Analyzing Bargain Stocks

Lonking is a leading supplier of construction machinery based in China. It manufactures wheel loaders (48% of 2021 revenues), forklifts (26%), excavators (14%), road rollers (1%), and others (11%). It is the market leader in wheel loaders and in the top three by market share in forklifts. Short-term prospects are poor in China’s construction industry. Further, the company faces intense competition. Management have intimated that profits will decline by over 50% in the six months to 2022. The track record reveals excellent growth in revenues and profits but the industry has apparently entered a period of stability (at best) and future growth cannot be extrapolated at similar rates. The company reported revenues of 13.7b rmb (FY20: 12.9b), ebitda of 1.2b (FY20: 1.9b), and net profits of 1.3b (FY20: 2b). Profit margins were lower in FY21 due to sharply rising steel and raw material costs as well as a reduction in customer spend in the excavator segment. The balance sheet is stro...

  Cabbeen (‘company’) is a China-based designer of apparel for men, women, and children. Its own brands are designed in its four workshops around the world, and production is outsourced to independent manufacturers throughout China. The company primarily serves tier two and tier three Chinese cities through a distribution network totaling 831 retail stores. It generates revenues via online sales (~49% of revenues), wholesale distributors (20%), consignment distributors (31%), and a self-operated store. The business is currently facing headwinds as a result of repeated covid lockdowns in mainland China, which is dampening demand and leading to curtailment of physical store investments and purchase orders. Management have indicated declines in net profits of over 50% compared to FY21 (see below) due to partial suspension of the company’s logistics centre and physical stores in various cities in China. Such a business is also expected to face issues of rapid inventory obsolescen...

ArcelorMittal is one of the world’s largest integrated steel manufacturing and mining companies. It is Europe’s largest steel operator, and has operations in sixteen countries on four continents. Revenues are primarily generated in Europe (57%), followed by NAFTA (16%), Brazil (14%), and CIS countries (11%). Its primary products are flat steel (55% of revenues) followed by long steel products (24%), and its primary customer is the automotive industry. Its main market, Europe, is expected to encounter economic headwinds caused in no small part by spikes in energy costs, which is a significant component of the company’s cost structure. The financial track record is strong, particularly recently with increases in steel prices. It reported US$ 82.2b in TTM revenues (FY21: $76.6b), ebitda of $20.9b (FY21: $19.1b), and net income of $16.8b (FY21: $15.6b). Normal demonstrated net income is much lower, however, at $5 to $6b. The company has also aggressively paid down debt, which curre...

  Huisen (‘company’) is engaged in the manufacture of panel-type furniture (cabinets, shelves, coffee tables, etc.) as well as upholstered furniture and outdoor furniture. It is China’s largest exporter of panel-type furniture and 2/3 rd of sales was generated in the US. Most of its revenues are concentrated among five customers including Walmart, which has been a customer since 2012. Rising interest rates and the inflationary environment is expected to dampen property purchases and therefore, furniture buys. The company raised equity financing of over HK$ 1.2b (~1b rmb) via an IPO in December 2020 at a price of HK$ 1.77/share. Revenues and e have grown steadily culminating in FY21 figures of 5.1b rmb (FY20: 3.9b) and 888m rmb (FY20: 541m) respectively. (FY21 was a year when Trump-era tariffs on China were in full effect.) The balance sheet is overloaded with net cash (net of all liabilities) of 2.2b rmb. The equity is currently selling for 1.4b rmb i.e., at a 36% disc...

  Nisso Pronity (‘company’) is a relatively small Japanese operator engaged in the businesses of metal processing (69% of revenues), rubber processing (20%), and construction (11%).   Its metal processing segment is primarily used to manufacture solar cell array support mounts for fireproof panels – thereby benefiting from increasing demand for renewable energy – specifically, the increase in construction of distribution warehouses (which mount solar panels) arising from the expansion of the e-commerce market for merchandise sales.   Sales in this segment fell significantly in the last twelve months due to lack of growth in sales of fireproof panels and decrease in large scale projects. Nevertheless, the orders received and backlog were higher than last year.   Further, the company has increased its ownership of a construction company (now a subsidiary) in the building hardware and metals fitting business as part of management plans to diversify in re...

Stalprodukt (‘company’) is based in Poland and is one of the leading European manufacturers of processed steel products. It sells electrical sheets (23% of revenues), steel profiles (19%), and extracts zinc-lead ores for the production of zinc and lead (50%) along with related activities. About half its revenues are generated in Poland and half is exported (mostly within the EU). It is at a competitive disadvantage to non-EU manufacturers who don’t have to pay as much for CO2 emissions and have lower energy costs. Energy is a substantial component of the cost structure – and currently rising costs will negatively impact operations. Management’s report on the latest quarter almost reads like a plea to the EU to impose anti-dumping duties on foreign manufacturers whilst extolling the importance of the industry. An offsetting factor is currently high (and volatile) prices of its finished goods. The most recent quarter saw large price spikes in all segments though volumes were stable...

Tsaker (‘company’) is engaged in the manufacturing of 1) dye and agricultural intermediates (70% of revenues), 2) pigment intermediates (21%), and 3) battery materials (9%). It also has a small environmental technology consultancy unit, which it intends to spin off soon. It has a prominent position in the first two segments, which contributes all of its profits. Though most of its revenues are generated in China (68% of revenues) and India (9%), it has an established sales network across the world with sales to Indonesia, Brazil, Germany, US, Japan, Taiwan, and Spain among others. The relatively new battery materials segment earned gross profits only in 2021 as the production line achieved sufficient volume. Management intends to almost double capacity in this segment by the end of 2022. The company is a steady and reasonably efficient performer reporting 2021 sales of 1.78b (FY20: 1.28b), ebitda of 438m (FY20: 318m), and net profits of 227m (FY20: 145m). 2021 results included ...