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China Minzhong: Increased long position at $1.065.

Monday, August 5, 2013

The last time I sold shares of China Minzhong's was at $1.185 a share.  Since then, I added to my long position twice at $0.97 and $1.025. Today, I added to my long position again at $1.065.

Technically, even though there is some volatility in the share price, the MACD is supportive as a higher low was formed even as a lower low in price was seen. Another higher low in the MACD would mean that momentum is relatively strong.

$1.055 seems to be the immediate support which is being reinforced by the rising 50d MA. The 100d MA seems to be flattening at $1.065. Of course, there exists a chance that the 200d MA might once again be tested and it now approximates $0.995. I am willing to hazard a guess that it would bring out the buyers if it should happen.

Apart from the technical picture, why am I willing to buy at $1.065 today? Well, quite simply, I believe that China Minzhong's share price is relatively cheap. Its stock is undervalued even at $1.065. With a NAV/share of RMB7.00 or S$1.47, the stock is currently trading at a 27.5% discount to its book value. At $1.065 a share, if we could simply repeat the last quarter's EPS, we are looking at a PER of some 3.44x for 2013. This is hardly expensive even after taking into account that the PERs of companies in the business of farming seem to be rather low.

On 13 May 2013, I said that China Minzhong reported what I thought to be a good set of numbers. Both revenue and net profit were up. What was also really impressive was the 260.5% increase in cash flow from operation for the first 9 months, year on year. The company is now effectively in a net cash position.

What is the free cash flow? This is what many value investors would say is generally more important than earnings. It is harder to fake cash flow but easier to fake earnings.

For the first 9 months, China Minzhong generated a free cash flow of some RMB 299.9 million. This is about S$ 62.98 million. We will have to wait for its 4Q results to see if this goes up or reduces. As there are about 653 million shares in issue, it means that there is already a FCF of about S$ 0.096 per share.

There is intention to pay a dividend in 2013 and with FCF positive, there is a good chance of this happening. The practice of paying an annual dividend could also become a standard because of Indofood which has an almost 30% stake in China Minzhong. Indofood pays out 40% of its earnings as dividends consistently, according to sources.

With China Minzhong's full year earnings possibly at S$ 0.30 per share, a 40% pay out is equivalent to S$ 0.12. Even if FCF bumps up proportionally in the 4Q, this is unlikely to happen as China Minzhong still needs to fund growth initiatives.

I would be quite happy if China Minzhong is able to provide a 5% dividend yield which will move the investment from the growth category to the income and growth category in my portfolio. Based on today's price of $1.065, it would require a DPS of $0.053. Possible?

Well, this could be wishful thinking. I will just have to wait and see.

Related posts:
1. China Minzhong: Good results and long black candle.
2. Tea with Mark Mobius: Focus on long term goals.


Capricon said...

Thanks for sharing !

May be you want to take a look at UMS holdings, it had regularly paying out dividends and increasing too. Yet to dive deeper into it's business though.

May be you can see some thoughts?


AK71 said...

Hi Capricorn,

You are welcome. :)

I have almost zero understanding of UMS Holding's business. So, although I have read good things about its dividends, I decided to stay away.

I do a bit of speculation but if I were to invest for dividends, that is not speculation to me. That, to me, is investing for income.

If I were to invest for income, then, I have to be a bit more knowledgeable about the investment.

Anyway, Drizzt over at Investment Moats did an analysis of UMS Holdings earlier this year. Go take a look:

l0nEr said...

Minzhong had been trying to issue bonds earlier this year, but turned to Standchart for loans instead when the bond market was shut off. Given that, i suspect the FCF is unlikely to be positive for the year. That said, who knows if they were borrowing to fund the dividends? im vested too, but i still think that dividends are a stretch...

AK71 said...

Hi I0nEr,

Apparently, they couldn't reach an agreement on the pricing of the proposed notes. Anyway, I think borrowing from a bank is a better idea as they could end up paying too high a coupon if they were to issue bonds. Look at Sound Global's issue and we get an idea of my concern.

The FCF is already positive for the reported 9 months, why do you think it would not be positive for the full year? Care to share?

Of course, positive FCF does not mean that we will see a dividend pay out. It is just something I wish for. ;p

Ray said...

wow AK, you're a brave one.
the charts shows that CMZ is still correcting or otherwise going downward outright... i'm still comtemplating whether to cut loss and you're adding! :D

AK71 said...

Hi Ray,

The foolish are often brave. :(

Technically, there is obvious weakness. There is a chance that we could see the immediate support broken and a longer term MA tested for support.

However, I looked at the volume and it is not massive. I looked at the momentum oscillators and selling momentum isn't overpowering.

Nonetheless, the more prudent thing to do is probably to wait and see. :)

chrisyoong said...

Trading halted today. Price fell to $0.53. Query from SGX.

Ray said...

CMZ absolutely tanked today..... Apparently a shortist research company exposed irregularity. Any thoughts?

AK71 said...

Hi Chris and Ray,

Yup, big shorting activity this morning. A really rapid plunge!

RayNg said...

Trading halt today with price tumble down to $0.53 or 48%.

Claucus Research reported that CMZ finacial irregularity.

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