Having thought about it for awhile, I have decided to divest my stake in Dapai International as soon as the price turns up. I was helped along by the many helpful cbox friends in LP's cbox.
My initial reasons for buying Dapai was purely because it was undervalued, I mentioned that it's business model was poor. Original Post here
It's PER is at 3+, and trading at 2/3 of NAV.
Intrinsic value calculated as a function of free cash flow with 10% discount rate and 0% growth is $0.52.
Very attractive right? Definitely. very undervalued.
However, there are many many cons against it.
Let's talk about it's fundamentals first.
- Company is in a growing, but not fast growing, segment of retail, Backpacks and Luggage.
Affluent Chinese can afford to buy highly differentiated retail goods like Samsonite, LV etc. Poorer chinese people probably would not look at Dapai, whose backpacks sell at about RMB 80-100. This leaves the middle class Chinese segment.
-High competition. Low barriers to entry.
-Product differentiation is not there.
Now let's go into the juicy bits:
- Company is a S-chip. Some China plays come to SGX having been rejected first by HKSE. It's financial figures might be...let's just say..."virtual". Lack of corporate transparency.
-Company might never reach it's purported intrinsic value. Why?
1.) Lack of interest in S plays
2.) Poor analyst coverage-CIMB used to cover Dapai, unsure why they decided to stop
3.) Poor institutional demand- BB's drive the market, not us.
4.) Lousy business.
I got the rest from Valuebuddies.com: link here
From member D.O.G. :
"2. Margins & Returns on Capital
Price is the main consideration for consumers since no-brand backpacks have the highest sales. Gross margin of 30% and net margin of 17% (both figures from 1H10) are pretty high for a company with a small market share in a fragmented, price-conscious, low cost-of-failure industry.
ROE for 2008 was 35%, for 2009 it was 21%. ROA for these years was 31% and 19%. These are incredibly high rates of return for a manufacturing business.
The pieces don't seem to fit.
3. Share Placement
The company did a share placement in May 2010. This was at a time when the company had only RMB 24m of debt and was swimming in cash. On 31 Mar 2010, almost 40% of shareholders' equity consisted of cash, RMB 551m. Yet the company chose to issue shares BELOW the reported tangible book value per share.
If the financial statements are correct there was absolutely no need to raise any money, and definitely not at such a low price. The amount raised was RMB 58m, only about 10% of the amount recorded on the books prior to the placement. There was basically no real change in the cash position after the placement, except that the new money was left in the holding company i.e. not injected into China.
The company claims it needed the money for "overseas working capital" or dual-listing expenses. Well, the 30 Mar 2010 balance sheet shows RMB 776m in retained earnings and RMB 551m of cash at the Group level. Surely one of the cash-rich subsidiaries could spare RMB 58m for a dividend to the parent company?
There is no excuse for not being able to get money out of China, since the company was able to do just that for its dividend payment in May 2010. Money left China and was paid to the holding company, and was then paid out of the holding company to shareholders.
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The placement alone already does not make any sense. Put together with the impressive margins and supernormal returns on capital, the whole thing looks very odd.
Also, the placement proceeds of RMB 58m almost exactly match the money paid out in dividends (RMB 60m). The placement was done in April, and the dividends were paid in May. Maybe it's all just an amazing coincidence and I have an overactive imagination. Maybe.
Maybe the stock is cheap for a reason."
I will err on the safe side and will be looking to divest after FY2010 results release soon.
If there' divided declared, I'll hold till XD.
ORD already must post more
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