Too good to be true?

Hey @madamswer and @croasian , we were recently talking about deep value opportunities on an MND thread. Well, gee wiz, based on the numbers, you'd have to say that this business is something that even Ben Graham would be salivating over. It's one of those peculiar businesses that operates in China, but has an ASX listing and an Australian office, for no obvious reason. No obvious reason on two counts. Firstly, because I don't think it has any operations in Australia, and it's top management is Chinese. Secondly, it has no need for cash, and never has since its listing in CY2012 (you'll see that in the numbers below).

Now I don't know how much I can trust the numbers, though the audit report certainly looks kosher. But if we can believe the financials, they are truly eye popping.

So here are some balance sheet key items for the last 3 financial years (they have FY's ending in December) (all amounts in AUD):

C = cash
TL = total liabilities (off balance sheet items are very small)
CAV = cash - TL  (ie, assumes business operations have no value)

CY2013:  C = $27.9m  ; TL = $14.6m ; CAV = $13.3m
CY2014:  C = $29.3m  ; TL =  $9,9m  ; CAV = $19.4m
CY2015:  C = $30.5m  ; TL =  $4.3m  ; CAV = $26.2m

With a total of 472m shares outstanding, and a current price of 2.3c, it has a market cap of $10.9m. So if you buy the whole business, you are getting paid $15.3m ($26.2m - $10.9m) for it!


And the business is not exactly a poisoned chalice, either. Here is what you get after you've pocketed all that cash:

Earnings:
CY2013:  NPAT = $13.9m  ; OCF = $9.9m  ;  Capex = $3.1m  ; FCF =  $6.8m
CY2014:  NPAT = $51.3m  ; OCF = $11.8m  ; Capex = $1.8m  ; FCF = $10.0m
CY2015:  NPAT = $61.0m  ; OCF =  $5.5m  ; Capex = $2.4m  ; FCF =  $3.1m

Current assets/liabilities (excluding cash):
CY2013:  assets = $25.0m  ; liabilities = $14.6m  ; ratio = 1.7
CY2014:  assets = $23.8m  ; liabilities =   $9.9m  ; ratio = 2.4
CY2015:  assets = $24.7m  ; liabilities =   $4.3m  ; ratio = 5.7 (!)

Total assets/liabilities (excluding cash) (note: business has no non-current liabilities):
CY2013:  total assets = $29.8m  ; tangible assets = $29.4m ; liabilities = $14.6m  ; tangible ratio = 2.0
CY2014:  total assets = $36.0m  ; tangible assets = $31.9m ; liabilities =  $9.9m  ; tangible ratio = 3.2
CY2015:  total assets = $36.8m  ; tangible assets = $34.8m ; liabilities =  $4.3m  ; tangible ratio = 8.1 (!)


Based on the 3 year average, the business has been generating the following returns on its equity (excluding the cash):  NPAT_to_equity = 170%  (!!) ;  FCF_to_equity = 27%

Or, if we assume a "lazy balance sheet"and keep the cash in the equity, the the 3 year average return is:
NPAT_to_equity = 78%  (!!) ;  FCF_to_equity = 12%


So there you go. The market will pay me 40c in the dollar, to own a business that is in rude financial health, and that generates an extraordinary return on its capital.

Too good to be true? My mum would say so...