Opportunities In Out-of-favour Stocks

JInraidx,
First of all, I ask my questions in sincerity and not trying to bulldoze any agruments.
1) What are the "not strong" red flags that you have spotted? Please share.
2) Given that 3 strong quarters are in the bag, It is very unlikely that they will not given out the dividends, given the strong cash position, and the high utlisation of capacity. If they can maintain their earning in a weak quarter (Jan- Mar), chances are more likely than not, Q4 is going to be ok. Why? If you look at various textile companies, there are a handful(I didn't have the time to check all), like china FibreT, Fuxing, etc that although they reported strong (YoY) growth in revenue, the QoQ growth is actually negative, of course there are also exceptions like foreland.  This prove that Jan-Mar period is indeed an weak quarter, yet Qingmei is able to increase revenue, which means capture more demand. Although this might be at the expense of lower prices, at least it shows its demands for the soles are still robust and there should not be reasons for sudden fall in earnings. 2nd result, if you visit the Ctei website, data.ctei.gov.cn/sjzx_honggsj/sjzx_honggsj_xse/287223.htm , you will realised, that the sales for textile apparrels and shoes in still increasing in Jan-April 26.8% higher than than same period in 2010. of course that doesn't mean Qingmei can capture these business opportunties but the external and macro market is still rather favourable. Of course, the website also mention that cost for raw materials have continue to climb and has make it risky for some SME companies to receive orders for fears of making loss, but that news article also emphasied is now that demand has dried up, rather, management of costs has been an heachache.
3) Therefore, it might be possible that Q4 earnings might be below expectations due to cost management issues, but with demand still robust, and that QIngmei can rough out Jan-Mar, chances are in the worst case scenario, investors might have to make do with lower dividends, but not no dividends.
4) As for post dividend performance, well, that will be 3-4 months down the route, and i think there are too many factors affecting prices and the effect of dividends will be just 1 of them
 

Although Qingmei remains significantly undervalued at a P/E of 2.5, I was rather disappointed with the modest topline (revenue) growth over last year. This is especially so because production capacity has so far supposedly increased by 50% (correct me if I'm mistaken)? To what extent has the increased capacity been utilized so far, is it entirely ready or only partially ready, when will the fruits be reaped in terms of significant bottomline growth? How many pairs of shoe soles did they sell and for which segment was there a slight decrease in average selling prices and by how much? Now if a lot of this increase capacity has not been fully utilized yet then make it clear that this is the case and that there is therefore a lot of room for growth. Will the doubling of production capacity significantly increase topline growth? Is their order book growing?
 
At a P/E of 2.5 with aggressive capacity expansion coming up I still have a lot of faith in this stock but they need to dramatically overhaul/improve their investor relations in terms of corporate transparency so we can get a better idea of what's going on. Take a leaf out of Eratat's book, they have an extremely good investor relations function! 
Let me know your thoughts Observer2 and Greencookie. 

Hi, Ethan999,
We now have a clearer picture following Qingmei’s latest 3Q11 results. Qingmei’s production capacity was at around 45 million pairs of shoe soles per year (about 11.25 million per quarter), prior to the capacity expansion to 65 million p.a. (about 16.25 million per quarter). Below are the overall sales figures for 2Q11 & 3Q11:
2Q11 [Oct-Dec 2011] – 11,842,000 pairs of shoe soles
3Q11 [Jan-Mar 2011] – 12,279,000 pairs of shoe soles  (increased by 437,000)
Qingmei;s expansion capacity would add about 5 million pairs of shoe soles per quarter but the Jan-Mar 2011 Quarter only saw an increase of 437,000 pairs.
In Qingmei’s 3Q11 Result Presentation Slides, it was mentioned that the testing and tuning up of production equipment & machineries were completed only in March 2011. Commercial Production started (actually) from April 2011. According to Chairman, Su Qingyuan, the Company is now focusing its effort to ramping up production to cater to the strong demand of its products from existing and new customers [see 3Q11 Result Press Release in sgx.com]
The recent scandals of some S-chips have brought market sentiments towards S-chips to an extremely low level. History has shown that it takes time for sentiment to recover and one must have the patience. My view is that the prices of fundamentally sound S-chips like Qingmei, Eratat and many others, are now at “bargain basement levels” similar to blue chips during the first half of 2009. For those who are not adverse to taking calculated risks, they can adopt a positive mindset and think out-of-the-box to take advantage of the situation. It is a fact that S-chips have high risks with many unknown & uncertain factors but they also come with high rewards for those willing to take the calculated risks. While one has no control over the risks of accounting frauds, or Chairman or CFO misappropriating funds, etc., one can still do much to reduce one’s risk exposure. For example, buy only fundamentally sound stocks at very depressed prices where the downside risk of capital loss is considerably less; and buy or hold only stocks with business that are really doing well as the risk of management “killing the goose that lays the golden eggs” is considerably less.

I salute you guys for yr very interesting and insightful posts --- i learnt something, actually i learnt a lot from ethano, observer, jinraid, greencook, etc

One more textile company china sky get into some kind of trouble with sgx.. It's request for extension to release results is rejected. The recent s- chip scandals have been largely confine to the companies from textile companies, no surprisingly, these are the s-chips that suffer more severe sell down as compared to other s-chip firms. Gaoxian, Hongwei, sino techfire, and the most recent china sky boos boos in coporate management has dampen investors' appetite for s- chips particularly from the textile industry. A quick check on the prices of textile companies like china taishan, fibretech, ziwo, fuxing, show that most are near or at prices when STI is at 2920(the japan panic), when most companies even s- chips have recovered somewhat.. Exception is foreland, even the dual listing plans announced by foreland and Fuxing has failed to catalyst the prices of these counters, no thanks to Gaoxian. Thus, these companies are really out of favour... Especially with the market struck in directionless trading, and risk prenium high, with eyes on whether greece will restructure and whether the debt limits or USA will be raised. most would rather give these companies a miss.. Yet, there are gems, I have no doubts. The question is... Timing.. My take is, the market has not really factor in the potential fears or risk premiums.. VIX is still at a low of 18. Maybe they believe that the debt limit will be raise and euro crsis can be settled.. But I would rather play safe, I accumulate at further weaknesses... I would still buy and sell s-chips which j think are oversold, but I will only invest only a small amount of money and be agile in taking profits an aggressive in loss-cutting, so that I can invest when the fears resurface. These out of favors but quality counters does not deserved to be oversold to this extend and they provide some opportunities for profits when u catch them at oversold levels. I must admits I am being speculative here, which is contrary to the value investing concept of most forummers here. That's why I emphasized a small amount of cash and agility in profits taking and aggressiveness in loss cutting. There of course could be some holdings of shares for long term investing, but I take some profits off the table now.. Of all the textile companies that I look at... I think qingmei is a good catch at such prices.. I used to like chinafibreT for it's prudene management of cash during the crisis, and the low price, but the manpower deployment really turn Me off And I have exited the counter... With losses.. It's still a undervalued company in terms of financial ratios but that they appointed someone from within to be independent director instead of sourcing one (which I was hoping that they do) really saps my confidence.

Hi Observer2,
 
Thanks for your responses on Qingmei.   At the point in which I made my previous post, I had not read their presentation which had just been released on 13th May, 2 days after they released their results. After reading the presentation, I still feel they could be clearer and more elaborate on the on-goings of the business.
A couple of points:
1.
·         Production capacity per annum increased 43% to approx 65m pairs of sports shoe soles ·         Completed testing and tuning up of production equipment and machineries in March 2011
·         Commercial production in April 2011 - Focused on ramping up capacity
At the same time, they also say: 'Y-on-Y revenue rose 7% due to: − 9% increase in sales volume to 12.3m pairs,  supported by increase in maximum production capacity'
Okay so the increase in production capacity has not really  translated into topline growth yet because they only completed the  'testing and tuning of production equipment and machineries in March and Commercial Production Capacity was ramped up in April'. So does the 9% increase in sales volume due to ‘increases in maximum production capacity’ come from the extra production they managed to squeeze in at the end of March after the testing and tuning up was completed?  A bit more clarity needed here.                  
2. In prior quarters demand for MD 2 soles had been increasing over MD 1 but in the latest quarter this trend was reversed, nevertheless resulting in an overall increase in shoe soles sold. But why has the trend changed since I thought MD 2 soles were initially favoured for their greater flexibility and what do they anticipate to be the trend in future?
They need to paint a clearer picture of their growth story because the potential certainly seems to be there.