C&G Industrial Holdings:Cash more than Share Price?
The latest quarterly report wasn’t very favorable to C&G Industrial Holdings, but are investors in C&G smart to dump it or are we sensing something amiss?
Here are some key notes from the quarterly repot:
- Revenue fell by 7.2% compared to previous period in 2007
- Sales were affected due to snow storm in early 2008
- Normal yarn products with lower margin were not manufactured or outsourced since Feb 2008.
- Selling price were reduced.
- Huge increase in expenses up 362%. This is the reason why net profit is lower
- The increase in administrative fees was mainly due to the increase in consultancy fee for research and development of RMB 14.7 mil and other necessary expenses to support business expansion.
- Profit fell from RMB 43 mil to RMB 14 mil, down 66.5%
- The balance sheet looks ok. Solid as ever
- Depreiciation and amortisation is higher from 5.4 mil to 9.9 mil
- This was mainly attributed to 2 new plants coming online.
- Operating Cashflow was lower, due to lower profit, but still positive
- Capital spending was RMB 9 mil compared to 5 mil.
- Overall Free Cashflow is still positive at 8 mil.
Business Outlook:
The Group has begun the construction of a new plant for the manufacturing of industrial bi-component fibre.
The new industrial bi-component fibre was invented by Chisso Japan in the 90’s, as a critical raw material for environmentally-friendly manufacturing of adhesive-bonded cloth. Adhesive-bonded cloth is widely used in healthcare and personal care products. SARS, Avian Flu, Foot and Mouth disease have spurred rapid demand on disposable adhesive-bonded cloth, which is projected to grow at 8-10% per annum globally. Besides healthcare and personal care products, the new industrial bi-component fibre can also be used as a critical raw material for the manufacturing of non-adhesive synthetic cotton, which are widely used in textile apparels, bedding and home appliance, with its distinctive environmental benefit of zero formaldehyde emission.
Moving forward, the Group will focus on product safety and environmental-friendliness, given the increasing importance modern consumers place on these factors. A prime example will be the new industrial bi-component fibre. The plant will take about 18 months to build, and the new industrial bi-component fibre is expected to contribute to the Group’s financial performance by 1Q09 with its annual production capacity of 20,000 tonnes.
PTA, MEG, PEG, PSF and SIP, the main raw materials used in the production of our products, are all petrochemical products. Any fluctuations in global crude oil prices, a global commodity, have an indirect impact on the prices of our main raw materials.
I must say they are really keeping mum on the future outlook for this company. While we hope that the consultancy charges are a one time thingy, the same cannot be said for falling revenue. It looks like cost of goods on raw materials is not such a big problem for C&G Industrial.
The outlook for oil looks to be challenging going forward, so we will see if this affects C&G through this period.
Since the release of this result share price have fallen from 24 cents to nearly 14 cents. So where is C&G in terms of valuation.
- PE is 2 times
- PTB is 0.40 times
- Enterprise value is negative (!):-90 mil RMB
- EV/EBITDA is -0.48 times
Is it for real? By buying a company now, you are like paying cash for cash + plants and production. Sounds a pretty good deal.
In this bear market, we get bargains like this, but you do have to be careful. Such a low PE indicates probably that going forward earnings is going to be highly unpredictable. I don’t like the sound that the company don’t sound out that the industry aren’t doing well as well.
Next up, my calculation is based on last full year profits.
Last years operating cashflow stands at RMB 188 mil. It is highly unlikely that we are going to hit it this year. The half year operating cashflow stands at RMB 88 mil. if we think it will be worse in the second half we add RMB 40 mil to 88 to get 128 mil, predicting that each quarter the cashflow will be 20 mil compared to 40 mil.
The revised figures are as follows:
- PE is 2.8 times
- EV/EBITDA is still negative no matter how u put it since Enterprise value is negative to start with.
Unless the management is damn corrupted, i don’t see why we shouldnt punt on thsi one.
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