Monday, May 10, 2010

'China-apeks' In Bursa

Great article in StarBiz. Yes, I have finally come around to comment on the Chinese boots-sports shoes-laces-etc. companies listed on the local exchange. Many people have asked me what I think, most just want me to reassure them that they made the right calls. Those who asked me probably would have bought and cannot understand why share prices still go lower and lower still.

CCA Calendar 11 by benacg.

Are they good buys? YES.
Are they mostly great buys? YES.
Their dividend yields are spectacular, can they last? Probably for a few years at least, but generally YES.

Then why tf are prices still drifting lower? The article below basically addresses the key issue. Some may have thought that the Malaysian investors are at fault, that they do not know a great investment even when you hit them over their heads.... WRONG. We know a good thing, but we cannot override a good thing that has a lot of baggage.

Its not that investors are not buying, its that the owners are selling, much more than we have been buying. Why are they selling if they are on such a good thing? Imagine a PER of 3x and a dividend yield of 20%-30%... where in the world to get that? Why would anyone want to sell? I wouldn't ... but some people would. Who are those people?

They are the private equity buggers. Say Mr. Wong has a small factory making shoes in Hell-looong-jiang, turning over RM10m a year and making RM500,000 profits. He started with RM100,000 capital 4 years ago. A private equity team thinks that they can pump in capital and modernise processes and put in professional management. So, they put in RM10m in additional capital for a 60% stake, valuing the company at about RM16m or thereabouts. Within a year revenue jumps to RM30m and they start making RM4m profit. They then rope in more private equity and pump in another RM5m to start opening retail outlets. Now the paid up is RM15.5m, and at RM500,000 a pop, they opened 16 branches over the next 12 months. Revenue jumps to RM60m and they make RM18m in profit.

They think of listing the bugger but their paid up is still minuscule and its faster and easier to list smaller companies in places like Bursa. Anyway, they ramp up their paid up from retained earnings, did some clever accounting and ta-dah, paid up jumps to RM40m. They list on Bursa with a valuation of 8x = market cap of RM320m.

The private equity guys' 60% stake cost them only RM15m, and now their 60% stake is worth RM192m. Which is why, they will take money off the table, you can't really blame them when their cost of shares is literally zilch. In this case, say they list at RM1.00. In actual fact, their cost per share is 15/320 = 4.6 sen per share. Hence you may be able to appreciate why they will sell at RM1.00, or 90 sen, or 80 sen, heck even 50 sen, hell why not 30 sen even.

Paying good dividends will lift the yield, that is all well and good, but to invests in these type of companies, look closely at the stakes that have to come onto the market. Xinquan is probably the best of the lot as the private equity partner has almost finished selling all their stake, after nearly one year. You have to do your homework and look for these additional information - yes, its all in the bloody prospectus that 99% of investors never read.

The proposed new rules should include:
a) all owners, promoters, minority shareholders of future China-companies have a moratorium on their shares. First 6 months, all locked up, 6-24 months: all can sell up to 20% of their stakes; beyond 24 months: no more moratorium.
b) In addition to quarterly results, there must be more regular news and updates from lead investment banker. Any news, positive or negative in mainstream media or business publications must be highlighted and hyperlinked from Bursa main site.
c) For all China listing, owners/promoters are only allowed to sell 10% of their shares as part of IPO, the rest will be all new shares issue.

The rules have to be stringent because you have to regain confidence for the investors in these counters. What about the juicy dividends, just buy and hold when dividend yields goes above 20%, you cannot predict when the shares will turn around but no one should argue when you are getting 20% dividend yield. The only question is how long can the dividend yields stay above 20%. If it stays above that, then heck care, just lock it up, but always monitor the quarterly earnings to make sure the numbers and metrics are looking ok (i.e. no huge jumps in inventory and/or debtors).

Once the private equity or peripheral shareholders finish selling, stocks will climb back for sure. You will have to do a lot more work, you need to keep abreast with company filings when and where substantial shareholders have been selling, and note how many more shares they have to sell.

In fact, the EPF should really send their analysts to these China companies and go to their factories and retail outlets to double verify the figures. If they stand up, and from a few people who have went there, they actually do stand up quite well - then EPF should collect the shares... I mean 15%-25% dividend yield, come on!!!

You want to invest overseas, they don't come more juicy than this. Yes, you will have to keep a close eye on operations but every investment has their risks. In another way, you will also help shore up confidence in luring overseas companies to list on Bursa.


by Lee Kian Seong, StarBiz: THERE was a lot of buzz in the market when three Chinese companies – Xingquan International Sports Holdings Ltd, Multi Sports Holdings Ltd and XiDeLang Holdings Ltd – listed on Bursa Malaysia in the second half of last year.

CCA Calendar 07 by benacg.

However, the weak performance of these stocks since then has disappointed a lot of investors. Some analysts point out that Malaysian investors need greater awareness of the fundamentals of Chinese companies listed here.

With two more Chinese companies – Sozo Global Ltd and K-Star Sports Ltd – scheduled to list soon, how will investors react?

Private equity banker Sherilyn Foong said investors’ lack of confidence in China companies seeking to list in Malaysia was not due to poor fundamentals or high valuations. She believes this “selling out” behaviour was contributing to the weak share price performance of these China companies listed on Bursa Malaysia.

Foong, who expects more Chinese listings in Malaysia this year, said companies should restructure their initial public offerings (IPOs) to reduce the offer for sale portions; i.e. the portions where the promoters are selling as part of the IPO exercise.

“This will help to allay investors fear that the promoters are cashing out,” she said.

In April, StarBiz reported that a wider moratorium on the sale of shares was being applied on new listings of China companies in Malaysia.

Investment banks sponsoring the new IPOs, in consultation with the SC, have initiated the move that imposes at least a six-month moratorium not only on the promoters of the company – which has been the usual practice – but also on a list of other shareholders who have emerged prior to the IPO.

The move is aimed at preventing a repeat of the heavy selling by a pre-IPO investor in one of the three listed Chinese companies. According to OSK Research, there is a perception among investors that only weak China companies would choose to list here. It also said that investors were sceptical of their earnings following accounting irregularities involving several China companies listed in Singapore.

“They (investors) believe that any Chinese IPO will just underperform following the three Chinese listings recently,” it said in a note.

OSK said to dispel these perceptions, China companies listed in Malaysia must deliver good earnings track record and payout dividends to show that they are genuinely generating cash.

“The management should be prudent and give achievable guidance. They should not over-promise and under deliver as it will dampen the market’s confidence towards these Chinese companies,” it said.

OSK said consistent updates and communication with the investment community was also necessary to lift investors’ confidence.

On company developments, Xingquan International, which recently concluded its Autumn/Winter 2010 Sales Fair, recorded a 35% rise in sales orders to about RM323mil compared with orders received at the same event last year. The company plans to further expand in inland China during the next financial year ending June 30, 2011. For the second quarter ended Dec 31, 2009, Xingquan International posted a 34.1% jump in net profit to RM30.6mil while revenue surged 61.3% to RM179.7mil from a year ago. The company’s share price closed at RM1.15 last Friday, up 1 sen. Xingquan International’s offer price was RM1.71 for retailers and RM1.80 for institutional investor.

CCA Calendar 12 by benacg.

On May 6, Multi Sports proposed a one-for-four rights issue, which will raise up to RM36mil for the construction of a new plant in Jinjiang City, China. The company plans to undertake a subscription of 54 million right shares at a price to be determined later. The Chinese shoe sole-maker intends to increase its production capacity to 79.6 million in 2011 from 24 million in 2009 to meet growing demand. For financial year ended Dec 31, 2009, the company posted a net profit of RM56.7mil, 22.7% higher than a year before. Its revenue rose to RM237.9mil from RM193.3mil in the previous corresponding period. Multi Sports share price shed 1 sen last Friday to close at 41 sen. Its issue price was 85 sen during the company’s IPO.

XiDeLang posted a net profit of RM68.4mil on revenue of RM385mil for the financial year ended Dec 31, 2009. The company is expected to benefit from the growing sports wear industry in China. The first phase of XiDeLang’s plant expansion exercise is expected to be completed by the third quarter of this year. The second phase is expected to start in mid-2011 and would be completed by end-2012. XiDeLang’s share price closed unchanged at 35 sen on May 7. Its IPO price was 58 sen.


K C said...

I must first confess that I bought quite some XDL shares at about 50sen each, basing on its fundamentals and have considerable paper loss. At 35 sen, XDL's PE ratio=2, P/B=0.8, Operating cash flow=25 sen, or P/OCF=1.4. In profitability, PM=18%, ROE=40%, clean balance sheet. Since I bought them, I have been singing 'why, why. why Delilah?' Now I understand why, or do I? said...

Dear Sifu, please write a blog post and teach us the correct way to gauge the 'status' of loading off by the private equity holders, i.e what numbers to get from prospectus, what numbers to get from trading volume, what are the rules of offloading and what are the sensitive dates, etc.

clk said...

In this part of the world, many IPOs are really exit strategies rather than the beginning of a new growth phase to raising capital.

Without institutionalising the management and systems, the presence (or eventual absence) of the founders are usually an evidence of a cashing exit stepping stone. said...

The owner still "owns" and operates the business. It is the early private investor that want out cash out. We still have the initial management.

Ivan said...

That is a very good article to share. :D

looking forward more and more articles about private equities fund- how they make money?

kl said...

I would'nt be too impressed with these small China companies' financials and promises. On a P/BV of several multiples, they were expensive at IPO stage. Appears cheap only on because profit growth was ramped up for the listing. Is it sustainable? Look at Hua-Ann I'ntl, a reverse takeover of Antah. Early investors sold after IPO. Company did not achieve rosy profit forecasts at all. Loss making in 2009. No dividend. Share still at over 50% discount to IPO price.

The Emperor said...

It would be silly to tar M-chips with a wide brush. We have a few factors to consider: SC is tightening the approval process (believe me, it was already tight before this), sentiment is so weak that prices are way below fair valuations. Datuk Siow Kim Lun, independent director of Xingquan, veteran investment banker & formerly of SC, will not jeopardise his reputation for a few hundred thousand ringgit.

kl said...

I don't think it silly to have a healthy dose of skepticism with regards to China co listings on Bursa. In fact, I think it prudent to be so. The expanding China market story can only go so far to entice investors. Let the initial listings perform first before you start believing with your money. That means healthy growth in turnover, profits, cashflow, and good control of debtors, inventory with no diversion of resources elsewhere. And consistent dividend payouts would add to my comfort. said...

There are really lots of new things to learn from investing.

I think I understand what Salvadore Dali wanted to say [after so many days since this post is written!!!]

XDL IPO by issuing 100 million new shares. They allocate merely 10 million to Malaysian Public and 90 million to PRIVATE PLACEMENT.

Due to oversubcribe from Malaysian public, the end poll was 20 million to Malaysian public and 80 million to the sohai (Private Placement)

It is the sohai from the private placement that sell off from the last 6 months since 11/11.

The owner still owns all shares (300 million or 60% of the company) according to the annual report. They are not allowed to sell their shares within 6 months from IPO. Although it is 6 months now, I doubt they will sell a single shares at current price.

I am trying to learn as much about XDL as possible and probably will attend the AGM this 18th June. If this is not another Megan, this will be a killing trade.

E said...

with such a significant stake in the company,won't the private equity investors be considered "insider" and hence required to disclse their trades? correct me if i am wrong, there have been no such disclosure for xdl since ipo. am i missing something, Mr Dali? said...

You need to report your trade publicly if you hold more than 5% of the company. Our local funds seldom hold more than 5% of a company, that's why you don't see the reporting. If 10 fund each holding 1% and they all start selling immediately after the IPO, the price will of course crash.

E said...

Ah Yap, thanks for your explanation.

E said...

Sorry for 2nd comment in quick succession, Ah Yap, in that case, am I right that there is no way at all to know whether the private funds are done selling? Btw, could you share your findings from the AGM? Thanks. said...

The annual report has to publish the 30 largest shareholders. The last annual report indicates that among the 30 largest shareholders as of May 2010, there are a few funds still holding XDL but only 2 funds hold 1.1% shares and the other funds hold less than 1%.

There are only a few cats in the AGM, maybe 20-30 shareholders? Shareholder very angry with company not giving out dividend on Q1. They keep pushing for it ,including me :D.

Unofficial "Insider" rumor is that they will pay 1st dividend in Aug. But based on their tone, the dividend payout ratio WON'T exceed 30%. I would guess 20% to 30%. 30% is very optimistic. The management want to hoard cash for expansion, they want bigger pie of the market. But even 20% payout is a very good catalyst for the stock price because at PE3, yield is 6%+.

Biggest problem of Chinese stocks is that it is very hard to know if the reporting numbers are accurate. Because unlike a local company, if they cheat on us, it is very hard to use Malaysia law to prosecute a China businessman. The problem happens not only with Malaysia, in Singapore and especially in US, shareholders is having big headache with these Chinese companies (FUQI, CSKI, NEP, CMFO...)

For Chinese shoes companies listed in Malaysia, most of the risk is covered by the extremely cheap valuation. How cheap? If you want to buy a Secret Recipe or any franchise business where you need to manage your own store full time on yourself, hire your own employee, do your own accounting and pay for income tax... you are still expected to pay PE2 to PE3 for a new locations with no historical business record. You need big capital investment up front and it is almost impossible to sell your business especially if it is not profitable.

Now you have a listed company selling you for PE2-3, you don't need to manage it, you can buy small chunk or big chunk and you can sell off in a day if you don't like it. If you can do you homework and understand what you are getting, you "may be" able to make a "wise" decision.

Another comparison is XDL makes around the same money as PADINI, why PADINI is selling 4 to 5 times more expensive then XDL? PADINI is indeed a safer investment than XDL, but is PADINI 5 times better than XDL? Is PARKSON 10 times better than XDL?

Unfortunately, whether your decision is "wise" take time to prove (3 years at least).

Disclosure: Long XDL.