Posted by: donmihaihai | September 21, 2008

Strong Balance Sheet but Rubbishy Cheap.

Rubbishy cheap was what I think when looking at the share price of Full Apex at the middle of trading day after Lehman Brother declared Bankruptcy. It is not hard to guess what I did that day as I consider, even without giving Full Apex much respect for it future prospect, Full Apex is worth easily 3 to 4 times more. With AIG being taken in and world stock markets continue their slumps, I made an even more rubbish bid at $0.10… But stock market swing to the other direction.

Strong balance sheet. Words that were not being paid attention to by players for the last few years suddenly become the focus point as the crisis continue. There are many calling and buying Pacific Andes as very cheap at 2 to 4 times earnings. I backed off and did not go further on Pacific Andes because my 1st impression is its B/S is loaded with debts. I never try to understand Pacific Andes business model but only companies with strong b/s will turn me on and Full Apex is certainly one of them.

At 1H2008, Full Apex shareholder equity stands at RMB1,288 million which is about the total lease payment plus property, plant and equipment. That works out to be about $0.30. And these assets include a PET chip plants plus 8 PET bottle plants with a production capacities of 2 billion bottles per year. And better still because of the localisation of bottling business, and I think the utilisation is about 50 to 70% for these 8 bottle plants. This provides growth as consumption in the regional areas increase as Chinese being richer without the need for new investment.

This translate into producing lot of free cashflow which can be use to pay down debts and increase dividends. 2007 is the 1st time that as a listed company, Full Apex is in net debts position due to the massive capital expenditure program on the PET chip plant. 2007 is also another year that Full Apex reduced it dividend per share to the lowest of RMB 1 cent. Both will change in 2008. With it strong cashflow, debts can be paid in 3 years if that is the sole purpose of cashflow. And while dividend per share of RMB 1 cent gives a dividend yield of 1.4% based on share price at $0.15, dividends payout ratio is just 5% of total NPAT. If Full Apex payout 20% of its profit, dividend yield become 5.5%. It will not hurt Full Apex much because it has the ability to pay much more, up to 50% of cash flow.

Back to the point of rubbishy cheap and strong B/S. At $0.15, back from the lowest of $0.125 Full Apex is selling at a P/E of 4.2 times 2007 earnings, PTB of 0.49 X of latest BV and a dividend yield of 1.4%. While a dividend yield of 1.4% look low, Full Apex has the ability to pay 50% of it profits which translate the dividend yield to 11 to 12%. To put the rubbishy cheap in word, at $0.15, I am getting 50% discount for all the PET chip and bottle plants which Full Apex spent 10 years to build, and another 30 to 50% discount again because the utilisation is at 50 to 70% only. Lastly, it is a very stable business because once at bottle plant is set up beside(or in) their customer plant, it will serve their customer for many years(can be longer than the depreciation period) and as the volume grow, new plant will be needed, it will most likely come from the owner of the existing bottle plant.

To complete it, management owner made its first purchase of Full Apex for a long time at $0.135 for 378,000 share on 16 Sep 08. As a shareholder, I hope the management understand and seek an EGM for a share buyback program. It is extremely beneficiary shareholder to buy back shares at the current price level.

Anyway it is not just Full Apex that is cheap, there are lot of stocks trading at below BV, low single digit PE, near to or at double digit dividend yield, majority shareholders buying and share buyback. One of them is TPV, It is sinking the total number of share by a few hundred thousands every day and purchased 0.1568% of total number of shares. It is not much taking into consideration that TPV has more than 2 billion of shares but it is not an easy task as not many are selling in this current slump. Nevertheless, I will strongly support this daily buyback program as just like the situation of Full Apex, it is extremely beneficiary shareholder buying at this price level.

Beside share buyback, TPV spot a dividend yield of 9.2% at the Friday closed price of $0.44, a dividend yield level that will attracts dividend lovers just a few years back and now it can be easily found. Dividend is the function of both stock price and level of payout and for a stock like TPV where payout is at the lower end of 20 to 30% of it reported NPAT, at the current level(it was over 10% at one point during last week), TPV is selling at 3.6 times last year earnings. Of course, when PE at 3.6 X and dividend yield of 9.2%, TPV is trading at 0.63 of NTA. But trading at what below BV(net tangible asset for TPV) is the last thing I want to know as there are no significant values in these assets unless TPV is selling at net-net. Well TPV is not.

The reason that TPV is not selling at net-net or near there despite having a PE of 3.6X earnings is that it has a high but not dangerously high level of debts as debt level is about 0.56X of shareholder equity and interests payment cover is still at a comfortable level of 4X. The good new is the two factors of 1) massive capital expenditure for both LCD monitor and LCD TV will slow down in the future as rate of growth for fierce fully competitive LCD monitor slow to a single digit. And 2) Trade payable should return to a comfortable level after CMO took at 7.12% of TPV. These will change TPV from generating negative cashflow from past 2 to 3 years to positive cashflow, also the possibility of positive cashflow after CAPEX. In fact, TPV debt level is already lower at 1H2008 compare to FY2007.

TPV is easily worth 3 to 4 X more than $0.44 and while its balance sheet is not like a castle, it is strong enough and in fact, if a global recession come which will affect TPV in term of profit but it will help TPV in term of rebuilding back their strong b/s. At this moment, one is paying 3.6X FY2007 earnings for a leading monitor assembler for LCD monitor with a market share of 28.3% and leading independent LCD TV assembler with a 4.7% market share which generated >20% on NTA for last five years.

The next few years for TPV is not about grabbing market shares for LCD monitor it should be more about profitability as the top player already get what they want with dominated market share. This will work wonder for shareholder through even higher dividend yield.


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