Posted by: donmihaihai | July 12, 2008

Beautiful China stock in the name of Angel.

The current market is so different from last year as it is not difficult to find cheap stock among small cap using basic indicator like P/E, P/B and ROE. What relevant beside cheap is finding the correct company(deem by me) and buy load of them by emptying my bank rather than guessing when will the market bottom, bottom at where and duration of the bear market. China Angel fits the bill of small cap cheap stock with the P/E of 5.5X and P/B of 1.1X at the price of $0.16. When FY2008 ended, China Angel will be value at below book value if it is still trading at $0.16. That is cheap and especially so if the businesses of China Angel are being consider and with a ROE 20% for FY2007.

China Angel sells mooncake, pastry products and snacks mostly in their brand “Angel” with a portion using “Qiwang” and “Wangfulai”. With mooncake as it main product and account for > 50% of its revenues in FY2007, it is not hard to see that China Angel is seasonal. In fact, just by knowing that its main product is mooncake, we know it is about festive and seasonal sales. And fundamentalist will usually say if something goes wrong at a particular year, not just that it will damage China Angel profit, it will be even more damaging to its share price. I would like to go even further by saying if that “something” is negative, like changes in tradition of mooncake festival or China Angel unable to execute and damage their build up goodwill in the eye of consumer during one particular year, the damage will not be one year but years or forever. If that doesn’t happen, then making the second or third step thinking, it is going to be opposite, a strong and very high return kind of business, properly better than any of the confectionery and branding companies listed in SGX that I have look through.

The thing about the business of selling mooncake is it is not a business of change and trend. Every buyer will expected to buy mooncake year after year unless someone is able to tell me the possibility of Mooncake festival without mooncake. There may have some changes and varies in taste, look, size and health concern over the years, it is not a big deal since it usually reflect in the culture of the Chinese consumers. Anything that does not subject to change can be a good business that earns high return over a long period.

The second point, most important one is mooncake will only be purchase before and during the festival but not at any time of the year. What so special of that? Well, looking at “Bak Gua”, which only being eaten during Singapore Chinese New Year will provide the link. “Lin Zhi Yuan” and “Mei Zhen Xiang” “pop out and 2007 Chinese New Year was a big one for “Lin Zhi Yuan” as media provide free advertising with news like long Q even in the face of higher price due surging raw material cost. “Lin Zhi Yuan” Bak Gua seem to be must for Chinese New Year regardless of the price. There are many similar factors between Bak Gua and mooncake and it is these factors that make it a good business.

1) Come in a box where it shows the brand. Anyone eating China Angel’s mooncake will instantly know that they are eating mooncake from “Angel”. It is the same for any brand.

2) Cheap mooncake don’t make the cut. Especially as a gift.

3) It is purchase once a year for own consumption or as a gift. Which mean one will look at what is in the ads (heavily advertise) and most important which brands they ate last year for clue. New brand has a hard time entering this market without lot of advertising on that year and many many years after to create the link between mooncake and its brand, e.g. mooncake and Angel in consumer mind. This favour establish brand.

4) Festive(once a year) + brand create pricing power in the hand of company. Consumer does not always remember what price they paid for mooncake the year before. Even if consumer know that the price goes up, festival provide the reason that they must buy it, even at a reduce level.

Beside, the business of selling mooncake is usually the business of Chinese, this usually exclude strong and establish companies from US and Europe, leaving behind local and foreign companies from the east, which mean a much level playing ground for China Angel.

Is China Angel being one of them? I don’t know and I am not favour of making trips to Guangdong, buy a few boxes of Angel mooncake and do a taste test. It is not going to work that way. And can brand gurus predict the future? I doubt so too. But the good thing is at the current price, even if China Angel does not have a strong brand and unable to establish one in the future, I am not losing anything much because I am not paying for it. But if “Angel” is going to be the “Lin Zhi Yuan” of mooncake, this will be a very profitable investment with load of cash dividends.

Concerns and/or for better time.

One of the concerns is that China Angel is small company and mainly sells in Guangdong province not the whole PRC. But I like the idea that China Angel is concentrating or unable to get out of Guangdong province because it is such a small company, just A&P in one province will cost it a bomb. If China Angel is to spread around the whole PRC, does China Angel have the resources to A&P? If not enough A&P is spend, sales may not follow. Anyway Guangdong is big and modern with better income which fit the model of China Angel.

Runaway expenses for A&P in FY2007 and FY2008. It may be true but from the look of it and what being reported, this is a deliberate move. I don’t mind earning lesser now and investing in the brand for the future.

Direct sale to corporate companies may not be as profitable as sale through retail outlet. I wonder what the management going to deal with this sale channel.

It is also the same as the chain of retail outlet, pastry and snack products segments that China Angel run and expanding. I don’t think these are as good as selling mooncake but well, no complain.

Lastly, at times, it is quite uncomfortable to see such optimist management who only see and talk about the bright future of the company.

 

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