Growth and Shareholder Dilution
posted by The Traveller on Sunday, May 30, 2010
In the China Small Caps space we find very many companies that grow net income by 30% and more year-over-year, so we can safely categorize them as 'Growth Stocks' by definition. However, it isn't actually net income growth that matters for valuation, it is EPS growth -- and here the picture can look quite different if we go into detail. Shareholder dilution is a common problem amongst US-listed Chinese stocks and while I do fully understand the need to raise money to fund growth, we have to look if the significant increase of the share count does actually translate into EPS growth for shareholders.
Let's have a look at seven randomly selected names in the China space, seven stocks that cover a variety of industries. All are traded on senior US exchanges.
Net Income Growth
| Ticker | Company | Net 2008 | Net 2009 | Growth | Net 2010* | Growth* |
|---|---|---|---|---|---|---|
| CAGC | China Agritech | 8,641,741 | 15,584,056 | 80.33% | 23,500,000 | 50.80% |
| CCME | China MediaExpress | 26,367,000 | 41,711,000 | 58.19% | 73,000,000 | 75.01% |
| CELM | China El. Motor | 8,015,892 | 11,497,698 | 43.44% | 18,450,000 | 60.47% |
| CNET | ChinaNet Online | 2,800,000 | 8,444,000 | 201.50% | 14,100,000 | 66.98% |
| DEER | Deer Consumer Prod. | 3,356,784 | 12,369,062 | 268.48% | 26,000,000 | 110.20% |
| ONP | Orient Paper | 8,774,415 | 12,720,208 | 44.97% | 18,000,000 | 41.51% |
| YONG | Yongye Int'l | 11,191,779 | 26,205,453 | 134.15% | 43,500,000 | 66.00% |
All seven stocks posted stellar numbers for 2009 with net income growth between 43% and 268%. 2010 guidance is also very positive for all seven companies. Now we should have a look at how the share count (fully diluted) has increased from January 2009 until today.
Shares Outstanding / Dilution
| Ticker | Company | O/S 2008 | O/S 2009 | O/S 2010* | Dilution 2010 | Dilution* |
|---|---|---|---|---|---|---|
| CAGC | China Agritech | 12,349,808 | 14,228,943 | 18,909,219 | 32.89% | 53.11% |
| CCME | China MediaExpress | 20,915,000 | 22,998,138 | 33,499,826 | 45.66% | 60.17% |
| CELM | China El. Motor | 10,679,260 | 12,356,530 | 21,244,743 | 71.93% | 98.93% |
| CNET | ChinaNet Online | 13,790,800 | 14,825,125 | 21,059,683 | 42.05% | 52.71% |
| DEER | Deer Consumer Prod. | 16,985,460 | 23,190,286 | 33,767,212 | 45.61% | 98.80% |
| ONP | Orient Paper | 10,769,896 | 12,232,878 | 18,336,566 | 49.90% | 70.26% |
| YONG | Yongye Int'l | 20,106,433 | 31,324,830 | 44,696,427 | 42.69% | 122.30% |
Whoops! And the 2010 numbers are based on the May filings, there are still seven months to go for increasing the share count even more. Now let's look at the income numbers again, but this time we'll measure growth on Earnings per Share:
EPS Growth
| Ticker | Company | EPS 2008 | EPS 2009 | Growth | EPS 2010* | Growth* |
|---|---|---|---|---|---|---|
| CAGC | China Agritech | $0.70 | $1.10 | 56.52% | $1.24 | 13.47% |
| CCME | China MediaExpress | $1.26 | $1.81 | 43.86% | $2.18 | 20.15% |
| CELM | China El. Motor | $0.75 | $0.93 | 23.97% | $0.87 | -6.67% |
| CNET | ChinaNet Online | $0.20 | $0.57 | 180.53% | $0.67 | 17.55% |
| DEER | Deer Consumer Prod. | $0.20 | $0.53 | 169.68% | $0.77 | 44.36% |
| ONP | Orient Paper | $0.81 | $1.04 | 27.63% | $0.98 | -5.60% |
| YONG | Yongye Int'l | $0.56 | $0.84 | 50.29% | $0.97 | 16.34% |
Already looks a little less exciting, doesn't it? Here are the 2010 numbers next to another in one table:
2010 Growth
| Ticker | Company | Shares | Net Income | EPS |
|---|---|---|---|---|
| CAGC | China Agritech | 32.89% | 50.80% | 13.47% |
| CCME | China MediaExpress | 45.66% | 75.01% | 20.15% |
| CELM | China El. Motor | 71.93% | 60.47% | -6.67% |
| CNET | ChinaNet Online | 42.05% | 66.98% | 17.55% |
| DEER | Deer Consumer Prod. | 45.61% | 110.20% | 44.36% |
| ONP | Orient Paper | 49.90% | 41.51% | -5.60% |
| YONG | Yongye Int'l | 42.69% | 66.00% | 16.34% |
Based on official company guidance and current share count as of May 2010 (assumed there will be no further dilution this year), all seven companies will grow net income by more than 40% but only one of them will be able to grow EPS by more than 40%. Two of the selected companies will likely end the year with negative EPS growth, while the remaining four should post rather unimpressive EPS growth between 13% and 20% for 2010.
For your investment decisions you should always look at projected EPS growth as well. Most companies will not give EPS guidance - instead they project high net income growth only and leave it to the investor to bring those numbers back down to earth. You should always think about possible shareholder dilution when a company doesn't provide EPS guidance, especially in the China Small Caps space.
This post doesn't mean the named companies would not be undervalued here, in fact most of them trade at very low multiples, and with market sentiment for Chinese stocks having lots of room to improve it is more likely that all seven stocks will trade significantly higher later this year, despite all the dilution. But if you need a reason for why the stock prices seem so depressed in selected emerging market names, always look into EPS growth first
6 Comments:
Good post, why you don't post in on www.seekingalpha.com
If you don't want to post there, I can post it with your permission.
Thanks! I do actually have a seekingalpha account but couldn't be bothered yet to cross post as I will move this site to its own domain next month.
Looks to me like CCME should command the highest P/E of all the stocks, as its numbers are far bigger than the other stocks mentioned. I can count on one hand how many companies grew net income from $26 million to $41 million in one year. Nice article.
yes, eps growth is half of the equation, PE expansion is the other half. CCME may see its PE double in a year and it's still cheap relative to its peers. The other thing is the eps growth described here is based on most recent guidance which itself is based on rather conservative assumptions and mostly organic growth and leaves out the effect of real growth by acquisitions or by rapid addition of revenue sources like busses for CCME, branded outlets for YONG... In the latter case, the 66% earning growth guidance is based on growing the # of branded stores from 9000+ by EOY 2009 to 20000 by EOY 2010, an average addition of 30 outlets per day. The actual growth seems to be much faster thus far with almost 4800 outlets added in Q1/10 or 50+ outlets/day. At this pace the # of producing outlets could almost triple yoy by end of the year and earning could double. Also, M&A could be another factor. Just pointing a few other things that may ultimately affect price appreciation.
All in all, the article is a very interesting objective analysis.
DEER is known widely to be a fraud, please becareful. We love your posting, and we'll keep you informed when we learn of a fraud financial story. DEER and any deal created by Ben Wey
China surprises us as always. There are many hard-working people and that's their secret. read more is the best solution for self-development as a blogger writer!
Post a Comment
Subscribe to Post Comments [Atom]
<< Home