Saturday, 19 January 2013

China listed companies on Bursa, does it make sense?

In The Edge of January 14, 2013 an article by Kathy Fong about China listed companies on the Bursa Malaysia. Their fundamentals all look good, but despite that, they are trading at unbelievable cheap valuations.

                   Net Cash(m)    Net Cash p/s  Share price
China Ouhua           125            19            12
China Stationery      864            70            77
XiDeLang(in RMB)      304            42            21
XingQuan              326           106            79
HB Global             131            28            32
K-Star                 79            30            16
Maxwell Intl          221            55            31
Multi Sports          223            43            31

The above based on the numbers from The Edge:
  • Net Cash: in millions RM, Cash minus Borrowings
  • Net Cash p/s: net cash per share in Sen
  • Share price: in Sen
Most shares are trading below the cash per share (in other words, the whole business comes for free) and are trading at valuations like 2 times net earnings per share.

Would it make sense to buy a basket of these stocks? To me it doesn't, if for every company that goes to near zero another company is taken private at say 30% premium, the returns just don't add up.

Investing is for a large part based on trust, trust that the balance sheet and profit & loss accounts are correct, the trust is obviously not here.

Bursa and SC have clearly improved the quality of recent Malaysian IPO's. I also have to admit that not yet one China listed company in Malaysia has actually gone bust or had any financial scandal. I am pretty sure that will happen, but things can take a lot of time to pan out.

To me, things must make sense, founders list their companies because:
  • They are good, reliable companies
  • The companies can use the new money injected to grow further
  • The founders want to take some money of the table (understandable, since often a huge percentage of their wealth is tied to this one company)
  • It offers a liquid market to their employees who might own shares or options in the company
  • Investors pick up the IPO shares since there is some value at the IPO price, taking into consideration the risk involved (companies that have just IPO-ed are notoriously more risky than companies that have listed 2 or more years ago).
I don't think listing these Chinese companies makes any sense at all. The investing public obviously doesn't trust the accounts and therefore the valuations are beyond believe.

Given that, which founder would list its company, knowing the share price will most likely go south after the IPO?

And for SC and BM, enforcement in Malaysia has already been proven to be so difficult, why make it even more difficult by listing Chinese companies?

Eight very depressing share charts of the Chinese listed companies in Malaysia:


  1. Hello!

    Anyone home? :)

    I would like to make a comment or two or maybe more. :)

    I like that you highlighted the yardsticks provided by the Edge, however I think these numbers by itself does not do justice since it does not reflect what is truly happening.

    For example.

    Chia Ouhua. China Ouhua Winery Announces Quarterly Losses . I wrote that almost a year ago.

    The cash situation then,

    Cash depleted. (55.469 million vs 160.695 million a year ago)

    I was lost for words then...

    I just glanced thru their most recent quartery statement and China Ouhua cash balance is up back to some 124+ million.

    Apparently there was a third party loan repayment of 24 million (!?) and trade receivables decreased by a whopping 44+ million.

    Profit wise, Ouhua's 3 quarters net profit is some 5 million versus previous year sum of 33 million.

    Forget the fact that this is China firm and just look at the numbers alone.

    Yes, cash balance is more than their share price, which sounds damn seductive but what kind of company is this?

    And for all it's cash 'richness', for current 3 quarters of the fiscal year, Ouhua only received some 755k in interest income. Why so low?

    Let's stray for a moment and look at XiDeLang. As per its most recent earnings, XDL is sitting on some 323 million RMB. It earns some RMB 965k in interest income.

    At the bottom of the cash flow statement. XDL said it placed some 2.114 million in deposits with financial instituion. (in Ouhua's case, for all its cash richness, Ouhua did not state how much money it has in deposits)

    XDL states it has some 323 million in cash but only pledges 2.114 million as deposits.

    Makes me wonder. ... what does XDL do with all its other money?

  2. Thanks Moolah, for your comments. I agree, the cash is very suspect, it doesnt make much sense.

    I will revisit this subject, but I need a bit time to do some research first.

  3. Investors don't trust the accounts because most of these 'unwanted' companies have 2nd or 3rd tier accounting firms as auditors; let alone the poor accounting procedures in China. The fact that you have highlighted the serious 'anomaly'of cash per share being much more than the share price of some of these companies could be serious case of window-dressing at y/e; which (professional)auditors should caution management against as this deflects from a true & fair view.