Fundamental Strengths And Relative Mis-Pricing Provide A Long Opportunity Into Global Sources

| About: Global Sources (GSOL)
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Summary

Chinese country risk discount pulling down Global Sources’s (GSOL) value as compared to the broader industry.

An impressive and consistent EBITDA margin north of 17% coupled with a strong balance sheet with no debt and a $137 million cash surplus as on FY 13.

Improving Chinese macro-economic factors will improve operating performance in a relatively short time horizon.

There are people who blame China and there are people who praise China, I fortunately don't feature in any of these lists, and hence use my objectivity (or at least claim to do so) when analyzing long term industry trends. A trend that began almost 2 decades ago and took the world by storm was China's manufacturing prowess.

Two decades past and the country is not only the leading economy in Asia but also the center of low cost manufacturing hub in the global arena.

As the country went along expanding its manufacturing spread across diverse industries from electronics to sophisticated contract manufacturing of needles to iPhone, Global Sources (NASDAQ:GSOL) found an opportunity to connect this vast supplier market to global buyers and came about with the idea of creating an online market place to enlist these suppliers and put their businesses online.

The company which once started off as an industry directory publisher and later moved into organizing trade seminars and fairs for supplier and buyer interaction and finally ventured into online marketplace development to broaden its horizon and cover a much larger market and at the same time penetrating in the large, small and medium scale manufacturers segment.

Broad industry comparison

Before I dwell more on GSOL and its operating parameters I'd like to highlight some broad parameters that drew me to this stock as an opportunity driven investment.

The above data presents a list of entities operating in the media space. Eyeballing the data reveals that for companies operating in the sub $200 million revenue levels, GSOL operates at EBITDA margin and ROC levels which not only beat average industry levels but are far better than companies operating in this sub region.

Operating parameters

FY 13 was a challenging year for GSOL, with mature markets of Europe still reeling under recession and the US economy on a recovery phase, this dampened economic situation created a hole in the company's financial performance as a large buyer base operate out of these regions and faltering demand hit the bottom line hard.

While the Chinese export market which is the biggest revenue driver for GSOL is relatively soft, improving macro factors in the US (evidenced by encouraging employment and GDP growth rates in the American economy) allowed the dragon to grow exports by ~3% in November 2014 as compared to a year earlier. The country was also able to grow its exports to the EU by ~4% in November.

Despite the modest gains in the US and EU, China can still feel the impact of a negative global economy as most parts of Europe and Japan continue to deal with the challenges posed by recession evidenced by a fall in Euro area investment prompting the ECB to cut its forecasts.

Although the Chinese economy posted record levels of trade surplus, the BOP was driven more by declining imports on account of fall in global oil prices than a jump in the country's export surplus.

That said, a change in operational strategy by GSOL to capture the vast untapped domestic market in greater China and aggressive focus on expanding its product offerings into newer territories coupled with continued focus on facilitating one on one interaction between buyers and sellers via its immensely successful trade shows held across China, the US and Africa has allowed the company to balance out and revise its revenue model.

In keeping with this strategy, the company launched its new mobile electronic vertical, an ecosystem of services for the mobile electronic industry in October 2014 to tap a global buyer base of around 400,000, including round about 100,000 verified buyers and more than 10,000 suppliers.

Valuation metrics

GSOL is currently trading at a price to book multiple of 1.23, considering the median price to book multiple of 1.98 for the sector, it brings us to a relative valuation of ~$10 for GSOL, an upside of roughly 60% on the current market price.

While a simplistic analysis of multiples to come up with the likely price is easy, it seldom works if you don't connect the dots well. In our case the dots lie in analyzing return, risk and growth numbers across industry to make reasonable judgments on the viability of using the multiple to make a fair assessment of under or over pricing in regard to GSOL.

For my analysis, I would consider the debt/equity ratio prevailing in the market as a proxy for risk, and on that count the company is relatively safe as there are no debt obligations, short term or long term for the company to meet, and coupled with a healthy cash balance in excess of $90 million as on quarter ending September 2014 further pushes the company into safer havens.

As an aside this cash per share position of a little over $3 at present account for over 50% of the company's present market value ignoring the value of other operating assets which on average have earned an ROE of 19% in the last 3 fiscal year ends.

From the standpoint of risk emanating from company specific sources, I believe GSOL is relatively safer than not only from its peer group but also across the small cap universe.

If the risk isn't emanating from inside, one of the reasons for this discount is the risk emanating from outside or macro factors, and I believe the company is being punished for its business exposure in China which make the investors skeptical in picking GSOL as a long term investment.

What many investors or traders describe as risk is actually the very risk that plagues Alibaba (NYSE:BABA), the Chinese e-commerce companies which debuted in the market last quarter with a resounding performance.

I believe there shouldn't be separate barometers to assess the same basket of resource, and in this case GSOL with its superior business experience and penetration in the Chinese market gives it an opportunity to make great returns in the coming times as it has done successfully in the past.

Final words

GSOL is always played in the markets as a short term cash and dash opportunity; I prescribe a longer time horizon investment with clear rewards for those investors who are looking to lift the veil of China discount to the company's stock and look at the company's core intrinsic strengths to assess its future outlook and performance and view this company in the same manner as they view Alibaba.

I reckon the stock a buy from both fundamental and pricing perspectives.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.