And now K-Star Reports Losses....

And there I was posting about China Ouhua Winery Announces Quarterly Losses.

Tonight I saw K-Star's earnings.

K-Star was featured in the posting Them Chinese Shoe Stocks where the EdgeMalaysia featured a massive article called Can China shoe stocks remain at bargains.

The article reasoned the case for them Chinese stocks by saying..

• ...... Most investors are no doubt sceptical about China stocks listed on overseas exchanges, given the numerous accounting issues these companies have faced in the US and Singapore over the last few years.
  
  However, analysts also noted that none of these issues has surfaced in Malaysia yet, and the Chinese companies listed here have consistently delivered strong earnings despite their lacklustre stock price performances.
  
  Xingquan International Sports Holdings Ltd, the first Chinese company listed in Malaysia for close to three years now, has yet to disappoint investors in terms of earnings. Apart from Xingquan, four other shoe companies listed here are Multi Sports Holdings Ltd, XiDeLang Holdings Ltd (XDL), K-Star Sports Ltd, and Maxwell International Holdings Bhd.
  
  According to calculations by The Edge Financial Daily, from 2006 to 2010, the five shoe companies chalked up a compound annual growth rate (CAGR) of at least 30% for both revenue and net profit.
  
  The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends.
  
  Their PERs are about two times — well below the market’s broader average of 15 to 16 times.

And the article said the following for K-Star

• K-Star
  K-Star is principally engaged in the design, manufacture and distribution of sports footwear under its own proprietary brands, Dixing and K-Star. The company generates over 700 designs annually.
  
  Its product range covers athletic shoes for running, tennis, basketball and mountain climbing as well as leisure. K-Star is also an OEM and ODM for international sports brands including Umbro, Diadora, Kappa and China’s footwear brand, Double Star.
  
  Its proprietary products are distributed across 18 provinces and three municipalities in China at over 870 retail locations. They are exported to Russia and other markets such as Ukraine, Belarus, the Czech Republic, Poland, Finland, Romania and Hungary. In 2010, K-Star expanded into sports fashion apparel and accessories.
  
  Listed on June 4, 2010, K-Star closed at 28 sen last Friday, falling 60.9% from its IPO price of 71.7 sen (IPO price adjusted for a one-to-three share split on Nov 1, 2010)
  
  It is trading at a 67.1% discount to its end-September 2011 book value of 177.97 yuan and close to its net cash per share of 25 sen. As at end-September 2011, it had cash reserves of 154.81 million yuan versus current borrowings of 17.68 million yuan, which translated into a net cash position of 137.13 million yuan.
  
  In FY10, it paid a net dividend of 1.6 sen per share, representing a yield of 5.7%. From FY06 to FY10, the company’s CAGR for net profit and revenue was 47.8% and 43.8% respectively. For FY10, it posted a net profit of 88.25 million yuan on revenue of 670.87 million yuan.
  
  For 3QFY11 ended September, it posted a net profit of 11.14 million yuan on revenue of 169.60 million yuan, down from a net profit of 31.16 million yuan on revenue of 191.48 million yuan previously. K-Star said the decline was mainly due to higher raw material and labour costs.
  
  Its sports footwear segment contributed to about 95% of revenue, while its sports apparel and accessories accounted for the remaining 5%.
  
  As part of its expansion plan, K-Star announced in October that it was buying a piece of state-owned leasehold land of 675 sq m in Jinjiang City in Fujian Province for 27 million yuan in cash.
  
  As at end-2010, it had four production lines at three factories in Jinjiang City. Its estimated annual production capacity was 3.97 million pairs and output utilisation rate was 93.7% in 2010.

So K-Star was listed on July 2010.

It's now only Feb 2012 and K-Star has just reported quarterly losses for its 2011 Q4 earnings!

!!!!!!!


past postings on K-Star can be found here: K-Star Sports

China Ouhua Winery Announces Quarterly Losses

China Ouhua Winery Holdings Ltd made its listing debut on Bursa Malaysia on 4th Nov 2010. It was the first winemaker to be listed on Bursa Malaysia.

A month before it was lited, Ouhua was featured on the EdgeMalaysia article:China Ouhua sees China's wine consumption doubling by 2013

• KUALA LUMPUR: China Ouhua Winery Holdings Ltd expects wine consumption in China to double in the next three years. Its executive chairman and chief executive officer Wang Chao says annual wine consumption in the country is currently one million tons, and he expects it to double to at least two million over the next three years....

The huge 'expectations' were pledged to the investing public.

It's now Feb 2012.

Ouhua announced its Q4 earnings.

Well.... Ouhua lost money.

Receivables increased. (115 million vs 62.9 million a year ago)

Cash depleted. (55.469 million vs 160.695 million a year ago)

........ !!

And Prominent Xtreme's 5.3 Million Jackpot Is Highlighted...

Posted last Friday: Prominent Xtreme Strikes 5.33 Million Jackpot

On today's Star that Prominent Xtreme issue was highlighted: KEuro under close watch after granted highway concession

• Wednesday February 22, 2012
  KEuro under close watch after granted highway concession
  
  PETALING JAYA: Kumpulan Europlus Bhd (KEuro) has become a closely-watched company since the issuance of the letter of approval for the 60-year West Coast Expressway concession to its subsidiary, West Coast Expressway Sdn Bhd (WCESB), last month.
  
  Even its recently-announced plan to acquire additional shares in WCESB from little-known Prominent Xtreme Sdn Bhd has come under scrutiny.
  
  KEuro had on last Friday announced to Bursa Malaysia its intent to acquire a 15.8% stake, or about 4.59 million shares, in WCESB from Prominent Xtreme. The proposed acquisition would cost RM5.34mil, or RM1.16 per share, which KEuro said it would finance by internal funds.
  
  Upon completion of the proposed acquisition, KEuro’s stake in WCESB would increase from the present 64.2% to 80%, while that of Prominent Xtreme would be reduced from 35.8% to 20%.
  
  In the same statement, KEuro had explained that Prominent Xtreme was principally involved in investment holding and property development businesses.
  
  As it turned out, filings with the Companies Commission of Malaysia showed that the nature of Prominent Xtreme’s business was listed as “dormant.” Shares in the privately held company were owned equally by two individuals, namely Liau Yoke Leang and Mohd Ruah Abdul Manan.
  
  A further check revealed that Liau was formerly the senior general manager of Agrocon Sdn Bhd, a smallish property development company, whose director and major shareholder was Chan Keat Wan. (Chan is the sibling of Tan Sri Chan Ah Chye, who is the major shareholder of KEuro.)
  
  Ruah, on the other hand, was a director of a smallish construction company called Ekspedisi Jasa Sdn Bhd. The information was based on records with the Construction Industry Development Board of Malaysia.
  
  Prominent Xtreme had in October 2010 entered a deal to acquire Perak Corp Bhd’s entire equity interest in WCESB, comprising 3.3 million shares, or a 12.19% stake, for RM4mil. Since completion of the deal, Prominent Xtreme and KEuro were the remaining two shareholders of WCESB.
  
  Analysts reckoned that KEuro would undertake further corporate exercises once the concession for the West Coast Expressway, which would be built at an estimated cost of RM7.07bil over a five-year period, is officially signed in the coming days.

P Gunasegaram: A perplexing settlement Between Danaharta And Tajuddin

On Star Biz:

• Saturday February 18, 2012
  A perplexing settlement
  A QUESTION OF BUSINESS By P. GUNASEGARAM
  
  Danaharta's deal with Tajudin over RM589mil is unsettling given that it had a judgement in hand for the amount
  
  AN out-of- court settlement when you already have a favourable judgment is allowing the bird already in hand to forever fly away. When those whom you ultimately represent have no idea why you gave that bird up in the first place it makes it doubly worse.
  
  Such is the case in the perplexing settlement between prominent Malaysian businessman Tan Sri Tajudin Ramli and Pengurusan Danaharta Nasional Bhd. Danaharta had already obtained judgement from the High Court against Tajudin in 2009 for a huge RM589mil, probably the largest sum awarded in Malaysian legal industry.
  
  The judgement gives interest rate on the RM589 million at 2% over Malayan Banking's base lending rate from Jan 1 2006. Assuming a simple interest rate of 8%, that amount would have now swelled to about RM840mil if the judgment were effected today. What could have made Danaharta lose that kind of money? And did it get anything in return?
  Danaharta is the national debt management agency set up in the wake of the 1998 Asian financial crisis to sort out debt problems in the banking system and recover as much money as possible from borrowers.
  
  It had filed a suit against Tajudin, a high-flying and favoured businessman, part of a group close to former Finance Minister Tun Daim Zainuddin, who at one time controlled Malaysia Airlines (MAS) and before that mobile telephone operator Celcom through his vehicle Technology Resources Industries Bhd (TRI).
  
  Tajudin got into serious debt and lost control of TRI and eventually sold his 32% stake in MAS back to the Government in 2001 at the same price he bought it several years back and much higher than the then market price, drawing heavy criticism. He had taken a loan of RM1.79bil to buy the stake in 1994.
  
  Earlier this week, when the case came up for hearing before the Court of Appeal, it was disclosed that an out-of-court settlement was reached and basically that was that. The terms of the settlement were not made public, despite the case being of great public interest and the fact that Danaharta is publicly funded and has at least a moral duty to explain why it went for a settlement.
  
  Predictably, the way this case has been disposed off has started tongues wagging and the rumour mill churning with much velocity. With important questions unanswered, serious questions over governance and accountability have risen to the fore and can only be detrimental for the country and its financial and capital markets.
  
  As one lawyer pointed out, with the High Court judgement, Danaharta was no longer a plaintiff but a judgement debtor while Tajudin was a judgement creditor. At least it would have been prudent on Danaharta's part to wait until the Court of Appeal had decided on Tajudin's appeal.
  
  In 2009, the Kuala Lumpur High Court ordered Tajudin to pay RM589mil to Danaharta following debts incurred when purchasing MAS shares. The amount was the balance from the RM1.79bil loan taken to purchase MAS.
  
  The High Court ordered him to pay Danaharta at Dec 31 2005 the principal sum of RM589mil owed plus interest at 2% above Malayan Banking's base lending rate from Jan 1 2006, until the loan was paid.
  
  Tajudin made counter-claims amounting to some RM13.5bil. These claims are far in excess of the RM589mil in dispute, by over some 20 times. It was filed against 24 respondents, including former Danaharta chief executive Datuk Azman Yahya and former Danaharta officers Datuk Abdul Hamidy Hafiz, Datuk Zukri Samat and Datuk Kris Azman Abdullah.
  
  He had claimed that Tun Mahathir Mohamad, who was Prime Minister then, had ordered him to buy the 32% stake in MAS to bail out Bank Negara Malaysia which had incurred foreign exchange losses. Mahathir denies this.
  
  That's the intriguing tale about this whole issue. It offers a lesson on how corporate Malaysia is run with its close interlinks between big business, Government and politics. It was a refreshing decision to see Danaharta turn around and pursue to the end creditors who have the means to repay their debts.
  
  But this settlement has negated all that and turned the hands of the clock back in terms of progressing to a more transparent and accountable environment with the proper standards of governance in place.
  
  If there is indeed a convincing explanation for this, than it is incumbent upon all parties, and especially Danaharta, which spent money and effort to bring the miscreants to book and got a judgment in its favour, to make this public so that the rest of us understand.
  
  Otherwise, we need to add this to yet another one of those things we must get to the bottom of and do something about.
  
  P Gunasegaram notes that the final amount involved amounts to more than three times that of the RM250mil loan involved in the cowgate (National Feedlot Corp) scandal. (t.p.guna@gmail.com)

Prominent Xtreme Strikes 5.33 Million Jackpot

On the Edgemalaysia.com

• KEuro to buy 15.8% of West Coast Expressway, up stake to 80%
  Written by Joseph Chin of theedgemalaysia.com
  Friday, 17 February 2012 18:57
  
  KUALA LUMPUR (Feb 17): KUMPULAN EUROPLUS BHD [] has proposed to raise its stake in West Coast Expressway Sdn Bhd (WCESB) to 80% a move to strengthen its control of WCESB after it secured the RM7.07 billion west coast highway concession.
  
  KEuro said on Friday it was buying a 15% stake or 4.59 million shares of WCESB from Prominent Xtreme Sdn Bhd for RM5.33 million.
  
  KEuro said together with the current 18.649 million shares or 64.20%, the acquisition would see it holding 80% equity interest.
  
  “Upon commencement of the CONSTRUCTION [] of the West Coast Expressway, WCESB is expected to contribute positively to the earnings as well as the shareholders’ value of the KEuro group,” it said.
  
  To recap, on Jan 26, 2012, WCESB received an approval letter from the Public Private Partnership Unit of the Prime Minister’s Department to undertake the proposed privatisation of the construction of the West Coast Expressway.
  
  This would be based on build-operate-transfer (BOT) with a concession period of 60 years, at an estimated project cost of RM7.07 billion.
  
  WCESB’s existing directors are Tan Sri Chan Ah Chye @ Chan Chong Yoon, Datuk Abdul Hamid Mustapha, Datuk David Frederick Wilson, Loy Boon Chen and Datuk Neoh Soon Hiong.
  
  The company has been loss making over the past five years. It posted net losses of RM21,594 in the financial year ended Jan 31, 2011,

That one statement highlighted....

• KEuro said on Friday it was buying a 15% stake or 4.59 million shares of WCESB from Prominent Xtreme Sdn Bhd for RM5.33 million.

My oh my!

A rm 5.33 million payout for Prominent Xtreme Sdn Bhd stake in WCESB????

WOW!

You might be interested in past postings...

• One More Question For Europlus
• That 7 Billion Highway Project!!!

And Green Packet Now Says .............

Once upon a time, not too long ago, the following were muttered in our financial world...

• Feb 2008: we expect the WiMAX business to be ebitda (earnings before interest, taxes, depreciation and amortisation ) break-even this year,"
• May 2008: we are targeting EBITDA positive by end of next year.
• May 2009: P1 will be EBITDA will break-even from next year.
• Feb 2010: concurred that will be EBITDA positive in the second half of this year.
• May 10: the company remained optimistic that it will be able to achieve an Ebitda break even
• June 2010: Green Packet Bhd’s target to turn earnings before interest, tax, depreciation and amortisation (Ebitda) positive by year-end may be delayed to next year
• Sep 2010: Puan added that Green Packet is maintaining that its Ebitda (earnings before interest, tax, depreciation and amortisation) will break even by the end of this year.
• Nov 2010: "We're confident of breaking even no later than the first quarter. Ebitda (earnings before interest, tax depreciation and amortisation) turnaround is really at the corner," chief executive officer C.C. Puan said at a press conference in Petaling Jaya, Selangor, yesterday.
• Feb 2011: defers its target of being EBITDA (earnings before interest, taxation, depreciation and amortisation) positive to end-2011.
• May 2011: Green Packet Bhd is on track to achieve its EBITDA (earnings before interest, taxes, depreciation and amortisation) break-even target by this year-end, according to the group's managing director and chief executive officer Puan Chan Cheong.
• Aug 2011: ... remained bullish that it will be a "ebitda positive" company by year-end

Oh yeah, we are talking about the one, the one and only one..... GREEN PACKET!

It was really hilarious when the following was written on the Star Biz last Nov 2011: Green Packet makes profit pledge again

• It is a pledge familiar to shareholders. At the briefing, Puan was asked twice if he was indeed confident of delivering an earnings before interest, tax and amortisation (EBITDA) break-even by the end of this year. He did not clearly answer in the affirmative but said that looking at the current figures, he believed that the company was on its way to achieving that goal.

Well on today's Star Biz, a slightly different message was sent out... GPacket poised to turn around

The following statements were made...

• ..... “We are already EBITDA (earnings before interest, tax, depreciation and amortisation) positive at group level as at end 2011. At both levels we will be PAT (profit after tax) positive in 2013,” GPacket group managing director C.C. Puan said in an interview.
  
  “As for P1, it will be an historic year, as in less than four years it will turn EBITDA positive this year. You must realise that we are in an industry where the gestation periods are long.”
  
  For this year, he expects the depreciation for P1 to amount to RM100mil. Hence, that will have an impact on its earnings.
  
  For the third quarter ending September 2011, GPacket reported a net loss of RM24.3mil versus RM13.7mil a year earlier. It is expected to announce its full-year 2011 results later this month...

Oooo lala.....

• “We are already EBITDA (earnings before interest, tax, depreciation and amortisation) positive at group level as at end 2011. At both levels we will be PAT (profit after tax) positive in 2013.

We ARE .... that's what he said..... we shall see.... it's earnings will be out later this month.

• “As for P1, it will be an historic year, as in less than four years it will turn EBITDA positive this year. You must realise that we are in an industry where the gestation periods are long.”

LOL!

Very strange isn't it?

Puan understands and has reminded that they ARE in an industry where the gestation periods are long.. but yet... the record showed that since 2008... he had kept on repeating and repeating and repeating and repeating and repeating and repeating and .......... repeating.........

XD

Them LOW PE Chinese Shoe Stocks Again

Posted last night: Them Chinese Shoe Stocks

I was also extremely annoyed with the following statements on that EdgeMalaysia article.

• The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends.
  
  Their PERs are about two times — well below the market’s broader average of 15 to 16 times.

The first statement.

• The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends.

Large cash reserves. Yes they all have the large cash reserves but as mentioned in the posting Them Chinese Shoe Stocks and recent postings on







Take K-Star. How much dividends did they pay in the year 2011? How much? I see one. Just this one: Final Dividend

Take XingQuan. Did XingQuan even pay a single send dividend in the year 2011? !!!!

Take XDL. How much dividends did they pay in the year 2011? How much? Final Dividend

How?

Does this justify the statement "The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends '?

Or do you reckon that the statement is sooooo misleading?

The next statement:

• Their PERs are about two times — well below the market’s broader average of 15 to 16 times.

Yeah PER of 2. So what?

Have a look at this posting: Buy That Chinese Stocks Cos Of The PE Is Very, Very Low

Allow me to reproduce it here in full once more....

-------------------------

Many of us are taught that low PE stocks are a buy. Some even add in yardsticks like ROE and cash per share. And as long as these requirements are met, they believe that they have a safety margin for their investment.

Me say? I feel the investors should look deeper. Understand the business and understand the company's books. Don't just simply invest in a stock because of the yardstick.

I believe more in practicals than theories.

I look for examples and as long as I could find an example that proves the theory wrong, then I feel one should be cautious.

Let me use .... Chinese listed stock (S-Chip) in Singapore as an example.

Take this OLD report from UOB Kay Hian back on April 2008. http://sinotechfibre.listedcompany.com/misc/UOBKH_SINBuyS-chips_030408%282%29.pdf

Let's look at page 14 of that pdf file.

Look at the data.

China Milk was trading then at S$0.675.

It has a ROE (%) 32.4 and net cash per Share (Rmb) 1.07.

UOB Kay Hian gave it a target price of S$1.32.

UOB reasoned...

• Outlook. Demand for dairy products in China remains strong. C Milk has adopted a multi-prong strategy to steer growth and to better leverage on domestic consumption. The strategy includes the following: a) improving herd quality to bolster production of semen and embryos so as to expand margins, b) moving downstream to produce processed milk, and c) developing herd size through internal breeding, the import of highly-productive herds, and even possibly mergers and acquisitions. We expect a smooth implementation of all these plans, backed by the Rmb1.8b cash in hand.
  
  Cheaper way to milk China dairy theme. C Milk is a cheaper way to ride on the rising dairy product consumption trend in China. The stock is trading at an undemanding 5.9x FY08 PE and 4.7x FY09 PE. Our DCFbased target price is S$1.32, representing 11.5x FY08 PE. Maintain BUY.

Trading at undemanding 5.9x Fy08PE and 4.7x Fy09 PE.

Sounds good, no?

Low PE, high ROE, got strong cash per share too....

What could ever go wrong?

Just about everything! Look at how China Milk Products shares have performed since April 2008!

The stock was suspended on Feb 2011!

And the story?

Scandal!

http://nextinsight.net/index.php/story-archive-mainmenu-60/912-2011/3971-shame-on-china-milk-management

From the article:

• This was a company that once commanded a market capitalisation of S$1 billion and, since its listing in 2006, had wow-ed a lot of investors with its supposedly immense profit margin, its profitability and cash hoard.

Great profit margins and cash hoard!

• The hard truth started to emerge when China Milk's convertible bond holders decided to redeem their bonds.
  
  The company at first claimed it had the US$170.56 million to meet its obligations on the convertible bonds. It just needed time and special approval of the authorities to remit the money out of the country.
  
  After all, it had said in its financial results announcement that as at end-September 2009, the group’s cash and cash equivalents stood at 2 billion yuan (S$409.7 million).

S$409.7 million in cash and cash equivalents. The bonds was only US$170.56 million.

• As matters worsened, the Singapore Exchange directed the company to appoint a Special Auditor.
  
  KPMG was the chosen one and it found a company whose cash hoard had been milked in major ways.
  When it repeatedly asked the Group to arrange an interview with its bank manager in China, KPMG was told that the manager had no time and could not assist.
  
  When KPMG asked to interview the main contractor which did US$72.9 million worth of improvement works, they were presented with a Mr Zhang Hong Tao who came across as being unfamiliar with the works done.
  
  In the first place, he didn’t own a construction company.
  
  The Group had commissioned improvement works to the farm and facilities and paid USD72.9 million over a period of 5 – 6 months ending in or around March 2010.
  
  When KPMG visited the sites, it was unconvinced.
  
  “One would expect salubrious farming facilities after spending USD72.9 million. However, the buildings and its facilities cannot be said by any stretch of reason to be no more than basic or at best average.”  .....

And do read for from the shocking full report from KPMG posted on SGX website.

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_B8AB2097A023C947482578AA00383459/$file/2011_06_07_ChinaMilk_FinalReport_Executive_Summary.pdf?openelement

So how?

In China Milk Products we have seen how the sad outcome of an investor who invests in the stock based solely on yardsticks.

Investing solely based on yardsticks is never enough.

I strongly one have to really understand the business and with China stocks listed abroad, you just got to be more careful because you never really know if those numbers (cash included) could be trusted!

I know that last statement is rather ... tricky. Look, I am not insinuating that all Chinese listed stocks are scams but with all the accounting fraud going on .... how can one be sure?

How?

Yeah... yeah... no risk no gain babe! No sugar no honey! ..... but is this the risk you want to take?

--------------------------------------------------------------------------------

Here's another article : http://www.sharesinv.com/articles/2011/03/25/s-chips-to-buy-or-not-to-buy/

• Interestingly, one distinctive characteristic about these S-chips is that they hold a lot of cash. This is evident from the financial statements of China Hongxing Sports and Hongwei Technologies, which had Rmb1,738m and Rmb145m respectively as at 30 Sep-10. As such, investors are spooked by two basic questions: Is the cash really there at all? And is it true that buying into an S-chip, will generally turn into a bad investment strategy?
• Detecting Red Flags
  As you may sympathize, many of the minority shareholders in all of the companies above as well as China Hongxing Sports & Hongwei Technologies have invested in good beliefs. As such, is there any method for those investors with limited analytical skill in detecting the potential red flag on S-chips?
  
  To put it simply, a company that has a lot of cash but refuses to give out handsome dividend may prompt the question on whether the cash is there in the first place, as in the case of China Milk. David Gerald, the president of Securities Investors Association (Singapore), said that companies with burgeoning cash balances should provide reasons why they are not declaring a cash dividend.
  Moreover, many S-chips are making cash calls even though they are already cash-rich. As such, this could be an indication that the management lacks capital discipline or that the company’s growth is not sustainable. Furthermore, an ‘unreasonably high’ capital expenditure (capex) also signals that the firm may poorly manage their manufacturing capacity and their budget. More often, an unreasonably high capex is often linked to other issues such as inflated profits.
  To top things off, JPMorgan Chase (JPMC) indicated that half of the S-chips are audited by a ‘Big Four’ accounting firm. And by contrast, three-quarters of Hong Kong-listed China firms do so. Astonishingly, the firms which do not hire ‘Big Four’ auditors are 60% more likely to fail than those who do, added JPMC.

-----------------------

How?

The problems and issues mentioned in regards to the S-Chip stocks. Do we same exact issue here?

Do we see a company with LARGE cash reserve making cash cashs via private placements and rights issue?

Do we see companies earning relatively low interest income for their huge cash reserve?

Do we see increasing receivables?

Do we see increasing profit but shrinking cash reserve?

How?

Would you want to be a LONG TERM investor and buy that LOW PE Chinese Shoe Stock?

Them Chinese Shoe Stocks

On the EdgeMalaysia:

• Can China shoe stocks remain at bargains
  Written by Clint Loh
  Monday, 13 February 2012 11:18
  
  KUALA LUMPUR: After being battered down from their IPO prices, all the five China-based shoe companies on Bursa Malaysia are trading at large discounts to their book values and at low price-earnings ratio (PER) of around two times. Coupled with impressive double-digit growth and attractive dividend yields, how much longer can they remain at bargain levels?
  
  Most investors are no doubt sceptical about China stocks listed on overseas exchanges, given the numerous accounting issues these companies have faced in the US and Singapore over the last few years.
  
  However, analysts also noted that none of these issues has surfaced in Malaysia yet, and the Chinese companies listed here have consistently delivered strong earnings despite their lacklustre stock price performances.
  
  Xingquan International Sports Holdings Ltd, the first Chinese company listed in Malaysia for close to three years now, has yet to disappoint investors in terms of earnings. Apart from Xingquan, four other shoe companies listed here are Multi Sports Holdings Ltd, XiDeLang Holdings Ltd (XDL), K-Star Sports Ltd, and Maxwell International Holdings Bhd.
  
  According to calculations by The Edge Financial Daily, from 2006 to 2010, the five shoe companies chalked up a compound annual growth rate (CAGR) of at least 30% for both revenue and net profit.
  
  The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends.
  
  Their PERs are about two times — well below the market’s broader average of 15 to 16 times.
  
  The recent listing of two China-based apparel stocks in Hong Kong could also provide a re-rating catalyst for the Malaysian — listed shoe makers. China Outfitters Holdings Ltd and Active Group Holdings Ltd were listed at PERs of six to seven times, three times more than their Malaysia-listed peers.
  
  With such low valuations, the possibility of potential privatisations and corporate exercises cannot be ruled out, according to analysts. This almost happened in the case of XDL.
  
  XDL’s share price saw some excitement recently when the company’s major shareholder revealed that he held informal discussions with Navis Capital Partners to sell a stake to the latter.
  
  According to reports, XDL’s founder and managing director Ding Peng Peng was “frustrated with the stock’s lacklustre share price”.
  
  However, the talks with Navis apparently did not pan out. Investors have started to take notice of XDL’s low valuations, and the stock has risen about 25% since the beginning of the year. It has proposed a bonus issue, private placement and warrants.
  
  Edmund Tham, head of research with Mercury Securities, said the perception of China-based stocks in Malaysia will gradually improve over the years.
  
  “It might take a couple of months or even years for investors to change their perception of China companies listed in Malaysia. Over time, with more roadshows and briefings, people will start to see that they are good companies, provided they continue to generate sufficient operating cash flows and profits,” said Tham.
  
  According to Tham, a good business model and an attractive dividend policy will cause investors to take note.
  
  He added that the public should not be doubtful about these companies as some of them have first- and second-tier global auditors such as BDO Binder and Grant Thornton.
  
  Tham covers Xingquan, Xidelang, Multi Sports and Sozo Global Ltd (a China-based foodstuff manufacturer listed on Bursa).
  
  Except for K-Star, all the companies are covered by a research house as a result of their participation in Bursa Malaysia’s CMDF-Bursa Research Scheme, which aims to enhance research coverage and interest in stocks, particularly smaller capitalised ones.
  
  On July 10, 2009, Xingquan became the first China-based shoe company to be listed on Bursa. The last was Maxwell which was listed on Jan 6 last year.
  
  Multi Sports made its debut on Aug 19, 2009, followed by XDL on Nov 11, and K-Star on June 4, 2010.
  
  The Edge Financial Daily takes a look at the five shoe companies and their underlying fundamentals that appear to be attractively undervalued.
  
  As at last Friday, the stock which had fallen the most from its IPO price was K-Star (-60.9%), followed by Multi Sports (-52.9%), Xingquan (-44.4%), XDL (-36.2%), and Maxwell (-23.1%).
  
  These counters are trading at a PER of 1.8 to 2.4 times, according to Bloomberg data. They are also trading below their book values at discounts between 41% and 67% and all are in net cash positions from RM90 million to RM193 million.
  
  Tham likes Xingquan as it registers the strongest earnings of more than RM100 million and has a strong leadership position in the outdoor casual wear market. Another analyst likes Maxwell as the stock is trading below its cash value per share.
  
  “The share price is something beyond our control. We will continue to manage the company well, deliver good results and hopefully the share price will take care of itself,” Xingquan CEO Wu Qingquan told The Edge Financial Daily recently.
  
  He believes the company can maintain double digit growth in its FY12 ending June.
  
  Xingquan
  Xingquan is principally engaged in the manufacturing and sale of shoes and soles, as well as the sale of apparel and accessories.
  
  In 2004, it started its own brand manufacturing business for footwear under Addnice and in 2005 expanded into the sports apparel and accessories market.
  
  Due to better growth opportunities, Xingquan left the sportswear market and ventured into outdoor casual wear with the launch of its Gertop brand in 2010. Its shoes, apparel and accessories are sold under the Gertop brand in the outdoor casual wear segment at more than 2,300 outlets via 31 distributors in 26 provinces in China.
  
  Compared with the IPO price of RM1.71 in July 2009, Xingquan tumbled 44.4% to close at 95 sen last Friday. The closing price represented a 43.8% discount to its end-September 2011 book value of RM1.69.
  
  At end-September 2011, it had cash reserves of 399.77 million yuan (RM192.05 million) against borrowings of 38 million yuan, which translated into net cash of 56.3 sen per share. From 2006 to 2011, Xingquan chalked up a CAGR of about 39% for both revenue and net profit.
  
  For FY11, it posted a 16% rise in net profit to 252.29 million yuan from 217.27 million yuan a year ago, while its revenue increased by 22% to 1.5 billion yuan from 1.23 billion yuan previously. Shoes accounted for 49% of revenue, followed by apparel and accessories (33%), and soles (19%).
  
  For 1QFY12 ended Sept 30, the apparel and accessories segment contributed 39% to revenue, compared with shoes (37%) and soles (24%). Due to higher contributions from its apparel and accessories segment in recent quarters, Xingquan expects the apparel division to be its main revenue driver.
  
  For 1QFY12, Xingquan posted a 25.4% increase in net profit to 70.21 million yuan from 56.01 million yuan a year ago, in addition to a 26.8% jump in revenue to 426.30 million yuan from 336.09 million yuan previously.
  
  Xinquan’s outlets in China grew to 2,382 in FY11 from 409 in FY06. The company said it will add 200 sales outlets in FY12. It will also expand its production capacity for soles to around 30 million pairs in FY12 from 24 million currently. Its current production capacity for shoes is about six million pairs.
  
  For FY10 ended June 30, Xingquan paid net dividends of five sen per share.
  
  To ensure sufficient funds for the planned expansion and working capital requirements, no dividends were declared by Xingquan in FY11.
  
  Maxwell
  Maxwell is an original equipment manufacturer (OEM) and original design manufacturer (ODM) in the sports shoe market. As an ODM the company is able to manufacture as well as design and develop shoes for its customers.
  
  Its primary products are court sports shoes (soccer, tennis, skateboarding, basketball, badminton and baseball), which contributed to 88.4% of revenue in 2010. Its end-customers include international brand names such as Yonex, Diadora, Kappa, Brooks and FILA.
  
  Since the debut at the IPO price of 54 sen in January 2011, Maxwell’s stock has tumbled by 23.1% to close at 41.5 sen last Friday. The closing price represented a 13.5% discount to its end-September 2011 cash per share of 48 sen and a 43.2% discount to its book value of 73 sen.
  
  Maxwell paid its maiden dividend of 3.35 sen net per share in September last year, which represented a net yield of 8.1% based on last Friday’s close. Maxwell has set a dividend policy of 20%.
  
  As at Sept 30, 2011, it was in a net cash position of RM193.12 million with zero borrowing. From 2006 to 2010, revenue and net profit grew at a CAGR of 46% and 53% respectively.
  
  For FY10 ended December, it posted a net profit of RM65.14 million on RM335.92 million in revenue. About 96% of the revenue came from China. Customers are mainly trading houses and brand distributors based in China. These customers in turn export Maxwell’s shoes to Europe, South and North America, Asia and Africa.
  
  For 3QFY11 ended September, Maxwell announced a 13.8% year-on-year (y-o-y) rise in net profit to RM22.59 million from RM19.85 million a year ago. Due to better sales, revenue also increased by 18.4% to RM114.7 million from RM96.88 million previously.
  
  For the nine months to Sept 30, net profit remained flat at RM49.6 million against RM49.8 million in the previous corresponding period, while revenue grew by 10.8% to RM272 million from RM245.3 million previously.
  
  Maxwell plans to increase its production capacity to 16 million pairs of shoes by adding four production lines to its current four. In 2010, it produced 11.27 million pairs of shoes, of which 47% was outsourced.
  
  It is close to sealing a deal with a leading international sports shoe brand, the company added.
  
  Multi Sports
  Multi Sports stands out from the rest as its main business is to design, develop and manufacture shoe soles only.
  
  It is a one-stop shoe sole specialist for China’s sports footwear industry. It is vertically integrated and is able to process raw materials into its needed shoe components. The company has produced over 300 designs suitable for a wide range of sports shoes.
  
  Since listing on Aug 19, 2009, the shoe sole maker has dropped 52.9% from its IPO price of 85 sen to last Friday’s close of 40 sen. It is trading 41.2% below its end-September 2011 book value of 68 sen.
  
  At end-September 2011, it had cash reserves of 365.3 million yuan versus borrowings of 27.5 million yuan, which translated into net cash per share of 31.2 sen.
  
  In FY10, Multi Sports paid a net dividend of 2.5 sen per share, giving a yield of 6.3%, based on its closing price last Friday. From 2006 to 2010, it chalked up a CAGR of about 30% for both net profit and revenue.
  
  For FY10 ended December, net profit increased to 139.14 million yuan from 113.94 million yuan for FY09, while revenue increased to 613.46 million yuan from 474.19 million yuan previously.
  
  Multi Sports’ revenue comes from four types of soles it produces namely thermoplastic rubber (TPR), rubber, ethylene vinyl acetate (EVA) Model 1 (MD1), and EVA Model 2 (MD2). EVA soles are known to have better elasticity, softness and flexibility.
  
  In FY10, its MD2 accounted for 56.3% of revenue, while MD1 contributed 31.2%, TPR (8.8%), and rubber (3.6%).
  
  For 3QFY11 ended September, it posted a net profit of 49.7 million yuan on revenue of 239.60 million yuan, up from a net profit of 35.78 million yuan on revenue of 152.72 million yuan previously.
  
  The company attributed the higher revenue to increased MD2 sales, but said profit margins had dropped due to higher labour and raw material costs, and depreciation expenses.
  
  In its 2010 annual report, Multi Sports said annual production capacity is expected to increase to 84.4 million pairs in FY11 from about 35.6 million in FY10, with its new production centre in Jinjiang City.
  
  On Dec 30, 2011, Multi Sports issued 67.5 million new shares or 15% of its existing issued and paid-up capital to sponsor a depository receipt programme in Taiwan, which entailed the issuance of Taiwan Depository Receipts. The issuance was expected to raise NT$236 million (RM24 million) for capacity expansion and working capital.
  
  K-Star
  K-Star is principally engaged in the design, manufacture and distribution of sports footwear under its own proprietary brands, Dixing and K-Star. The company generates over 700 designs annually.
  
  Its product range covers athletic shoes for running, tennis, basketball and mountain climbing as well as leisure. K-Star is also an OEM and ODM for international sports brands including Umbro, Diadora, Kappa and China’s footwear brand, Double Star.
  
  Its proprietary products are distributed across 18 provinces and three municipalities in China at over 870 retail locations. They are exported to Russia and other markets such as Ukraine, Belarus, the Czech Republic, Poland, Finland, Romania and Hungary. In 2010, K-Star expanded into sports fashion apparel and accessories.
  
  Listed on June 4, 2010, K-Star closed at 28 sen last Friday, falling 60.9% from its IPO price of 71.7 sen (IPO price adjusted for a one-to-three share split on Nov 1, 2010)
  
  It is trading at a 67.1% discount to its end-September 2011 book value of 177.97 yuan and close to its net cash per share of 25 sen. As at end-September 2011, it had cash reserves of 154.81 million yuan versus current borrowings of 17.68 million yuan, which translated into a net cash position of 137.13 million yuan.
  
  In FY10, it paid a net dividend of 1.6 sen per share, representing a yield of 5.7%. From FY06 to FY10, the company’s CAGR for net profit and revenue was 47.8% and 43.8% respectively. For FY10, it posted a net profit of 88.25 million yuan on revenue of 670.87 million yuan.
  
  For 3QFY11 ended September, it posted a net profit of 11.14 million yuan on revenue of 169.60 million yuan, down from a net profit of 31.16 million yuan on revenue of 191.48 million yuan previously. K-Star said the decline was mainly due to higher raw material and labour costs.
  
  Its sports footwear segment contributed to about 95% of revenue, while its sports apparel and accessories accounted for the remaining 5%.
  
  As part of its expansion plan, K-Star announced in October that it was buying a piece of state-owned leasehold land of 675 sq m in Jinjiang City in Fujian Province for 27 million yuan in cash.
  
  As at end-2010, it had four production lines at three factories in Jinjiang City. Its estimated annual production capacity was 3.97 million pairs and output utilisation rate was 93.7% in 2010.
  
  XiDeLang
  XDL is predominantly involved in the design, manufacturing and marketing of its own Xidelang brand of sports shoes, as well as designing and marketing of sports apparel, accessories and equipment in China.
  
  It churns out around 2,000 sports shoe designs yearly, of which 500 are commercialised. Its direct customers are intermediaries such as third-party distributors and retailers.
  
  XDL’s products are retailed across 25 provinces and municipalities in China through a network of more than 2,500 retail locations, of which about 1,300 are concept stores.
  
  Shares in XDL have been actively traded since the start of the year following speculation that a major shareholder plans to sell its entire 54.5% stake in XDL to Navis Capital Partners. However, XDL said in a Bursa announcement last month that it had not made any concrete plans or proposal on the matter.
  
  Since Dec 30, 2011, XDL has risen about 25% to close at 37 sen last Friday. Despite the recent surge, XDL is still trading at undemanding valuations. Based on Friday’s close, the share price was at a 49.3% discount to its book value of 73 sen (as at Sept 30, 2011)
  
  As at end-September last year, it had cash reserves of RM136.53 million and current borrowings of RM47.17 million, which translated into net cash of RM89.36 million or 20.3 sen per share.
  
  In FY10, it paid net dividends of 2.5 sen per share, representing a yield of about 6.8% based on Friday’s closing price. From 2006 to 2010, the CAGR for revenue and net profit was 48.5% and 60% respectively. For FY10, it posted a net profit of RM68.19 million on revenue of RM77.91 million, all of which was derived from China.
  
  XDL’s shoe segment contributed 53% of revenue, while the remaining 47% came from its apparel, accessories and equipment.
  
  For its 3QFY11 ended September, its net profit increased to RM23.98 million from RM21.92 million a year ago, while revenue was RM132.94 million compared with RM125.25 million previously.
  
  XDL said an increase in brand awareness and demand led to the improved performance.
  
  On Jan 18, XDL proposed a private placement, bonus issue and rights issue of warrants to raise up to RM29.7 million for expanding production capacity at its new design and production centre.
  
  The construction of the first stage of the centre is expected to be completed by the first half of 2012.
  
  
  This article appeared in The Edge Financial Daily, February 13, 2012.

I do have some small comments on these 2 statements.

• Most investors are no doubt sceptical about China stocks listed on overseas exchanges, given the numerous accounting issues these companies have faced in the US and Singapore over the last few years.
  
  However, analysts also noted that none of these issues has surfaced in Malaysia yet, and the Chinese companies listed here have consistently delivered strong earnings despite their lacklustre stock price performances.

Ok..

The first statement, of course, it's a fact.

The second statement, is so twisted in my flawed opinion.

Of course, none of these Chinese stocks have been found guilty of accounting fraud yet but shouldn't we look and review the symptoms and characteristics of the Chinese stocks that were alleged to have committed of accounting fraud and then shouldn't we compare with the Chinese stocks listed here? Simple question, do they share the same questionable issues within their balance sheet?

That would be more logical yes?

Now take a look at this posting: Featured Posting: China Integrated Energy (CBEH): The Latest Alleged Chinese Fraud

CBEH was alleged to have committed accounting fraud.

Let's look at some of the symptoms and characteristics posted on that posting.

• Despite generating $38.5 million in net income and $35.6 million in operating cash flow in the first 9 months of 2010, the company decided to issue a total of $37.4 million worth of new shares in December 2010. If CBEH is as profitable as it claims, does not need to dilute shareholders at an irrationally low valuation of 6.1 times net income.

Logical reasoning, isn't it?

Question: Do we see this here?

Are we seeing these Chinese stocks listed here raising more cash?

Are we not seeing some of them raising more money via private placement and rights issue?

If they are so cash rich, why want to raise more money?

Would you want to be an investor in such a company?

And here's my flawed thinking, if company is so cash rich and valuations is so really low and un-justifiable, why don't the owners take their company private? 2 times PER valuations mah... some even 1.xx PER valuation. Why doesn't the owners want to take it private?

The article then continues:

• CBEH management has claimed that the Chongqing Tianrun biodiesel facility with capacity of 50,000 tons/year will generate $32 million in revenue and $10 million in net income in 2011. We believe that their projection is highly exaggerated. In reality, the AIC financials for Chongqing Tianrun show 2009 revenue of $1.5 million, a net loss of -$420,000, and total assets of $4.36 million, of which only $790,000 is property, plant and equipment. Given that CBEH recorded over $8 million in PP&E on its supposed 100,000 tons/year facility in Tongchuan City (which we also believe has exaggerated results), we question why CBEH is spending $16.5 million on an unprofitable, tiny company with less than $1 million in real assets.

Yeah, where is the MOOLAH??? We have here a Chinese company who claims to be rich but does not seem to earn much interest from the tons of money it said to have!!!!

Question: Do we not see the same issue with some of these Chinese companies?

Which is why the article makes the damning remark: 'We doubt that the $79.6 million cash on the balance sheet actually exists!!'

How?

See this is not stereotyping of these Chinese stocks.

In my honest opinion, these are simple issues that a long term investor have to address. Despite the stocks being cheap, several investing issues exists. Issues that makes the investor sceptical about the company.

And if one is sceptical, why take the risk to be a long term investor?

Investing in a stock just because of a low PER has its risks. ( Remember Megan Media? )

Ok, out of the list, I have to give credit to Maxwell. At least the company pays decent dividend and the owner had put his money where is mouth by buying more shares last year.

What has the other done?

The one that claims of being frustrated by low share prices.... why didn't he buy his own shares? Why don't he take it private? And what does his company do instead? A private placement and rights issue?