Re:market correction... by happin31st, Jul. 06:07 PM Markets are inherently unpredictable beasts, so I wouldnt get too...
Re:market correction... by peter lee31st, Jul. 02:36 PM Hello ,
can someone tell me why the current run can last till ...
Re:market correction... by Harlequin31st, Jul. 11:54 AM What stocks to bet on for short-term?
Seems like quite a few goo...
Re:China Gaoxian & A... by Harlequin31st, Jul. 11:53 AM Gaoxian reporting results on Tues, Aug 10.
http://www.nextinsi...
Re:market correction... by MacGyver30th, Jul. 04:11 PM Market is bullish again.. Good trading period from now to early-m...
S-CHIPS: Warning signs in stock bargain department
Written by Sim Kih
Wednesday, 24 September 2008
FTSE ST China Index is at 6 times PE, half that of STI.
BARGAIN HUNTING in the sea of red?
Singapore-listed China stocks may under-perform in bear markets, but one must concede China’s GDP growth of close to 10% is still the highest among major economies.
In comparison, Singapore is expecting GDP growth of up to 5% this year, said Prime Minister Lee Hsien Loong during his National Day rally speech.
NextInsight short-listed 12 “bargain” S-chips below using the following criteria:
1. Dividend yield greater than 3% 2. Trading at discount to net assets 3. Positive free cash (operating cash > capex) Close to 10% of S-chips met the above ‘fundamental value’ criteria (See figure 1 below).
Of this, more than half were trading at less than 4 times historic PE:
Company Name
Stock Price
Mkt Cap S$mln
Sales S$mln
Historic PE
Discount to Book
Dividend Yield
Asia Environment
$0.205
87.8
96.2
3.9
39%
9.8%
Hongwei Tech
$0.150
33.8
66.1
2.6
40%
9.4%
Sky China Petroleum
$0.115
33.8
40.8
1.8
48%
8.1%
Changtian Plastics
$0.155
102.3
131.5
2.1
30%
7.1%
Asia Power
$0.170
68.9
129.8
5.0
23%
6.5%
Hongguo
$0.205
81.4
153.5
3.6
20%
6.4%
China Precision
$0.240
96.0
159.7
4.3
9%
5.6%
Reyoung Pharm
$0.165
55.0
150.3
4.7
41%
5.5%
Synear Food
$0.290
398.8
460.4
6.3
30%
4.9%
Bio-Treat
$0.150
133.7
291.8
4.8
68%
5.3%
China Sky Chemical
$0.455
370.6
475.1
2.4
35%
4.6%
China Sun Bio-chem
$0.165
133.8
347.2
3.1
57%
4.2%
Bargain S-Chips (source: NextInsight / Bloomberg, as at 22 Sep 2008)
Considering the risky nature of S-chips, what are some potholes to avoid when stock-picking from the “bargain department”?
There are 10 barometers that suggest to seasoned investors there’s more than meets the eye.Many of these include detailed checks on cash, which is harder to manipulate than earnings. In its recent report, JP Morgan identified the following companies as passing their “warning alerts” screen: COSCO Corp, Yanlord Land, Delong Holdings, People's Food, Chin Fishery, Hsu Fu Chi, China Aviation Oil and EPURE Intl.
Among them, China Fishery, People’s Food and Hsu Fu Chi have the following attributes (using consensus estimates for the non-rated companies):
FY09E P/E < 10x;
FY07-09E EPS growth CAGR > 20%;
FY08E dividend yield > 2%;
Net-working-capital-to-sales ratio < 15%.
Does your 'bargain gem' fail any of these 10 warning alerts?
Readers should note there could be sound reasons behind some of these “warning alerts”, so the discerning investor would investigate further before writing any stock off.
10 warning signs for troubled stocks
1. Extremely low deposit rate for cash
This is a major warning alert. Using China’s annualized cash rates as an example:
0.72%
Demand deposits
1.8%
3-month time deposit
2.5%
12-month time deposit
It is thus reasonable to expect interest on bank deposits for S-chips to exceed 1%.
JP Morgan screen
Deposit rate for cash <1%
Total cash/market cap > 5%
2. High cash reserves, but high debt
A high-cash and high-debt scenario indicates poor financial discipline since companies can logically cut finance costs by paying down their debt with excess cash.
Investors begin to wonder there is “balance sheet management” around the book closure date, or in the worst case scenario, a possibility of fraud or embezzlement of cash.
JP Morgan screen
total debt/market cap > 30%
total cash/market cap > 30%
3. Much higher capital expenditure for the same capacity
If a company's fixed asset investment per ton of production capacity increases sharply over its expansion schedule, investors begin to wonder if the increasing depreciation expense that shows up on the profit and loss statement could in fact be excesses in other operating expenses.
Inability to sustain growth
4. High gearing, high working capital requirement
High working capital requirements, low net margin and high gearing will slow growth.
JP Morgan screen
High net working capital to sales ratio (>20%)
High gearing ratio (>35%)
Net working capital to sales ratio – net margin > 15%
5. Frequent fund-raising
JP Morgan screen
Issues of new shares or convertible bond more than twice during 2004-2007.
Changes with key officers
6.Hit-and-run
When a controlling shareholder dilutes its stake to below 50% within a few years of listing, there may be reason for investors to ask questions.
Another situation would be a passive investor holding the controlling stake.
7.Resignation of key managers, directors or auditor
Most auditor replacements in Asia are related to unsettled disputes on accounting practices.
Investors should be alert if senior managers resign without a proper reason.
If the company was doing well, why would they leave instead of enjoying the corporate spoils?
Often, the resignations potentially indicate corporate governance issues that investors were unaware of before, said JP Morgan.
Poor corporate governance
8.Acquisitions that do not make sense
Investors require acquisitions to show synergy, and a fair acquisition price.
This is especially so if the seller is an interested party or an affiliated company. Volume and size of transactions could mask sharp unwarranted jumps in certain accounting items.
9. Lack of sufficient disclosure
This could include failure to disclose large payments related to subsidiaries acquired from a related party, and such payments were subsequently highlighted by independent auditors.
10.High cash reserves, but low dividend payout
JP Morgan screen
net cash/market cap > 10%
rising cash level in the past two fiscal years
dividend payout ratio < 20%
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