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China Minzhong: Too cheap to sell.

Monday, June 11, 2012

One of the things we hear is that we should buy at prices we would not sell at and to sell at prices we would not buy at. Not too long ago, on 5 June 12, I said that it is not a good time to sell China Minzhong's shares and that it would be more sensible to think of adding to any long positions. See the blog post: here.



In a research dated 11 June 12, Kim Eng says that:

We would not recommend investors to cut loss at this stage as stock valuations are still too cheap to do so. ... The next catalyst for the stock would be the full-year results ended in June 2012. We expect to see revenue recovery due to the late-winter season and the fact that Minzhong should also be able to collect the bulk of its receivables in 4QFY6/12. The full-year numbers should reveal the impact of the European problem on both demand and asset quality.

How low can the share price go? We conduct a scenario analysis to determine how low the share price can fall to ... Although we believe that the share price has already factored in the potential slowdown in demand in Europe and our target PER of 4.7x is 25% below the historical average, we have:

1. cut our sales volume further by an aggressive 40%,

2. written down CNY200m in receivables for FY6/13, and

3. revalued the share price at 3.7x PER, which is 1 standard deviation below the historical average PER.

The upshot is a target price of SGD0.51, which is only a little below the current price of SGD0.53.

Minzhong’s worst case NAV per share (we exclude land use rights, land improvement costs as well as 20% of trade receivables) also suggests the current share price provides a very safe floor.

8 comments:

LCF said...

HI AK,

I don't get the part where you mentioned "buy at the prices we would nto sell at" - shouldn't it be, "buy at the prices everyone would not buy at?" :D

I think NAV/unit is overrated? As in, there's no guarantee the current price hovering about its NAV/unit means a it is the ultimate safe floor. Still depends on the moody Mr Market aye? Probably more meaningful to fund managers as their compensation is a fraction of it

LCF Personal Finance

AK71 said...

Hi LCF,

Nope, I mean exactly what I wrote. If a stock is trading at a price that is too cheap to sell at, then, it is a price we would not want to sell at. It could be a price we want to buy at.

Book value (NAV/unit) is actually more useful in a bear market environment as investors get defensive. In fact, value investors would typically look at this in their decision making process.

In a bull market environment, investors are more interested in growth and look at PE ratios but in a bear market environment, it makes sense to look at NAV.

What Kim Eng has done is to look at the stock from the perspective of FA and stress tested by building a worst case scenario.

Share price could go below NAV/unit in very bearish conditions, of course. So, you are looking at price which is very much sentiment driven and this is why you have a different view from Kim Eng who are looking at value.

LCF said...

Hey AK, well said, especially on the bear market environment. Well,am not a trader, but more of a fundamentalist too. I think fundamentalist too looks at support/resistance before buy/sell...and you are right to say that when we factor in the NAV/unit into the equation, that reinforces what we think is the good price with sufficient margin of safety.

LCF

AK71 said...

Hi LCF,

I like a mix of FA and TA in approaching investment decisions too. It is not a bullet proof approach, of course, but I hope it is a more complete one. :)

ivan said...

Hi AK,

Hope you had a good lunch, its the time of the day again to start to feel sleepy :)

On the topic of too cheap to sell, I recall you had a position in Tee Intl. It has just hit 0.191, what do you think of this price? I am tempted to average down, but however as I recall our MIIF discussion, it is at 0.505 at the moment, still deliberating over which counter. Or perhaps both!

Thoughts?

AK71 said...

Hi Ivan,

I had a light lunch but I am still feeling sleepy because of some medication I am taking.

Yes, I have a small long position in Tee International. This is a very illiquid counter and price volatility is expected. If we were to buy now, the offer price is 20.5c per share. I would buy more closer to the NAV/unit of 17.5c. ;p

I would much rather buy some MIIF which is now selling at 51c/unit. I would imagine the buy queue at 50c to be quite strong. :)

Howyuan said...

Hmm..of course the price can go down further if there is accounting discrepancy?

Seems like I really can't get it (Chinese companies prone to frauds) off my head!!

AK71 said...

Hi Howyuan,

If there is plenty of monkey business going on, we could see it going to zero... This, of course, has happened before. :(

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