Real Nutriceutical Group Ltd (HK:2010) (Time to buy?)

Real Nutriceutical is a provider of health-related products, with a primary focus on amino acid-based nutritional supplements in the rapidly growing Chinese market. They are now the largest manufacturer of amino acid-based nutritional supplements in China. Their diversified product portfolio stretches across the entire health industry spectrum, including nutritional supplements and general health food, health drinks and pharmaceuticals.

“Real Nutri” is the leading brand in both amino acid-based and general nutritional supplement market in China.

 

It is listed on the Hong Kong Stock Exchange.

A quick look at the financials of the company (see below). It shows that turnover, gross profit, profit before taxation & profit for the year have generally been improving over the years.

The earnings per share has an upward trend over the years. FY2011 is a relatively good yea.

“If you can follow only one bit of data, follow the earnings — assuming the company in question has earnings. I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.” Peter Lynch

The Good Points:

• The P/E at 3.5 is relatively low, which is good.
• Profit margin and Operating margin are relatively high. Which shows that the company has good pricing strategy and operating efficiency
• The total cash is more than the total debt. After deducting the total debt, there is still a total cash amount of HKD138.63M.
• The current ratio (proportion of current assets available to cover current liabilities) is high. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses)

The Bad Points:

• Price to book ratio is high (more than 1). Seems to be over-valued.
• EV/EBITDA is more than 10. (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value)
• The Return on Equity is low in my opinion, at 14.16%. Would prefer to be around 20%.

 

Let’s do a quick study on the trailing PEG and intrinsic value of Health Management International Ltd.

1) Trailing PEG

• P/E: 3.5 (from Morningstar, see below)
• Dividend Yield (%): 3.26
• EPS compound growth rate: 12.56% (base on 5 years revenue growth rate )

The trailing PEG will be 3.5/(12.56 + 3.26) = 0.22. Which is good (< 1).

2) Intrinsic Value

First let’s look at the estimated 5 years earning growth which is 12.56%. Let’s assume a 20% discount, the figure will be 10.048%.

Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula.

F = P(1+R)^N where:

• F = the future EPS
• P = the starting (present) EPS (0.63)
• R = compound growth rate (10.048)
• N = number of years in the future (5)

Estimated future EPS: 1.02

I will be estimating the future PE of Real Nutriceutical Group Ltd to be 5.86 (See data from Morningstar above) Average from 2010 to 2014.

Future Stock Price

P=EPSxPE

• P = future stock price
• EPS = future EPS
• PE = future PE

Hence future stock price of Real Nutriceutical Group Ltd is 1.02 x 5.86 = 5.9772

Intrinsic Value

P=F/(1+R)N

• P = present (intrinsic) value
• F = future stock price (5.9772)
• R = MARR (15% or 0.15)
• N = Number of years (5)

Hence, the intrinsic value of Real Nutriceutical Group Ltd is 2.97.

Stock price of Real Nutriceutical Group Ltd on 22 July 2015 is 2.15.  There is margin of safety and percentage difference between the intrinsic value and current stock price is 38%!

 

In summary:

Real Nutriceutical Group Ltd has consistently performed well over the past few years. However it is not a small, fast growing company. With a market capitalization of HKD 3.31B, and a return on equity of only 14.16%.

The high price to book ratio, EV/EBITA seems to suggest that the stock is overvalued. However, the trailing PEG, and stock price which is lower than the estimated intrinsic value seems to suggest otherwise.

“Know what you own, and know why you own it.” Peter Lynch

Would like to know more about their amino acid-based supplement. However nevertheless, they are a well established brand in China.

 

Need to know more about the company and its product before I consider buying the shares of Real Nutriceutical Group Ltd .