Talk of a bubble in Chinese Internet stocks has abounded recently and not without reason. The Shenzen Composite Index, where most of the tech stocks are listed, is up 190 percent over one year.
“There are very high price earnings ratios of the technology stocks trading in China right now. … Even an early stage venture capital company would be valued at $100 million. These are unheard of numbers. That’s why people say it could be a bubble in the brewing,” said Alan Lau, senior partner at McKinsey & Company in Hong Kong.
Indeed, the median price earnings ratio for the Shenzen market is 108, which is pricey even compared to lofty American standards.
So true value investors have to look somewhere else for bargains and seem to have found Jicheng Umbrella Holdings LTD. It went up 1,830 percent until June 9 on no news and then changed its ticker symbol (2999 HK) and underwent a stock split. On June 15, it still had a market cap of HK$16 ($2 billion).
To find out what’s so special about the company, we can go straight to the IPO prospectus, where it states, “We are principally engaged in the manufacturing and sale of POE [plastic] umbrellas and nylon umbrellas.”
Ok, that doesn’t sound very special, so surely the company must be dominating its market, “We were the third largest umbrellas and parasols manufacturer in [China] in terms of sales volume in 2013, with approximately 2.0 percent market share and a total sales volume of 33 million units.” No, not quite.
So it must be growing by leaps and bounds? Sales went up 25 percent for the 10 months ending October 2014 and profits are up 20 percent for the same period. This is good, but also doesn’t quite justify such a stellar performance.
So the management must have great ideas for the future? They do.
“We intend to implement the following principal strategies to expand our business and create values for our Shareholders:
- increase and develop our market share in the overseas markets;
- strengthen our product design and development capabilities and optimize our product offerings;
- increase market share and penetration in the PRC and promote our brand and brand awareness in the PRC; and
- increase our production capacity.”
That sounds great, but also doesn’t sound like a 1,800 percent increase in share price, normally reserved for revolutionary stories such as Apple and Alibaba.
Well then, the stock must be a real bargain? Taking the earnings from the first 10 months of 2014 ($10 million) and extrapolating them to a full year ($12 million) and dividing the current market cap ($2 billion) by the pro forma full year 2014 earnings we arrive at a price earnings ratio of 166.
Ok, forget about fundamentals and valuation; this company just knows how to make it rain.
