Fu Shou Yuan International Group Limited

Before I go into Fu Shou Yuan International Group Limited, let me start off with my thoughts on my stock portfolio.

Thoughts on Stock Portfolio

I typically don’t change the components of my stock portfolio much. In other words, I don’t trade often and am basically quite ‘lazy’ or ‘hands-off’ when it comes to managing my portfolio.

However, in recent times, I had to say goodbye to a number of stocks in my portfolio. Not because I sold them away, but rather it was because they were delisted. See below:

LYXOR JAPAN (TOPIX®)(DR) UCITS ETF: On 22 July 2016, Lyxor International Asset Management has decided on an early liquidation of the Class USD of the Fund as the Class has not attracted sufficient investor demand. I have already received the cash payout.

NIRVANA ASIA LTD: On 8 July 2016, Private-equity firm CVC Capital Partners said that it agreed to pay $1.1 billion to buy out Nirvana Asia Ltd., Asia’s largest funeral services provider by revenue. They would pay three Hong Kong dollars (39 U.S. cents) a share to take Nirvana private. Nirvana Asia was only recently listed by end 2014. I have already received the notification from the brokerage firm asking me to confirm if I would like the subscribe to the cash payment or preference shares/ordinary shares/ cash offer.

SMRT: On 20 July 2016, Temasek Holdings’ unit Belford Investments announced that they are offering $1.68 for each SMRT share that Temasek does not already own. Well, at the back of my mind, I was hoping that the privatization does not materialize (on 29 Sept 2016).

So even though I did not ‘sell’ my stocks, my cash component still increased in recent times. I did achieve realized a profit from the cash offer for Lyxor Japan and Nirvana. But still, I would much rather they stay in my portfolio for a longer period of time/years.

Cash Proportion

If I include the cash offer for Lyxor Japan ETF (which I have already received) and the estimated cash offer for Nirvana Asia (which I have yet to receive), the cash proportion will be approximately 14% (see below). Still relatively low proportionally. However, I reckon I have significant war-chest…. to start thinking of what to do next.

However, before I continue, I still think now is still not the time to start buying shares actively. US markets are still high, while the Singapore market is range bound. In short, “blood is not on the street” yet.

Nevertheless, it is always a good time to read about potential stocks. A few stocks have been on my radar in recent times and I have written about them. See the below list.

Straco Corporation Ltd (read here)
Chipotle Mexican Grill, Inc.(read here)
Super Group Ltd (read here)
QAF Limited (read here)
Heineken Malaysia Berhad (read here)
Singapore Technologies Engineering Ltd (read here)

Death-care Stocks

As mentioned earlier, one of the stocks in my portfolio will be delisted soon – Nirvana Asia Ltd. I like this company and its business (Death-care). With the delisting of this stock, I do hope to find another stock which is in the same industry and fundamentally similar to replace it.

I have previously written about the listed Deathcare companies and Nirvana Asia in Oct 2015 (read here).

About Fu Shou Yuan

Reading through what I have written previously, Fu Shou Yuan appears to be a good candidate. It is listed on the Hong Kong Stock Exchange.

The beauty of a deathcare company is that it is relatively immune to recessions or economic slow-downs. As mentioned in the Chairman Statement in Fu Shou Yuan 2015 Annual report:

Although China’s economic growth has slowed down, the core business still managed to achieve robust growth due to the relatively limited impact of the economic cyclical fluctuation on the death care industry.

A bit about the company:

In 2015, cemeteries and funeral facilities controlled by the Group span 15 cities throughout the PRC. The Group is the largest death care services provider in the PRC. As at the end of 2015, the group owned up to 14 cemeteries (of which 13 were constructed and 1 was under construction) and were operating up to 9 funeral facilities throughout the PRC.
It operates through three segments: Burial Services, Funeral Services, and Auxiliary Services. The Burial Services segment primarily sells burial plots but also provides cemetery maintenance services, and sells other burial-related products and services. The Funeral Services segment offers customized funeral services comprising planning, organizing, and conducting funerals. The Auxiliary Services segment provides landscape and garden design services.
In January and February 2016, the company entered into agreements on the construction and operation of funeral homes under BOT model and the construction of cemeteries on a joint venture basis with relevant local governments of Tai’an City in Shandong Province and Bishan District in Chongqing Municipality respectively.
In 2015, the company completed the acquisition of Guanlingshan Cultural Cemetery, Wuyuan Wanshoushan Cemetery, Anyang Tianshouyuan Cemetery and Changzhou Qifengshan Cemetery. They also entered into a cooperation agreement with Dafeng Funeral Home in Dafeng City, Jiangsu Province on jointly developing Dafeng Funeral Services Center.
Construction of the production base for environmental-friendly cremation machines in the Guangde City of Anhui Province was completed in February 2015.
in 2015, the Group realized the sale of 17,322 tombs and performed 15,176 funeral services and recorded total revenue of RMB1,108.0 million, representing an increase of 39.3% as compared to 2014.

The main revenue generator is from Burial services as shown above.

Of which, the majority of the revenue comes from Shanghai.

Sale of burial plots represented the largest component of their revenue from burial services, which contributed 98.3% of their revenue from burial services for 2015.

The selling prices of burial plots of each cemetery vary according to local market conditions. They have twelve cemeteries in operation as of December 31, 2015, and have been deriving revenue from them. They achieved remarkable growth for 2015 in almost every cemetery where they operate as compared to 2014.

Financial fundamentals

It does have relatively better financial fundamentals (See below).

Looking at the above figures:

The bad points:

In terms of valuation, P/E is high (at 28.49). Price/book ratio is way too high (>1). Similarly, for EV/EBITDA, it is very high (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value). In gist – expensive stock.
The current ratio at 3.92 is too high. A high current ratio can be a sign of problems in managing working capital. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).

The good points:

In terms of Profitability, Profit Margin and Operating margin are high (at 26.13% and 37.34% respectively).
Balance sheet wise: With a total cash of HKD200.65M vs total debt of HKD27.33M, thus leaving the company to be within an overall cash position of HKD173.32M.
It has low Total Debt / Equity ratio.

I am neutral on the Management effectiveness. The Return on Equity at 15.02% is ok. Not fantastic but acceptable.

In general, the fundamentals of the company is alright. Not exactly a growth stock (eg. ROE >20%). Its balance sheet is great, but its valuation appears expensive.

Historical financial performance
Let’s check out its historical financial performance. Although the company was founded in 1994, it was not listed for long. It was only listed in Dec 2013, and the stock soared as much as 66 percent in their Hong Kong trading debut.

China funeral company soars in HK debut, leads spate of 1st day gains (read here)

Although the history does not guarantee the future, however, frankly that is the only fact we have. See below charts (Data from Morningstar).

The revenue, operating income, and net income have all been trending up over the years. Which is good.

The company has been increasing the dividend payout in recent years. However, the payout ratio has also increased – although the ratio is not alarmingly high (less than 30%).

The free cash flow has been steadily increasing over the years. Which is great.

This chart looks worrisome. In general, ROA, ROE, and ROIC have been trending downwards, while financial leverage remains stable at low levels. Well, a good sign is to see at least ROIC was stable in recent years.

Looking at the above charts, in general, the fundamentals have been trending up over the years, especially the Net Income and Free Cash Flow. In addition, the dividend has been increasing. However, the increase in income did not translate to better ROE and ROIC in recent years… and given the relatively short history, I wonder if this stock would be “investor friendly”.

Trailing PEG and Intrinsic Value
Let’s do a quick study on the current share price of HKD 4.59– via Trailing PEG and Intrinsic Value.

1) Trailing PEG

P/E: 29.57 (Most recent filing from POEMS)
Dividend Yield (%): 1.1 (from POEMS)
5 years EPS compound growth rate: 13.94 (from POEMS)

The trailing PEG will be 29.57/(1.1+13.94) = 1.97. Which is not good (above 1).

2) Intrinsic Value

First, let’s look at the estimated 5 years earning growth. We are going to use a time-frame of 5 years from now for this purpose. Given EPS and a PE ratio, the 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 (0.16)
R = compound growth rate (13.94%. However let’s take a 20% discount, and use 11.15% as I am not really sure if growth can be maintained.)
N = number of years in the future (5)
Estimated future EPS: 0.27

I will be estimating the future PE of Fu Shou Yuan to be 37.1 (See below data from Morningstar) – average of the PEs from 2006 to 2016.

Future Stock Price
P=EPSxPE

P = future stock price
EPS = future EPS
PE = future PE
Hence future stock price of Fu Shou Yuan is 0.27 x 37.1 = 10.017

Intrinsic Value
P=F/(1+R)N

P = present (intrinsic) value
F = future stock price (10.017)
R = MARR (15% or 0.15)
N = Number of years (5)
Hence, the intrinsic value of Fu Shou Yuan is HKD 4.98

The stock price of Fu Shou Yuan International Group Limited (1448.HK) on 19 Sept 2016 is HKD 4.59. Hence, there is a margin of safety. The stock price is approx. 8% lower than the intrinsic value.

In gist:

I like the business model of this company and the fact it is the largest death care services provider in the PRC. From what I have read, it is still actively growing its business. The Death care industry is a pretty recession proof industry.

However, I am always careful when it comes to China-linked stocks. And moreover, it was only recently listed in Dec 2013. There isn’t much historical data.

It does not have a high dividend yield and its ROE and ROIC have not been trending up in recent years.

The valuation of the stock is rather expensive, and the trailing PEG also show that the stock is over-valued. The intrinsic value is higher than the current stock price, but the margin of safety is not big (well – I did, after all, took a 20% discount for the compound growth rate). I would want a bigger buffer for China-linked stocks.

I like the fact that the stock price has been trending downwards in recent months.

Well, good stock nevertheless. Still expensive- will be keeping an eye on this one.

Yup, still waiting for the storm to come.