Camkids & Naibu Global - Two Undervalued Chinese Retailers

Camkids Group: http://www.camkids-ir.com/
Naibu Global: http://www.naibu.com/


Camkids and Naibu are two companies that I have covered before. Both are Chinese retailers and both are undervalued when compared to both their national and international peer groups. One difference between the two is that Camkids has seen its share price rise over 20% since its 2012 IPO whereas Naibu's share price has dropped by over 20%. The market has not been receptive to Chinese companies over the last decade, with investors being skeptical over the legitimacy of the companies in question. In many respects, investors have been correct with companies such as Geong International and HaiKe Chemical examples of Chinese disappointments. Taking HaiKe as an example, the company reports over £1.4bn in revenue but has failed to translate that into profits, and makes substantial losses year-on-year. Bank loans (debt) are also substantial. The market therefore values the company at a pitiful ~£8m. Elsewhere, an orange producer, Asian Citrus, has had to respond to accusations of falsifying orange crop figures from Chinese press- the combined result, of this and other issues, is that investor confidence in Chinese companies is very low. I reckon that Camkids and Naibu have the potential to buck this trend.
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Camkids Group
This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2013/02/camkids-group-rerate-due.html


I start off with Camkids and there is still not a lot to say about the charts position due to the lack of data points. Regardless, the overall picture remains bullish and that is impressive considering the across the board failures of Chinese companies' share prices since their IPOs. China New Energy (LSE:CNEL) is a clear example of that downward price action.

To recap what Camkids does. Camkids Group is the sole owner of Camkids HK. The group designs and sells outdoor goods for children, the equipment mostly spanning shoes and clothes. The age range focused upon is 8-12 although this does stretch up to 18 for some products. New seasonal lines are developed, branded and sold across mainland China, but to date, most of that has happened in 'Tier 1' and 'Tier 2' cities. These are cities that are generally more developed (for example Beijing would be considered a Tier 1 city). There are advantages and disadvantages to this approach. The main benefit is that disposable incomes tend to be higher meaning higher absolute revenue and this is created through driving relatively high margins. The counter argument though is that some aspects of the Chinese clothing market suffer from oversupply meaning that the distribution channels are liable to be reduced. That is arguably becoming a big issue with the influx of western brands to China although this process is not exactly quick. The result is that there is margin pressure on other companies within the sector.
However, this has not yet affected Camkids who pushed their gross margins up to new highs of 38.2% recently. On September 17, Camkids released its interim results which reported for the 6 months until the end of June. All figures have been converted to GBP from RMB as in the Interim Results


Two examples of Camkids products
- Revenues increased 20.9% to circa £44.4m
- Gross profits rose by 25% to circa £17m
- Net profit after tax rose 13.9% to circa £9.2m
- Earnings per share at 12.3p
- Net cash rose 53.7% to approximately £29.5m
- Maiden interim dividend of 2.3p/share

Looking solely at those headline figures with the current share price of 108.5p and market cap of £81.8m, we can start working out some ratios. One of the most impressive figures there is the cash pile which represents 36% of the market cap. That has allowed for a healthy interim dividend to be paid which already gives a prospective yield of 2.1%. I would therefore expect the final dividend to be in excess of 2.7p (i.e. giving a total of x>5p). At 5p, that gives Camkids a possible yield of 4.6% or higher. However, that is not the salient point about the dividend. That is a key differentiator between Camkids, and Chinese companies of the past. They have started trading well, and are already issuing dividends to shareholders - that is a clear vote of confidence and that should help alleviate investors fears.

Earnings per share did drop slightly compared to H1 2012 and that is likely to have been a contributor to the share price drop on the day. Regardless, using a very conservative H2 EPS estimate of 13p implies a full year EPS of 25.3p (that is actually a drop on 2012 and I don't expect that). With the current share price of 108.5p, that translates to a very low PE ratio of just 4.28. A less conservative estimate would be FY EPS of 28p which would equal a PE ratio of 3.88. Compared to other UK listed peers, the company is therefore trading at a fraction of its worth. A typical General Retailers PE ratio in the UK easily exceeds a multiple of 10. On that basis alone, the market is factoring in a huge discount for the company being Chinese. Is that valid? The extent of the discount is not, in my opinion. On the 28p EPS, an undemanding and heavily discounted PE of 5 still implies a share price of 140p which is equivalent to 29% of upside.

Elsewhere in the results, Zhang Congming, Executive Chairman of Camkids, commented: "The Board is pleased to announce these strong results for the first half of 2013. The Group's order book has grown during the period with a new distributor appointed in Shanghai and 75 new stores opened since the year end. At the end of this year the Group will discontinue its non-core OEM operations in order to focus on areas of growth. Having taken initial steps to commence e-commerce sales, the Group is also looking to focus its forthcoming expansion in fast growing tier three cities in China, which have considerable government support and are benefiting from increasing urbanisation. The Board believes that the long-term outlook for Camkids remains promising.
"The Board is aware of the challenging competitive environment in which it operates and has noted that some of its distributors are becoming more cautious. Though this sentiment has not impacted the Group's trading to date, the Board adopts a conservative stance towards its prospects for the first half of 2014 and will update the market at the full year pre-close in early 2014. The Board, however, anticipates that the results for the current financial year will be in line with market expectations, and this confidence in the Group's future is reflected in today's announcement of a maiden interim dividend of 2.3 pence per share."

The cautious outlook will no doubt have also contributed to the share price fall, but with the current valuation, that is something to bear in mind, rather than be fixated upon. There are two points of growth potential to focus upon though. The first regards the e-commerce sales. E-commerce in China remains immature, but there is massive potential. A bit of researching reveals that Camkids already have a lot of their stock available on www.jd.com (A Chinese equivalent to Amazon). Jd.com was launched in October 2012 and has over 100 million registered users (previously called 360buy.com prior to relaunch). Camkids have set up their own store that is viewable at the following address: http://camkids.jd.com/. Looking at the site is very reassuring, and as well as looking professional, it provides tangible evidence that the product exists, and the customer base exists. The Camkids part of jd.com was set up this year and already a lot of the products have reviews attached to them (Yes, they are in Chinese!). However, looking across the reviews, the feedback is extremely positive with the reviewed items settling at a rating between 4 and 5 stars. This positive reception should help offset any sales decline in Tier 1/2 cities (T1/2). The group also operates on another large e-commerce site, TaoBao.com: http://shop102601214.taobao.com/
The second point regards to the cities targeted. As aforementioned, Camkids has focused on the T1/2 cities as this is where disposable incomes are highest. However, these markets are relatively saturated, so the company has made a strategic move to cover some of the high-potential T3/4 cities. That is a strategy that Naibu has followed, and has done very well with. Camkids is also planning to focus upon its own products at the end of the financial year (having developed a dedicated R&D centre) and that will help drive up margins in some of the sales. Margins from the OEMs and ODMs currently stands at ~23% which is much lower than the group average of 38.2%. That does mean sales will drop slightly but that is less than 5%. During the period, expenses grew by 61% to 5.3% of the group's total revenue. This was driven by marketing cost rises.

A Camkids store
One query I did have regarded the IPO price - why price a company so cheaply as it is bound to draw some doubt. To answer that, Matt Butlin (Head of Equities) at Camkids broker Allenby said the following:

"We did the IPO of Camkids on just 3.4x 2012 earnings and with a 6% yield. It was so low for several reasons:
i) We did test marketing and we were guided that it had to be cheap and have a chunky yield to get interest
ii) The sector (HK listed sportswear companies) was going through a tough time and at the time the sector was on 6x
iii) The Chairman and main shareholder (now 66%) wasn't selling any shares so with a raise of just £6.4 (c.10% of the equity) his dilution was minimal
iv) The Chairman wanted the IPO to be viewed as a success so was happy to take a low price
v) Naibu was already listed on AIM and trading on 1.5x at the time which muddied the water for the Camkids roadshow as that was who everyone compared the company against and we spent a lot of each meeting explaining how the companies differed
vi) A higher price would have led to less cash being raised, less liquidity and less chance of the price rising post IPO (currently +23%)"


He added:

"The Chinese sportswear sector is currently enduring a bloodbath, years of over production have led to inventory stockpiles and players slashing prices in order to sell stock. The impact of this can be seen in exhibit 3 of our recent note (attached). Camkids has two important differentiating factors which has protected it to date:
i) Its focus is on the children’s market which has been more resilient i.e. Xtep reported a 20% yoy decline in revenues in 1H 2013 but its kids division recorded a ‘significant increase’ in revenue in the same period. We saw similar comments in 2H 2012 when Anta and 361 reported poor results but their kids divisions were the only areas of growth. Hearing peers say that the children’s market is more resilient gives us confidence in Camkids given it is a 100% child focused company.
ii) Camkids focuses on the ‘outdoor’ sportswear market (hiking, walking, camping – Timberland type gear) and not the general sportswear market (running, football, tracksuits etc.). This gives Camkids a differentiating factor to the peer group which generally churn out the same type of trainers and tracksuits."


I consequently remain of the view that Camkids offers investors an undervalued stock trading at a large discount. Growth may flatten during 2014 due to the reasons alluded to above, but potential in Tier 3 cities should help reduce the impacts of possible negatives in the Tier 1 & 2 cities. The sector may currently be oversupplied, but that will clear over time and Camkids does have the benefit of diversity (i.e. not just one type of good). If doubt continues to be dispelled, it would be fair to expect a substantial uplift in the company's share price. The lack of liquidity may actually be an obstacle to fair value being achieved as institutions will likely find it difficult to accumulate shares and may therefore be deterred - a move to unlock that liquidity would be sensible. Nonetheless, cash covers over a third of the market cap and profits should continue to rise, albeit at a slower rate. As it stands, fair value is much higher than the current price so if you can adhere to the inherent Chinese risk then there should be the chance to benefit from a valuation-led rebound.

UPDATE (23/01/14) - A factor which changed CAMK's outlook has come to my attention. The lock-in period for Pre-IPO investors expired upon the last set of results, and that has probably been the reason for the downturn. For that reason, and that reason alone (it has the potential to depress the share price, as has happened at NBU and CTEK), I have moved CAMK from Buy to No Rating at 86.50p for a circa 16% loss. On the Review Results page, a close price of 88.80p is shown to account for a 2.30p dividend issuance
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Naibu Global
This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2012/11/naibu-global-international.html


Compared to Camkids, the story for Naibu is quite different, albeit just as interesting. Rather than appreciate, the share price has fallen sharply, despite having a strong IPO where it rose almost 20% just after listing. Since then Naibu has drifted downwards - this movement backed by low volumes up until July 2013, when large trades started to go through. This appreciable pick up in volumes is represented on the chart by the blue rectangle. The reason for the large volume is because a large number of shares were transferred between two parties, in large transactions. The first share transaction took place during the day of volumes over 10m. The shares were transferred from early-stage investors in Naibu to new investors located in London and Hong Kong. In addition, the directors of the company participated in the placing and bought large quantities of shares.

Executive Chairman Huoyan Lin commented: "The Board is pleased to announce this Placing, which removes some of the early stage investors in Naibu whom the Company would like to thank for their past support. The Board continues to view the future with confidence and looks forward to working with these new shareholders, as well as our remaining existing shareholders, to further drive the Company's growth."

Furthermore, in July, two other early stage investors Riemann Holdings and Win Zone Limited sold out. To add to that, earlier this week, Allied Property Capital, a company incorporated in the British Virgin Islands (where there is no income/corporation/capital gains tax), sold their 20% stake in Naibu on the market. Obviously for every buyer there is a seller. The two reported institutions who took up the extra shares are Montoya Investments (who took a 6.6% stake) and Hargreave Hale (who took a 6.5% stake). Cue the question, why did the companies sell out? That is a question ultimately only they know the answer to. Perhaps a more appropriate question would be, why did Naibu list on AIM aside from the obvious answer, to raise cash. That question is made more interesting by the fact that Naibu only raised £6m during its IPO when it was seeking to raise up to £50m. (Before you wonder, Naibu's valuation is ridiculously low so that is not the issue). Furthermore, most companies who only raised that fraction of the intended amount simply would back out and cancel the IPO. It does not even make an ounce of sense now that institutions are buying into the company.

However, I have a possible idea of why this has been the case (this is by no means valid so do not assume it to be). The reason I attribute for the dumping of stock is inherent with the reason to list.  I reckon that the main reason they listed was to provide an exit for the early-stage shareholders. A vast majority have now done that which corresponds with that idea. There are probably also some benefits which may or may not relate to China's currency control laws. It would make sense if it was something to do with the transfer of cash by the owners. However, with that transfer of ownership, objectives may swing back towards creating shareholder value, and that could be why institutions are now taking stakes. This exit route also makes sense considering the IPO went ahead regardless of the weak market demand. Alternatively, the institutions may now be taking stakes because the liquidity is improving.

Like Camkids, Naibu also sells both shoes and clothes although shoes make up over 50% of the sales. Investors have been very critical of Naibu compared to Camkids and it is fairly easy to understand why - the share price has fallen and early stage investors are selling out. It therefore makes complete sense for investors to be skeptical. A point I like to stress is that if Naibu was up 50% since the IPO, investors certainly would not be as doubtful.

I asked Naibu what they considered to be their unique selling point and what is allowing them to buck the trend of a declining industry: "We believe that Naibu's unique selling point is providing fashionable and affordable products with excellent quality to our target clients aged between 12 to 35. Naibu's target market is in tier 3 and tier 4 cities where the potential for sales growth is very high. While some of the sector competitors, by contrast, focus on tier 1 and tier 2 cities, which are relatively mature and saturated, and thus offer less growth opportunity."



Unlike Camkids, Naibu previously has not had a large amount of information (in English) available to investors, and ultimately that is a point that all Chinese IPOs need to improve upon. Naibu's broker Daniel Stewart also does not issue publicly available broker notes (unlike Camkids' Allenby Capital) and that does not help the situation. Regardless, they are making a conscious effort to improve that, and recently have released a Q&A pdf regarding the questions at their AGM. One of those questions regarded the location of Naibu's own stores (excluding distributors). The locations are not readily available. However, the above map shows the main locations, and this is actually backed up with a search I did on China's native search engine, Baidu. That gives me sufficient confidence to believe that the company is being open and honest in that respect.

A big difference between Camkids and Naibu is that Naibu focuses upon the lower tier cities and that is what leads them to be more bullish on forward trading. This does mean that their products has a lower price point. Naibu also released its interim results this week:


Four examples of Naibu Branded Shoes
- Revenues increased by 20.5% to £100.8m
- Post-tax profits rose by 16.1% to £16.2m
- H1 EPS up circa 12% to 30p
- Maiden interim dividend of 2p/share with a scrip dividend available upon request
- Cash balance up to £39.7m
- 104 new stores opened during the period, taking the total to 3,144 stores
- The company is in discussions to acquire a production plant in Quangang. The transition should be smooth with production at Quangang expected to start in Q4 2013. The older production lines will be discontinued

Once again, we can derive some calculations from this. Naibu's current share price is 68p and the market cap is just £37.29m. Assuming a symmetrical full year performance and consequently a H2 EPS of 30p, that implies full-year EPS of 60p meaning that Naibu currently trades on a PE ratio of just 1.1. Even applying Camkids' very conservative 2013 forecast PE Ratio of 4.28 leads to a share price of 258p for 2013 earnings. Conservatively, dropping the FY EPS to 55p still means Naibu trades on a PE ratio of 1.23. That is far too low especially since cash exceeds its market cap and the company has no notable debt. That majority money is being sidelined for a production expansion scheme that is expected to total around £30m and that is likely to be a reason why previous shareholders did not demand a special dividend. Once again, should the dividend (which for just the interims is a 2.94% yield) be paid successfully, which it should be, then this is extremely reassuring. Once again, a deviation from what past Chinese listed LSE companies have done.

Huoyan Lin, Executive Chairman of Naibu, said: "The Board is pleased with the progress that has been made during the period, with 104 new stores opened, significant investment made into R&D, and plans to improve the Group's production facilities progressing well. Government policies in China are supportive of urbanisation, a key growth factor for Naibu, and the Board intends to capitalise on the significant opportunity in China as disposable income continues to increase and sports activities become more popular. Naibu is well placed to benefit from the opportunities for growth in the Chinese sportswear market, both in the near and longer term, and the Board is particularly excited about the Group's plans to expand into more cities and provinces over the coming months."

Naibu's cash is held in China's fourth largest bank. Expectedly, trade receivables did rise by almost 38% over the six months which is some cause for concern as some Chinese companies have seen a lot of their cash pile up into receivables without being realised. However, positively receivable turnover days (the time taken to receive the money) actually fell to 116 and 93% of receivables were within the 90 day window. The group's customer base was also more diversified that Camkids' with only one customer contributing in excess of 10% of turnover.

The company's AGM Q&A document is available here: http://www.naibu.com/130905/AGM.pdf

I also remain bullish on Naibu shares. Looking past the doubts that investors have displayed is a company that is still keen to grow and is backing that by touting a possible investment ina new production zone that will help build presence across Central China and beyond. The company is currently covered by its cash balance and is trading on possibly the lowest sustained PE ratio across the entire London Stock Exchange. Due to the price action, Naibu is risky, but if the market does start to trust the company, it is likely it would re-rate significantly. Building credible institutional presence is an encouraging sign.

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Ultimately, both companies are clearly cheap on standard valuation metrics. However, the market continues to ignore such metrics and apply ridiculous discounts to the pair, discounts that would not be reasonable in almost any other part of the world. It is not true that just because a company operates in China that is must be illegitimate. I remain of the view that both companies are credible and are making steps towards improving their view to investors. Both websites are being upgraded with English content, and both companies have won numerous awards for their products. At 108.5p/share for Camkids, and 68p/share for Naibu, both companies are completely undervalued. Even if they don't return to peer valuations, there should be room for significant upside in Camkids and Naibu. They are paying healthy dividends which is a major progression, are backed by cash piles and at this level, should have most of the valuation risks factored in.

UPDATE 07/02/14 - Naibu (LSE:NBU) has moved up sharply today following a tip in the Investors Chronicle today. Currently standing at 74.5p, I will monitor closely over the next few days to ascertain whether moving the company to No Rating is suitable

UPDATE 10/02/14 - I have moved Naibu from Buy to No Rating this morning after a further advance in the share price to 82.5p. Adding back the large 6p dividend collected, that totals to 88.5p meaning that a 4% profit was booked. Naibu has not performed to expectations and I have concerns regarding the corporate governance of the company - the risk profile is no longer attractive, given how long Naibu has been listed, plus the illogical share sales

13 comments:

  1. One of the most interesting articles. I am sure that investors in both companies will appreciate your effort. I bet that these two companies may even be good for a merger! Unlikely probably :)

    CraigJ

    ReplyDelete
  2. I don't think your comment about Naibu's PE ratio of 2.13p makes sense.

    ReplyDelete
  3. Ok I tried to conduct some more research but this article covered almost everything!
    I am plannig to top up my portfolio on Monday.

    CraigJ

    ReplyDelete
  4. thanks, very interesting, Naibu looks really odd, but Hargreaves Hale coming on board as I understand is extremely positive given the track record of investing.....at worst I think one more positive RNS should IMO dispel doubters .....let's see

    ReplyDelete
  5. I love this reviewing website thx!!!
    I hold a few companies not including these two but may dip into CAMK next week because I like the broker notes from Allenby
    Eric (21/09/13)

    ReplyDelete
  6. I don't understand what this means:

    "Elsewhere, an orange producer, Asian Citrus, has had accusations of producing orange crop figures from the Chinese authorities"

    I'm familiar with Asian Citrus, and I'd like to respond to whatever it is you're trying to say here. I just don't understand your English. What do you mean?

    ReplyDelete
    Replies
    1. Hi John,

      Yes, that is a typo - I have now changed that so it makes sense. The accusations came in February 2012 from a magazine and spread from that, but they were never proven. It did damage the share price (unfairly) and that has created unnerve as it is a scenario some people quote. Nonetheless, the claims were rejected by the company have to be presumed untrue.

      El1te

      Delete
    2. maybe you would like to update investors on your camkids article after this mornings drop as very valid questions are being asked on the lse chat boards

      Delete
  7. An views re the recent drop sub-90p ?

    ReplyDelete
    Replies
    1. The drop has been on low volume and isn't based on fundamentals. The trading update effectively reversed the previous caution the company had, with a ~7% order book rise. Technically the lack of liquidity means the share price is at the mercy of pretty much any trade that goes through

      Delete
    2. agreed El1te - lets see how much the price can drop
      hopefully we get a good update in January on 2013 figures

      who ever buys at these prices is getting an incredible divi yield.

      Delete
  8. any updates on the cause of CAMK and NBU price hammering since March?

    ReplyDelete
    Replies
    1. Hi there,

      As it stands, I'm steering clear of both. Confidence in Naibu seems very low and there are still pre-IPO investors in CamKids. Since covering both of these Chinese stocks, I've learnt that they aren't making a conscious/ good enough effort to try to convince investors about the investment proposition, and that concerns me. There investor relations are poor to say the least, and unfortunately the timescales now seem very long (as trust is hard to re-build). I reckon a similar scenario will play out at JQW.

      El1te

      Delete