (USD4 thousand), or 0.3%, was mainly attributable to more sales generated from software design services for the quarter end September 30, 2010, as compared to same period of 2009.

Gross Profit. Gross profit was RMB94,982 thousand (USD14,196 thousand) in the three months ended September 30, 2010, an increase of RMB14,153 thousand (USD2,115 thousand), or 17.5% when compared to RMB80,829 thousand in the corresponding period in 2009. The increase in gross profit was primarily attributable to increased sales volume in all end-markets. Gross margin was 14.2% in the three months ended September 30, 2010, compared to 14.4% in the corresponding period in 2009.

Selling, General and Administrative and R&D Expenses. Selling, general and administrative and R&D expenses were RMB60,148 thousand (USD8,990 thousand) in the three months ended September 30, 2010, or 4.8% lower than the corresponding period in 2009. The expenses for the three months ended September 30, 2010 and 2009 are as follows:

	Three Months ended September 30,
	2010							2009
	Amount				% of Net Revenue			Amount		% of Net Revenue			% change
	USD’000		RMB’000					RMB’000
Selling expenses		1,754		11,737		1.7	%		26,028		4.6	%		(54.9	%)
General and administrative expenses		4,263		28,518		4.3	%		21,409		3.8	%		33.2	%
R&D expenses		2,973		19,893		3.0	%		15,756		2.8	%		26.3	%
Total		8,990		60,148		9.0	%		63,193		11.2	%		(4.8	%)

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Selling, General and Administrative Expenses.The decrease in selling expenses in the three months ended September 30, 2010 of RMB14,291 thousand (USD2,136 thousand), or 54.9%, was mainly attributable to a charge in allowance for doubtful account of RMB16,506 thousand for the three months ended September 30, 2009 as compared to RMB nil thousand for the same period of 2010. The additional charge for doubtful accounts was assessed in accordance with the Group’s accounting policy. The decrease in selling expenses was offset in part by an increase in product logistics costs, such as transportation and warehousing charges. The increase in general and administrative expenses of RMB7,109 thousand (USD1,063 thousand), or 33.2%, was primarily attributable to RMB5,621 thousand of an unrealized exchange gain mainly resulting from the appreciation of Australian Dollars against RMB during the three months ended September 30, 2009 as compared to an exchange gain of RMB330 thousand (USD49 thousand) for the same period of 2010. The increase in general and administrative expenses was offset in part by an increase in staff cost, including increase in stock-based compensation cost of RMB1,244 thousand (USD186 thousand) of which was mostly granted in the beginning of 2010, and other general administrative expenses, such as office rental due to an increase in headcount as a result of our acquisition of Mega Smart in May 2009.

R&D Expenses. R&D expenses increased in the three months ended September 30, 2010 by RMB4,137 thousand (USD618 thousand), or 26.3%, as compared to the corresponding period in 2009. R&D expenses mainly consist of staff cost and R&D facility charges, and the increase was primarily attributable to an increase in R&D staff cost, including increase in stock-based compensation cost of RMB1,111 thousand (USD166 thousand).

Interest Expense.Interest expense increased in the three months ended September 30, 2010 by RMB2,863 thousand (USD428 thousand) or 500.5%, as compared to the corresponding period in 2009. The increase in interest expense was attributable to an increase in average bank borrowings.

Interest Income. Interest income in the three months ended September 30, 2010 amounted to RMB3,971 thousand (USD594 thousand), compared to RMB3,716 thousand in the corresponding period in 2009. The increase was mainly attributable to an increase in average bank deposits as compared to the corresponding period in 2009.

Income Tax Expense. The effective income tax rate for the three months ended September 30, 2010 and 2009 was 11.7% and 12.9%, respectively. The decrease in effective income tax rate was due to the increase in revenue generated by certain entities in the PRC with tax holidays compared to the same period in 2009.

Extraordinary Gain. Extraordinary gain of RMB6,737 thousand in corresponding period of 2009 represented the reversal of consideration payable for the Keen Awards acquisition of RMB29,118 thousand, offset in part by the reduction of Keen Awards related intangible assets of RMB26,803 thousand and the respective deferred taxation in relation to the intangible assets of Keen Awards of RMB4,422 thousand.

Net Income; Earnings per share. As a result of the above items, net income attributable to Cogo Group, Inc. for the three months ended September 30, 2010 was RMB31,096 thousand (USD4,648 thousand), as compared to RMB22,960 thousand in the corresponding period in 2009. We reported basic earnings per share of RMB0.83 (USD0.12) and diluted earnings per share of RMB0.82 (USD0.12) for the three months ended September 30, 2010, as compared to basic earnings per share of RMB0.62 and diluted earnings per share of RMB0.61 for the corresponding period in 2009.

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

Overview

The following table sets forth information regarding the breakdown of revenues and income from operations between our product sales segment and service revenue segment:

	Nine Months ended September 30,
	2010		2009
	RMB’000		RMB’000
Net revenue
Product sales
Digital media		1,053,188		917,098
Telecommunications equipment		446,773		375,675
Industrial business		316,762		181,161
Services revenue		23,446		21,030
Total net revenue		1,840,169		1,494,964

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Net Revenue.Total net revenue increased by RMB345,205 thousand (USD51,596 thousand), or 23.1% in the nine months ended September 30, 2010 when compared to the corresponding period in 2009. The increase was mainly due to the continued expansion in all end-markets.

Product Sales

Details of product sales by market type are as follows:

	Nine Months ended September 30,
	2010							2009
	Amount				% of Net Revenue			Amount		% of Net Revenue			% Change
	USD’000		RMB’000					RMB’000
Digital media		157,416		1,053,188		57.2	%		917,098		61.4	%		14.8	%
Telecommunications equipment		66,777		446,773		24.3	%		375,675		25.1	%		18.9	%
Industrial business		47,345		316,762		17.2	%		181,161		12.1	%		74.9	%
Total product sales		271,538		1,816,723		98.7	%		1,473,934		98.6	%		23.3	%

Product sales for the nine months ended September 30, 2010 was RMB1,816,723 thousand (USD271,538 thousand), or RMB342,789 thousand, or 23.3% higher than the corresponding period in 2009. Digital media sales increased by RMB136,090 thousand (USD20,341 thousand), or 14.8%; telecommunications equipment related sales increased by RMB71,098 thousand (USD10,627 thousand), or 18.9%; and industrial business related sales increased by RMB135,601 thousand (USD20,268 thousand), or 74.9%. The increase in product sales was mainly attributable to the Group’s continued effort and strategic focus in the expansion of the industrial business end-market, the increased sales volume as a result of growing demand and the and the promising new lines of business such as automotive, HDTV, smart meters, smart grid and 3G handset access.

Services Revenue.

Services revenue is as follows:

	Nine Months ended September 30,
	2010							2009
	Amount				% of Net Revenue			Amount		% of Net Revenue			% Change
	USD’000		RMB’000					RMB’000
Services revenue		3,504		23,446		1.3	%		21,030		1.4	%		11.5	%

Services revenue was derived from the provision of technology and engineering services, network system integration and related training and maintenance services. The increase of RMB2,416 thousand (USD361 thousand), or 11.5% more sales generated from software design services for the quarter, as compared to same period of 2009.

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Gross Profit. Gross profit was RMB260,341 thousand (USD38,912 thousand) in the nine months ended September 30, 2010, an increase of RMB46,446 thousand (USD6,942 thousand), or 21.7% when compared to RMB213,895 thousand in the corresponding period in 2009. The increase in gross profit was primarily attributable to increased sales volume in all end-markets. Gross margin was 14.1% in the nine months ended September 30, 2010, compared to 14.3% in the corresponding period in 2009.

Selling, General and Administrative and R&D Expenses. Selling, general and administrative and R&D expenses were RMB172,526 thousand (USD25,787 thousand) in the nine months ended September 30, 2010, or 0.8% higher than the corresponding period in 2009. The expenses for the nine months ended September 30, 2010 and 2009 are as follows:

	Nine Months ended September 30,
	2010							2009
	Amount				% of Net Revenue			Amount		% of Net Revenue			% change
	USD’000		RMB’000					RMB’000
Selling expenses		4,704		31,472		1.7	%		59,362		4.0	%		(47.0	%)
General and administrative expenses		12,875		86,139		4.7	%		63,890		4.3	%		34.8	%
R&D expenses		8,208		54,915		3.0	%		47,876		3.2	%		14.7	%
Total		25,787		172,526		9.4	%		171,128		11.5	%		0.8	%

Selling, General and Administrative Expenses.The decrease in selling expenses in the nine months ended September 30, 2010 of RMB27,890 thousand (USD4,169 thousand), or 47.0%, was mainly attributable to a charge in allowance for doubtful accounts of RMB26,118 thousand in the nine months ended September 30, 2009, as compared to RMB2 thousand for the same period of 2010. The additional charge for doubtful accounts assessed in accordance with the Group’s accounting policy. The decrease in selling expenses was offset by an increase in product logistics costs, such as transportation and warehousing charges. The increase in general and administrative expenses of RMB22,249 thousand (USD3,325 thousand), or 34.8%, was primarily attributable to RMB13,218 thousand of an unrealized exchange gain mainly resulting by the appreciation of Australian Dollars against RMB during the nine months ended September 30, 2009, as compared to an exchange loss of RMB3,178 thousand (USD475 thousand) for the same period of 2010. In addition, there was an increase in staff cost, including stock-based compensation cost of RMB3,405 thousand (USD509 thousand) of which was mostly granted in the beginning of 2010, and other general administrative expenses, such as office rental due to an increase in headcount as a result of our acquisition of Mega Smart in May 2009.

R&D Expenses. R&D expenses increased in the nine months ended September 30, 2010 by RMB7,039 thousand (USD1,052 thousand), or 14.7%, as compared to the corresponding period in 2009. The R&D expenses mainly consist of staff cost and R&D facility charges and the increase was primarily attributable to an increase in R&D staff cost, including stock-based compensation cost of RMB2,967 thousand (USD444 thousand) as a result of expansion in industrial market.

Interest Expense.Interest expense increased in the nine months ended September 30, 2010 by RMB5,135 thousand (USD768 thousand) or 475.0%, as compared to the corresponding period in 2009. The increase in interest expense was attributable to an increase in average bank borrowings.

Interest Income. Interest income in the nine months ended September 30, 2010 amounted to RMB10,758 thousand (USD1,608 thousand), compared to RMB10,688 thousand in the corresponding period in 2009. The increase was mainly attributable to an increase in average bank deposits as compared to the corresponding period in 2009.

Income Tax Expense.The effective income tax rate for the nine months ended September 30, 2010 and 2009 was 10.6% and 11.6%, respectively. The decrease in effective income tax rate was due to the increase in revenue generated by certain entities in the PRC with tax holidays compared to the same period in 2009.

Extraordinary Gain. Extraordinary gain of RMB6,737 thousand in corresponding period of 2009 represented the reversal of consideration payable for the Keen Awards acquisition of RMB29,118 thousand, offset in part by the reduction of Keen Awards related intangible assets of RMB26,803 thousand and the respective deferred taxation in relation to the intangible assets of Keen Awards of RMB4,422 thousand.

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Net Income; Earnings per share. As a result of the above items, net income attributable to Cogo Group, Inc. for the nine months ended September 30, 2010 was RMB82,015 thousand (USD12,259 thousand), as compared to RMB50,881 thousand in the corresponding period in 2009. We reported basic earnings per share of RMB2.21 (USD0.33) and diluted earnings per share of RMB2.16 (USD0.32) for the nine months ended September 30, 2010, as compared to basic earnings per share of RMB1.40 and diluted earnings per share of RMB1.35 for the corresponding period in 2009.

Liquidity and Capital Resources

Cash flows and working capital

Our accounts payable cycle typically averages approximately one month, whereas our receivables cycle typically averages approximately three to four months. Accordingly, working capital, being current assets less current liabilities, is needed to fund this timing difference.

As at September 30, 2010, apart from the cash payable in relation to our acquisition of the subsidiaries, we had no material commitments for capital expenditure.

As of September 30, 2010, we had approximately RMB917,265 thousand (USD137,100 thousand) in cash. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and factoring facilities and possible future public or private equity offerings. At times, we may evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which may require the use of cash. We believe that our cash, operating cash flows, credit arrangements, and access to equity and debt capital markets, taken together, provide adequate resources to fund our ongoing operating expenditures for the next 12 months. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity, as well as from other sources.

As of September 30, 2010, we had working capital of RMB1,340,897 thousand (USD200,417 thousand), including RMB917,265 thousand (USD137,100 thousand) in cash, as compared with working capital of RMB1,243,646 thousand, including RMB667,320 thousand in cash, as of December 31, 2009.

Operating activities used cash of RMB13,803 thousand (USD2,062 thousand) for the nine months ended September 30, 2010, compared to cash used of RMB24,282 thousand in the corresponding period in 2009. The cash used in operating activities for the nine months ended September 30, 2010 was primarily due to an increase in cash paid to inventory purchases of RMB153,622 thousand (USD22,961 thousand) near the end of September 2010 to meet expected demand in the coming months. For the nine months ended September 30, 2009, the increase in cash paid to inventory purchases was RMB43,693 thousand.

Investing activities used RMB91,219 thousand (USD13,634 thousand) for the nine months ended September 30, 2010, mainly for payments for acquisitions of subsidiaries of RMB65,127 thousand (USD9,734 thousand) and purchases of property and equipment of RMB5,675 thousand (USD848 thousand). Investing activities used RMB91,219 thousand (USD13,634 thousand) during the nine months ended September 30, 2009, mainly for payments for the acquisitions of subsidiaries of RMB65,127 thousand (USD9,734 thousand).

Financing activities provided cash of RMB358,379 thousand (USD53,565 thousand) for the nine months ended September 30, 2010, primarily arising from proceeds from bank borrowings of RMB401,150 thousand (USD59,958 thousand), partly offset by purchase of treasury stock of RMB42,771 thousand (USD6,393 thousand).

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Indebtedness

On October 7, 2005, the Group entered into a credit facility with Standard Chartered Bank (Hong Kong) Limited (“SCB”). On July 6, 2010, the facility is revised into a general banking facility. The facility is secured by funds on deposit of not less than USD5,000 thousand. The facility of the current account overdraft bears interests rate of 0.5% per annum above the HKD Prime for HKD overdraft or 0.5% per annum above the USD Prime for USD overdraft, payable monthly in arrears. The facility of trade finance bears interest at 2% per annum above HIBOR for the import/export facilities denominated in foreign countries. The outstanding loan balance under the SCB facility was RMB110,166 thousand (USD16,466 thousand) and RMB31,040 thousand respectively, as of September 30, 2010 and December 31, 2009.

On October 7, 2005, the Group entered into a USD9,000 thousand credit facility with the Bank of China (Hong Kong) Limited (“BOC”). On April 23, 2010 the facility with the BOC was USD31,000 thousand. The facility is secured by funds on deposit in an amount not less than USD15,000 thousand and bears interest from LIBOR/HIBOR +2% per annum, depending on the different kinds of borrowings made and is used to settle foreign exchange obligations to the extent needed. The BOC facility is repayable on demand and the BOC may increase, reduce and/or cancel the facility by providing written notice to the Group. Interest on this facility accrues until payment is demanded by the BOC and no commitment fee is required for this facility. As of September 30, 2010 and December 31, 2009, the outstanding loan balances under the BOC facility were RMB165,391 thousand (USD24,721 thousand) and RMB33,957 thousand, respectively.

On April 28, 2010, the Group entered into a factoring agreement (the “Factoring Agreement”) with the BOC. Pursuant to the Factoring Agreement, BOC granted the Group a line of credit of up to USD30,000 thousand or its equivalent amount in HKD, secured by funds on deposit in an amount not less than USD15,000 thousand, being the aggregate amount with other facilities with BOC, if any. The facility bears an interest rate of 2% per annum above HIBOR or LIBOR, depending on the currency in which the borrowings are denominated. As of September 30, 2010, the outstanding loan balance under the Factoring Agreement was RMB8,512 thousand (USD1,272 thousand).

On November 18, 2009, the Group entered into a credit facility with Guangdong Development Bank Shenzhen Branch (“GDB Shenzhen”). The facility is valid for 12 months commencing November 18, 2009 and terminates on November 17, 2010, and loans under the facility bear interest at 1.5% per annum above the 3-month LIBOR and no commitment fee is required for this facility. GDB Shenzhen may terminate the facility if the Group does not regain its ability to perform its repayment obligations and cannot provide guarantees acceptable to GDB Shenzhen within 30 days after it ceases performing its repayment obligations. No minimum guarantee deposits are required. On January 22, 2010, the Group entered into a Credit Extension Agreement with Guangdong Development Bank Macau Branch (“GDB Macau”) which established a revolving secured trade finance term. The credit extension is valid for 12 months commencing January 22, 2010, and loans under the Credit Extension Agreement bear an interest rate of 3-month LIBOR or HIBOR rate plus 1.5% per annum, depending on the drawdown currency. As of September 30, 2010 and December 31, 2009, the total outstanding loan balance under both GDB Shenzhen facility and GDB Macau facility was RMB227,310 thousand (USD33,975 thousand) and RMB54,405 thousand, respectively.

On October 8, 2010, the Group entered into general banking facilities (“Facility I” and “Facility II”) with the Hong Kong Branch of China Merchants Bank (“CMB”). Facility I consists of a revolving loan facility of up to the lesser of (i) USD20,000 thousand or (ii) the amount of the bank guarantee (“Bank Guarantee”) issued by Shenzhen Branch of China Merchants Bank. The maturity date of Facility I is the earlier of (i) December 30, 2010 or (ii) five banking days prior to the expiration date of the Bank Guarantee. Facility I bears interest at a rate equal to the greater of LIBOR at the rate of one or two month periods or the cost of funds of CMB, plus 1.3% per annum. Facility II consists of an irrevocable letters of credit (“LC”), loans against a trust receipt (up to 180 days) (“TR”) and an invoice financing loan (up to 180 days) (“IFL”) up to a total amount of the lesser of USD20,000 thousand or the aggregate amount of the Bank Guarantee (“Facility II”). Facility II commences on January 1, 2011 and matures on the earlier of (i) October 8, 2011 or (ii) five banking days prior to the expiration date of the Bank Guarantee. Commissions and interest on the facilities and loans under the Facility II are as follows:

(1) LC opening commission: first USD50 thousand at 0.25% and at 0.3125% thereafter.

(2) Acceptance commission: first USD50 thousand at 0.25% and at 0.3125% thereafter.

26

(3) TR loan interest rate: at 1.3% per annum. above the greater of (i) LIBOR or (ii) the cost of funds of CMB.

(4) Commission in lieu of exchange: first USD50 thousand at 0.25% and at 0.3125% thereafter.

(5) Invoice Financing loan interest rate: at 1.3% per annum above the greater of (i) LIBOR or (ii) the cost of funds of CMB.

The Facilities are secured by a bank guarantee up to the amount of RMB140 million issued by Shenzhen Branch of China Merchants Bank. In the event of default, the Facilities provide for interest of 5% above interest otherwise payable.

As of September 30, 2010, the weighted average interest rate on the outstanding bank borrowings was 2.3% (2009: 2.0%).

Some of our customers enter into arrangements with their respective banks for purposes of settling their bills. Under such arrangements, we were entitled to collect the amounts owed directly from the customers’ banks when the invoice becomes due. In certain circumstances, we have arranged to transfer with recourse certain of our bills receivable to the bank. Under this discounting arrangement, the bank pays a discounted amount to us and collects the amounts owed from the customers’ banks. The discount costs 4.9% of the balance transferred, which is recorded as interest expense. For the nine months ended September 30, 2010, we had received proceeds from the sales of the bills receivable amounting to RMB18,387 thousand (USD2,748 thousand), compared with RMB49,708 thousand for the same period last year.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Our reporting currency is the Renminbi. Transactions in other currencies are recorded in Renminbi at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are remeasured into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings.

The State Administration on Foreign Exchange, or SAFE, of the PRC, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended, or the “Rules”. Under the Rules, once various procedural requirements are met, Renminbi is convertible for current account transactions, including trade and service-related foreign exchange transactions and dividend payments, but not for capital account transactions, including direct investment, loans or investments in securities outside China, without prior approval of the SAFE of the PRC, or its local counterparts.

Since July 2005, the Renminbi is no longer pegged to the U.S. dollar. Although currently the Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 0.3% per day and the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market. As of September 30, 2010, the exchange rate of RMB to USD1.00 was RMB6.6905. On June 19, 2010, the People’s Bank of China announced the removal of the de facto peg. Following this announcement, the Renminbi appreciated from 6.7968 Renminbi per U.S. dollar on June 21, 2010 to 6.7709 Renminbi per U.S. dollar on July 2, 2010.

We conduct substantially all of our operations through our PRC operating companies, and their financial performance and position are measured in terms of Renminbi. Our solutions are primarily procured, sold and delivered in the PRC for Renminbi. The majority of our net revenue is denominated in Renminbi.

27

Any devaluation of the Renminbi against the U.S. dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms of U.S. dollars. On the other hand, the appreciation of the Renminbi could make our customers’ products more expensive to purchase because many of our customers are involved in the export of goods, which may have an adverse impact on their sales. A decrease in sales by our customers could have an adverse effect on our operating results. In addition, as of September 30, 2010 and December 31, 2009, we have cash denominated in U.S. dollars amounting to RMB290,804 thousand (USD43,465 thousand) and RMB149,399 thousand. Also, from time to time we may have U.S. dollar denominated borrowings. Accordingly, a decoupling of the Renminbi may affect our financial performance in the future.

We recognized a foreign currency translation adjustment of approximately RMB5,131 thousand (USD857 thousand) for the nine months ended September 30, 2010. We do not currently engage in hedging activities and as such, we may in the future experience economic loss as a result of any foreign currency exchange rate fluctuations.

Interest Rate Risk

We are exposed to interest rate risk arising from short-term variable rate borrowings from time to time. Our future interest expense will fluctuate in line with any change in our borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant market risks is not material. Our bank borrowings amounted to RMB511,379 thousand (USD76,434 thousand) as of September 30, 2010. Based on the variable nature of the underlying interest rate, the bank borrowings approximated fair value at that date.

If there was a hypothetical 1% change in interest rates, the net impact to earnings and cash flows would be approximately RMB5,114 thousand (USD764 thousand) over a one year period. The potential change in cash flows and earning is calculated based on the change in the net interest expense over a one year period due to an immediate 1% change in price.

Inflation

In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision of and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were effective as of September 30, 2010.

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the second quarter of fiscal 2010, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

There have been no material developments in the Company’s legal proceedings from those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2009.

Item 1A. RISK FACTORS

There have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10- K for the year ended December 31, 2009.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. (REMOVED AND RESERVED)

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

(b) Exhibits

Exhibit No.	Document Description
10.1*	Confirmation Letter of Standard Chartered Bank (Hong Kong) Limited, dated July 6, 2010.
10.2*	Facility Letter by and among Standard Chartered Bank (Hong Kong) Limited, Comtech International (Hong Kong) Limited, Keen Awards Limited and Comtech Broadband Corporation Limited, dated February 22, 2010.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

* Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 9, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COGO GROUP, INC.
November 5, 2010	By:	/S/    JEFFREY KANG
		Jeffrey Kang
		Chairman and Chief Executive Officer
		(Principal Executive Officer)
November 5, 2010	By:	/S/    FRANK ZHENG
		Frank Zheng
		Chief Financial Officer
		(Principal Financial Officer)

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