With the improving market sentiments for penny stocks and S-chips,
good out-of-favour stocks are fast becoming a rarity. Those who were brave enough to take a position in such stocks over the last few months would probably be laughing their way now to a good restaurant if not to the bank. Of the 3 examples of out-of-favour stocks highlighted in this thread, all of them have since notched up gains ranging from 25% to 121%.
China Gaoxian [42 cents] – up
121% from 19 cents (20-10-2010)
Qingmei [33 cents] – up
27% from 26 cents (13-12-2010)
Eratat [25 cents] – up
25% from 20 cents (7-12-2010)
At this stage of the market,
FUJIAN ZHENYUN appears to be the only good undervalued profitable stock left that continues to remain out-of-favour with investors. Those with an appetite for such a stock may like to check out on this one.
FUJIAN ZHENYUN is principally engaged in the research and development, design, manufacture and sale of a broad range of plastic pipes and fittings for four main piping systems, namely water distribution, communications, gas & electrical piping. The stock had its
IPO in August 2007 at 62 cts and is
listed in the Second Board [Catalist]. The company has a share capital of RMB 115 million comprising
35 million S-shares listed in Singapore and 80 million unlisted shares, the bulk of it in the hands of the management.
The share price of Fujian ZY took a big plunge in early June 2010 after its previous auditor, KPMG failed to pass its FY 2009 financial account (not in accordance with International Financial Reporting Standards) because of some accounting discrepancies in certain business transactions. Since most investors were already fearful of S-chips because of the many cases of insolvency and poor corporate governance among them over the last 2 years, this incident had further dampened Fujian’s stock price to insolvency level. In July 2010, Fujian ZY appointed Deloitte & Touche as Special Auditor to help resolve its accounting problems. The Special Auditor completed its assignment recently and did not find any accounting fraud or serious misdeed. The company has agreed to implement all the recommendations of the Special Auditor to improve its accounting management by March 2011. However, the share price of the stock has remained grossly undervalued.
The positive & negative points for this stock are as follows –
Positive Points
- The company has an impressive track record with EPS of around 70 cts (RMB) or 14 cts(S) each year for the past 3 years (FY07-09). Although the profit growth had been rather flat, it is one of the few S-chips that have performed well in its business for FY 08 & 09 while many others had suffered a decline in profit or a loss due to economic slowdown.
- According to its 1H10 results, the company has cash holdings of RMB 273M and borrowings of RMB 16M. . Its EPS for the First Half is 37 cts(RMB) or 7.4 cts(S) [annualized 14.8 cts]; & its NAV is RMB 4.77 or 95 cts(S). Its PE is only 2.5x at a price of 35 cts.
- The company’s major customer remains the government-linked organizations and thus faces less debt collection problems.
- Fujian had declared dividends of 9.96 cts(RMB), 3.83 cts(RMB) & 5.64 cts(RMB) for FY 07, 08 & 09 respectively.
- For business growth, the company acquired 5 PE plastic pipe production lines in 2008 to boost PE production capacity by about 11,000 tons. In end-2009, it acquired 10 new PVC-M production lines for RMB 52 million to boost its PVC-M water pipes production by about 20,000 tons p.a. starting mid-2010. This is expected to boost its EPS well beyond 14 cts(S) this year. [1H2010 EPS is already 7.4 cts(S)].
Negative Points
- It is a very illiquid stock and an S-chip - only 35 million issued S-shares in Singapore and rather difficult to buy or sell in sizeable quantity.
- Market sentiments towards S-chips have yet to recover significantly. Hence, upside of its share price will be limited – may be to PE of 5x or 70 cts ?
DISCLAIMER:
Good, undervalued, out-of-favour stocks are likely to give extra-ordinary gains but its risks are also very much higher if there are uncertainty factors. Each individual should do their homework or analysis taking into account the risks vs the rewards before making any investment.