Jiashili Group Limited

Jiashili (‘Group’) manufactures and sells biscuits within China via a network of distributors. 

It sells over 53,000 tons of biscuits/year under the following categories: breakfast, crisp, sandwich, wafers, coarse grain, and others. Its sandwich and breakfast biscuits are the two largest product segments – each contributing 27% of sales, and 31% and 23% of gross profits respectively.

The group had to halt manufacturing for a month during the pandemic lockdown. Further, its sandwich biscuits segment saw declines in sales for the first time as the prolonged suspension of school reduced demand from the younger customers it serves.

TTM sales were $1.76b (2019: 1.81b); ebitda was $175m (2019: $202m) and net profits were $104m (2019: $124m).

The financial position is reasonably stable with a marginal net cash position. The liquid asset ratio was below par at 0.9:1 but not a major cause for concern.

Management have made questionable capital allocations of $112m to a partnership investing in unspecified unlisted equities, $83m in loans to third parties ($7m impaired in the last six months), and $7m investments in associates producing aggregate losses. Just avoiding these would add another five percentage points to returns on tangible assets.

They have distributed an average of 40-50% of profits as dividends but the recent interim dividend was cut to zero potentially halving the current year dividend to $20m.

The stock sells for $627m ($1.51/share), which is 5x 2019 earnings.

Recent investment and purchase commitments indicate a plan to diversify into manufacturing healthy drinks and distributing pasta products purchased from a third party. The total capital commitments are $176m (including $38m to the unlisted equity partnership described above), which points to squeezed free cash flows over the next couple of years.

However, this stock isn’t unreasonably priced and earnings are expected to grow over time without endangering the shareholders’ interests too much. It isn’t a screaming bargain, but it isn’t an unsound investment at the current price either.