22 August 2011

Identify and Invest in CASH MACHINE to Succeed in Stock Investment

Recently many people used BEAUTY CHINA HOLDINGS LIMITED as a lesson or a reference to "advice" investors get rid of China IPO. They emphasize the similarity of current China IPO with BEAUTY CHINA HOLDINGS LIMITED, that are, large amount of CASH and low PE. Hereby, I would like deliver some different point of view via analysis BEAUTY CHINA HOLDINGS LIMITED based on its annual report from 2006 to 2008 (which is free and available from SGX website) to give some fair for other China IPO.
Personally, I still believe that most of the time, a particular company will become the so-called SCAM is because the owners of the business cannot further its business to earn money. Therefore, all we need to do is to find a profitable business. Remember, no one will try to turn a profitable business into a SCAM to earn a one-shot profit; but it is possible for a bad business.


Profitable business is a CASH MACHINE. A CASH MACHINE will help its owners (all shareholders) generate CASH. In short, to succeed any investment, all we need to do is (1) identify CASH MACHINE; and (2) own the CASH MACHINE as long as it will generate huge amount of CASH for us.

Now, let's see the data which I am interested in to identify CASH MACHINE:

From Income Statement (HK $,000)
Revenue
2005 : 346,586
2006 : 466,601
2007 : 632,5762008 : 768,477

Net Profit after tax
2005 : 109,616
2006 : 134,740
2007 : 161,8632008 : -328,157

From Cash Flow Statement: (HK $,000)
Increase in trade receivables + other receivables
2005 : 25,199 + 8,983
2006 : 42,608 + 16,737
2007 : 88,165 + 12,1272008 : 116,331 + 43,006

CAPEX:
Acquisition of PP&E + others
2005 : 21,873
2006 : 36,861
2007 : 64,036 + 220,2302008 : 146,225

From Balance Sheet (HK $,000)
Trade Receivables + Other receivable
2005 : 91,067 + 26,369
2006 : 129,346 + 43,106
2007 : 212,407 + 50,5592008 : 111,481 + 93,988

Cash and cash equivalents
2005 : 241,629
2006 : 277,966
2007 : 191,2292008 : 64,582

Bank Borrowing (Current)
2005 : 9,615
2006 : 5,000
2007 : 85,5152008 : 154,927

Therefore, obviously, something significance happened after the financial year of 2006. Borrowing increased significantly due to huge amount of CAPEX. Huge CAPEX in right area will help company excel in the future and vice versa. But its core business did not doing well and the ratio of receivables to net profit increased. Negative free-cash flow (Net operating cash flow - CAPEX) also another signal for investors to be aware because the company is no longer capable to generate CASH. Again, paper profit does not equal to CASH generation.

Actually, all business is risky, and most of the the businesses will end up with bankrupt if them fail in competition and no longer generate CASH. Therefore, as long as the company can generate CASH, no matter what is its "Cover", it is a good investment and time will prove it. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia

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