This article is to share my analysis on Delong Holdings Ltd (SI:DELO). Delong first came to my attention with their explosive growth in share price. On closer inspection I found that they were seemingly undervalued, even after their share prices multiplied.
Delong's undervaluation is beyond explaination. Even after the tremendous appreciation the past year, it is still trading below fair value by nearly any metric. Granted some actions taken by management were questionable, it is still no reason for their stock to be trading at such outrageously low valuation.
Reason to buy Delong:
- Outrageously low valuation on nearly any metric (PE, PB etc.) and compared to industry.
- PRC govt took measures to tighten supplies of steel, which may support steel prices and eventually, Delongs earnings for some time.\Cash rich and low debt.
- On a macro level, GDP from construction outpaces national GDP (12% vs 6.7%), suggesting heightened demand for construction materials such as the hot rod steel which Delong manufactures.
- Management have started to diversify its business with the joint venture into Indonesia and acquisition of 2% of clothing design firm Qingdao Kutesmart. In my opinion, this shows that management are thinking long term.
Reasons to avoid Delong:
- Acquisition of 2% of Qingdao Kutesmart at 49 times their profits after tax is questionable. Do management feel that they have to pay that amount? Or is there something deeper?
- Closure of their Laiyuan County Aoyu Steel operations may see Delongs profitability decline. But that is yet to be seen.
- As a steel linked company. Delong's fortunes and pain are closely tied to the prices in steel. Undoubtedly it has brought them fortunes over the past year. But can this last? And will steel prices fall if trade war escalates?
- Delongs attempts to diversify and venture overseas could backfire. This is a double edged sword kind of initative.
Overall, It still baffles me why Delong is trading at such low multiples. Minority shareholders have written in with calls for management to distribute dividends and to take measures to shore up their share prices to much fairer valuations. But by the response it sees management aren't budging. While I do see the rationale for some dividends, I can understand if management do not distribute dividends - They are afterall the majority shareholder at 75%.
With such large amount of cash reserves, Delong could invest in improving productivity and/or venture other industries. There is potential for Delong to increase their earnings potential in the future.
In my view, even if Delong's earnings were to be cut by half. Or if their debt level doubled. Or if their free cash were to be halved. Delong would still be a value buy.