I have just divested of Dapai International at a $200 loss.
While I do not deny that panic was a factor, I think I do have legitimate reasons to "panic sell".
Today, many small and mid cap S-shares are in the red.
On Friday and then Sunday, 2 small cap S chips applied for a trading suspention, China Hongxing Sports, a shoemaker, and subsequently Hongwei Technologies. Both have had audit issues regarding their financial positions.
Many S shares on SGX look undervalued, with large cash hoards and extremely low PE Ratio, and Dapai is one of them. Dapai sits on 13c cash per share and has low PE Ratio of 2+, and is trading at less than NAV.
Why did I divest of Dapai?
1.) Management during the IPO promised at least 20% of profits to be paid out as dividend a year. They did not fulfil this for FY2010, saying
"Our Board decides not to declare dividend for FY 10 so as to retain reserve for the capex of the
new Anhui luggage plant and for future business development. The Board will consider
recommending a steady dividend policy of the Group at the end of next financial year."
They have already declared a dividend policy and reneged on it. 20% of profits this year adds up to a mere S$10 million.
2.) They are sitting on a large cash horde of S$130 million ($110 million last year) and YET did a placement exercise at LOWER than the market price at that time.
There was no need to raise money, about S$10 million worth, since they already had $110 million in the bank at that time
The kicker: They paid out dividend of the same amount just a couple of months later.
3.) Regarding point number 1, the board decided to withhold dividend as they said they have to retain capital to build the 500 stores and the new luggage facility.
-Unless I've read the financial statement wrongly, I believe they have already factored in some payment for both the facility and shops, as seen by the S$13 million spent on PPE.
-They are STILL swimming in cash with S$130million and negligible debts.
4.) Interest payment for their cash is at RMB 561,000, silhouetted against total bank balance of RMB 659,535,000.
That's 0.08%. Again, I'm fairly sure the interest rates in PRC are higher than those offered by POSB. Even then, POSB offers 0.125%, and a higher amount if you have more money.
I find it hard to believe that Dapai can earn such a miserable amount of interest on their cash balance.
5.) Profit Margins. Dapai has a whopping 21.2% net profit margin. Contrast this to Nike, Inc, which despite having huge branding power achieves only 7% net profit margin, and adidas AG with 2.4% net profit margin.
Either Dapai has a monopoly over it's market (which it doesn't) or it can manufacture stuff SO cheaply or it's so high quality that people are willing to pay a premium for it, or ....
Average selling price per backpack is RMB 75, which is S$ 15. Pretty cheap.
Average selling price per luggage is RMB195.9, roughly S$ 50. Also pretty cheap.
Since Nike manufactures most of it's stuff in Vietnam and China, I assume that both Nike and Dapai's average cost price to be similar.
Dapai's figures then show that they can manufacture a backpack for S$ 11.50 and a luggage for S$ 38.50.
If Nike/adidas is able to sell a backpack for around S$ 50 (I saw at Queensway), and Dapai at S$ 15, I fail to see how Dapai can exceed Nike/adidas' margin. Of course, Nike/adidas make other things other than backpacks and 7% / 2% includes these other things. So I might be wrong here.
Hence I decided to divest of Dapai. When you can't trust the financial reports, you can't do accurate judging.
Not to say that Dapai is definitely cooking the books, but I have some doubts. I also did mention that I did not like Dapai's business.
Never should have invested when I was in doubt. An expensive $200 lesson made.
I will steer clear of the S-chip segment from now on, unless the parent or SSH are government owned.
Showing posts with label Divest. Show all posts
Showing posts with label Divest. Show all posts
Monday, February 28, 2011
Monday, February 14, 2011
Dapai International Holdings: Looking to divest
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.
===
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.
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.
===
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.
Subscribe to:
Posts (Atom)