The price looks like a bargain to the point where one would wonder, why did anyone not seeing the 100 dollar notes lay on the floor. Even if the performance of the group turn out lower than expectation, a Ncash per share of RM 0.41 provide a safeguard to the investor's money, as long as the company dont start loosing money.
Before the analysis
1. Why did a PRC company opts to enlist on foreign stock market?
The first is branding purposed. Having the company enlisted on public stock market, will give assurance to their business partner, while bringing better management practise and stricter internal control to the company.
The second, enlisting is another way to acquire working capital in a reasonable cost. Especially useful in a time when obtaining bank loan for a non-GLC company is hard in China.
2. Why did PRC companies usually retained large portion of earning after tax, despite low level (in term of ratio) of capital expenditure requirement, and high reserve capital?
As i mentioned before, unlike other company in developed country, obtaining large amount of bank loan is a much harder task for non-GLC companies in China. Taking an excerpt from my past article:
This leaves the People’s bank of
Hence, retaining a large portion of earning after tax has become a common practise for many PRC company. When market outlook remain positive, no corporate manager will want to pass on the expanding opportunity simply due to inadequate capital issues.
3. Why are PRC companies are usually undervalued, even if their P/E ratio can go as low as 2 to 3?
First, as mentioned above, the dividend payout ratio for majority of PRC companies are quite low. Hence, investor dont feel secured investing in company that wont give you anything in return for the first few year.
Second, due to past bad reputation of PRC companies, either,some have revenue dropped shortly after their public listing activities, or, some even involve in fraudelant activities which costs investor their hard earned money. For more details , see here
Thirdly, there have been past experience in Malaysia, and for PRC companies enlisted on foreign market, to delist the company when share price is vastly undervalued. The delisted price ( or share buyback price) were much lower than the intrinsic value of the company. Investors who, buying in anticipating share price will ultimately match the intrinsic value, end up like placing money in a deposit box, receiving no or little dividend (due to low payout ratio practised by PRC). No investor who emphasized on cash flow after reading " Rich Dad Poor Dad" will park their money into this company.
The Financial part
All Figure below are in unit of RMB, computed based on closing price at 7th September 2012.
| Price | 0.693 | ||
| 1 year | 3 year | 7 year(all time) | |
| net profit margin | 0.1713 | 0.1950 | 0.2200 |
| EPS | 0.2554 | 0.3073 | 0.2368 |
| dividend per share | 0.0000 | 0.0577 | 0.0577 |
| NAV | 1.4879 | 1.4879 | 1.4879 |
| NAV(cash) | 0.8274 | 0.2758 | 0.1182 |
| ROE | 0.1716 | 0.2227 | 0.7547 |
| PER | 2.7140 | 2.2551 | 2.9269 |
At initial glance, with KLCI's average P/E ratio at 18, a company with PE ratio below 3 is a definitely buy signal. A Net cash per share ( cash and cash equivalent minus current liabilities ) above current share price provide a safety cushion for investor money, even if the company stop operating now.
Although the company recorded a surprisingly lower revenue last quarter in year to year basis, the business remained profitable with an adjusted PE ratio still better than market average. Not to mention that the dividend per share provided a good cash flow return to the investor.
Future Prospectus
Warren E.Buffet concluded that :" a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row"
In other word, we need to avoid,
- capital intensive business which,
- product differentiation is nearly impossible
- the industry is in state of overcapacity
The main operation of MSport holding, is to provide the shoe soles for sport shoe manufacturers in China. The company did not depend on single customer as none of their customer account for more than 5% of their sales (good) . Hence, the performance of the group , will be largely tied to industry performance. The company was performing better than one of its main competitor , Qing Mei Group holding, indicating a better management quality(good). However, none of the companies occupy more than 10% of the market.
Unfortunately positioned in the upstream product chain, product differentiation is nearly impossible in the shoe soles market(bad). However, this is not a capital intensive business, where 1 unit of fixed asset will generate 3 unit of revenue(good). The industry was in a state of temporary overcapacity, as utilisation of the plant had dropped from average 90+% to under 80%(bad).
For long term prospect, unless difference in labour cost between China and its main competitor become too significant, much of the shoe production will remained operating in Main land China, where local market is dominated by domestic company. Chinese spending on shoe per capita is just 2.3 pairs per annum, lower than India (2.5 pairs), Malaysia (2.6 pairs) , and much lower than Developed country ( average 4-5 pairs)(good).Hence, i would expect the market will grow ( albeit at a slower rate than before ). And MSport Holding is a safe bet here.
Reference
2011 WorldFootwearYearBook
Bursa Saham Company Information
Overview of the company in Money DJ
Overview of "red chip(PRC linked)"
Singapore stock exchange info for QingMei
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