Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
CORPORATE DIGEST | 06 APRIL 2010
China Sports – Laying The Footprints To Success
By Ernest Lim
Pursuant to China Sports’ (CSPORT) placement of 120m new shares and its weak 4Q09 results, investors have expressed their displeasure by driving CSPORT share price down 23%, from S$0.175 to S$0.135 since my coverage 2 months ago.
With reference to my previous article (1 Feb 10: China Sports Taps Investors For Cash Twice Within Half A Year – Is It A Buy?), I have pointed out that it is crucial for investors to differentiate between short term (now to 3QFY10) and medium term horizon (4QFY10-FY11) for CSPORT where the growth rates for its top and bottom lines are different. Thus, it did not come as a surprise to me that its 4Q09 results and forward guidance are soft.
In this article, I will first discuss its results and subsequently whether it is still worth a “Buy”.
FY09 – Key takeaways
Based on Table 1 below, 4QFY09 sales and net profit were weaker than 4QFY08 due to weak demand, high distributors’ inventories level and naturally, lower average selling prices (ASP) for its products.
Table 1: Key information at a glance (Source: Company)
*No of shares refer to the actual number of shares as at that period under review and do not refer to weighted average of shares for that period
**SGD / RMB fixed at 4.86.
FY09 revenue increased 2.4% from RMB1.86b to RMB1.90b due mainly to:
a) the upgrade and opening of more of the specialty stores as per Table 2 below.
Table 2: Points of sales for FY08 and FY09 (Source: Company)
*The points of sales were compiled by aggregating the number of sales outlets given by CSPORT distributors. This include YELI specialty stores
b) an 11% increase in sales of YELI apparel and
c) the successful launch of YELI accessories in Aug 08. Accessories’ sales have soared 66% since FY08.
Although CSPORT FY09 results are soft (in line with my expectations), investors have punished the stock severely. Is this still worth a medium term buy? Let’s take a look.
What has not changed?
Inventories – still high
Firstly, the inventories which distributors are carrying are relatively high and according to my estimates, this should resolve by around 4QFY10 amid the large discounts that they are promoting to consumers.
Retail sales continue to improve
China retail sales continue to be strong. Retail sales jumped 17.9% in the first two months as compared to a year earlier. According to China National Commercial Information Center, retail sales are expected to rise to about 19% this year, with urban retail sales increasing at 19.5%. This should provide some support to demand for CSPORT products.
Pro-consumer climate to continue
China’s legislation is likely to place higher priorities to improvements to social security and promotion to more equitable economic development this year. Among other measures, there would likely be a stronger safety net of pension, health care and unemployment benefits. With these measures, consumers would arguably have more disposable income to spend on sportswear.
Increasing awareness in sports
There is no lack of sports activities to increase the PRC consumers’ awareness in sports. Examples of such sports activities include the 2010 Asian Games in Guangzhou and the 2011 World University Games in Shenzhen. Besides these events, there are other big international sports events, such as the FIFA World Cup in South Africa to be held this year. All these activities should spur interest in sports and sportswear.
FIFA world cup event stores – to raise the profile of YELI brand
According to management, CSPORT would be gradually rolling out the FIFA World Cup Event Stores from the middle of April. Although this is unlikely to have significant contribution in the short term, the presence of these stores should raise consumers’ awareness and profile of YELI brand as they are located near or inside YELI stores.
What has deteriorated? - Intense competition ahead
According to management, the issue on inventories is not as problematic as rising competition in the sportswear industry. Competition is increasingly intense as some Chinese sports companies such as Peak Sports were just listed in Hong Kong last year. Flyke International Holdings Ltd has also just listed in Hong Kong last month, raising HKD363.9m. Besides those competitors which went to Hong Kong for listing, there are other peers such as Xidelang which went to list in Malaysia. Thus, there is an influx of competitors which are cash rich. These companies would be eager to put their funds into use by expanding aggressively in China and carrying out large price discounts to gain market share. This would undoubtedly pose competition to CSPORT.
To avoid direct competition with Tier 1 brands which are mostly positioned as performance brands, CSPORT’s management has shrewdly positioned its YELI brand as sports casual wear. Furthermore, management would be conserving cash so as to better compete with them through its on-going efforts in advertising and promotion, improving product design, expanding its distribution network, as well as, collaborating with FIFA to raise YELI profile in China. However, management cautioned that the fruits of such measures take time to materialize. To this aspect, CSPORT has increased its cash buffer over the last half year by raising cash through rights issue and share placement.
Valuations – price downgrade to S$0.185
With reference to Table 3 below, CSPORT, with its medium term growth drivers, is trading at a substantial discount to its peers. I believe CSPORT should be able to trade to around 8.1x FY11F earnings which should translate to a target price of S$0.185. This was lowered from the initial target price of S$0.285 as I have concerns on the possible aggressive expansions and price cuts from CSPORT’s competitors, especially those companies that are armed with cash from initial public offerings. This competition is likely to filter into 2011 where growth may be adversely affected.
View Full-sized Image Table 3: A comparison of CSPORT and its peers (Source: Bloomberg)
Potential upside risks
Upside risks include: a) faster than expected recovery in ASP; b) earlier than expected contribution from FIFA and c) Pro consumer government policies which may cause a re-rating in consumer stocks.
Conclusion – Medium term buy based on current price
Based on the close of S$0.135 on last Monday, there is a 37% upside which warrants a medium term buy (i.e. up to 2 years). For investors who have bought CSPORT at S$0.175 on the day that my first article was published, they should consider holding CSPORT till at least above their cost price, unless they have better alternative uses of their funds.
China Sports International Limited. The Group's principal activities are designing, manufacturing and selling sports fashion footwear and sports fashion apparel under the brand name Yeli. The Group also produces shoes for OEM customers under international labels such as Kappa. The products are sold throughout the PRC and exported through exporters to countries in Europe, the Middle East, South America, Asia and South Africa. The Group operates in the People's Republic of China.
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Business Description:
Tong Herr Resources Berhad. The Group's principal activities are manufacturing and selling stainless steel fasteners. Products include nuts, bolts and screws and all other threaded items. It also operates as an investment holding company. Operations are carried out in Malaysia and Thailand. The Group distributes its products to Asia, Europe, North America and other countries.
This is a cyclical stock. Its industry is down with the poor economy. However, its balance sheet is strong. It has turned in profits for the last 2 quarters. It has cash equivalent of RM 155.331 million and this equates to cash of RM 1.22 per share.
Shares Outstanding: 127.43 million
Closely Held Shares: 77.320 million
With so many shares closely held, this company is little different from a private limited company. No wonder it is traded at a steep discount.
Why does this company keep so much cash unproductively employed?
Business Description:
Boustead Holdings Berhad. The Group's principal activities are warehousing and distributing fast moving consumer products for selected clients. Other activities include designing, constructing, upgrading, repairing and maintaining naval and merchant ships; planting and processing oil palm, as well as forestry and oil bulking installations; manufacturing cellulose fibre cement boards used for wide ranging ceiling and cladding applications; provision of commercial, Islamic and investment banking services, money broking, fund management, underwriting of general and life insurance business, and property investment and development. It is also involved in investment holding. Operations are carried out in Malaysia.
Boustead to sell land in Sumatra for US$50m
By DANNY YAP
danny@thestar.com.my
KUALA LUMPUR: Diversified group Boustead Holdings Bhd, which is targeting to sell off its 17,000ha of plantation land in south-west Sumatra before year-end, hopes to raise about US$50mil from the sale. (=US 2,941 per ha) Deputy chairman and group managing director Tan Sri Lodin Wok Kamaruddin said over 50% of the land was currently planted with oil palm.
“We are on the lookout for buyers. If we get a good price we will sell,” he said told reporters after Boustead’s AGM and EGM yesterday.
On reasons for selling, Lodin said as it was a stand-alone plantation, there were logistics problems, and the company had no plans to expand it.
Lodin said Boustead would continue to hive off its non-core and non-performing assets to improve efficiency and also reduce bank borrowings.
He said Boustead had managed to dispose of its non-profitable businesses and non-core assets over the years which had helped to reduce its gearing. “Our gearing is currently 0.8 times, compared with 1.2 times in 2009.”
On dividends, Lodin said Boustead would continue with its quarterly dividend payout although it was not a written company policy. The payout was on condition it remained profitable.
For the financial year ended Dec 31, 2009 (FY09), Boustead paid out dividends net-of-tax amounting to 22.1 sen per share.
The total dividend payout of RM184mil represents 54% of its attributable profit and a 27% increase from the payout from FY08.
“This increase in dividend payout is sizeable given the enlarged share capital as a result of the rights issue undertaken during the third quarter last year to increase shareholder base,” he noted.
On Boustead’s performance, Lodin said despite a tough year in 2009, the company managed to post a respectable pretax profit of RM502mil, compared with RM679mil in 2008.
On the key performance indicator this year, he said Boustead targeted a return-on-equity of 10%, pre-tax return-on-asset of 7% and net dividend of 18 sen.
On its disposal of the 80% stake in BH Insurance (M) Bhd to AXA Affin General Insurance Bhd, Lodin said the company would gain RM363mil from the sale. In addition, Boustead would also rake in RM75mil profit from BH Insurance’s business prior to the stake sale.
“It was a good investment,” he said, adding that after the disposal of BH Insurance, it still maintained a 20% stake in Affin Bank.
On its business outlook, Lodin said all divisions looked good taking account of the improved global economic conditions. “We anticipate a better year,” he said, adding that Boustead would continue to focus on its six core business divisions - heavy industry, plantation, property, trading, finance and investment as well as manufacturing and services.
Lodin said the heavy industry division, especially shipbuilding, would continue to be the key driver of growth for the company.
He said the division now contributed about 30% to revenue, adding that the finance and investment division contributed about 20%, property 20%, plantation 15%, trading 10% and manufacturing 5%.
“We believe our plantation division can do better this year with crude palm oil prices on the uptrend. Another division that can perform better include finance and investment.”
In general terms,it (intrinsic value) is understood to be that value which is justified by the facts, e.g., the assets, earnings, dividends, definite prospects, as distinct, let us say, from market quotations established by artificial manipulations or distorted by psychological excesses.
- Benjamin Graham and David Dodd
Before you risk your hard-earned money on a stock, you probably want to know the value you can expect to get in return. The value you assign to a stock, or that stock's intrinsic value, is the maximum amount that you are willing to pay now for future benefits, which could come from dividends or the potential sale of the stock at a realistic future price. It makes no sense to buy a stock when its intrinsic value is smaller than the current price.
Buffett cautions: "The calculation of intrinsic value, though, is not so simple ... intrinsic value is an estimate rather than a precise figure."
Nazir says SC proposal would severely hit M&As
By ELAINE ANG
elaine@thestar.com.my
PETALING JAYA: The Securities Commission’s (SC) proposed rule change on the assets and liabilities method of buying listed companies will result in a severe drop in merger and acquisition (M&A) activities in the country, said CIMB Group Holdings Bhd group chief executive Datuk Seri Nazir Razak.
“(The SC proposal) in its present form, absolutely, will cause a drop especially in mergers, not so much takeovers. Value is created by mergers,” he told a press conference to announce the group’s plans to set up a research institute to promote Asean integration yesterday.
The press conference was held on the sidelines of the 7th Asean Leadership Forum.
To recap, the SC had recently issued a consultative paper which proposed to raise the shareholder approval level in an acquisition via assets and liabilities from the current simple majority to 75% shareholder approval.
It also suggested an additional requirement that not more than 10% of shareholders present can object to the deal.
Under Section 132 (c) of the Companies Act, a buyer only needs a simple majority to take out the assets of the listed company.
This allows the buyer to circumvent the Takeover Code, where the threshold to take over a company and de-list it is higher at 90% acceptance of shares outstanding that are not owned by the offeror.
This is aimed at protecting the interests of minority shareholders by requiring a higher threshold of shareholder approval before a deal is done.
Nazir said if the bar was set too high there would be no deals.
“What we want is a framework to protect minorities but enables transactions to be done. In its present form, it is so prohibitive that you will see a very sharp drop in M&As.
“Is that good for the country and capital market?” he said.
Nazir highlighted the need to strike the right balance between the interests of the majority and minority shareholders.
“Minorities also profit a great deal from M&A activities. We have to be very sensible in evaluating the new proposals.
“I have heard comments that the higher the takeover threshold the better, especially for minorities. It is not true that the more power to minorities the better it is.
“Minorities also need deals, mergers and takeovers,” he said.
