DAPAI int'l is a backpack/luggage manufacturer/distributor in PRC
Is this company a value play?
It recently issued a profit warning for 3Q 2010, with supplier problems, they couldn't deliver on backpacks/luggage.
What the CEO and board decided to ". We had sub-contracted all our luggage
manufacturing to a number of suppliers, of whom two major suppliers were unable to meet
our orders due to their labour shortage problems. As a result, our luggage sales had been
adversely affected.
The significant drop in sales and profits after tax for 3Q 10 was mainly attributable to (i) the
consequential decrease in sales of luggage products ; and (ii) the special discounts on
backpack products given to distributors in order to compensate their loss on luggage
shortage.
The Group has explored other avenues, including sourcing from other new luggage suppliers
and manufacturing a number of our luggage products in house, to reduce the impact of the
current luggage supply issue.
In order to ensure steady luggage supply in the long run, the Board has resolved that the
Group needs to build a new manufacturing facility specifically for luggage products."
Is this a problem that can be quickly solved? Major suppliers with
labour problems blamed as the cause of the loss in revenue and profits. The board's solution to the problem is to build a
new factory for luggage products. Ermmmmmm........................ am I missing something here?
If McDonald's was experiencing a beef patty shortage due to lack of abattoirs, will building a new slaughterhouse solve the issue? Wouldn't the slaughterhouse be empty due to the labor problems?
hmm.....
anyway....
1.) History of Consistently increasing sales, earnings and cash flow
SALES: sales in 2010 dropped YOY in 1st quarter (no explanation), grew in 2Q, Dropped in 3Q due to the reasons stated in the profit warning.
Profits: Gross profits increased YOY in 2Q, but dropped in 1Q and 3Q.
Net profits: Again, slid during 1Q and 3Q but increased in 2Q.
Ok, net profits, gross profits and sales roughly correspond, which does not lead me to question the earnings quality.
2.) Good competitive advantage
Competitive Advantage: one of the biggest(if not the biggest) backpack/luggage manufacturers in PRC leads it to have substantial economies of scale in production, logistics etc
But other than the economies of scale, I fail to see how it has a wide economic moat. In fact, it seems to have little to no other competitve advantage other than the EOS.
It is a non branded manufacturer, means "DAPAI" doesn't have the cachet that LV, AX has. Not even deuter, nike or adidas. In other words, it's products are in what economists term a "monopolistic competition" as compared to an "oligopoly" in the luxury bag segment. what monopolistic competition means in theory is that firms like dapai don't have much price setting power like Louis Vuitton or even Nike/Adidas has. i.e. If all non branded bags are selling at RMB 100, if it prices it's dapai brand bags at RMB 101, people won't buy it. Whereas Nike can price their backpacks at SGD 50, and Tan Ah Kao brand undercuts Nike by selling at SGD 20, people will still buy the Nike.
3.) Future growth drivers
As an industry, yes, due to the rapid affluence of PRC, people are able to travel more, and buy proper bags like dapai makes. But other than the industry increase, I don't see much growth drivers for dapai specifically. Having said that, it would be good to buy into industries which are in sector rotation now.
4.) Long term debt < 3x per annum profits
Dapai is in good financial shape. other companies have Non-Current liabilities. Dapai has non current
liability. yes, singular. RMB22.68mil in deferred tax liability, and RMB 33million in bank loan, which is payable within 12 months. Year to date Dapai's profits are RMB215million . Can easily pay off it's long term debt with just a single quarter's earnings.
5.) ROE above average
Assuming Dapai continues at it's current pace (i simply divided the 3 Quarter earnings by 3 and multiplied by 4), it's ROE is 18.5%
Not sure how impressive is that, I can't find another backpack maker listed on SGX.
6.) Low capital expenditure reqd. to maintain current operations
Well, obviously since the board has mandated that a new facility to be built, a substantial amount of capex is required, but relatively short term. Other than that, can't see much capex required to sustain the business, which is good.
7.) Senior management staff are holding, buying the stock
Chairman Chen Xizhong owns slightly more than 50% of the stock.
When to Buy:
1.) Undervalued
Px less than intrinsic value
Ok, here goes my intrinsic value calculations again.
Discount Rate of 10%
No Growth :RMB 2.66 or SGD 0.52
5% Growth: RMB 3.45 or SGD 0.68
10% Growth:RMB 4.59 or SGD 0.91
Discount Rate of 15% (hurdle rate)
No Growth:RMB 2.16 or SGD 0.43
5% Growth: RMB2.72 or SGD 0.54
10% Growth: RMB 3.49 or SGD 0.69
P/E Ratio: Price: 0.200
Earnings: average of first 3 quarters made up to 1 year: SGD0.0576
which leads to a low low P/E Ratio of 3.47
P/NAV:
NAV RMB 1.5481 or SGD 0.30534
P/NAV or otherwise known as P/book value: 0.667!!!
Stock Price looks very cheap.
2.) Stock price in consolidation phase/ uptrend
Downtrend since the profit warning.
My conclusion:
The business doesn't look very attractive, yet, it's financial position is strong. However, has significant blemishes as it's cash flow dropped from 2009 to 2010. Company is getting poorer.
The stock price is extremely undervalued however you look at it, even when i used a super high discount rate and no growth, the intrinsic value is still at 43 cents.
Trading at 2/3 of NAV.
As for the business side:
most of which i've covered on top; one thing i don't like is that dapai is opening 500 new stores in PRC, by 1H 2011. erm...if you open new stores with lack of inventory...what are you gonna sell?
my opinion: I might enter small , maybe 4 or 5 lots or so. I don't like the business, but it's very cheap. I'll have to think very hard on this. With the supplier issue, it's 4Q results are going to be poor too.
Any opinions?
Disclaimer: I base all my opinions that the books are not cooked. Which cannot be assumed for these S-chips.
