China Minzhong: Increased long position at $1.065.

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.

Yongnam: Buy since price is more reasonable now?

Yongnam's share price has been declining and in the last session, it closed at 31c. Now, this got my attention.

I initiated a large long position in Yongnam at 24.5c and have collected two rounds of dividends. I have also divested three quarters of my investment in the company by now as its share price rose. As I started divesting a bit too soon, I estimate that only two third of my remaining long position is free of cost.

Including dividends collected, however, close to 90% of my long position is free of cost. Remaining long position still shows a 26% paper gain even after the decline in the last session. All in all, this has been a pretty good investment for me.

So, why do I like Yongnam?

Yongnam is a natural beneficiary of the planned expansion of the MRT network in Singapore. It is a leader in the provision of structural steelworks, specialist civil engineering and mechanical engineering services. It has a proven track record even in Hong Kong, having clinched many contracts in the territory's MTR network expansion, the latest of which was announced on 25 June 2013. Why won't its businesses be chugging along nicely?

Yongnam's competitive advantage is to a large extent due to its massive investment in reusable steel struts. To have such assets and in such quantity like they have at today's price is not easily achievable and this presents a high barrier to any potential competitor. That was also a reason why I thought paying a price slightly above its NAV was acceptable when I got in at 24.5c.

The updated NAV/share on 31 March 2013 for Yongnam was 26.5c. So, my buy price is now at a discount to its NAV. This is a positive development.

I also like how Yongnam has plans for a recurring income base although this will take many more years to bear fruits. An example of this is a joint venture for the construction and management of an international airport in Myanmar. Result of that tender exercise has yet to be released, I believe.

When this news was made known, many people chased the share price of Yongnam and it hit a high of 38.5c not too long ago. This was all based on speculation. There was no certainty that Yongnam would get the contract and even if the consortium it is a part of should get the contract, it would not see immediate benefits. With share price at 31c now, probably, many got burnt.

Isn't Yongnam a good stock? Yes, qualitatively and quantitatively, I believe so. So, why did this happen? Well, even with a good stock, the more prudent thing to do is to wait for a pull back to what is a more reasonable valuation before buying.

Is the valuation more reasonable now at 31c a share since I said it got my attention. Well, it is definitely more reasonable now than at 38.5c! That is a safe answer to give. OK, end of blog post. Kidding!

Let us look at earnings? 1Q EPS was 0.91c. If we annualise this, we get 3.64c which gives us a PER of 8.52x with a share price of 31c. At 38.5c, the PER was 10.58x. Remember that all these calculations do not take in probable improvement in EPS in future quarters.

If we are conservative, buying at NAV is probably a good idea. However, I would say that paying a small premium to its NAV is acceptable. I liken it to paying a higher price for a powerful weapon in a fantasy RPG game that will give me an unfair advantage over others. Evil grin!

As usual, I am corrupted by TA and if we look at the chart, the longer term uptrend is still intact if we take reference from the 200d MA which is still rising. It now approximates 29c. This is a long term MA and is expected to provide stronger support although it does not mean that price might not whipsaw which could see 27.5c as a possible target.

So, I should rush to put a buy order at 27.5c? Remember, TA is about probability and not certainty. A smallish hedge at the 200d MA might not be a bad idea.

Reminder: I am talking to myself.

Results announced on 15 May 2013: here.

Related posts:
1. Yongnam: Investing in infrastructural developments.
2. Yongnam: 1c dividend per share.