China Shoto General Discussion Thread

Found this article from a few months ago -end of April .

Lots of cash ,low historic/forecast PE and connections with some of China's key telecom companies.

http://www.growthcompany.co.uk/recommendations/1020952/china-shoto.thtml

Mentioned approvingly in last weeks Shares mag.

Worth accumulating on weakness I'd say.

Hi Ohisay,

I hold, but suspect that you have to put up with a stiff discount comapred with a UK based company because it is a Chinese business. Even if the PE remains discounted the prospects for earnings growth are good.

A dual listing or move to a full listing could do wonders for the SP though.

Jim

Comments from Giles Hargeaves have resulted in the SP surging north once again. You can listen here: http://www.citywire.co.uk/adviser/-/video/week-in-investment/content.aspx?ID=353760
Jim

Sorry guys, that last post was meant for the WCC board.

Jim

Turned up a report on the last AGM in June by Alice on TMF which I hadnt seen before.I suspect there may be an opportunity to top up at levels a bit below 200p if the current general market weakness extends into September.

http://www.fool.co.uk/news/investing/company-comment/2009/06/17/alices-agms-china-shoto.aspx

CHNS announced their H1 results on Tuesday.  Despite the results being terrific the share price initially fell sharply because of misunderstandings about  two issues - the Chairman resigning and selling his shares to the CEO, and the passing of the interim dividend.

On to the results To achieve 23.4p EPS for H1 was excellent imo given the H1 world economic climate, as exemplified by the big drop in overseas/Indian sales in the half. The Chinese telecoms boom, which will continue for the next 3 years, is what held up sales and profits, as I hoped they would do.

I believe CHNS remain cheap given:

- a P/E of 4.4 at the current 203p based on the 47p EPS forecast
- £20m cash including short-term investments, i.e almost half the m/cap
- CHNS' m/cap remains less than its tangible NAV
- the likelihood of Indian and other export markets recovering soon, and

- the potential for a step-change upwards in profits with the new lead recycling plant

It's also worth noting:

- H2 is usually better than H1 in both profit and cash flow terms
- unusually there were £1.1m of impairment provisions (much larger than in prior periods). For example, WNN this morning announced a "normalised" EPS excluding impairments - if CHNS had announced similarly the EPS would have been substantially higher at around 28p EPS. CHNS could at that rate announce 56p EPS for the year, which might cause a stir at the current price
- CHNS have scrapped the interim divi previously, before reinstating the full divi at the finals, so this isn't new. After due consideration of working capital needs and the new recycling plant I feel this will happen again (see below)
- note the £4.3m cash inflows from operating activities (i.e after debtor/creditor movements), compared to the £4m cash outflow last H1, in this the seasonally weaker period

- the results were also excellent in the core yuan currency before taking currency appreciation into account (contrary to what the notorious deramper PapalPower/Prosolenes has been posting elsewhere) - I'll expand on this in another post.

There are negatives:

- results would have been reasonable, but not half so impressive without yuan currency appreciation over the last H1
- the Chairman's going is unexpected, and the resulting combined CEO/Chairman post is not good corporate governance. Perhaps they'll announce a replacement.

Seymour Pierce are very positive as follows (pasted from another bb) - they haven't always been so regarding their own clients. They should also add the short-term investments on to the cash balance as they have in the past - CHNS actually have £20m net cash including these:

"China Shoto 3,5 (BUY) - Going Green: H1 Results to 30 June 2009
CHNS.L (240p) Market cap: £56m

Results reflect strong demand from China Mobile, China Unicom and China Telecom which are increasing network coverage and need backup batteries to support mobile infrastructure. Accordingly, China Shoto reported sales growth of 41% for the six month period and 47% uplift in pretax profit. This margin expansion reflects a lower lead price and a larger proportion of sales coming from backup batteries.

These results show a pretax profit of £6.4m on revenue of £96.4m for the six month period. Our full year forecast is a pretax profit of £12.5m on revenue of £200m. We are therefore comfortable that China Shoto is on course to achieve this estimate.

The company has announced that it intends to invest in a new lead acid battery recycling project. We see this as a prudent step by China Shoto to offset environmental concerns with its product suite. Accordingly, the group will not pay a dividend at the interim stage as capital expenditure increases. We retain our forecast of a 5p full year dividend. Investors should be mindful that Mr Yang, Chairman and Chief Executive is the company’s major shareholder with over 40% of the equity and his interests are aligned with other investors.

We note that China Shoto’s strong first half performance reflects domestic revenue. Export revenue in the first half was just £3.5m compared to £11.7m in the same period last year. India is China Shoto’s principal export market. We note that the company has been active in participating in trade fairs during the first half. These include locations from Moscow to Singapore. In the event that these efforts are transformed into sales, there could be incremental revenue in the second half.

China Shoto has announced that the company’s Chairman is step down. Cao Guifa joined the company at flotation in 2005. The company’s major shareholder and chief executive, Mr Yang will take on the role of Chairman.

Our 2009 estimates suggest that the company should generate eps of 47p. This places the company on a 2009 prospective PER of just 5.1. The company had a net cash balance of £9m at the end of June which gives comfort for a company which is growing so quickly.

Jim McCafferty | Research Analyst | 020 7107 8070 |
jimmccafferty@seymourpierce.com"

Great writeup. Is there any colour or background of why Cao Guifa left? This RNS doesn't really help much (not that I would expect it to).

The Company announces that Mr. Cao Guifa has stepped down from the Board to
pursue other interests, and Mr. Yang Shanji will take over the post of Chairman.

The Board would like to thank Mr. Cao Guifa for his contribution to China Shoto
for the past four years.

Mr Cao Guifa will also be cancelling his right to exercise his share options. He
currently holds 300,000 options at an exercise price of GBP1.3. These options
will be cancelled.

http://www.stockopedia.co.uk/news/announcement/CHNS/090915chns000693.htm

http://www.stockopedia.co.uk/news/announcement/CHNS/090915chns000324.htm

Thx Betasurfer. Amazing to see such a bargain price imo at 198p. .

On a P/E of barely 4, at less than tangible NAV and with the excellent long-term prospects in a number of sectors and geographies we all know about CHNS continues to be a bargain imo.

Plus there's the possibility of a complete step-change upwards in profits with the lead recycling facility.

And CHNS has £20.5m net cash - almost half the m/cap.

Re your query, I talked to the Seymour Pierce contact late last week. A brief summary (my interpretation remember):

- the Chairman wasn't involved with CHNS pre-IPO, so his going has no effect on the company. He was there only to facilitate/advise on the listing and subsequent operations, and his function has been more than fulfilled. Plus...

- his shareholding was disposed of at 180p since that was the prevailing price when his leaving was first mooted in the summer. This backs up the argument that his leaving is perfectly amicable and non-problematic

- Seymour Pierce will be talking to CHNS about appointing a replacement Chairman

- Seymour Pierce recommended the payment of an interim divi, but the company wanted to play safe. As they've done before

- as regards the new recycling factory, SP noted that on past form CHNS would be able to build it in 6 months (rather than the 2 years necessary in the UK), since this was their timeframe in the past for building a factory.

Secondly, let's talk about currency appreciation.

The 23.4p EPS in H1 was AFTER a one-off hit of £1.2m impairment provisions.

Thus the true trading profit for H1 was around 28p EPS, compared to around say 17p EPS last H1 after taking into account the much smaller impairment provisions in that half.

At that rate CHNS could announce 56p adjusted EPS before impairment (as for example WNN did the very same day of the interims!!) at the year end. The market's perception of CHNS might then be very different.

Even with 30% currency appreciation, you can see that profits and EPS are significantly up on last year, despite the collapse in exports and the sliding world economy.

And given the complete reversal in sales to India the overall 3% rise in sales in the host currency - at much higher margins - is surely a terrific performance against most companies' performance in the same period.

The only points to reflect on are that the NOMAD should press for a replacement Chairman, and that the NOMAD and/or the company are at fault in not explaining matters as fully as they could have.

Indian/overseas sales are much reduced, which puts the overall performance in perspective - when these recover, and the new facility is in place, one can only begin to imagine what CHNS might achieve.

Overall then CHS appear on track to achieve the target 47p EPS and maybe a lot more from the core business, especially with the world economy improving.

In reply to rivaldo (post #8)

Great posts, Rivaldo although, having looked at it, I am less persuaded by the merits of this one personally. I have written up my thoughts here: http://www.stockopedia.co.uk/article/view/34120/china-shoto-is-this-share-right-for-value-investors . Comments always welcome if you think I have missed a trick.

Hi valueinvestor, apologies, not been here for a while so missed it. Will offer some comments at a later date.

Meanwhile, terrific news today - CHNS announced that 2009 PBT would be "materially ahead of market expectations":

http://www.investegate.co.uk/Article.aspx?id=201001280700062377G

Historic 2009 EPS should now be at least 52p EPS given previous forecasts of 47p EPS.

At the current 316p that's a minimum historic P/E of 6.1. And that's after an unusually large impairment charge in H1.

The "true" adjusted historic EPS for 2009 could be around 60p or more, which would leave 2010 looking at perhaps 70p+ EPS given normal impairment charges.

That's a current year P/E of 4.5.

The planned lead recycling facility might come on stream this year and would materially and quickly improve profitability.

A poster elsewhere noted a comment from the house broker - "Seymour Pierce say price target of 500p is both realistic and conservative", targeting EPS of 50.4p in 2009 and 53.8p in 2010".

Those EPS targets are VERY conservative. 50.4p EPS for 2009 is likely to be the house broker playing safe as in the past, allowing them to raise their forecasts and target prices again after the 2009 results are published soon.

The m/cap is now almost £80m. An inkling of a dual Hong Kong listing in the upcoming results would likely see a further share price rise which in itself would see the m/cap at £100m, i.e an acceptable level for such a listing.

An excellent post on ADVFN listed comparators for CHNS in terms of having lead re-cycling and battery manufacturing facilities:

"Hoppecke Batteries, Germany .. privately held
Exide .. public. On a p/e of 9 ish but laden with debt & losing money
Johnson Controls .. their energy division.
Coslight .. Asian peer listed on hk @ p/e of 19"

Battery demand from Telco's in India, China and the EU are all set to grow as 3G networks roll out, and in the EU there's a need for basestation batteries to be replaced through life-cycle redundancy.

Given that CHNS had £20m+ net cash at the end of H1 - before the seasonally much stronger in cash flow terms H2 - CHNS' cash pile could be a lot higher now.

The proposed lead recycling facility could therefore be funded by either one of or a mixture of:

- existing net cash
- use of extensive but currently unused bank loan facilities
- a small fundraising via a fundraising at a much higher share price in Hong Kong via a dual listing

Whichever way it is funded, the new facility should have a very positive impact on earnings.

As it is, the core CHNS business is evidently performing extremely well.

As I've noted before, CHNS has yet to be re-rated for its entry into renewables via:

- wind power storage products
- solar power storage
- electric bike and car batteries

On a P/E of 4 or 5 for 2010 even a 50% re-rating would leave CHNS only on a P/E of 6 to 8.

We commented regularly on this company but found the ebb and flow of the cash hard to fathom. Management were also unable to provide a proper explanation - and it wasn't just the language!
www.investorschampion.com/research/company/china-shoto