One night, while I was sifting through the numerous earnings reports for 4Q10, I found a company that has long been forgotten by most investors I believe. I remember the stock clearly as it was listed when I first came back to Singapore after my studies.
Before going more into the company specifics, I would like to state a new theory of mine, its called the momentum critical mass stage of companies. What is this new theory about? In technical trading terms, momentum strategy is when a trader identifies a trend and rides it for what its worth. Now this new theory I have is based a lot on the technical trading concept. I believe every company has humble beginnings and for it to grow, it needs to gain critical mass for its products. Saying that, without gaining critical mass in investor following, the stock will flounder. What does the stock need to do? It must have positive catalysts in terms of earnings and dividend growth, positive announcements like yield accretive acquisitions, divestments etc to create shareholder value. Positive newsflow is crucial! I believe good news will not be a one-off but it will come in close succession like within a couple of months within each other. This is what I mean by momentum. A strong momentum in positive newsflow will create interest in the company and when the there are enough investors on the bandwagon, it reaches critical mass and the stock will move towards an accelerated growth stage in terms of stock price and earnings. One stock that is in this stage is Hong Leong Asia. The other I believe is the stock I am going to share with all of you today.
Ok more on the stock that I have found. This time, its a Chinese pharma stock called Luye Pharmaceutical. I know this name may not sound familiar to any of you but I believe many of my mates and fellow stock punters would be familiar with the name, Asiapharm. After a change of name, its now called Luye pharma. I remember how the company started from a small pharma company selling over the counter drugs to becoming a major player in the drug market.
Luye Pharma is a leading specialty pharmaceutical group in the People’s Republic of China (“PRC”) focusing on the research and development, production and sale of natural drugs , drugs with new delivery system and new drugs with other specific features .
Today their products have an established presence in the PRC and are widely used in the fields of oncology, orthopaedics, neurology, gastroenterology, cardio vascular and hepatology.
Their products have access to over 3000 hospitals across the country, and leveraging on our extensive distribution network in the PRC, we are entering new markets, including Singapore , Malaysia , Pakistan , Vietnam , Crodia , Norway and South Korea .
The growth of this company has been phenomenal. Since 2007, they have grown their revenue from RMB 508 mil to RMB 954 mil. Earnings grew from RMB 58 mil to RMB 129 mil. Considering there was a financial crisis over the past 2 years, the company has managed to grow considerably both its top and bottom line.
The issue that puzzles me most is why the company is still listed. In 2008, there was a general offer by MBK partners, a private equity firm to take the company private at S$0.725 per share. This was basically a leveraged buyout deal with the major shareholders and management. When they made the offer, the stock was trading at $0.635 and its earnings were less than half of what it is today. The total level of acceptances were 39%, adding the 44% that was already held before the offer, the open float for the company is now 17% only. I believe that MBK will be looking at the stock with great interest, if they want to take it private, they will have to offer a lot more this time. I do believe they will do so.
Another interesting fact on the company, is the historical p/e over the past 3 years have been 30 times or more. But currently, it is trading at only 14 times. So its far from its historical mean. With earnings growth, growing so strongly, this is not a demanding p/e level at all. Earnings have grown mainly because the drugs on the company's suite have seen strong demand, this is a good sign that the drugs may be gaining a critical mass following.
Cashflow wise, the company has managed to generate good operating cashflow over the past 3 years. Everyone knows that SVI loves healthy cashflows. They currently are net cash with little gearing. Their cash is level is more than sufficient to cover all its liabilities.
A close investment advisor to me asked, why do I like to look at stocks that lack liquidity? My answer was, I love companies that no one else looks at, that is when the stock has the most potential and the upside will be a lot more than a well researched stock.
Two posts in a day!!! I must be the hardest working investment blogger in Singapore.
Best,
SVI
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