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Friday, May 22, 2015

Real Nutriceutical Group (瑞年国际): Stable & Growing

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The group was in net cash position all this while although its borrowings was in upward trend. Borrowings surged up in 2014 due to acquisition of 60% equity stake in Magic Galaxy. 

Current ratio and acid test were more than one. Depreciation / PPE ratio was less than 10%. Trade receivables / Revenue ratio is quite high at 45%, but its cash conversion cycle is manageable around 60 days. 

PPE contributed around 40% of its total assets which is quite a norm for a manufacturer in my opinion. Invested capital is contributed by 80% shareholders' equity and the rest from borrowings which is quite healthy to me. 

ROE and ROIC were dropping throughout the years as the growth rate in capital was faster than the growth in operating performance. ROE and ROIC were around 14% and 18% respectively. 


Operating cash flow was quite good, net cash from operating / net profit ratio was more than one. 

But somehow the group spent a lot in capex since 2011 to expand its production capacity as well as technical know-how for the past few years. Capex / Sales ratio was around 28% and the amount of capex spent was around its net profit recorded which is quite high

Thus, it's not surprise its free cash flow was negative from 2011 to 2013. The group able to chalk up a positive FCF in 2014 and even recorded a 5% FCF / Sales ratio. Things remained to be seen whether the group able to continue to record a good positive FCF moving forward. Else, the group need to look for external funds to fund its capex or worst case, they are cooking the book which is a nightmare for the investors. 

Mr Wang FuCai is the Founder, Chairman as well as the CEO of the company. He is responsible almost everything related to the group. He has 30 years of experience in the health care and pharmaceutical industry. 

He currently having around 22.9% ownership of the group. 


Some of the recent corporate movements of the group

1) In May 2013, the group issued a convertible bond worth HK200 million with 6% annual interest and conversion price of HKD3.0 which is higher than current price. Thus, probably nobody will convert it. 

2) The group acquired 60% Magic Galaxy for RMB200 million whose core business is manufacturing of high end eye drop products in PRC. 

3) The group entered into MoU in Jan 2015 to acquire Ailire Investment who operates over 600 integrated drug retail chain stores which have strong business presence and retail network for medicine sales in China. The group target to get RMB100 million from each retail shops to get HKD600 million increased in sales. This probably will be the main growth aspect from the group in 2015. 

4) The group plans to spin off its beverage business through a separating listing on the stock exchange. The group's beverage business only able to record around RMB450 million sales in FY2014. Thus, I think the proceed raised will not be that high. 

5) In April 2015, the group issued a private placement of about 130 million new shares to third parties at HK2.36 per share to raise HK303 million. Perhaps HKD2.36 a good support? 

In terms of valuation, PE ratio is around 4.4, dividend yield is quite low due to low payout. Enterprise value multiple is quite low at 2.4, thanks to its high operating profit. 

Perhaps, is a good company to invest in? Have to take note of its capex amount and cash flow. 

Reference
- Annual Report
- Company website

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