China listed companies on Bursa, does it make sense (2)

[Updated in red]

I posted before about China listed companies on Bursa. I received several reactions (both through comments and in private), and like to clarify things.

The valuation for these eight counters is very cheap, by all standards, because the market clearly doesn't trust the numbers (reported profit, cash in the bank, etc). I do agree with the market on this observation.

The reason why I think this: it would be so simple to increase the share price, either by a share buyback program or (preferably) by paying out a decent dividend. An example for the latter:

Say the share price is RM 1.00 and the company has nett earnings per share of RM 0.50, for a PE of 2 and has a strong balance sheet (quite typical for the China listed companies on Bursa). If it would pay out half of its earnings in dividend, then the dividend per share would be RM 0.25, for a whopping dividend yield of 25%! With the RM 0.25 retained earnings it would grow its profit (and thus dividend) the next year even further.

But there is no China listed company on Bursa having this kind of dividend yield, not even one.

 I do not want to imply that all Chinese listed companies on Bursa are frauds, in the contrary, but I am sure there are some suspect cases, and it is almost impossible to say which ones are frauds and which ones aren't (or to which extend).

In case people wonder how a company can report cash in the bank that "isn't theirs": companies can get a cash injection at the end of the quarter from certain banks which will be reversed the next day. There should be a liability on the balance sheet to offset the extra cash, but that will be left out. No risk for the bank, the cash will always stay inside, they just charge a small fee for their "service".

Unfortunately, these practices have been observed in the past in Chinese listed companies in other countries. The result is that the interest rate over that quarter doesn't tally with the average cash balance during that quarter that one would suspect, given the beginning and ending balance.

I hope to have some time in the future to do some more research on this subject. The two comments I received are both quite interesting:

Anonymous:

"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."

Moola:


"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 through their most recent quarterly 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 institution  (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?"