Monday, March 31, 2008


Was browsing through sgx announcement during lunch time when I saw that Celestial annual report is out, so curiously I took a look at it. Celestial is a leading manufacturer of soy protein-based food and beverage products in Heilongjiang.

I wasn't going to look through the whole thing, just looking at the main figures which I thought was interesting.

1. COGS as a % of revenue for 2006 is 55.7%. That for 2007 is 61.0%. That's not a good sign. Possibly Celestial is being held hostage by the rising soy bean prices. They mentioned that soybean prices rose by 24.6%, but it seems some of their measures to control cost is good, otherwise, I believe the COG as a % to revenue will be even higher. The good thing is that their products are not essential food staples, hence are not affected by the policies imposed by PRC govt to curb inflation. They plan to increase their selling prices and that will really be a good test to see if they have pricing control - a sign of economic moat.

Gross profit went from 44.3% in 06 to 39.0% in 07. Net profit margin goes from 31.9% in 06 to 23.3% in 07.

------------------Financial leverage-----asset turnover-----net margins-----ROE

Financial leverage seems a bit too high. They stated on their annual reports that their gearing dropped from 87.5% in 06 to 75.1% in 07. That's scary and probably that's the factor that drove up their ROE to over 20%, which is quite good. I didn't check their past reports, but I would start to get interested if the business generates 15% to 20% ROE and above consistently over at least 5 years.

Their total borrowings in FY06 is a 1.22 billion RMB (total equity is 1.40 billion RMB, operating cash flow 0.28 billion RMB). Total borrowings for FY07 is 1.32 billion RMB (total equity is 1.75 billion RMB, operating cash flow 0.45 billion RMB). Are they over stretching themselves with too much debts? Funny thing is that they hold nearly 1.65 billion RMB in cash and equivalents, earning an effective interest rate pa of around 1.67%, while the effective interest rate of total bank borrowings is 7.99%.

It's almost like borrowing money from loan sharks then putting them in savings banks to earn interest. Well, they better have good use of the money, because that will be huge cost to them.

3. I think celestial is worth at least $1.50. At current price of $0.655 and EPS of $0.13 it is trading at a pretty undemanding 5 times FY07 earnings. With net asset value of $0.55, I'll feel even more comfortable buying at that level. There's a support around that level too.

Oh, almost forgot to mention, at current price, there's also a dividend yield of 3%. Could be one off, since they didn't state their dividend policy clearly. So if I were to buy, I wouldn't be attracted by their dividend only. This seems like a BATA stock - Buy And Throw Away (after the inflation storm and food scare eases off and the price escalates).

Haha, I'm such a cheapskate :)