Full Apex manufactures plastic bottles.
‘DIRT CHEAP’ was what I was thinking when looking at the share price of Full Apex (ranging between 13 cents and 15 cents) in the middle of the trading day after Lehman Brothers declared bankruptcy.
I consider, even without giving Full Apex much respect for its future prospect, Full Apex is worth easily 3 to 4 times more than the price then.
The company has a strong balance sheet. ‘Balance sheet’ was not taken seriously by many investors in the last few years when the market was in a bullish mood. Now suddenly, it has become the focus point during the financial crisis.
There are many people calling a ‘buy’ on Pacific Andes as it is very cheap at 2 to 4 times earnings. I backed off after I found out that its balance sheet is loaded with debt. I did not go on to examine its business model as only companies with a strong balance sheet will turn me on.
Full Apex is certainly one of them. At 1H2008, Full Apex’s shareholder equity stood at RMB1,288 million which is about the total lease payment plus property, plant and equipment. That works out to be about $0.30.
2007 results improved.
And these assets include a PET chip plants plus 8 PET bottle plants with production capacities of 2 billion bottles per year. And better still because of the localisation of bottling business, I think the utilisation is about 50 to 70% for these 8 plants.
This provides growth as consumption in the regional areas increase as Chinese become richer, without the need for new investment.This translates into a lot of free cashflow which can be used to pay down debts and increase dividends.
2007 was the first 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.
It was also the year that Full Apex reduced its dividend per share to the lowest: RMB 1 cent. I expect that both will change this year. With its strong cashflow, debts can be paid in 3 years if all the cashflow is channeled to that purpose.
And while the dividend per share of RMB 1 cent gives a yield of 1.4% based on share price of $0.15, the dividend payout ratio is just 5% of total net profit. If Full Apex raises its payout to 20% of its profit, the dividend yield become 5.5%.
Full Apex has the ability to pay much more, up to 50% of cash flow.
Back to the point of dirt cheap and strong balance sheets. At $0.15, up from the lowest point of $0.125, Full Apex is selling at a P/E of 4.2 times 2007 earnings, price-to-book of 0.49 X of latest book value and a dividend yield of 1.4%.
While the dividend yield looks low, Full Apex has the ability to pay 50% of its profits which translates into a dividend yield of 11 to 12%. At $0.15 stock price, I would getting a 50% discount for all the PET chip and bottle plants which Full Apex spent 10 years to build, and another 30 to 50% discount because the utilisation is at 50 to 70% only.
Lastly, Full Apex is a very stable business because once the bottle plant is set up beside(or in) their customer’s plant, it will serve their customer for many years (which can be longer than the depreciation period). As the volume grows, a new plant will be needed, it will most likely come from the owner of the existing bottle plant.
It is noteworthy that the company chairman, Guan Lingxiang, made his first purchase of Full Apex in a long time at $0.135 for 378,000 shares on 16 Sep 08. I hope the management will seek an EGM for a share buyback program. It is extremely beneficial to shareholders if the company buys back shares at the current price level.
"Donmihaihai" is a 30-year-old retail investor. His previous article contributions were:
TPV: Why I held it for 7 years
CHINA STOCKS: Buying opportunities!
