Seeking Alpha

Southhill Partners'  Instablog

Having spent two years with a brokerage researching on hedge funds and trading strategies, I'm currently running my own portfolio. My main interest is in equity long/short ideas, emerging markets, and macro issues. ================ Having spent two years with a brokerage researching on hedge... More
  • Carter’s long-term themes remain intact after accounting restatement
    Carter’s is the largest designer, marketer, and retailer in the United States of apparel exclusively for babies and young children, with multiple dominant brand names, including Carter’s, OshKosh, Child of Mine and Just One Year. Its products target kids from the ages of birth to seven years old.
     
    With the recessionary economic environment and weak consumer demand, baby apparel businesses continue to prosper. Parents may cut back their own clothing, but not their baby’s. Carter’s stock price has more than doubled since its early bottom in July 2008.
     
    However recently, Carter’s (CRI) stock price plunged as much as 30% as it delayed filing of Q3 quarterly report on October 27th 2009 to review its past accounting for vendor allowance.
     
    Today, Carter’s announced that it has completed its review of the accounting irregularity, and plans to restate its financial statement 2004-2009. The sec filing today shows Carter’s had slightly overstated revenue and earnings 2004-2007, and understated revenue and earning for 2008 and 2009. The restatement has a cumulative impact of 7.5M on retained earnings, which has almost minimal financial impact. As a result of the review, President Joe Pacifico has left the company.
     
    As the dust of accounting issues is about to settle, I believe several long-term themes of Carter’s remain intact.
     
    Strong brand names
    The strength of Carter’s brands among its target customers is just amazing. CRI has dominant brands that command a 14.1% market share, with the Carter’s brand leading the category at 10.9% market share, and OshKosh at 3.2% market share. Every mom knows about the Carter’s, Just One Year and OshKosh brands. And new moms will soon recognize the brand as they very likely receive Carter’s new baby gifts from their mom friends, often before the baby is born. Strictly speaking, Carter’s is not in the fashion business, but the consumer staples business, because of the staying power of its brand names. 10 years later, popular fashion names like Abercrobie & Fitch (ANF), Aeropostale (ARO) and Express may not be around, but babies may still wear the Carter’s and OshKosh.
     
    Margin improvement potential
    Since its acquisition by Carter’s in 2005, the OshKosh brand had experienced sales declines, resulting in significant losses. The management’s effort to revive the brand has resulted in sales and margin improvement since 2008, and should push the overall margin higher.
     
    Retail growth potential
    Carter’s currently operates 271 Carter’s and 168 OshKosh retail stores nationwide. The total number is small comparing to its competitors like Gymboree (GYMB), Children’s Place (PLCE) and the Gap Inc (GPS). The management’s plan to continue growth in retail stores is another major driver of sales growth.
     
    Demographics Trends
    According to the statistics from National Center for Health, the US birth rate has increased for the last five straight years since 2003. The demographics trends continue to work in Carter’s favor.
     
    Overall, Carter’s has a solid business that generates a respectable ROE of about 20%. With the accounting issues behind, the Carter’s stock is still trading at an attractive $26, or just 12x forward P/E. Historically, it has been trading at around 15x forward P/E. I believe, the solid fundamentals should gradually drive the stock price back to the level of historical valuation.


    Disclosure: No position in all mentioned
    Tags: CRI, GYMB, PLCE, GPS, ANF, ARO, Retailer stock, long ideas
    Dec 23 05:26 pm | Link | Comment!
  • History of China Medstar(LSE: CMDS) sheds light on Concord Medical Services (CCM)
    Concord Medical Services (CCM), a leading Chinese operator of radiotherapy and diagnostic imaging centers in China, went IPO last Friday at a price of $11. The stock closed the first day of trading at $9.5, down 13.6%.
     
    Concord operates the largest network of radiotherapy and diagnostic imaging centers in China, with 83 centers in 36 cities across the country. Typically, it enters into long term contracts with hospitals to lease and manage these centers. The business is highly profitable, with gross margin over 70% and net margin above 40%. The industry outlook appears to be quite positive as well. The relatively underdeveloped medical infrastructure in China resulted in significant unmet demand for medical services, particularly in the cancer diagnosis and treatment area. Concord Medical has been expanding at a fast speed in the last two years, more than doubling the number of centers operated from 34 by the end of 2007 to 83 in September 2009, through both organic growth and acquisitions.
     
    It is hard to find comparable companies for Concord Medical. NightHawk Radiology Holdings (NHWK) is somewhat similar. For the record, Nighthawk IPOed at $17 in 2007 and ended up $4.54 at close of December 14th. Even though Concord Medical operates with high operating margin, its asset turnover is very low, thus the resulting ROE is not at all great. So the big question is how attractive the business model is and how should investors understand it. 
     
    Fortunately, one company that Concord acquired in 2008, China Medstar (LSE: CMDS), was a public company listed on London AIM market (market for international smaller growth companies). It operated a very similar business as Concord. A review of the history of Medstar as a public company helps shed some light on Concord’s business.

    Here is the quote from Concord Medical's prospectus:
     
    To complement our organic growth, we have also selectively acquired businesses to expand our network. In July 2008, we acquired China Medstar Pte. Ltd., or China Medstar, a company then publicly listed on the Alternative Investment Market of the London Stock Exchange, or the AIM, for approximately £17.1 million or approximately RMB238.7 million (US$35.0 million). At the time of the acquisition, China Medstar jointly managed 23 centers with its hospital partners across 14 cities in China.
     
    Medstar went into public on London Stock Exchange late 2006. At the beginning of 2007, Medstar had 16 centers and was planning to open another 19 during the year, but it underachieved by adding only one center. Plagued with other delinquent account issue with a big customer, Medstar saw its stock price fell over 80 pence in June 2007 to 32 pence in May 2008, half of its book value, before Concord announced the acquisition of it for $35M, or 62 pence per share. The book value of Medstar at the time of acquisition was $33M.
     
    The short history of China Medstar highlighted several potential risks for Concord:
    1. Due to the capital intensive nature of the business, sufficient funding is the key to expansion. Post IPO, Concord has a cash balance of $161M. It appears to be in a much better position than Medstar in 2007.
    2. A/R credit risk. Concord’s A/R balance currently stands as high as $17M, while it generated $30M revenue for the first 9 month of 2009. The AR days is as long as 160 days. This could be a substantial risk if any delinquency happens.
    3. Healthcare sector risk. Policy tightening in the sector may slow down contract signing and center expansion.
    4. Management execution risk.
     
    Concord also plans to enter the hospital business using about half of the IPO proceeds, by opening two specialty cancer hospitals. The hospitals should have a lower margin than the radiotherapy and diagnostic imaging centers, but the AR days will be much shorter. It also remains to be seen if the management can run the hospitals successfully.
     
    With a stock price of $8.7, Concord is currently trading at about 25x 2009 earnings, which is not cheap, given the above risks mentioned. Although I like Concord’s business, many questions remain. I prefer to have them answered before buying into this broken IPO.


    Disclosure: No position
    Tags: CCM, IPO Analysis, Healthcare, China
    Dec 15 05:03 pm | Link | Comment!
  • Irrational investors: a contrast of Duoyuan Printing and STR Holdings IPOs
    Two IPOs debut with exactly opposite results attracted my attention last Friday: Duoyuan Printing (DYP), a fast growing Chinese offset-printing equipment manufacturer, to sell 5.5M shares at $8.5, whose stock closed down 8.6% at $7.77. The other is STR Holdings (STRI), a manufacturer of encapsulants for solar panels, to sell 12.3 million shares at $10 a share, whose stock closed up 31% at $13.10.
     
    Since I did look into both companies before their IPOs, I find this outcome very interesting.
     
    In my opinion, Duoyuan Printing (DYP) is a very sweet deal at the $8.5 offer price, let alone $7.77. My previous post here details why.
     
    STR Holdings (STRI), although appears to be attactive from its roadshow presentation, actually has a few things that make me frown, after I dig deeper into its prospectus:
    - The company had a net tangible asset of ($5.72) per share, totaling $(223.4) million, prior to the IPO. For those who don’t know accounting, this means if the company is liquidated today, the shareholders won’t get anything back, as it actually owes more than its asset. Would this prevent me from investing in a company? No necessarily. But I'll be very cautious. 
    - 73% of the total shares sold, or 9 million shares, came from selling shareholders including the executives, so the company only gets 27% of the total IPO proceeds. When the private owners and executives are eager to sell, I’ll be cautious buying into it.
    - The solar segment revenue declined 26% in the first half of 2009. Although impacted by the financial crisis, the world output of solar panels still grows in 2009, due to government stimulus all over the world. I would imagine the output of solar panel encapsulants be highly correlated with the output of the panels. Such a big decline in revenue concerns me.
     
    The following table sums up some simple facts of the two IPOs, without getting much into the valuation of both stocks.


     
    Strictly speaking, these two companies are not comparable, as they belong to two totally different industries. However, I find this table quite helpful and revealing.      
     
    Duoyuan Printing appears to have a much stronger balance sheet, with no debt, while STR Holdings has tons of debt. Although both companies presented an appealing growth story: Duoyuan Printing’s seems to be more consistent, while STR Holdings experienced some recent decline in revenue not very well explained. No shares are to be sold by the executives of Duoyuan printing, while all executives at STR Holdings are selling some shares. Surprisingly, it was Duoyuan Printing that fell on the day of IPO, while STR Holdings went up 30%. 

    Was Duoyuan Printing priced too high and STR Holdings priced attractively? The answer is still no. Duoyuan Printing is a growth stock very attractively priced. STR Holdings’ prospectus shows it earned $6.2M in the first half of 2009, and its market capitalization is $549M. Even assuming the earning improves in the second half 2009, it doesn’t appear to be cheap, noting that right now even a well established solar stock like First Solar (FSLR) is only trading at 16x 2009 earnings.

    It is puzzling for me to see that the investors shunned an attractive Duoyuan Printing, but were brave enough to jump into STR Holdings. I hope people do know what they were buying into, not just for the hot “solar” tag on it.


    Disclosure: Long DYP, no positions in STRI, FSLR
     
    Tags: DYP, STRI, FSLR, Long Ideas, IPO Analysis
    Nov 10 12:39 pm | Link | Comment!
Full index of posts »
Latest Followers
Posts by Ticker
ANF, ARO, CCM, CRI, CRIC, DGW, DIA, DYP, EJ, FSLR, GPS, GYMB, PLCE, QQQQ, SINA, SPY, STRI
Posts by Themes
Retailer stock, China, Healthcare, industrial goods, IPO Analysis, ISM index, Long ideas, Long Ideas, long ideas, VIX
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.