Baoye Group Co Ltd (2355:HKG)

Recent Share Price: HK$4.41 (H Shares)

Accounting: Hong Kong Accounting Standards

Fiscal Year: Dec. 31st

Market Cap: ¥2.16 billion ($316 million)

imagesThe principal activities are construction services, real estate development and manufacturing and distribution of building materials in the PRC.

The company was founded by Bao Gen Pang in 1974 and is headquartered in Shaoxing, China

Sales per Businesses
2016 2017 Delta
HKD (in Million) % HKD (in Million) %
Construction 14,956 70.3% 16,465 75.2% +10.09%
Property Development 3,684 17.3% 3,066 14% -16.79%
Building Materials 2,441 11.5% 2,145 9.8% -12.14%
Others 179.71 0.8% 208.75 1% +16.16%

baoye

 

2018

As of June 4th, Baoye has bought back an additional 22,616,000 H Shares, lowering overall share count to 563,594,053.

2017

During the year ended 31 December 2017, Baoye repurchased 23,500,000 H Shares, representing approximately 8.98% and 3.84% of the total number of H Shares and a total number of issued shares of the Company, respectively. The total amounts paid were HKD133,713,000 (equivalent to RMB118,420,000).  Baoye canceled 26,162,000 H Shares.

Share Repurchases

Beginning in 2014, the company has reduced overall share count by ~15%

H-Shares
Hong Kong $
Chinese RMB
Share Count*
% Reduction
2018
 22,616,000
 563,594,000
-4%
2017
 23,500,000
 133,713,000  $
 ¥118,420,000
 586,210,000
-4%
2016
 2,662,000
 15,159,000  $
 ¥13,535,000
 612,372,000
0%
2015
 19,372,000
 129,927,000  $
 ¥104,240,000
 612,372,000
-3%
2014
 31,220,000
 151,070,000  $
 ¥121,982,000
 631,744,000
-5%
2013
 662,964,000
*Based on retired shares; 2018 estimate

Risk of Fraud

For the last 10 years, the company has been profitable every year; in addition, the company has net borrowings of ¥216,781,000, dividends paid of ¥(755,795,000), and share buys backs of over ¥(400,000,000) — for a net outflow of ~¥(1 billion).  The last issuance of shares was in 2007.

Total compensation for executives in 2017 was ¥4,380,000; EBITDA reported in 2017 was ¥852,429,000.  The company does not report any executive loans.

Insiders control over 50% of shares outstanding.

Pang Baogen (Chairman) 193,753,054 34.38%
Wang Jianguo 47,950,291 8.51%
Gao Jiming 12,059,254 2.14%
Gao Lin 9,544,775 1.69%
Xu Gang 5,971,303 1.06%
Gao Jun 5,794,259 1.03%
Lou Zhonghua 4,533,172 0.80%
Wang Rongbiao 2,647,911 0.47%
Jin Jixiang 2,440,527 0.43%
50.51%

Yi Cai Zhu, via his wife, reports significant holdings in the H Shares.  I do now know what his association is with the company — if any.

Shareholders – H Shares
Name Equities %
Yi Cai Zhu 29,304,000 13.8%
Dimensional Fund Advisors LP 6,618,600 3.12%
Grantham, Mayo, Van Otterloo & Co. LLC 2,044,000 0.96%
AXA Investment Managers Asia (Singapore) Ltd. 1,690,000 0.80%
The Caisse de dépôt et placement du Québec 1,252,000 0.59%
Mackenzie Financial Corp. 539,167 0.25%
Dimensional Fund Advisors Ltd. 446,853 0.21%
CBR Investment AG 250,000 0.12%
Norges Bank Investment Management 179,999 0.085%
Acadian Asset Management LLC 160,156 0.076%

 

In Millions 12/31/15 12/31/16 12/31/17 6/30/18
Cash and Short-term Investments  ¥3,839.73  ¥4,373.00  ¥2,915.45  ¥3,865.83
(0.85 * Accounts Receivable)  ¥5,061.75  ¥6,183.75  ¥8,409.90  ¥8,757.55
(0.60 * Inventory)  ¥4,288.80  ¥4,308.60  ¥4,959.60  ¥4,629.60
(0.25 * Other Current)  ¥136.72  ¥266.25  ¥699.50  ¥239.58
Total Liabilities  ¥13,622.00  ¥15,881.00  ¥20,646.00  ¥19,608.00
Preferred Stock  ¥-  ¥-  ¥-  ¥-
NNWC  ¥(295.00)  ¥(749.40)  ¥(3,661.55)  ¥(2,115.44)
NCAV  ¥3,867.00  ¥4,012.00  ¥3,227.00  ¥3,236.00
NCAV + LT Investments  ¥4,552.58  ¥4,717.95  ¥4,228.00  ¥4,543.00
TBV  ¥6,358.47  ¥6,810.47  ¥7,301.47  ¥7,887.47
Enterprise Value  ¥(361.52)  ¥(857.83)  ¥1,515.62  ¥546.45
Retained Earnings  ¥4,907.18  ¥5,372.10  ¥5,960.20  ¥6,659.83
Dividends Paid  ¥(61.24)  ¥(61.24)  ¥-  ¥-
Sale or Purchase of Stock  ¥(104.24)  ¥(44.68)  ¥(92.16)  ¥-
Shares Outstanding  612,372,000  612,372,000  586,210,000  563,594,000
P / NNWC -946% -409% -68% -97%
P / NCAV 72% 76% 77% 63%
P / NCAV + LT Investments 61% 65% 59% 45%
P / TBV 44% 45% 34% 26%
NCAV Burn Rate 17.0% 3.7% -19.6% 0.3%
Debt / Equity 8.4% 4.1% 24.0% 27.4%
Sloan Accrual Ratio -4.8% 2.2% 9.4%
F-Score 6 5 3
FS-Score 7 5 3
Z-Score  1.8  1.6  1.3
Beneish M-Score  (1.5)
EV / EBITDA  (0.38)  (1.16)  1.78
EV / Operating Income (5yr)  (0.07)  (0.18)  0.35
EV / Operating Income (10yr)  0.17
EV / FCF (3yr)  (0.16)  (0.33)  NA
EV / FCF (5yr)  (0.21)  (0.27)  5.39
EV / FCF (10yr)  0.92
EBITDA (FY)  946.11  $  738.24  $  852.43  $
Operating Income (5yr)  5,026.97  $  4,716.06  $  4,385.34  $
Operating Income (10yr)  8,778.16  $
FCF (3yr)  2,296.44  $  2,630.62  $  (299.46) $
FCF (5yr)  1,738.42  $  3,223.10  $  280.98  $
FCF (10yr)  1,643.80  $

Untitled

Write Up

Value Investors Club (skierholic)

Disclosure: We own shares in Baoye Group Co Ltd (2355:HKG).

 

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2 thoughts on “Baoye Group Co Ltd (2355:HKG)

  1. hello!

    Thanks a lot for the post. I have done some DD and my conclusion is that Baoye is a good company – it has competent and (possibly) honest management, a long history of fine performance, and has historically been financially prudent.
    I think its undervaluation comes from macro fears. The company depends quite a bit in public spending, and it is feared that China (specially SoEs and local administrations) has already too much debt, also, any general economic downturn would also affect the sector.
    If you look at the PB ratio for say the last 10Y, it has hardly been at such a low level. Indeed, the PB ratio is ever dropping – yet the SP remains within a certain range. That is, the companys value increases, the SP remains the same.
    Now, in the last few weeks the SP increased a bit – if it drops again I will probably start a position and then let it be for as long as it takes for the SP to double.
    One concern I have though is Pang Baogen, he is already in his 60s, and he is not only Chairman but also CEO. I wonder how much longer will he remain in the company, and how will the company change after he leaves.

    Best,
    Elliott

    Like

    • Hi Elliott,

      Thanks for your interest in my blog and for your consideration of this post.

      If it’s a fraudulent company, it’s certainly not acting like one! Since my post, the company has bought back an additional 960,000 H-shares and appears to have recently approved another round of H-Share reduction, not to exceed 10% or ~22M shares. The recent sale of 1/3 equity interest in their Zhejiang Baoye development arm to Daiwa House (a public Japanese company) also brings some legitimacy to the company. I would, however, be more comfortable if they paid a dividend. And it’s also worth noting that David Webb has stated in an interview that he has never in his career owned any listed H-Share because he doesn’t trust them.

      With the recent appreciation, it has grown into a ‘normal’ position size for me, which is around 3%.

      However you slice it, the stock looks cheap to me.

      I’m looking for safe and cheap stocks. Cheap is a good catalyst in its own right, but having another known catalyst is even better. If I knew if and when Pang Baogen will retire and what will happen after he is gone, it would make my job a lot easier. Warren Buffett used scuttlebutt a lot in the partnership days with his net-nets; I don’t have that luxury. So if you hear of anything, let me know!

      Many thanks,
      Brent

      Like

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