China Powerplus, which has a market cap of approximately S$66.5m, has other attractive features:
* It has no debt;
* Instead it has RMB 263m in cash (i.e. S$52m or about S$0.12 per share. But RMB 166m has been earmarked for investment in China Steel Australia. We'll come to that later.)
* Operating cashflow has usually been healthy.
* Free cash flow has also been strong, coming in above 10% most of the time.
However, the company has disappointed at several times.
Its topline has grown by about 9% per annum since 2005 while bottom line has hardly moved during this period.
All margins (i.e. gross, operating and net) have been declining since 2005 and so has the company’s return on equity.
The company's current assets as at 31 Dec 2007 consist of:
* S$10 m inventory
* S$10 m trade receivables
* S$ 52 m cash which can be broken down into:
(a) S$19 m in cash
(b) RMB 166m for the purchase of 142,500,000 China Steel shares which are listed on the ASX (Australian Securities Exchange) for around S$0.23 per share acquisition price.
Currently, China Steel is trading at AUD 0.30, which means the value of the stake is about S$54m – i.e. S$0.127 per China Powerplus share.
As announced in Nov last year, China Powerplus intends to acquire the 142,500,000 shares from Jadefield Group which is 50% owned by Lim Hung, the son of Lim Seck Yeow, a non-executive director and a substantial shareholder of China Powerplus.
RMB ‘million |
2007 | 2006 | 2005 |
| Revenue | 388.5 | 322.2 | 290.9 |
| Gross profit margin | 29.2% | 30.2% | 34.1% |
Net profit |
72.7 | 63.5 | 71.7 |
| Net profit margin | 18.7% | 19.7% | 24.7% |
| Earnings per share (RMB cents) | 17.7 | 18 | 20 |
Total liabilities of China Powerplus amount to approximately S$9 m.
Using the net-net approach and applying a discount to the value of the inventory and trade receivables,
we get 54m + 19m + (0.75 * 10m trade receivables) + (0.5 * 10m inventories) - 9m (liabilities) = S$76m - i.e. S$0.18 per share
If we were to adhere to Benjamin Graham's rule of net-net approach, Powerplus would be attractive at 2/3 of S$0.18 i.e. S$0.12.
At the current price of S$0.155, we're not too far off. And we're getting the rest of the business for free. Bear in mind that this business of selling hand-held power tools has been rather profitable and has been a cash-generating machine.
At S$0.155, China Powerplus certainly looks attractive. However, we have to bear in mind a few risks.
(1) Over the years, management has released a number of 'positive' announcements and initiatives - however nothing fruitful seems to come out of all these such as Japanese OEM contracts, Lehman Brothers 'deal' etc.
(2) When the company was listed, the selling point was the agricultural boom in China. However, due to a series of weather-related disasters that wrecked farmland in China, the company is now focused on 'Garden & Lawn' tools segment with an increasing emphasis on exports.
My view is that 'Garden & Lawn' tools are not productivity-enhancing tools that are essential to farmers.
(3) Management’s investment decisions have not gone down well with me. I would certainly have preferred them to give out a final dividend for FY07 (considering the cash-pile they're sitting on) in addition to the 0.25-cent interim dividend, rather than go into a volatile business which I'm not sure they have a good understanding of.
In short, I am not convinced by their reasons for the investment in China Steel, though it is in the money currently. The stake in China Steel is supposed to enable Powerplus to secure a stable supply of stainless steel for Powerplus’ manufacture of its equipment, which currently use iron steel that can rust.
All said, the stock’s downside seems limited at this point, but systemic risks affect small companies much more than big corporations, as I have witnessed first-hand. Thus, despite the attractive valuation, the 3 factors I have mentioned and the flat performance of the company's operations over the past 3 years are certainly enough to hold me back from putting another dollar into the stock.
The writer is a 30–something retail investor.
