Seeking Alpha

China Economic ...'s  Instablog

China Economic Review
Send Message
China Economic Review analyses Chinese companies and sectors to produce reports, both custom designed for individual clients and for wider distribution. We conduct analysis that allows for actionable investment decisions. We make use of our extensive local resources, local knowledge and... More
My company:
CER Research
My book:
China Economic Review Magazine
View China Economic Review's Instablogs on:
  • Namtai Electronics: Strong rebound
    2010-11-17: Namtai Electronics (NTE.NYSE) has returned to form with some impressive third quarter results. SinoSage remains of the view that this is a stock worth watching
    Namtai Electronics (NTE.NYSE) has managed to reinstall market confidence with a surprise return to profit in the third quarter following incredible difficulties over the last two years.

    Revenue increased 58.3% year-on-year, or 53.4% quarter-on-quarter, to US$174.7 million, while net income improved by 68.9% year-on-year, or 137.1% quarter-on-quarter, to US$7.6 million. Namtai’s three major business segments, consumer electronics and communication products, LCD products and component assembly, posted year-on-year revenue gains of 80%, 23% and 60%, respectively.

    Namtai’s board responded by saying it would resume the payment of quarterly dividends in 2011. Expected dividend each quarter is set to be US$0.05 per share.

    Namtai is a manufacturing and design services provider to a select group of top global original equipment manufacturers (OEM) in the telecom, consumer electronics, medical and automotive sectors. The global economic downturn hit the company hard, and it posted dramatic declines in sales and net income for 2008 and 2009.

    But on inspecting the stock in August, SinoSage found that Namtai had great upward potential, largely thanks to its strong balance sheet – a cash position of US$203 million and no debt.

    We concluded the stock was undervalued because investors were not fully taking into account two issues: first, Namtai’s strong future earnings potential, given that its position in the high-end consumer electronics market; and second, the likelihood that the company would address the slow start at its plant in Wuxi and the delay in gaining control of a plot of land in Shenzhen earmarked for development.

    Namtai’s share price has since jumped 28.4% from US$4.69 per share to US$6.02. SinoSage believes the company will further improve its sales revenues and generate better returns as the global economy gradually recovers.

    Even though price-to-book ratio has increased from 0.64 to 0.86, the strong current assets and debt absence makes this more an undervalued stock instead of a risky one, and there is still much growth potential.
    Dec 20 12:56 AM | Link | Comment!
  • China Education Alliance delivers strong 2Q results
    2010-09-25: China Education Alliance's (CEU.NYSE) share price may be languishing, but it should rebound once the US market recovers China Education Alliance (CEU.NYSE), which provides online and on-site guidance to Chinese students preparing for examinations, scored highly in its second-quarter financial results.

    First-half net profit reached US$7.92 million, up 21% year-on-year, while revenue for the same period rose 19% to US$19.5 million. Gross margins improved to 81.6% in the first half of 2010, 4.4 % increase year-on-year. This compares favorably to industry leader New Oriental Education & Tech Group (EDU.NYSE), which produced a gross margin of 61.9%.

    Cash flow from existing operations came to US$10.1 million in the first half, up 20.64% year-on-year, indicating a strong recovery in Chinese spending on education and career training.

    China Education Alliance’s most recent closing price was US$4.08, down 9.53% since August 14, when the company released its second-quarter results. Its price-to-equity (P/E) ratio is currently only 7.15 and the price-to-book (P/B) ratio is 1.53, pretty low for a company with an annual growth rate of above 45% in the past three years.

    An analyst at brokerage Rodman & Renshaw, who asked not to be named, pointed out some possible reasons for the struggling share price.

    The gloomy prospects for the US economy obviously have an impact, dampening investor enthusiasm for small- to mid-cap stocks. At the same time, China Education Alliance offers little liquidity as only a limited number of its shares – 31.65 million – are tradable.

    “No doubt it negatively impacts the preferences of institutional investors because when they want to sell the shares, it could be difficult to find someone else to accept the selling,” he told SinoSage. “But it is indeed a very good company.”

    (Full disclosure: Rodman & Renshaw’s investment banking division has underwritten share offerings by China Education Alliance.)

    Currently, the average price-to-equity (P/E) ratio of US-listed education industry stocks is 17 while the average price-to-book (P/B) ratio is 14.3. And it’s very unlikely to see the US education industry having stronger growth prospects than its Chinese counterpart.

    Diluted earnings per share (NYSEARCA:EPS) for 2009 were US$0.59 and SinoSage is confident in China Education Alliance reaching an EPS between US$0.55-US$0.59 in 2010. Now is a good time to go long on this stock.
    Dec 20 12:55 AM | Link | Comment!
  • AutoChina: Weighed down by mounting costs
    2010-09-07: Strong second-quarter results can't disguise the fact that truck leasing firm AutoChina International (AUTC.NASDAQ) is still burning cash AutoChina International (AUTC.NASDAQ), a leading commercial vehicle leasing company, reported revenues of US$202 million for the second quarter, up 67% on the first three months of the year, while net income rose 75% to US$11 million. On a year-on-year basis, revenue and income increased by an astounding 220% and 188% respectively.

    As of June 30, AutoChina had 14,638 vehicles out on lease, with 4,130 new leases in the second quarter compared with 2,507 in the first.

    Yes, the results look impressive, but SinoSage remains fo the view that AutoChina survives on a diet of capital injections because its business model is not sustainable.

    Following a capital injection of US$177 million in 2009, the company raised a total of US$242 million in the first half of 2010 – US$91 million from short-term borrowing, US$74 million in loans from affiliated firms, US$10 million in exercised warrants and US$66 from a secondary offering.

    Yet AutoChina still managed to produce a negative cash flow of US$6.3 million for the first half. Where did this cash go? Big ticket items of the US$248.3 million total spend included US$6.8 million on expanding the company’s network of sales and leasing outlets, US$39 million on loan repayments, US$140 million on new vehicles and US$57.7 million in deposits for future vehicle purchases.

    The pressure on AutoChina’s finances is only going to intensify as the company expands. It expects to lease 5,363-6,363 vehicles and open 82 more branches in the second half of 2010. If a truck is priced at US$40,000 on average, the total purchase cost will be around US$234 million (excluding other sales costs). With US$55.2 million in working capital at the end of June, AutoChina needs to find a further US$178 million in the next 12 months.

    Luckily, the company recently announced that it has secured US$78 million in loans from three Chinese banks: US$37 million from Industrial and Commercial Bank of China (601398.SH, 1398.HK), US$29 million from China Huaxia Bank (600015.SH) and US$12 million from China CITIC Bank (601998.SH, 0998.HK).

    That still leaves AutoChina US$100 million short. SinoSage believes the company will raise this through its affiliated partners and banks, a practiced habit from past quarters.

    In March, AutoChina placed a secondary offering of 2 million shares at US$35 each, generating US$70 million. In August, it decided to repurchase the shares at a price below US$35. Based on the current price of US$22.79, the company stands to make a profit of US$24.4 million.

    It is unclear how AutoChina plans to finance this purchase in its current circumstances. SinoSage suspects the company won’t repurchase all the shares – the secondary placement looks appears to be nothing more than an exercise designed to express management’s confidence in the business.

    Smart investors should see through this charade – just as they should see through the strong earnings announcements and recognize what SinoSage has been saying all along: AutoChina is effectively on life support, spending more in six months than it makes in 26 months and relying on external funding to stay in business.

    This remains a stock to avoid.
    Dec 20 12:48 AM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments

Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.