Analyzing Bargain Stocks

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