Analyzing Bargain Stocks

China Starch (‘Company’) manufactures and sells cornstarch (70-80% of revenues), lysine, starch-based sweetener, modified starch, and related products. It’s one of the leading manufacturers in China. The industry is currently experiencing overproduction, which has dampened selling prices and margins. Further, corn kernel prices (main raw material) keep hitting new highs. It is characterized by heavy capital expenditure and fairly low returns on tangible assets. The company, however, has powered through the pandemic hitting new records in sales due to additional production facilities coming onboard in the last six months. It also benefited from raising prices on animal feed products due to restrictions on imports arising from lockdowns in other countries. It reported sales of $8.6b, ebitda of $381m, and net profits of $178m in the last twelve months. It’s ebitda margins have fluctuated between 3.1% and 11.5% in the last five years. Average current earning power can be estimated at...

CKW (‘Company’) operates in the construction industry and specializes in a) Foundation Construction (80% of revenues) and b) Drilling and Site Investigation Works (20%). It generates practically all its revenues in Hong Kong via the public and private sectors. The company appears to be well run and operated as demonstrated by its financial track record. The industry is currently subject to severe competition and price wars resulting in a reduction of gross profit margins from 24% to under 19% over the year. Contractual requirements are also getting more stringent and labour costs are rising. Covid-19 didn’t have any impact in the recent period, however, as the company progressed strongly on its major projects according to schedule. It reported sales of $1.5b in the last twelve months with ebitda of $124m and net profits of $63m – backed by cash flows. Ebitda margins have dropped steadily from 14.5% five years ago to 8.4% recently. The financial position is healthy with net cash o...

Shenguan (‘Group’) manufactures edible collagen sausage casing products. This comprises over 90% of its sales. It also manufactures collagen-based pharmaceutical, food, skin care, health care, and bioactive products – and conducts research and files patents to expand its product portfolio. It occupies a leading position in the industry supplying major manufacturers of processed meat products and sausages. It serves the higher-end of the nutritional market where collagen casings are preferred over pig casings. Over 90% of its sales are in China though it generates sales in South America, South-east Asia, and the USA as well. It is currently enduring an oversupply situation and greater competition in its industry after pork production declined in China. It is also subject to variations in the price of its major raw material – cattle hide – though this has been stable in the current period. Furthermore, Covid-19 has delayed resumption of activity at its customers, and reduced sales by...

NAS Holdings (‘Company’) distributes and services Surface Mount Technology (‘SMT’) equipment, semiconductor manufacturing equipment, and software on manufacturing control. Its customers include major telecom and electronic equipment manufacturers. It generates revenues from sales (97% of total) and leasing of these machines. The company sources most of its supplies (81.5%) from Fuji corporation in Japan – making it sensitive to the Yen (a 3% change in JPY/HKD results in a 10% move in profits). It generates most of its sales from China (92%) and the balance from other Asian countries. The pandemic didn’t adversely impact recent business results but the Sino-American trade war caused a spurt in orders by a major customer abruptly changing its manufacturing process. TTM Sales printed at $3.1b (2019: $2.4b) and ebitda was $213m (2019: $159m). Net profits were $136m (2019: $111m). Earnings were backed by strong free cash flows. The financial position was very strong with net cash of $...

China Uptown (‘company’) is  a property developer currently engaged with two residential and commercial properties in Maoming, Guangdong a fast-developing tier-3 city in China. (It is also profitably engaged in trading raw cane sugar, which ends in 2020, but this is not significant.) The properties are: a) 90% ownership of Zhanqian 7 th Road, Yuehua East District – Gross floor area of 245,000 sq.m (fully developed in 2018 and units are currently being sold); and b) 65% ownership of Jixiang-23, Jixiang District – Gross floor area of 118,000 sq.m (acquired in May) This is a cash hungry company that constantly raises funds from banks, directors, and shareholders to purchase and develop properties - and hasn’t paid a dividend. Most recently it consolidated its shares 10:1 and issued almost 40% of its pre-issue share capital to a minority shareholder in September raising $72 m in the process. We have adjusted the share count and the cash receipt to the balance sheet published...

AB (‘Group’) is engaged in construction activities in Macau. It generates revenues from fitting-out works (60-85% of revenues) and structural works (15%-40%) for government as well as private sector customers. Covid-19 has suspended construction activities and brought a halt to tenders of new projects in Macau. The group’s revenues declined almost 40% to $274m and incurred losses of $7m. Average revenues and earnings over the last five years were around $300m and $30m respectively. Operating cash flows averaged $18m due to heavy working capital investments, and free cash flows averaged over $16m/year. The financial position is strong with net cash of $183m. The group raised $61.2m net of fees at $0.67/share in 2018 in an IPO. Of this, $24.7 remained unutilized – to be used primarily for financing operations and $6.1m for potential acquisition candidates in the construction field operating in the Guangdong-Hong Kong-Macau greater bay area. (In September, the group acquired a related par...

Sitoy (‘Group’) is engaged in the manufacture and retail of handbags, small leather goods, travel goods, and footwear products – along with property investment. It generates 75% of its revenues from manufacturing for other brands, 24% from retailing its own brands (five in total), and the balance from rental income from its three commercial properties. It generated 39% of revenues from China, 17% from North America, 21% from Europe, and 20% from other Asian countries indicating good geographic diversity. The group was hit badly by the social unrest in Hong Kong followed by Covid-19 – reducing demand for the retail segment, and order flow for the manufacturing segment. The retail segment recorded substantial net losses. Sales declined to $1.8b (2019: $2.4b) and net losses were $133m compared to a profit of $126m last year. A closer examination of the financials reveals that $138m in losses were a result of write-downs of inventories, and impairment provisions for tangible asset...

Wuxi Sunlit (‘company’) manufactures and sells equipment for steel wire production lines, which produces steel cords that are ultimately used as reinforcement in automobile tyres. The company sold the following products: a) Brass electro-plating wire production lines (50% of sales); b) Standalone machines (25%); and c) Mould repairing equipment, parts, and accessories (15%) among other related products. It generates 90% of sales within mainland China. Its customer concentration is very high – generating 76% of revenues from just two customers. Further, it is subject to intense competition resulting in lower selling prices for its products. Covid-19 has added to the pain by causing customers to delay testing and purchase of equipment. Sales have fallen to $146m in the last twelve months after peaking at $210m in 2018. Similarly, net profits have fallen to just $4m from $57m in 2018. Taking recent sales and applying 5-year average margins, as the business appears to be cyclical, re...

Goldpac (‘Group’) provides embedded software and secure payment products for financial institutions, governments, and other companies in the healthcare, transportation, and retail industries. It generates 60% of its revenues from ‘Embedded software products’ (ESP), 16% from ‘Data processing’, and 24% from ‘Equipment’ sales – with the latter two categories clubbed under ‘Platform and service’ segment (PS). Mainland China contributes 92% of revenues, and Macau contributes 8%. Sales in the ESP segment declined 30.5% over the year during Covid-19, but this was offset by revenue growth of 23.8% in the PS segment due to increased demand for ‘contact-free’ services and the group’s AI self-service kiosks. Margins are also higher in the PS segment (36% pre-tax) compared to the ESP segment (23% pre-tax) – resulting in a lower decline in the bottom line. The group reported sales of $1.5b (2019: $1.6b) and earnings of $190m (2019: $201m) in the last twelve months. Earnings were backed by str...

Here’s a company selling at less than cash net of all liabilities – let’s examine whether the stock is worth the price. Futong is a Hong-Kong listed provider of Enterprise IT infrastructure products, cloud computing, and artificial intelligence (AI) solutions. All of its customers are in China. It generates its revenues from “Enterprise IT products” (60% of revenues), and “Provision of services” (40%). IBM terminated its partnership with the company in May for unspecified reasons – IBM products contributed 25% of revenues in 2019. Customers have also pared back spending after Covid-19 struck. Sales have declined precipitously from a peak of $4.2b to just $769m in the last twelve months. Profitability has been anorexic with wafer-thin margins of 1% in the best of years. Profits in the last six years aggregated just $26m. In addition, we suspect the recent quarter doesn’t reflect all expenses as $10m in staff costs were abruptly capitalized as an intangible asset, supposedly for...

Jilin Changlong (‘Company’) is a purveyor of Chinese medicines and pharmaceutical products. Originally set up as a state-controlled entity in 1989, it was converted to a limited liability company in 1995. It generates all its sales from mainland China. It sells its medicines under the brand names ‘Changlong’ and ‘Qing Tong’. Its best-selling drug is ‘Hai Kun Shen Xi’, a drug for chronic renal failure that was developed in 2003. Sales and net profits were $700m and $159m respectively for the last twelve months. Relatively high profit margins of 25% indicates the effect of patent protection. The financial position is very strong with net cash of $818m and net current asset value of $1.1b. The equity is selling for $835m or just above net cash, which appears extraordinarily cheap, and 5.2x earnings. Management has been relatively stingy with dividend payouts – with only $32m (or 20% of profits) paid in the last year yielding 4%. Moreover, they have a propensity to invest substan...

Hengxin (‘Company’) manufactures equipment for telecom providers - primarily for 4G networks. It is incorporated in Singapore, and listed in Hong Kong. It sells Radio frequency coaxial cables (51% of sales), Telecom equipment and accessories (21%), Antennas (24%), and other related products and services. It generates 80% of revenues in China, and 20% abroad (including 3% in India). The primary issue with this company is that its products are at the tail end of the 4G network life cycle. The key word used in the annual report is business “transformation” to enable it to stay competitive when 5G networks roll out in full flow. Covid-19 has also significantly disrupted the company’s production and sales with revenues down 28%. Customers have delayed or held up orders during this period. Sales have declined steadily since 2017 ending at $1.3b (2019: $1.6b) in the last twelve months. Net income printed at $73m (2019: $129m). A conservative (perhaps generous) estimate of current earn...

Fountain Set (‘Group’) is majority owned by Cofco corporation, a Chinese state-controlled entity, and listed in Hong Kong. It is engaged in the manufacture of fabrics for apparel retailers and brands. It sells dyed fabrics and yarns (88% of sales) and garments (12%). Its sales are generated primarily in China, Sri Lanka, Hong Kong, Korea, and Taiwan – all profitable geographical segments. It has eight production facilities in China, Sri Lanka, and Indonesia. Covid-19 has significantly impacted production and sales of retail apparel. Sales volumes were down 33% and cotton prices were down 16% over the last year – resulting in losses in the first half of 2020. The group’s performance track record has been satisfactory generating average revenues of $6-7b and ebitda of $350-400m. Working capital management appears to be excellent and the earnings are fully backed by operating cash flows. Capital expenditures, as expected for this industry, is fairly high, and deducting recent depr...

GDH (‘Group’) is a Chinese state-controlled entity, listed in Hong Kong, and engaged in the following segments: a) Tinplating (84% of revenues); b) Distribution of Fresh and live foodstuffs (15%); and c) Property leasing. It generates 53% of its sales from mainland China, 20% from Hong Kong, and 29% from other Asian countries. It conducts its tinplating business via a 66% subsidiary in which, Posco (the prominent Korean steel manufacturer) is the other partner. This business is subject to the typical cyclicality associated with excess capacity and fluctuations in tinplate prices. In its foodstuffs business, it has a 47% market share of distribution of live pigs into Hong Kong, which is profitable. It has enjoyed a recent surge in the prices of pigs as a result of the African swine flu and limited domestic supply. It also trades in corn starch via a 40% associate, which is loss-making. It intends to dispose the corn-starch business via a public tender (as it is state-controlled) with an...

Rivera (‘Company’) is listed in Hong Kong and engages in securities and property investments. Being an investment company, its value is more meaningfully derived from analysis of the balance sheet. Surveying the balance sheet, we find several assets and minimal liabilities. The significant assets are as follows:  a)  Investment property in Macau: on the books at $29m but valued at $647m (as at December 31 st , 2019)  b) Interest in associate: 37% interest in a Shanghai property investment company valued at $756m, generating net profits of about $125m/year with a very strong balance sheet. c)  Equity investments (non-current): includes 12.5% ownership of Tomson Group valued at $423m at market. (And $9m in unlisted start-up partnerships.)  d)  Equity investments (current): valued in the market at $255m including $124m in Bank of China shares. e) Cash and bank balances: $932m Total liabilities, including deferred tax liabilities and non-controlling interes...

Sinopec (‘Company’) is engaged in the provision of engineering and contracting services to the oil refining and chemicals industries. It is a Chinese state-controlled entity having significant dealings with other state-controlled entities (55% of the order backlog are with related parties). 33% of its shares are listed on the Hong Kong stock exchange. It operates in the following segments: a) Engineering, consulting, licensing (5% of revenues); b) EPC Contracting (65%) i.e. project management services; c) Construction (29%) i.e. providing infrastructure; d) Equipment manufacturing. Practically all of its projects are based in China but 10% of revenues were generated in Saudi Arabia and Kuwait. 60% of revenues were generated from the petrochemical industry, and 23% from oil refining. The company performed reasonably well during Covid-19 due to progress on all its major contracts. Increases in project execution costs, however, slightly reduced earnings. It won new orders, which w...

Shineroad (‘company’) is a leading distributor of food ingredients, food additives, and packaging material to customers across China – primarily to Shanghai and eastern China. The company has long-term relations with established suppliers like Nestle (ingredients) and Mitsubishi (additives), and supplies over 2,000 products to a diversified customer base of over 1,000 customers including food and beverage companies, confectionaries, dairies, bakeries, trading companies, and restaurants. Selling and distribution activities were hampered when Covid-19 struck, and earnings went down slightly (as short-life products were sold at a discount), but revenues went up. Sales grew steadily over the years to $675m in the last twelve months (ttm) and net profits fell from $34m to $27m (ttm). Capital expenditures aren’t significant and free cash flows have averaged over $21m annually. The financial position is very strong and overwhelmed by a net cash balance of $241m. The net current asset ...

Sun Hing (the ‘company’) is a Hong Kong listed company that serves as a one-stop printing service provider. It operates across five segments: a) Package printing (corrugated boxes, etc.) – 61% of sales; b) Paper gift set printing (booklets, etc.) – 20%; c) Card printing (warranty cards, etc.) – 11%; d) Smart package printing (RFID labels, etc.) – 5%; e) Other printing (stickers, etc.) – 3%. The company’s production facilities are based out of China and it sells to Hong Kong (52% of sales), Europe (22%), USA (13%), as well as mainland China itself (7%). Though Covid-19 affected customers’ willingness to spend on printing and promotion, the company increased revenues and profits across all segments over the year through optimization of orders and cost control. Key risks faced by the business include rising raw material (paper, etc.) and labour costs, as well as stricter environmental requirements in China. Customer concentration is fairly high with three customers accounting for...

HM (‘Company’) is listed in Hong Kong (HK) and provides integrated printing services for corporates. This includes financial printing services (95% of revenues), marketing collateral printing services (for fund houses and insurance companies), and related services. It has a diversified customer base generating recurring orders, and prospers with the growth of listed companies on the HK stock exchange. Covid-19 has caused delays and cancellations in various projects resulting in revenue declines of 20% over the last year. The company listed early in 2017 raising $40m after listing expenses - at $0.60/share. Revenues have declined since 2016 from a peak of $160m to $115m in the last twelve months (ttm). Ebitda, a proxy for cash earnings, declined from $27m in 2016 to $11m ttm. The company generated small net losses (ttm) after deducting interest on lease liabilities. Current operating earning power appears to be around $12m conservatively. After deducting depreciation and taxes, ...