KUALA LUMPUR: After being battered down from their IPO prices, all the five China-based shoe companies on Bursa Malaysia are trading at large discounts to their book values and at low price-earnings ratio (PER) of around two times. Coupled with impressive double-digit growth and attractive dividend yields, how much longer can they remain at bargain levels?
Most investors are no doubt sceptical about China stocks listed on overseas exchanges, given the numerous accounting issues these companies have faced in the US and Singapore over the last few years.
However, analysts also noted that none of these issues has surfaced in Malaysia yet, and the Chinese companies listed here have consistently delivered strong earnings despite their lacklustre stock price performances.
Xingquan International Sports Holdings Ltd, the first Chinese company listed in Malaysia for close to three years now, has yet to disappoint investors in terms of earnings. Apart from Xingquan, four other shoe companies listed here are Multi Sports Holdings Ltd, XiDeLang Holdings Ltd (XDL), K-Star Sports Ltd, and Maxwell International Holdings Bhd.
According to calculations by The Edge Financial Daily, from 2006 to 2010, the five shoe companies chalked up a compound annual growth rate (CAGR) of at least 30% for both revenue and net profit.
The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends.
Their PERs are about two times — well below the market’s broader average of 15 to 16 times.
The recent listing of two China-based apparel stocks in Hong Kong could also provide a re-rating catalyst for the Malaysian — listed shoe makers. China Outfitters Holdings Ltd and Active Group Holdings Ltd were listed at PERs of six to seven times, three times more than their Malaysia-listed peers.
With such low valuations, the possibility of potential privatisations and corporate exercises cannot be ruled out, according to analysts. This almost happened in the case of XDL.
XDL’s share price saw some excitement recently when the company’s major shareholder revealed that he held informal discussions with Navis Capital Partners to sell a stake to the latter.
According to reports, XDL’s founder and managing director Ding Peng Peng was “frustrated with the stock’s lacklustre share price”.
However, the talks with Navis apparently did not pan out. Investors have started to take notice of XDL’s low valuations, and the stock has risen about 25% since the beginning of the year. It has proposed a bonus issue, private placement and warrants.
Edmund Tham, head of research with Mercury Securities, said the perception of China-based stocks in Malaysia will gradually improve over the years.
“It might take a couple of months or even years for investors to change their perception of China companies listed in Malaysia. Over time, with more roadshows and briefings, people will start to see that they are good companies, provided they continue to generate sufficient operating cash flows and profits,” said Tham.
According to Tham, a good business model and an attractive dividend policy will cause investors to take note.
He added that the public should not be doubtful about these companies as some of them have first- and second-tier global auditors such as BDO Binder and Grant Thornton.
Tham covers Xingquan, Xidelang, Multi Sports and Sozo Global Ltd (a China-based foodstuff manufacturer listed on Bursa).
Except for K-Star, all the companies are covered by a research house as a result of their participation in Bursa Malaysia’s CMDF-Bursa Research Scheme, which aims to enhance research coverage and interest in stocks, particularly smaller capitalised ones.
On July 10, 2009, Xingquan became the first China-based shoe company to be listed on Bursa. The last was Maxwell which was listed on Jan 6 last year.
Multi Sports made its debut on Aug 19, 2009, followed by XDL on Nov 11, and K-Star on June 4, 2010.
The Edge Financial Daily takes a look at the five shoe companies and their underlying fundamentals that appear to be attractively undervalued.
As at last Friday, the stock which had fallen the most from its IPO price was K-Star (-60.9%), followed by Multi Sports (-52.9%), Xingquan (-44.4%), XDL (-36.2%), and Maxwell (-23.1%).
These counters are trading at a PER of 1.8 to 2.4 times, according to Bloomberg data. They are also trading below their book values at discounts between 41% and 67% and all are in net cash positions from RM90 million to RM193 million.
Tham likes Xingquan as it registers the strongest earnings of more than RM100 million and has a strong leadership position in the outdoor casual wear market. Another analyst likes Maxwell as the stock is trading below its cash value per share.
“The share price is something beyond our control. We will continue to manage the company well, deliver good results and hopefully the share price will take care of itself,” Xingquan CEO Wu Qingquan told The Edge Financial Daily recently.
He believes the company can maintain double digit growth in its FY12 ending June.
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