Qingmei Group Holdings

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I would suggest caution when approaching any investment. Whether or not that person is really working in a hedge fund is immaterial - the important thing is to look at the financials, facts and assumptions ON YOUR OWN to see if they hold water, and to also study the Company's business model yourself and dig through its prospectus and latest announcements/financial reports to ascertain the facts and figures.

While it is true that pre-IPO investors generally cash out upon IPO, I have also seen cases where they retain a substantial stake and continue to work with Management to enhance ROE and profits (I previously worked in this industry before). For some Funds, there is also a moratorium for 6 months to 1 year which means they are restrained from selling off immediately on IPO.

My view is that I generally do not rely on complex formulae and WACC (Weighted Average Cost of Capital) or CAPM models to value businesses. What is more important (to me) is to get an understanding of the economics of the business, look at the three key financial statements, margins, ROE, ROA, Management quality and experience, level of capital expenditure, working capital requirements, debt levels and FCF generation. Somehow, too much number-crunching from Finance textbooks may complicate and obfuscate rather than enlighten. Just my 2-cents though so no offense.

(Not Vested)
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
In this case, I see a good chance that the profitability, economics and business risks of Qingmei - including customers' credit/default and fixed-asset related risks - and the entire sports shoe manufacturing industry in PRC trending towards the worst over time. Rising labour cost and the strength of CNY will continue to hurt the industry. Qingmei mainly supplies to domestic shoe brands which are suffering from increasing price competition among themselves, falling prices and mostly also falling profit margins.
- Revenue rises 9.4% to RMB1.3 billion
- Gross profit margin down marginally to 28.9% due to higher manufacturing overheads
- Proposes final dividend of RMB 12.92 cents per ordinary share
- Seeking potential investments to expand shoe sole business and achieve synergies through vertical integration

Looks quiet decent at first glance. They paid out a dividend of RMB 0.1172 for FY 2010. If you add up just the dividend paid out in 2010 & 2011 it comes to RMB 0.2464 (S$0.0465) which is approximately 25% of the current share price. Assuming they are able to perform in a similar manner over the next 6 years with a similar dividend payout an investor will be able to recover his entire capital invested at today's price. Does make one ponder on the investment merits of Qingmei.

And considering that EPS for FY 2011 is RMB 0.431 (S$0.0814) it will take approximately 2.5 years for Qingmei to earn out the total worth of the company as on date. Total debts are RMB 25 million (S$4.5 mil) which is quiet low.

I have just decided that Qingmei is worth a bet and put in some money into this counter...
"You are right not because the world agrees or disagrees with you, rather you are right because your facts & reasoning are right."
Largest (and controlling) shareholder pares its stake in spite of the low P/E, cash position, dividends blah blah blah.


D123 Wrote:Largest (and controlling) shareholder pares its stake in spite of the low P/E, cash position, dividends blah blah blah.

Here we go again. The controlling shareholder Mr Su Qingyuan sold a 4% stake at $0.1685 per share. This corresponds to a valuation of 2x PE, 54% of NTA and a dividend yield of 15%. Gearing is only 2.4% and the company is swimming in cash (40% of NTA, RMB 398m). The simplest explanations I can think of are that either the accounts are fake, or Mr Su is an idiot. I will leave the complicated explanations to others.

As usual, YMMV.
Possibly Mr Su needs the cash now. Mr Su bought Buzhida in his own name sometime back. Buzhida was performing underwater. Hence he may need more cash now. This info were found in a few chinese articles on Buzhida and Qingmei read some months back.

I am not holding any Qingmei stock.
(09-10-2011, 12:29 PM)thinknotleft Wrote: Possibly Mr Su needs the cash now. Mr Su bought Buzhida in his own name sometime back. Buzhida was performing underwater. Hence he may need more cash now. This info were found in a few chinese articles on Buzhida and Qingmei read some months back.

I am not holding any Qingmei stock.

thru the hard way, i have learnt that actions speak louder than words and sceptics although may not make big $, they will survive better too.

If this is really true, the returns of Buzhida must be more attractive than Qingmei then? Shouldnt those who invest in Qingmei, now go for Buzhida instead (if it is available lah)?? hehe.. Tongue
Visit to the AGM today

Had been to the AGM held today at the Raffles City Convention Centre. It seems that CEO Mr. Su Qingyuan is not very comfortable speaking in English and so the floor was held by Mr. Tan Siok Sing (Lead Independent Director).

Had three queries for management. Am providing the same along with management responses:

1. Expected dividend payment for year ended 30 June 2011.
Reply: There is no fixed policy regarding dividends and management would not like to make any advance pronouncements on the same.

2. Why did the major shareholder sell a 3.6% stake at just S$0.1685 (PE of less than 2 times).
Reply: This is a personal decision of the major stakeholder and the board does not have any say in the same.

3. Financial outlook for FY ending Jun 2012 considering the present economic climate in China.
Reply: The business environment in China right now is quiet on the defensive. Qingmei has put on hold its plans to increase capacity to 84 million soles. They will continue with current capacity of 65 million soles and will purchase equipment for an increase to 84 million soles once capacity utilization is more than 90%. Currently capacity utilization is around 80%. However the good point is that is that it takes a very short lead time (a couple of months) to get the equipment up and running once management feels that the need has crystallized.

Question from one of the attendees at the AGM:

1. Why are gross margins for Qingmei much higher than their competitors.

Qingmei is an ODM (Original Design Manufacturer) as compared to an OEM (Original Equipment Manufacturer). This gives them a much stronger and a more value added relationship with their customers along with a better gross margin.

Most importantly from my one-to-one with Mr. Tan Siok Sing was the assurance that the Audit Committee (AC) has taken all pains to make sure that Qingmei does not turn out to be a fraud case like numerous other S-Chips. I had a similar assurance from Mr. Pek Yew Chai (Independent Director & Audit Committee member), who is a former CEO of Singapore Computer Systems (SCS). These clarifications offer a certain degree of assurance to minority shareholders like myself that we are not being taken for a ride.

I would really appreciate if any other members who had been to the AGM can pen down their thoughts as well.

"You are right not because the world agrees or disagrees with you, rather you are right because your facts & reasoning are right."
The management of Qingmei is very silly. Instead of making hundreds of millions of dollars a year in agent fees, they are only making RMB 275m a year.

Let me explain.

On page 62 of the IPO prospectus, the pairs of shoe soles sold for FY07-FY09 is shown:

FY07: 11.8m pairs
FY08: 23.9m pairs
FY09: 30.9m pairs

On page 138 of the IPO prospectus, the number of production workers at the end of FY07-09 is shown:

FY07: 3,149
FY08: 3,307
FY09: 3,597

From FY07 to FY09, the number of workers increased by 14%, while the total output increased by 162%.

Page 118 of the IPO Prospectus states that demand for their shoe soles "is not susceptible to significant seasonal or cyclical demand conditions" so we can reasonably assume the number of workers throughout the year approximates the number reported at year-end.

Let's compute the implied annual output per worker for these years:

FY07: 3,747 pairs
FY08: 7,227 pairs
FY09: 8,590 pairs

Clearly, in FY08 the company managed to hire Superman, who, as we know, is exceptionally strong and doesn't tire easily. So even though the number of workers increased by only 5%, one of them was Superman who can do the work of thousands. As a result, total output went up by 103%.

Then, in FY09 the company also managed to hire Wonder Woman. Wonder Woman is also very strong, but she's not as powerful as Superman. So the increase in output was not as great. The worker headcount increased by 8.7%, and output increased by 29%.

Was hiring Superman and Wonder Woman a good move? Of course! From FY07 to FY09, the company's sales grew from RMB 294m to RMB 834m, and profits increased from RMB 47m to RMB 182m. Net of their salaries, the 2 superheroes helped the company earn an extra RMB 135m per year.

But the company could just close the factory and take the 2 heroes on tour. It could charge appearance fees and take a cut for itself. If they were cast in a movie it would be able to share in the ticket sales and DVD royalties. And of course there would also be merchandising sales. It's far more profitable to concentrate on managing 2 heroes than having the same 2 heroes toil away in a shoe sole factory in China.

Therefore, the management of Qingmei is being silly in not fully exploiting the earning power of its 2 superhero employees.

What's that, you say?

Superman and Wonder Woman don't exist???

But if that's true, that means that the numbers put out by Qingmei are fake. How can that be possible?

After all, the headcount numbers can't be false, right? Because the management of Qingmei would never under-report their FY08 and FY09 headcounts in order to save on social security contributions and health benefits, or to underpay workers, right?

If the headcount numbers are true, that would mean the production output is fake. But the company wouldn't fake production, right? Because if the production is fake, then the sales are fake, the profits are fake and the cash is fake.

But it can't all be fake, right? Because 3 of the 4 independent directors have been there since December 2009, surely they know the company inside out, better than the 3 Su brothers who started the business in September 2003, right?

Surely attending meetings every quarter for 2 years is more than equivalent to working in the factory every day for 8 years, right? After all, the 4 independent directors are all university graduates while none of the 3 Su brothers finished university. The independent directors are all smart people with lots of experience in finance, law and operations, while the Su brothers only know how to make shoe soles, and wouldn't know how to cook the books to fool the independent directors and auditors, right?

So, since the management would never fake the headcount or output numbers, that means they do actually have Superman and Wonder Woman on their payroll. That brings me back to the original conclusion: they are very silly to not fully exploit the earning power of their 2 superhero employees.

As usual, YMMV.
Now i have to disagree with you on the wonder woman part.
She cant be working in a shoe factory.
We all know she works for that undergarment factory.(think wonder bra)

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