Wednesday, September 10, 2008

Who wants Sino Hua-An?

Ivan's investing diary wrote the following on the posting Regarding Sino Hua-An


  • Huaan might not be a growth stock . But at the level of 44 cent now it was a value stocks. Coke price has dropped 20%. However with capacity expantion of another 50% (added 60 to the current of 120) it shld overcome the price dropping issue.

    Where you find can find a stock with pe "<" 4 , cash rich, price/nta <1 and attribute dividen of at 20% from its profit every year? It might not be a grow stock. But definetly a value stock to hold for middle long term.
Dear Ivan,

Many thanks for your comments.

Let me share some of my flawed views on Huann yet again.

Regarding Huann as a value stock at 44 sen.

In my humble opinion, yes, every stock will have some sort of value at a given price. However, just how valuable is such 'value'? Here we have a stock that has no growth, which means an average company. Would you agree on this issue? And would buying an average company at a cheap price equates the best investing strategy? I don't know about you but some would prefer to buy an excellent company at a cheap price as a better alternative, yes? And usually excellent company's are companies that are able to earn more and more money each year. Isn't this what we all want if we do own a company? And if so, why should investing be any different?

Now let's look at how average is this Huann. I had made another posting on it, More On Sino Hua-Ann

See the following part.

And let's look at the company's net profit margins.

1) 07 Q4 Revenue 233.375 million. Net Profit 37.442 million. Margin = 16%.
2) 08 Q1 Revenue 290.798 million. Net Profit 35.567 million. Margin = 12.2%.
3) 08 Q2 Revenue 434.426 million. Net Profit 36.916 million. Margin = 8.5%.


How would you interpret such earnings?

Look at the revenue, its sky rocketing but the company has NOT been able to turn the extra, extra revenue into more cash and instead the net margins are deteriorating. From 16% to just 8.5%.

How? How would you evaluate such earnings? Good? Average? or Poor?

Now that would be rather poor yes? The declining margin places a huge question mark over Huann's ability to generate better profits and if you ask me, in an environment where its main product was enjoying a bull run, Huann's performance was terribly poor. Hey, that's my blunt and flawed view on it.

Now regarding PE.

As it is, right now, based on current earnings, most stocks are looking cheap.

That's a fact.

However, for the market, most of the time, the market is only interested in what the stock can earn in the future.

Which means, one has to address the sustainability of Huann's earnings.

Firstly, as listed company here, Huann's earnings track record is simply too little.

And the biggest issue in my opinion is Huann's products itself. It's clearly cyclical and given the fact that most commodities prices have turned south in a dramatic fashion, it's most likely that Huann's products would command a much lower pricing. Is this not possible?

And last but not least, I have to repeat yet again, when Huann's products was in a bull run, Huann's earnings was flat. And if that is the case, if Huann's products turn 'soft', surely Huann's earnings would decline, yes? Is this not possible? And if that would happen, surely Huann's earnings per share would decline. So what appears cheap now in relative to PE, might not appear cheap later if the earnings decline.

Hope my flawed second opinion helps.

1 comments:

Ivan's investing diary said...

Moola,

No doubt , you are figure expert. But I think you do not have a good understanding on how to run a business.

1st
Revenue increase, margin drop as its raw material are increasing faster than its products sold. On the other hand,If commodities price drop , its cost of raw material will drop as well. That translate to lower raw material and better margin.


2nd
The profit of the company in 2007, 127,522,000.

Culmulative profit for 2 Quater 2008
72,484,000

Projected 4 Quater (same as 2007)
128,000,000 ( Total)

Market Value of the company
1,122,307,817 * 0.33 = 370,361,579

thus we get

pe= 3

Its cash reserve on 2008 = 75,739,000

The company is debt free

Analysis
---------
Even earning is flat for 3 years i will get the stock for free on the 4th year. More than 33% a year plus its cash reserve.


3rd
Yes, you can buy cyclical stock (timber, plantation, steel etc)when the commodities is in bull. But how much you have to pay for, rocket high price ?? Or when the newspaper say .. oh ya xxx worth to buy now? revise target price of xxxx upside to XXXX? Js like what happen few month ago when all the steel counter traded at record high price? (If one are thinking of fast money, i guess cyclical stocks is definetely not a good choice.)

Or Rather to buy something when someone are willing to sell you at a ridiculous cheap price keep it and wait for good timing to sell?

Commodities bull in china havent die. Travel to China and have a look. It will make you 10 times better than to do reading online. Thinks as a contrarian, it will make you rich beyond your imagination.