China Starch Holdings Limited

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 $230-240m/year.

The financial position is strong with a net cash position of $288m, and a healthy liquid asset ratio.

The company has committed to invest $87m in a joint venture with a Japanese manufacturer of lactate-acid products – for which its cash resources appear ample.

Management have paid regular dividends of $60-$70m but this dropped to less than $40m currently.

The stock sells for $755m ($0.126/share) or just over three times earnings, which appears out of whack for a leading company with steady operating performance. Further, the company repurchased 200,000 shares on the exchange as recently as ten days ago for $0.134/share.

Without other information to the contrary, this appears to be a sound common stock investment at current prices.

Note: $ represents Hong Kong Dollar