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  • LITB: Better But Cheaper Than VIPS & AMZN

    Risk and negative factors:

    1. Too much reliance on Google's search to get target clients. More than 80% from Google. Marketing fee paid to Google accounted for more than 50%.

    2. Too low repeated patron rate. More than 80% of its clients are one-off ones while regular clients are less than 20%. The company has to keep paying Google to obtain new clients.

    3. Too low net profit margin, only 3%.Over the past years, none of its domestic peers has make profit yet.

    However, with the successful IPO, the company is now famous and can attract more individual consumers. They can go directly to visit the company's website, thus somehow saving the cost paid to Google, improving net profit margin.

    4. Some of the products that sold by its China entity may infringe IPRs. Since the products are not manufactured by the entity nor the company itself, and legal action against Chinese companies by foreigners usually turn out to be nothing, the IPR issue here has very minimal impact to the company.

    5 Momentum slowing down. CAGR decreased from 2008-2012's 234% to 2013Q1's 100%.

    6 Potential threat from competitors. Taobao.com & JD.com are the 2 most powerful competitors in China. They have not entered the company's territory yet. The emerging global online retail market should be big enough for thousands of them to survive.

    7. China's increasing labor cost may erode its gross profit margin. In east coastal cities, the labor cost did have increase a lot over the past years, 10% p.a at least. However, not in the rest of China. The company could purchase products manufactured in the much less developed west inland cities, where labour cost is much lower than the east coastal cities.

    Positive factors.

    1 Management:Dream Team. Each team member has more than 15 years of successful starting up and management experience in the E-com & internet service provider sector. Each is an expert in his area. They are well-educated overseas returnees and have worked for both the Chinese companies and foreign-owned companies, including Google and Amazon. The team has been very efficient and stable since they started up the company in 2008. Insiders and competitors describe them as "down to earth,low profile, creative and professional".

    2 Impressive growth & huge market potential. Sales increased from $6.4m in 2008 to $200m in 2012, up 30+ times. 98% of its sales from outside China, only focusing on wedding gown, small accessory/gadgets, and home and garden. With its successful track record, it can certainly turn around and tap on the huge Chinese market and enter other products and establish its own brand and make bigger money. One more thing to remember is that E-com penetration rate today is still just way too low. According to Euromonitor, global retail online sales is expected to grow at CAGR of 18% to $850b in 2015.

    3 Immune to economy's slowdown. The company's clients are all individuals that seek deeply discounted bargains. The worse the economy, the more bargains they buy, the better the company's business.

    4 Unique business model. As an E-com, the company does not maintain a sales team that has to entertain its clients. It relys on Google's search to obtain buyers online. Once the buyers make orders and payments online, the company instructs its supplier to produce and deliver to UPS, who then couriers to the buyers around the world. Once the buyers acknowledge receipt of goods, the company pays the supplier. From the day the company receives orders to the day clients receive goods and suppliers get paid, it's only around 26 days on average, while its domestic competitors may take at least 90 days. With a much better payment terms, suppliers jump in line to do business with LITB. The company has done tons of work to streamline its operation and improved the whole supply chains. Right now it has successfully maintained 0-sales team, 0-inventory, 0-account receivable, therefore, no inventory risk, no bad debt risk, no labour issue, and of course, always positive working cash flow, and even operation cash flow. None of its competitors could have achieved this, including its domestic peers, DealExtreme (8086.HK), DANG, VIPS, Taobao.com, JD.com, nor its foreign peer, Amazon.

    5 Transparent and hard to cook books. E-com companies business are easy to understand and almost everything transparent. Daily online visitors attracted, daily couriers sent, unit prices, etc, are all easy to get. Investors can even personally visit their websites and test their services. What's more, unlike many other US-listed Chinese companies via reversed take-over, LITB is not a family business and has gone through a much stricter IPO process. Note that its IPO is not before the rampant Chinese accounting scandals, but right AFTER.

    6 Operational risks totally diversified. The company sells about 5000+ products produced by 2000+ suppliers, to 150+ countries, in 18 languages. The means it does not rely on any single product, supplier, or any single country.

    7 The founders used to work for Google, Microsoft,and Amazon. They have know-how on Google's key word search algorithm, on E-com's supply chain management. They are well connected to Google.

    8 It'll take years for its domestic competitors to achieve what the company has achieved today, e.g., well-connected to Google, know how on the algorithm, 18 languages, 150+ countries, 2000+ suppliers, 5000+ products, 0 inventory, 0 receivable, 0 sales team. For its overseas competitors like Amazon, they are not based in China, thus not able to enjoy the cheap labour cost.

    9 Estimate. LITB began to make net profit of $1.1m in 2012Q4, and $2.4m in 2013Q1, with a net profit margin of 4%. The company is expected to report net profit of $4.6m in Q2, $7.2m in Q3 and $11m in Q4, making total net profit of $25m in 2013, EPS=0.5, net value per share is $2.1. The other simple way to estimate is to assume its sales double 2012 and achieve net profit margin of 6%, thus making net profit of $24m. With sales double and marketing fee decreased, EPS=0.5 VPS=2.1 should be totally achievable in 2014, if not in 2013.

    10 Evaluation. VIPS now trading at 50 PE and 20 PB and Amazon at 212 PE and 16 PB. LITB only at 30 PE and 7 PB. The gap will soon be filled, by either VIPS and Amazon down or LITB up when its next 2 quarters result comes out. VIPS is also a China-based E-com that flash sells discounted dresses within China, but its business model has now been copied by many other followers and faces heads up competition from E-com giants like DANG, Taobao.com and JD.com. It has not make any profit yet before 2013. Amazon sales only increased 3 times 2008-2012 and has very little room to improve its profit margin & growth, while LITB increased 30 times 2008-2012 and has huge room to improve its profit margin & growth in the years to come. So if the market can give them 50-212 PE and 16-20 PB, why can't LITB? if so, based on EPS=0.5 VPS=2.1, its stock price should be (25 to 42) as per VIPS, or (34 to 105) as per Amazon.

    When China-based E-Com VIPS had its IPO in Mar 2012, the whole market did not trust it and became very skeptical. Will it become another accounting scandals? Will it meet or even beat Wall Street's EPS expectation?Will Sino-US corporate audit rift persists? VIPS started to soar in Sept 2012 when it did beat the expectation. Now its stock price has risen 5 times since the IPO. In May 2013, Sino-US reached a partial deal on the rift. This is a big break-through after the 3 years impasse and definitely a good news for all the US-listed Chinese companies. True still many other issues pending, e.g, VIE issue, but what can you get when everything settles down?

    So let's sit back and see if LITB can follow VIPS's suit, beating the Street's consensus expectation in the next 2 quarters.

    Disclosure: I am long LITB.

    Tags: LITB, VIPS, DANG, AMZN, E-com
    Jun 14 9:13 AM | Link | Comment!
  • YONG: Deeply Discounted, To Take Off Soon

    The article in Chinese has been published in my company's website on May 2012 and here: http://xueqiu.com/6977823556/23300689 on 15 Mar 2013. I've long position of YONG and will intend to maintain it in the next 72 hours. Below is its simple translation.

    In Oct 2011, we found Yong was deeply undervalued @ around $4.5, with 2012/13EPS=$1.6/$2.3, 2012 PE=1.5 PB=0.3 PEG=0.02. It's 20 times cheaper than its international peers (MON, SYT) and 50 times cheaper than its domestic peers. The book looks great and has been audited by KPMG. It should absolutely worth a shot if the book is clean. "Shengminsu" is a liquid nutrient for crop, the company's sole product, meaning "life essential".

    We decided to test the product while at the same time carry on our due diligences.

    2011.10, I tried it on an unknown flower at my apartment's balcony. Meanwhile, I bought it in dozens of bottles and gave it to the farmers in my hometown village. They used it on the following crops: peanuts, rice, cucumber, sugar cane and taro. Of course, it was a comparative trial. 6 months later, the farmers told me that the product did work. My own test also showed that the flower (F1) on which Shengminsu was sprayed grew much better and faster than the one (F2) on which Shengminsu was not sprayed. In fact, F2 withered and died within 2 months while F1 still grew lushly as of this moment in May 2012.

    2012.01-03, we spent 3 months on the due diligence.

    To verify the company's sales figures, we decided to have a test check and so picked up 2 of its 27 sales provinces. We visited more than 20 of its retail branded shops in the 2 provinces and disguised ourselves as customers to get their sales figures. The total 2 provinces sales volume we got from the shops matched the figures disclosed by Yong. We also talked to the farmers who've used Shengminsu. Most of their feedbacks were quite positive, except complaining about the relatively higher price than that of its peers.

    To verify its net profit margin, I compared its net margin with its domestic peers. Yong's average gross margin and net margin are 56% and 19% from 2008 to 2011; CGA's 44% and 26%; Penshibao's around 70% and 40%. In terms of sales revenue in China's crop nutrient sector, Yong is No.1, CGA No.3, Penshibao's sales figure is not disclosed, probably No.4, since it is a private-owned company. Nomura once invested $6m into and owned 16% of Penshibao. Nomura then restructured Penshibao's whole management team. Except for the chairman, all other key positions, including CEO and CFO, were appointed by Nomura. Soon these insiders found that the company's book had been cooked. So Nomura sued Penshibao and claimed in the court that " Penshibao's net margin is only 40%, instead of 80%, which is what Penshibao's book cooked". Penshibao's 40% net margin claimed by Nomura should be reliable, at least not exaggerated. Therefore, compared with its domestic peers, I believed Yong's net margin is not cooked. We also compared Yong's other financial ratios with its peers, but found nothing weird, except it is deeply undervalued.

    Morgan Stanley has also done an extensive due diligence and finally bought $50m of Yong's convertible bond with a strike price of $8.8 and bought $12m of Yong's ADR @$5.1 in the open market in late 2011 and early 2012. One of my MBA classmates working for MS told me that since US-listed Chinese companies have totally lost trust from investors, MS's team working on this deal were under lots of pressure, very skeptical and cautious, checked more than 400 of Yong's retail branded shops and talked to hundreds of farmers in Guangdong and some other provinces. They even hired KPMG to audit Yong.

    The company's chairman and CEO, Mr Wu zisheng, bought back $3m @$5.5, quite a decent amount compared with its market cap of less than $300m.

    Everything seemed to look great, even too good to be true, but why undervalued? I need to find the reasons, otherwise I won't take the shot.

    The following reasons may explain why it's undervalued.

    Reason 1. Short sellers' accusation and attacks.

    Reason 2. Overseas investors have lost confidence and trust in almost all the US-listed Chinese companies because of a series of their accounting scandals in recent years.

    The accusations include the following.

    Accusation 1. Yong's SEC filing does not match with SAIC filing. In China, except for state-owned companies, almost all the companies each has at least 4 different books, for tax bureau, bank, SAIC, and itself, respectively.

    Accusation 2. Yong fabricated Stanford's certificate to prove its product's effectiveness. Yong had denied.

    Accusation 3. Yong spent $30m to buy a customer list from the Hebei provincial distributor. It's true. Yong explained that it's much cheaper this way than to take over the distributor. By skipping the distributor, Yong can sell the products to the customers on the list directly and thus increase gross profit margin. I compared the gross profit margin and found it did increase.

    Accusation 4. Yong spent $35m to purchase a lignite ore from a company which legal representative is a farmer. It's true. We checked with China's Ministry of Land & Resource and got confirmed that Yong have already obtained the exploration right and was expecting the mining right as of May 2012. The ore is estimated to be worth more than $200m and will secure the company's lignite supply for the next 10 years. I don't care where the $35m is going, all I care is whether the ore is worth $35m and whether Yong can get the ore.

    Last, but not the least, I asked a couple of my friends in this sector for their insightful comments, I also did a negative check via Baidu. All ended up with nothing negative.

    Now that the homework is done, let's have a summary.

    Negative side:

    1. Back door listing via reverse take-over.

    2. Weak trust and no catalyst in US-listed Chinese companies.

    3. VIE issue (variable interest entity).

    4. Some management members' professional background not strong.

    5. No dividend.

    Positive side:

    1. Audited by KPMG.

    2. Deeply undervalued.

    3. $50m + $12m investment from Morgan Stanley.

    4. Product patents and technology secrets.

    5. Management's $3m buyback.

    6. Huge potential growth. (as the No.1 player, Yong has a market share of only 2%. China has arable land of 2bn mu, each mu needs 5 bottles of Shengminsu per year, and each bottle's price is RMB15, so the market is RMB150b in total. 1% increase in market share, means RMB1.5bn sales increase.)

    7. Government policy in favor of green crop, green food.

    8. Survived from short sellers' attack before 2012.

    9. Extensive due diligence done by KPMG, MS and more important, by ourselves.

    I believed Yong's current stock price has already factored in most of the negative elements, but apparently, not the positive ones. Therefore, from Mar to Apr 2011, we bought Yong @$3.7, much lower than MS's entry cost of $8.8, $5.1 and Yong CEO's buyback cost of $5.5.

    Disclosure: I am long YONG.

    Mar 19 5:17 AM | Link | Comment!
  • CXDC: Almost Perfect, But Fuzzy.

    The article in Chinese has been published here: http://xueqiu.com/6977823556/23297771.

    Below is a simple translation into English.

    CXDC: Almost Perfect, But Fuzzy.

    I had not hold any position of the stocks mentioned in this article. I've no plan to do so in the next week.

    First, good news (investment highlights)

    1. No.2 producer of modified plastics in terms of revenue and capacity, No.1 in terms of CAGR, profitability and number of product patents. "Green new materials".

    2. Stable & efficient Management.

    3. High entry barriers of capital, technology and qualifications.

    4. $100m investment from Morgan Stanley (NYSE:MS) in convertible bond with a strike price of $6.25, at least 40% higher than its current price of $4 to $4.5.

    5. The company's founder pledged significant amount of shares in favor of MS to guarantee the company's net profit CAGR>50% from 2011-2016.

    6. The company's CPA is KPMG, a big 4.

    7. Almost perfect financial performance.

    8. Extremely undervalued. 2012/13/14 EPS = $1.8/$2.7/$4.0, its current stock price is only $4-$4.5. 2013PE<2, PB<0.6, PEG<0.04.

    Please note that even if its stock price drops to zero, MS's $100m would not be affected, coz it's convertible bond with a coupon rate of >7% p.a. and MS has 2 seats in the board of directors with veto power to ensure the money is properly used & protected.

    Now, the bad news (potential traps and risks).

    1. Back-door listing via reverse take-over (RTO). With such an excellent financial performance, its IPO could have been made in either in HK or mainland China long ago or even now. With its product all sold domestically, Why RTO in USA, the other side of the earth? We know its international competitors, like LYB, Kumho-Sunny and Bayer have already dominated the overseas markets and have even taken 51% of China's own market share. Now that it has been deeply undervalued for years, if its books are clean, why does it just go private and then list in HK or China?

    2. For years until now, average daily trading volume even less than 0.1% of its total shares, no research reports/coverage by any analysts or institutions. Why? Book-cooking, they believe.

    3. Investor-unfriendly: no company website; extremely limited information disclosures; no fight-back against or feedback to the short-sellers' attacks; no stock buy-back or bonus, despite of its strong cash flow and profitability, huge cash balance, low debt ratio. If the books are clean, why the company has never done anything to boost the long deeply discounted stock price? If the buyback and bonus needs hard-earned money, then the income tax receipts and bank statements of 2011/2012 cost nothing, is the company willing to and dare the company to provide them?

    4. Share holding structure. The founder owns almost 70%. American investors do not like this. Small shareholders' interests may not be taken care by the sole big shareholder.

    5. Independent director, Mr Robert L. Brisotti, resigned; change of its CFO and CPA; all for reasons unknown or un-disclosed. Rampant negative comments in the internet from its staff (Baidu/Google the company's name and you'd find it)

    6. 2011.04 the company announced to buy back $10m before 2012.06, but it only bought back $0.1m, what a joke. Understandable if it stops buyback after the stock price has been boosted up, but it stopped the buyback even the price was still dropping. Why? Embarrassingly short of money or of credibility?

    7. Fantastic excellent financial performance. The company changed its former CPA and used KPMG in 2012. Kingfa (SH600143), Pret (SZ002324) is the No.1 and No.3 domestic player in this sector. LYB, Kumho-Sunny and Bayer are the big international players, whose products are far more reliable than the Chinese players'. Yet, in terms of CAGR, gross profit margin, net margin, operation efficiency, quick ratio, ROE, etc, none of the above players can beat the company, if fact, not even close. China's auto industry's CAGR has slowed down to 8% in 2008-2012, but the company's CAGR is 80%! Jesus Christ, what a miracle! Not surprisingly, its 2012 book will report Non-GAAP EPS=$1.8, 60% up over 2011. Look at the below table to compare with its both domestic and international peers.

     

     

    2008-2012

    on average

    CXDC

    Kingfa

    Pret

    LYB

    Bayer

    CAGR

    70%

    13%

    31%

    -3%

    2%

    Gross margin

    25%

    17%

    22%

    7%

    50%

    Net margin

    15%

    7%

    12%

    5%

    6%

    8. Unable to verify its key assets, sales volume, and profit. Its 2011 annual report shows income tax of RMB117m, with this big tax amount, it should be among the top 100 income tax contributor in Harbin. But we can not find its name in the local tax bureau's official websites. I input its name to inquire on the websites, it returned nothing other than "No result". I inquired the tax bureau via phone, they refused to confirm.

    9. 2011.06 the company approved a new manufacturing facility construction plan. The facility includes 5 plants and 1 office building, its total cost is RMB435m. This is a big sum of money, given its total 2009-2011 net profit is RMB589m and 2010 year-end total assets is RMB1bn. The construction is commissioned to Harbin Shengtong Ltd, which legal representative is the company's former employee. The 435m will be paid to Shengtong. Is this a related transaction, what's the relationship between the employee and the company's management, between Shengtong and the company? Why dose not the company construct itself, instead by Shengtong? Are the plants and buildings worth RMB435m?

    10. The company's top 3 customers contributed 73% of its sales revenue, way too much concentrated. What if someday it loses just one of them and 25% of revenue is gone?

    11. The annual demand for modified plastics for automotive applications is at most only 2.4m tons during 2013-2016 (China produces 20m cars p.a, each car needs 0.1 ton, CAGR=6%), while China's total capacity is at least 4m tons already as of 2013. CXDC, Kingfa and Pret's total capacity is 700k tons in 2013 and is to increase to 1.5m tons in 2014. There's another 3m tons from over 1000 domestic manufacturers and more than 1m tons from the big international players & their subsidiaries/JV in China. China's auto industry already suffers overcapacity, with extremely intensive competition. As we can see car prices have been dropping significantly and continuously, even including those imported luxury cars.

    Last, some conclusion. 1-9 are typical symptom of book-cooking companies, while 10-11 are the key risks that the company can do nothing to mitigate in the very near short term.

    Since the information about and/or disclosed by the company is very limited, at this moment, I can not confirm it's a scum, nor can I deny it is not.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: CXDC, Auto parts
    Mar 17 4:28 PM | Link | Comment!
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