Seeking Alpha
What is your profession? ×
Small-cap, macro, value, momentum
Profile| Send Message|
( followers)

Not wanting to be left behind by one of the sovereign wealth funds buying (more) stakes in beleaguered banks, many Chinese smallcaps have started to buy back their own shares. Ever since a number of accounting scandals and noted short-sellers like Muddy Waters got onto their case, many of these Chinese smallcaps have been in near terminal decline.

We have already noted China Infrastructure Investment, and here's another one, Andatee China Marine Fuel Services Corporation (NASDAQ:AMCF). What do they do? Well, this, from their surprisingly neat website:

Andatee China Marine Fuel Services Corporation through its operating subsidiary Dalian Xing Yuan Marine Bunker Co. Ltd. is engaged in the production, storage, distribution and wholesale purchases and sales of blended marine fuel oil for cargo and fishing vessels. [Andattee]

Their listing is not the result of any reverse merger (these have become rather tainted as an unusual number of these are facing one accountancy controversy or another) but a proper IPO in Jan 2010.

Something like the following must be awful to watch (at least until the end of August) if you are CEO of a business you believe in:

click to enlarge

Let's look at a few metrics. At first glance, it is rather cheap and the CEO might have a point:

  • Sales ($225M) are almost 10x market cap ($32M)
  • Last year, they did make a decent although by no means overwhelming profit ($9M)
  • Cash-flow was about the same $9M as profits, but there was $45M generated from financing activities ($26M from net borrowing and $19M from selling stock) that went mostly into capital expenditures ($10M) and "other cash flows from investing activities" (a whopping $32M). There was also a surge in accounts receivable (from $0.4M in 2009 to $5M in 2010)
  • The only analyst following the story expects them to make 57 cents in profit this year, which certainly makes the shares cheap
  • That is, however, considerably below the 95 cents per share of last years profit, the pain seems to have started in Q2 when they missed estimates by quite a bit (14 cents versus 26 cents expected, but keep in mind that it's just the one analyst)

Looking in a little more detail where the cash went, we found the following in the 2010 Year-end report:

  • Two acquisitions Mashan Xingyuan Marine Fuel Co., Ltd and Hailong Petrochemical Co., Ltd for $2.2
  • A $17M certificate of deposit (at three different banks)
  • $14M in construction projects
  • Another $10.6M in finished construction projects

The certificate of deposit strikes us as somewhat odd considering the amount of net bank borrowing that went on at the same time. However, keep in mind that interest rates can display unusual patterns in China. It's even perceivable they get a higher return on the CoD compared to what they have to pay on their borrowing, but there are no details provided so this is mere speculation on our part.

The company also grows at a pretty clipper pace:

Our revenue increased by US$66.9 million, or 53.8%, from US$124.3 million for the year of 2009 to US$191.2 million for the year of 2010. The increase in our revenues was due to the increased sales volume and higher average crude oil price. The increase in sales volume is due to our acquisitions and marketing strategy. The sales volume increase by approximately 53,000 tons, or 22.1%, from 240,000 tons in 2009 to 293,000 tons in 2010, due to the promotion efforts of 1# marine fuel in Southern China , the sales volume of 1# marine fuel increased by approximately 40,000 tons in 2010. This increase accounts for over 75% of overall increase in sales volume

Aside from the increase in sales volume of 1#, the increase in sales volume was partly the result of sales achieved by Mashan and Hailong, amounting to approximately10,000 tons. The portion of retail sales in our total revenues remained largely flat at 42.6% for the year of 2010, compared to 43% for the year of 2009. In 2010, 2# marine fuel represented 6.3% of our sales, 3# marine fuel represented 7.0% of our sales, 4# marine fuel represented 55.4% of our sales, 180CST represented 9.0% of our sales and 120CST represented 8.6% of our sales. [2010 year-end]

Here is the buyback program:

Under this plan, Mr. An may purchase up to a value of $2 million of the Company's common stock through September 19, 2012, subject to certain conditions. The timing and actual number of shares repurchased will depend on a variety of factors including regulatory restrictions on price, manner, timing, and volume, corporate and other regulatory requirements and other market conditions in an effort to minimize the impact of the purchases on the market for the stock. Rule 10b5-1 permits corporate officers, directors and others to adopt written, pre-arranged stock trading plans when they are not in possession of material, non-public information. There can be no assurance that any shares will be repurchased.[Company PR]

It hasn't been the first, as one can read in the 2010 year-end report:

The following repurchases by the Company of its common stock were made pursuant to the share repurchase plan approved and adopted by the Board of Directors of the Company. Under the plan, the Company was authorized to buyback its common stock up to a value of $0.5 million. The plan remains valid through October 2011.

So what happened is that the old program terminated and they instigated a new one, four times the size. Hence the pop in the share price, but with the RSI in the high 80s and the stock price at the 200 day moving average we think a breeder is warranted. We would sell out of the money calls if these existed, but alas. The shares are shortable and we feel almost sorry for them to recommend that.

We have a bigger point to make at this point though. These companies suffer from what is known in economics as information asymmetries. The whole group has been tainted by (arguably quite a number of) bad apples, and now the good suffer from the bad, because it's just too hard to figure out which is which.

There is nothing we encountered that indicates something is not ok here, but we're not forensic accountants either. By all accounts, this is a perfectly legitimate business that grows at a healthy 40%+ rate, but we feel the shares have jumped too much in too short a time while Q2 earnings were a little below par.

We have some advice for the company (and many like them). De-list as soon as possible. All the cost the company incurs as a result of listing on a major US market, and on top of that the cost of the share buy backs, can't that be much better invested in the business itself?

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AMCF over the next 72 hours.