Analyzing Bargain Stocks

Dongyue (‘Group’) is listed in Hong Kong and is a leading operator in the Fluorosilicone industry. It manufactures fluoropolymers (32% of sales), refrigerants (22%), organic silicone (24%), dichloromethane (13%), and other products (4%) – for use in a wide variety of industries such as construction, electrical, electronics, automotive, household appliances, aviation, etc. The polymers segment is the largest contributor to profits – 47% in the last six months. The group has well-integrated operations. For instance, the key refrigerant R22 is used as raw material for the polymers and organic silicone segments, and ingredients of methane chloride are used as inputs for the refrigerant and organic silicone segments. Such efficiencies are reflected in high returns on tangible assets (see below). The group recently reduced its interest in the organic silicone subsidiary from 77% to 57.75% and listed it on the Shenzhen stock exchange – raising $820m in equity (and increasing non-controlling i

Sam Woo (‘Group’) is in the construction business providing foundation works and ancillary services in Hong Kong and Macau. It is a relatively small company with $170m in market capitalization and a handful of contracts. Therefore, it is greatly impacted by the vicissitudes of the construction business (and construction accounting). Covid-19 and the social unrest in Hong Kong has impacted the approval of public infrastructure projects. It currently has contracts in hand aggregating only $214m, which will be completed in the next two years. Management expects severe operating headwinds in the near future. Fortunately, the group’s balance sheet as at September 30 th reveals a net cash position of $73m. Its net current asset value was only $23m but net tangible assets were $621m, which largely includes $541m of machinery and equipment. (The machinery and equipment were subject to strict impairment tests in the auditors’ report.) Since we can’t hang our hat on net current asset va

Fufeng (‘group’) is engaged in the manufacture and sale of a) Food additives including MSG and starch sweeteners (52% of revenues), b) Animal nutrition products (31%), c) Colloid products (7%), d) High-end amino acids (6%), and e) “Others” including fertilizers, synthetic ammonia, pharmaceuticals, etc. The group generates 68% of its revenues within China and is a leading player in the amino acid industry. It also has access to relatively low-cost coal power, which is instrumental in strengthening its pricing power. Covid-19 reduced demand from the catering industry for food additives. Further, corn prices (raw material) were higher during the period. Its animal nutrition segment continued to be sluggish after the swine flu outbreak in 2019. The colloid segment, which primarily sells Xantham gum used in oil mining, was impacted by low crude oil prices. And the high-end amino acids were impacted by US tariffs arising from the US-China trade dispute. However, sales declines were offset by

Consun (‘Group’) sells modern and traditional Chinese medicines via its ‘Conson’ (87% of sales) and ‘Yulin’ (13%) segments respectively. The group’s kidney medicines – Uremic clearance granules - contributes 70% of sales. These are sold along with contrast medium used in magnetic resonance imaging (MRI), orthopedic medicines, dermatologic medicines, and medicines for women and children among others. It holds leading market positions in uremic clearance granules and contrast medium segments. The effects of Covid-19 decreased sales of all product lines except the kidney medicines (which reported a modest increase), and impaired some of the aged receivables. In 2019, management wrote down all the goodwill on the Yulin segment ($350m) due to significant declines in sales and diminished prospects. These factors depressed TTM and 2019 earnings. TTM sales were $1.7b – down from a high of $2.2b in 2018. TTM ebitda was $539m (2019: $638m) and ttm net profits were depressed at $41m (2019: $91m)

Dawnrays (‘Group’) is in the business of manufacturing and selling non-patented pharmaceutical medicines - including a) intermediate pharmaceutical and bulk drugs (22% of sales); and b) finished drugs (78% of sales). It generates 90% of its sales within China and exports the rest primarily to Russia, Turkey, and Pakistan. The group also has an investment in a joint venture to research and develop biopharmaceutical products and technologies (currently loss-making). Covid-19 reduced patient visits to hospitals and intake of the group’s drugs. The group also suffered supply bottlenecks as some production had to be suspended. However, the major varieties of its products are sold via centralized procurement by the state – for which it won several bids. This stabilized revenues and reduced production costs arising from enhanced scale. The group reported ttm sales of $1.05b (2019: $1.08b), ebitda of $433m (2019: $462m) and net profits of $260m (2019: $290m). The financial position w

Design Capital (‘Company’) is engaged in three business segments: It a) sources and supplies furniture to the US market via third-party e-commerce channels (70-80% of revenues); b) sources and retails furniture to the Singapore market via its own branded retail stores (12%-16%); and c) provides interior design services in Singapore. Most of the segment profits are also generated by US furniture sales (67-92% of pre-tax profits in the last two years). The Singapore furniture segment results are comparatively marginal and the interior design service earnings fluctuate with the local property market. The US segment performed well during the pandemic with increases in sales and profits as customers opted for e-commerce purchases of furniture. This performance was enough to offset the declines in the Singapore segments, which suffered from lockdowns. The US operation was affected, however, by increased tariffs that reduced gross margins. The company reported ttm sales of $663m (2019: $662m)

Qilu (‘Company’) is the toll operator of the Jihe expressway in Shandong province. It entered into a build-operate-transfer agreement with the Shandong transport authority to operate the expressway till 2034. The latest balance sheet as at June 30 th is relatively simple with intangibles representing the toll operating rights of $2.9b and excess net cash of $1b – arising from a public offering in 2018 to acquire other toll rights. Net book value was reported at $3.9b. Average net earnings (after amortization) were roughly $530m/year. The stock sells for $3.5b representing apparently attractive multiples of 6.6x earnings and a modest discount from book value, along with a 9% dividend yield. But this misses a significant acquisition made after the interim report that changes the face of the financials. On September 14 th , the company acquired toll rights to two expressways from Qilu Transportation, which were: a) Deshang expressway (expiring in 2040) and b) Shennan expressway (expiring