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 ...

Texhong (‘company’) is engaged in cotton textile manufacturing and is the second largest operator in China by revenues. Its primary products are yarn (78% of revenues), and knitted garment fabrics (20%). It also sells grey fabrics and non-woven fabrics. Its profits are primarily generated in China (49%) and South East Asia (48%), along with the US and others. Tangible assets are primarily located in China (90%) and the rest in South East Asia (mostly Vietnam). Its primary raw material is cotton and is exposed to escalations in prices, which hit decade highs in 2021. Trade payables are denominated mostly in US$. Sales and profits rose in 2021 compared to 2020 to 26.5b rmb and 2.7b rmb respectively (PY: 19.6b and 530m) – primarily due to finished goods pricing increases. Though revenues in the primary yarn segment were up 34%, volumes were up only 9%. The results appear to be a result of abnormally good operating conditions. Taking normal revenues of 22-23b rmb (achieved in 2019) a...

China High Speed Transmission Equipment Group (‘company’) is a leading supplier of wind gear transmission equipment for wind turbine manufacturers. It also supplies industrial gears for the heavy equipment market. This combined segment (‘wind’) contributed 90% of profits. It concentrates on the 2MW-7MW wind turbine market though prototypes for 8MW-15MW are in the pipeline. It supplies the leading manufacturers in China as well as prominent overseas manufacturers such as GE, Siemens, Suzlon, and Doosan (15% export sales). In addition, it manufactures rail transport gear transmission equipment (2% of sales) and started a trading business in 2020 dealing mostly in refined oil, electrolytic copper, and steel products (30% of sales but only 5% of profits). Though sales in the wind segment were up 3.3% over the year, segment profit margins declined from 14.5% to 11%. In addition, operating cash flows were strained with large working capital requirements resulting in outflows of 1.5b rm...

Remak (‘company’) is part of the Zarmen Group listed in Poland and specializes in assembling, installing, and maintaining industrial boilers and other related equipment for power plants. They generate 67% of revenues within Poland and the balance from the rest of Europe – currently Germany, Finland, Malta, and Lithuania. Construction/assembly accounted for 75% of revenues while repairs/maintenance accounted for most of the balance. The company is relatively small in size and generates lumpy revenues as it relies on a handful of long-term contracts with established power plants. However, customer concentration is fairly low and the largest customer doesn’t account for more than 20% of revenues. Recent revenues have slumped primarily as a result of the coronavirus pandemic that has reduced available jobs, exacerbated supply and labour shortages, and delayed cash collections. It generated revenues ranging from 250m-375m zloty since 2018 when it made a fairly substantial acquisitio...

Orca Energy is listed in Canada and its primary asset is a natural gas field in Tanzania, which is governed by a production sharing agreement (PSA) with Tanzania Petroleum Development Corporation (TPDC), the national oil company. The PSA divides the gas reserves as ‘protected’ and ‘additional’. The company operates the wells and gas processing plant for the protected volumes on a ‘no gain/no loss’ basis - but can earn on volumes in excess of that. The PSA also mandates provisions on further revenue sharing arrangements based on daily volumes, cost recoveries, and taxes payable. Gross proved plus probable reserves were certified by independent valuers at 229.5 Bcf (billion cubic feet). At 2020 production volumes of 19.4 Bcf, the company roughly has 12 years of reserves left. The company generates 62% of revenues from the power sector and the balance from the industrial sector. It generates average revenues of $80m and operating cash flows (net of interest expense) of just under ...

China Oriental (‘group’) is in the business of manufacturing steel products (68% of revenues) as well as trading steel/iron ore and real estate development. It is a relatively large concern – ranked in the top 300 largest firms in China – and holds a leading position in H-section steel products since 2009 (41% of revenues). Other sales are: steel strip products (37%) and billets, sheet piling, and cold rolled sheets among others (22%). It also has 387m RMB of properties under development in inventory. Though it’s a large entity with presumed efficiencies of scale, it generates a sub-par return on capital (~7.5%). Part of this is due to the heavy capex typical of the steel industry. The group has also made large investments in railway transportation, which should enhance efficiencies (and reduce carbon footprint) when it becomes operational within the next year. Certain loans and advances were made on an interest-free basis – facilitated by the “government department concerned” (3...

Following on from our analysis of Avarga, we dive into its main subsidiary, which is listed in Canada – Taiga Building Products (‘Taiga’). Since Taiga is Avarga’s dominant asset, most of the economic analysis is redundant – except for some additional information below. Taiga is the largest independent wholesale distributor of building products in Canada (comprising 78% of sales). In addition, it sells to the US and parts of Asia. Its inventories comprise lumber products (70%), allied building products (18%), panel products (11%) and production consumables. The company recently reported losses for the quarter ending September (which wasn’t available for Avarga) – this seems primarily due to rapidly falling prices of lumber, set against relatively higher inventory costs accumulated earlier in the year. It also has sales and earnings information stretching further back as Avarga acquired majority control of Taiga only in 2017. Average earnings range between CA $40m and $55m. T...

Avarga is listed in Singapore and is primarily engaged in the wholesale distribution of building (lumber) products in Canada (~75% of revenues) and the US (~20%) – which contributes over 90% of sales and profits. It conducts this via its 71.8% equity interest in Taiga Building products (‘Taiga’) listed in Canada (valued at SG $193m at market). It’s also engaged in manufacturing paper/packaging products in Malaysia (used for e-commerce), and electricity generation in Myanmar. Looking at the consolidated financial statements, the group generated bumper sales and profits in the last twelve months due to exaggeratedly higher lumber prices that hovered over US $1,000/mbf (‘1000 board feet’). Lumber prices are currently below $600/mbf. Average revenues since 2018 amounted to $1.7b (70% of TTM revenues of $2.4b). Applying average blended profit margins of just under 5.5% yields $95m of ebitda and $60m in after-tax profits – which equates to average cash from operations in the past four ...

Dutech (‘company’) is listed in Singapore and primarily operates in two segments: a) High security solutions (HSS): Manufacturing safes for ATM machines, banking, and commercial use; and b) Business solutions (BS): Manufacturing ticketing/vending machines (used for parking, gaming, lottery, etc.) and wholesaling semiconductor and precision machine parts. Though both segments contribute equally to sales, the HSS segment contributes 85% of profits. It is Asia’s largest operator in the HSS segment – its UL and CEN certified products are valued in Europe (60% of sales) and the Americas (25%) – but not so much in its home base of China (4%) where it doesn’t intend to compete with lower-priced offerings. This segment, however, faces long-term headwinds due to the increasing use of cashless transactions resulting in lower demand for ATM safes. In addition, the industry faces rising raw material and labor costs. Moreover, the US-China trade spat resulted in higher costs with the use of t...

IJTT (‘company’) is engaged in manufacturing automobile parts – primarily for use in trucks and construction machinery. Isuzu Motors – a prominent commercial vehicle and diesel engine manufacturing company - owns 43.5% of the company’s stock, and generates 69% of its sales. Its sales are primarily generated in Japan (83% of 2020 sales – split further as 54% auto parts and 29% engine parts) with the balance from the rest of Asia (17% auto parts – primarily to China’s construction machinery market). Moreover, its tangible asset investment is split similarly - and includes operations in Indonesia and Thailand. FY20 sales were actually higher than expected because of rushed buying before Japan’s consumption tax hike kicked in. However, the coronavirus pandemic has significantly diminished sales for the company’s products – and suspended production. TTM sales (to September 2020) was 136.3b yen (FY20: 171.7b); ebitda was 6.4b yen (FY20: 13.9b yen) and net losses were 1.2b yen (FY20:...

Geostr (‘company’) manufactures construction materials used in a) the civil engineering segment using reinforced concrete; and b) the building construction segment using precast concrete. It primarily specializes in supplying tunnel structural materials for subways, waterworks, and sewerage. The industry is blighted by an aging workforce and a shortage of skilled labor. It also faces the unpleasant long-term prospect of a declining population and consequent reduced demand. Further, it is also exposed to rising raw material prices of cement, aggregates, steel, etc. Nippon Steel (third largest steel manufacturer in the world) owns 42.3% of the company – directly and via subsidiaries. It also generates about 50% of the company’s sales. The company primarily serves the public sector and therefore its prospects are tied to the Japanese government’s public investment plans, which has been relatively firm in the recent past – though some work has been suspended as a result of the corona...

Trinity Industrial (‘company’) is part of the Toyota Group and is engaged in manufacturing painting equipment (74% of 2020 sales), and automobile interior and exterior parts (26%). The segment profit split is 83% and 17% respectively. The Toyota Motor Corporation owns 40.71% of the company directly and through other subsidiaries. Further, 38% of 2020 sales were to Toyota. In addition to Japan (67% of sales), the company also sold to customers in China (18%), rest of Asia (8%), and others (7%). The company primarily sells to the automobile industry and hence, its fortunes are tied to automobile demand and the industry’s capital investment plans. It is also subject to raw material price rises in resin and steel, which are procured internationally. Recent demand in Japan was adversely impacted by the consumption tax hike – and the main markets of USA and China exhibited lower demand in the last year. Though the pandemic worsened this situation, the company’s sales fell only 6% in th...

Mori-Gumi (‘company’) is a small civil engineering and construction company – with minor operations in real estate sales/leasing, and manufacture and sales of crushed stones. Asahi Kasei Corporation owns 30.26% of the company. Its civil engineering and construction segments are roughly split 50:50 on a revenue basis. Its orders are also split roughly halfway between the government and private sectors. About 1/3 rd of its projects are categorized as “special mission”, and 2/3 rd are generated as a result of competitive bidding. Two customers accounted for 35% of its revenues. The travails of the Japanese construction industry include lower prospective demand due to an aging population; and a real shortage of skilled workers joining the industry. The coronavirus pandemic led to delays and suspensions of major contract work. Though reported sales in the last six months were higher over the previous period, construction orders were down 20%. The company reported TTM sales (to Sep...