Dapai International Holdings (formerly "China Zaino")

[junming82]

Hi All,

I was researching stocks and came across Dapai which i thought is a good stock and undervalued by Mr Market.

The company produces backpack and luggage bag and is a market leader in China. Revenue and net income for the company has been growing for the past 5 years. It has a high gross margins of 30% and has no debt. The ROE and ROA has also been good, at 40% and 20% respectively. And it is trading at a low P/E and P/B.

Wonder if anyone has any other thoughts on this company

[nsengkia]

Profit Warning - See http://info.sgx.com/webcoranncatth.nsf/V...A00282CB1/$file/Dapai_ProfitWarning_3Q10_Final.pdf?openelement

[Musicwhiz]

Profit Warning - See http://info.sgx.com/webcoranncatth.nsf/V...A00282CB1/$file/Dapai_ProfitWarning_3Q10_Final.pdf?openelement

The question here is whether this profit warning represents an incident which is one-off in nature, or if it will become a persistent and nagging problem for the Company such that it results in permanent and irreversible impairment to business fundamentals.

In this case, I note that the luggage division suffered due to the inability of some suppliers to continue supplying the Company. As a result, the Company has decided to build a factory to manufacture their own luggage. In a subsequent announcement, Management did indeed indicate that they had selected a piece of land to be used for the construction of a new factory for luggage, in order to ensure a steady supply of luggage instead of relying on suppliers (who may be unreliable as in this instance).

So my perception is that this is probably a one-off incident.

[FFNow]

The question here is whether this profit warning represents an incident which is one-off in nature, or if it will become a persistent and nagging problem for the Company such that it results in permanent and irreversible impairment to business fundamentals.

In this case, I note that the luggage division suffered due to the inability of some suppliers to continue supplying the Company. As a result, the Company has decided to build a factory to manufacture their own luggage. In a subsequent announcement, Management did indeed indicate that they had selected a piece of land to be used for the construction of a new factory for luggage, in order to ensure a steady supply of luggage instead of relying on suppliers (who may be unreliable as in this instance).

So my perception is that this is probably a one-off incident.

Yes, I strongly believe it's a one-off incident and market reacted too much to it. So, it benefitted me and I went in to buy. I have analysed Dapai in my blog at http://financiallyfreenow.wordpress.com/category/dapai/ Like Musicwhiz said, company has taken steps to counter this problem and this was stated in my blog as well under Part 3 of the analysis.

[junming82]

This is an once-off thing and Dapai has accquired land to set up manufacturing facilities. I see the expansion plans that the company has in place to further improve its market position.

The question here is whether this profit warning represents an incident which is one-off in nature, or if it will become a persistent and nagging problem for the Company such that it results in permanent and irreversible impairment to business fundamentals.

In this case, I note that the luggage division suffered due to the inability of some suppliers to continue supplying the Company. As a result, the Company has decided to build a factory to manufacture their own luggage. In a subsequent announcement, Management did indeed indicate that they had selected a piece of land to be used for the construction of a new factory for luggage, in order to ensure a steady supply of luggage instead of relying on suppliers (who may be unreliable as in this instance).

So my perception is that this is probably a one-off incident.

Yes, I strongly believe it's a one-off incident and market reacted too much to it. So, it benefitted me and I went in to buy. I have analysed Dapai in my blog at http://financiallyfreenow.wordpress.com/category/dapai/ Like Musicwhiz said, company has taken steps to counter this problem and this was stated in my blog as well under Part 3 of the analysis.

[FFNow]

junming82, just wondering how you discovered Dapai?

[junming82]

i found Dapai using screener at Phillip Capital. I subsequenly also found your analysis on it at your blog which was well written. I hope we can share more undervalued stocks ideas and learn from each other

[d.o.g.]

Some thoughts:

1. Brand

According to the "market survey" article on Next Insight, no-brand backpacks outsell branded backpacks 5:1. Dapai claims a 35.8% market share among branded backpacks, so the true market share is at most 35.8% of 16.7% = 6%. This is not meaningful as far as pricing power is concerned.

2. Margins & Returns on Capital

Price is the main consideration for consumers since no-brand backpacks have the highest sales. Gross margin of 30% and net margin of 17% (both figures from 1H10) are pretty high for a company with a small market share in a fragmented, price-conscious, low cost-of-failure industry.

ROE for 2008 was 35%, for 2009 it was 21%. ROA for these years was 31% and 19%. These are incredibly high rates of return for a manufacturing business.

The pieces don't seem to fit.

3. Share Placement

The company did a share placement in May 2010. This was at a time when the company had only RMB 24m of debt and was swimming in cash. On 31 Mar 2010, almost 40% of shareholders' equity consisted of cash, RMB 551m. Yet the company chose to issue shares BELOW the reported tangible book value per share.

If the financial statements are correct there was absolutely no need to raise any money, and definitely not at such a low price. The amount raised was RMB 58m, only about 10% of the amount recorded on the books prior to the placement. There was basically no real change in the cash position after the placement, except that the new money was left in the holding company i.e. not injected into China.

The company claims it needed the money for "overseas working capital" or dual-listing expenses. Well, the 30 Mar 2010 balance sheet shows RMB 776m in retained earnings and RMB 551m of cash at the Group level. Surely one of the cash-rich subsidiaries could spare RMB 58m for a dividend to the parent company?

There is no excuse for not being able to get money out of China, since the company was able to do just that for its dividend payment in May 2010. Money left China and was paid to the holding company, and was then paid out of the holding company to shareholders.

===

The placement alone already does not make any sense. Put together with the impressive margins and supernormal returns on capital, the whole thing looks very odd.

Also, the placement proceeds of RMB 58m almost exactly match the money paid out in dividends (RMB 60m). The placement was done in April, and the dividends were paid in May. Maybe it's all just an amazing coincidence and I have an overactive imagination. Maybe.

Maybe the stock is cheap for a reason.

As usual, YMMV.

[FFNow]

Some thoughts:

1. Brand

According to the "market survey" article on Next Insight, no-brand backpacks outsell branded backpacks 5:1. Dapai claims a 35.8% market share among branded backpacks, so the true market share is at most 35.8% of 16.7% = 6%. This is not meaningful as far as pricing power is concerned.

2. Margins & Returns on Capital

Price is the main consideration for consumers since no-brand backpacks have the highest sales. Gross margin of 30% and net margin of 17% (both figures from 1H10) are pretty high for a company with a small market share in a fragmented, price-conscious, low cost-of-failure industry.

ROE for 2008 was 35%, for 2009 it was 21%. ROA for these years was 31% and 19%. These are incredibly high rates of return for a manufacturing business.

The pieces don't seem to fit.

3. Share Placement

The company did a share placement in May 2010. This was at a time when the company had only RMB 24m of debt and was swimming in cash. On 31 Mar 2010, almost 40% of shareholders' equity consisted of cash, RMB 551m. Yet the company chose to issue shares BELOW the reported tangible book value per share.

If the financial statements are correct there was absolutely no need to raise any money, and definitely not at such a low price. The amount raised was RMB 58m, only about 10% of the amount recorded on the books prior to the placement. There was basically no real change in the cash position after the placement, except that the new money was left in the holding company i.e. not injected into China.

The company claims it needed the money for "overseas working capital" or dual-listing expenses. Well, the 30 Mar 2010 balance sheet shows RMB 776m in retained earnings and RMB 551m of cash at the Group level. Surely one of the cash-rich subsidiaries could spare RMB 58m for a dividend to the parent company?

There is no excuse for not being able to get money out of China, since the company was able to do just that for its dividend payment in May 2010. Money left China and was paid to the holding company, and was then paid out of the holding company to shareholders.

===

The placement alone already does not make any sense. Put together with the impressive margins and supernormal returns on capital, the whole thing looks very odd.

Also, the placement proceeds of RMB 58m almost exactly match the money paid out in dividends (RMB 60m). The placement was done in April, and the dividends were paid in May. Maybe it's all just an amazing coincidence and I have an overactive imagination. Maybe.

Maybe the stock is cheap for a reason.

As usual, YMMV.

d.o.g thanks for the analysis. It was very insightful.

I also wondered why did the company do a share placement when it had lots of cash and negligible debt. Maybe I'm breaking one of the major rules of value investing: If in doubt, never invest. Am I making a mistake here by investing in Dapai? I take your advices well as I know you are a reputable investor from Afralug forums.

[d.o.g.]

Maybe I'm breaking one of the major rules of value investing: If in doubt, never invest.

This is a very good rule to live by. Investors as a whole would be far better off if they followed this rule. It's OK to miss out on a chance to make big bucks - there will always be another chance. But if you take a big loss you might not get a second chance.

Am I making a mistake here by investing in Dapai? I take your advices well as I know you are a reputable investor from Afralug forums.

The law distinguishes between financial advice and fund management. I am not licensed to give financial advice, nor am I an exempt financial advisor. I am only an exempt fund manager. So I will be silent here.