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Originally Posted by clicker
This goldpac is quite interesting.
Market cap is 2.1bil HKD. They have cash and bank deposit ~2bil HKD in total. Their net income for 2016 is 230mil HKD. They paid 17 HK cents in dividend in 2016, about 6.6% yield. That is just way too cheap. Why?
The Hong Kong market is weird. I think there is a relatively small amount of fundamental players. So sometimes you have a bunch of fundamental investors who are fully invested and only look at the share price once every two weeks.
So prices can move down quite a bit without them stepping up and buying more to put a floor in. And with low coverage the stock might not get much attention. So then the price can be set by a bunch of speculators who don't care much about fundamentals.
I think the HK market lends itself to some great trading strategies due to the random crazy volatility you see sometimes. Probably little competition and you can still get a nice amount of quality data.
If China loosens currency controls, that could prove a nice catalyst with a flood of unsophisticated Chinese investors flooding in (like you saw in mid 2015).
Another reason could be that the market thinks that Alipay etc will dominate regular payment methods. So that demand for bank cards will plummet over the next decade. Doesn't fully explain the cheapness though since they have a pretty decent moat and 7% global market share.
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I am from Hong Kong and there just too much bull**** imo like China Huishan Dairy.
You might find a few gems here but with the work required for due diligence, it is not worth it imo for small accounts.
I think you can lower the odds of fraud several ways. See if other large investors did major due dilligence, see if their products show up in large consumer surveys. See if revenue makes sense compared to total industry size etc. Huishan had several several red flags tbh (besides the lofty valuation).
If the company has shown to generate free cash flow and paid out a significant % of what they received in share offerings, it is unlikely to be a fraud.
From the muddy waters report:
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Our conclusions are based on our investigators visiting 17 Huishan cow farms started or completed since the IPO, extensive research of government records, and consulting industry experts. Overstating CapEx is typical for frauds. When a company reports fake profits, it has a “fake cash problem.” The only anti-fraud device most audits employ is cash confirmation. Although many frauds in China have forged cash balances, it can be challenging to do so. As a result, frauds tend to buy assets and over-report the amounts they paid. This gives them an excuse for not actually having the cash their reported profits imply. In our opinion, Huishan is inflating its CapEx in a manner consistent with this pattern.
The two part report is a really good read :
http://www.muddywatersresearch.com/research/
A major risk is that auditors are lazy and just get the bank statements from the company instead of from the bank itself. This happened in one case in India. They could just forge bank statements since the auditors were lazy.
Anyway I add Sinomax, and remove Youyuan from the list. Sinomax is obviously not a fraud since they made a high profile investment in the US. And the chairman purchased more shares than what was sold in the IPO in 2014. Looks lilke this one could trade at a 4-6x PE once earnings normalize again. List:
Real estate:
Asia standard
CSI properties
Keck Seng
Boaye group
manufacturing:
Goldpac
Jiangnan group
Okayama Paper
Sinomax (new)
Food and beverage:
Tianyi Summi
Changshouhua
Future Bright
Tianyun
Jiashili
@DTEJD: Thx for suggestion, but how do you get to a 6.5x PE? I get closer to 10x.
Last edited by dfgg; 05-20-2017 at 07:32 AM.
