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Another one bites the dust

October 28th, 2009 · 1 Comment

There is a bit of a slaughter going on in smaller Chinese ADR’s. Here is another one, CSR

We have written quite extensively about this company before. We can’t see why. There was nothing to worry about in the earnings report out today, although GAAP profit is inflated by the restructuring of the convertible notes. But it is a stable grower, and although debt is substantial (decreasing from $205M to $181M), it sits on $100M of cash as well.

It reaffirmed it’s outlook with 2010 earnings per share between $1.15 to $1.20. The share price of $5.50 (at the time of writing) doesn’t seem to begin to do justice to that..

However, it has been really cheap for a long while, some possible reasons:

  • Most revenues, although they grow at impressive rates, are non-recurring. On the other hand, the security market in China can be considered a rather healthy growth industry.
  • The company is relying in part on acquisitions for top-line growth, and this has come at the expense of margins. Integration might also be complex, and financing these acquisitions has lead to substantial debt and debt financing obligations. On the other hand, acquisitions provide geographical, technology and product expansion, and cross-selling opportunities.
  • Although the company has addressed this issue at least in part, the financing created a substantial wedge between GAAP and non-GAAP earnings, blurring the visibility somewhat (even though the company lists the factors that explain the difference at every earnings report)
  • A ‘China disount’. These ADR’s are way cheaper than anything listed in China itself, but until there is a mechanism for arbitrage, these differences are likely to remain. When China sells off (invariably because valuations get to rediculous values), these ADR’s usually follow, even if valuations here are nowhere near mainland China ones. Such a ‘China’ discount is related to (real or perceived) accounting and shareholder rights issues, but we think that this is somewhat unfair, especially for companies listed on grown-up exchanges (with the accompanying reporting obligations) and little to no debt.
  • We have a feeling many of these companies are favourite tools of traders, which tends to make them very volatile (see also the remark above about the relation between these ADR’s and the mainland Chinese market)

Tags: CSR

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