Confirming Market Bottom with Volume

On the 15th April I report the stock market is bottom out. Three days later I see signs to confirm this view.

Citi Group announce greater than expected loss and AT&T are cutting jobs. However Honeywell and other companies are announcing double digits profit. For the past few days, the stock market has only react to good news and ignore the bads.

** It is as if someone know about the good earnings and are continueing to buy, thus stop the stock market from falling **

The A50 Tracker fund which tracks the China A50 index is behaving oddly. One can see the double bottom acompany by huge volume. This is a very strong market bottom signal.

China is a very primitive market. Inside Trading is a norm. Chinese investors are very indiscreet in their trading. If the Chinese Stock Market is bottom out and someone in China know about it then they will put a lot money in the stock market indiscreetly. These volumes are just that.

Positive Feedback
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China is a positive feedback market. Companies get a big portion of their earning from investment income. When the stock market do well then earning from their investment income increases which in turn boosts the share price and the stock market. When the market fall then the positive feedback drives the market down very quickly. Until some events trigger the end of the cycle. The end of the bull run was triggered by the subprime crisis.

These few days the international stock market is doing well but not the China Stock Market. This is because of there is a very strong positive feedback momentum driving the market down.

The A50 volume shows someone is putting money into the China stock market and this is the trigger to end the bear cycle.

Stock Market Bottom Out

Today is the 15th April 2008. The stock market worldwide has bottomed. Wachovia reported unexpected loss today. This week Merrill Lynch and City Group will release bad results.

However Dow is holding up. Gold & Oil are down. Dollar vs Euro is up.

In Hong Kong, Lee Shau Kee bought $0.50 Billion of his company ‘Henderson Development’ 12.HK.

What does that tell you?

We can ignore the bad results from the earning season. Earning results are delay by four months and we all know last December was bad. They tell you nothing of the future.

The U.S cannot afford the dollar to slide further. Rumour has it they are pushing up the dollar. Lee Shau Kee knows it and so do people who are buying in the U.S. to keep the Dow up. Bottom line, something is happening and those who know are already buying.

Want Want China 151.HK Part 1

Want Want launches IPO in Hong Kong on the 26th March 2008. The company’s product is well known and has good financial in its balance sheet. However due to poor market sentiment its stock price falls below its listing price of $HK3.00 and reaches a low of $HK2.53 on second day of trading. Today it closes just below $3.00 at $2.99.

Want Want’s IPO prospectus claim they are one of the leading food and beverage manufacturers in China. They are the market leader in China for several of their key products, including having a market share of 68.6%, 40.6% and 28.5% in rice crackers, flavoured milk and soft candy, respectively, in terms of sales for the six months ended June 30, 2007 according to the ACNielsen Report (a report commissioned by the Company). They believe they are the market leader in China in popsicles, ball cakes and gift packs. Their core brand, “Want Want”, (“旺旺”), which symbolizes prosperity and good fortune in Chinese, is, they believe, the most widely recognized food and beverage brand in China.

Let’s compare it to the Real China. The belows are Want Want’s core products.

There are seven different types of soft sweets & milk flavour sweets in the below. Your author recognises three products; QQ Gummies, QQ Bears & Hot-kid Milk Chewy. I particularly like the QQ Gummies and the Hot-kid Milk Chewy. Warren Buffett buys Coca Cola stocks because he thinks it is a good product. I feel the same way about QQ products. I like their taste very much.

Like many Want Want products the Want Want Rice Crackers can be found in many store and super market in China. My wife used to like it very much. Again, it seems we have a good product here.

The Want Want milk tastes very good. I still drink it from time to time when I am in China. However there is a lot of other type of drinks so I don’t always buy it. This kind of market competition is stated in Tinyi Holding’s company result. So again it seems the story fits in with the Real China.

The below is a spirit which I vaguely recognise from super market shelfs but since I don’t drink strong alcohol I can not comment.

Your author recognises almost all of Want Want’s product, likes and consumes some of them on a regular basis. This is because your author saw Want Want advertisements on TV from Hong Kong and China for many years. I can still remember the Want Want rice cracker advertisement; it is weird, funny and hence memorable. It can be said that these products have their own unique taste. It is important for a company’s products to be unique i.e. there is little difference between two different brands of distill water and therefore consumers can easily switch to another brand of distill water. This is one of Warren Buffett’s methods of valuating a company’s product.

Summary

Want Want’s products are good, unique and widely known & consume in China.

Want Want China 151.HK Part 2

Financial Analysis

A company with good products is not good enough if earning is poor. Want Want’s turnover, profit and earning per share growth have increase year on year over the past two years. It is important for the turnover to increase because it indicates the company is selling more goods and not artificially inflating the earnings through other mean. A further look at the IPO prospectus confirms that finance income constitutes less than 5% of the gross profit. This is very important in the current market sentiment because we don’t want future profit to decrease due to the stock market. This is something we cannot say for the insurance industry since a lot of their income come from investment profit.

Key Ratios

To looki at a company’s ratio and compare it with the industry sector tell us whether the company’s state of health.

PE Ratio

Want Want have the lowest PE ratio in the industry. Assume everything else is equal Want Want share price has potential to double to reach 197.HK’s PE of 8.2 or to ten fold to reach 322.HK’s PE of 49 . U-President China 220.HK has a par value of US0.01 vs. Want Want US0.02. U-President China is trading at $HK4.00 when Want Want is only trading at $3.00. The share price is cheap.

Equity

Want Want have equity of $HK5,845M. We can confirm that the company is not small and hence has a market position.

Financial Ratios

Want Want EPS is comparable to Tinyi Holdings 322.HK. It has more debt than Tinyi but less than China Foods therefore it is acceptable. Lastly and most importantly its profit margin is much better than the rest of the industry this is extremely good.

Want Want China 151.HK Part 3

Management

The key to a company’s success lies with its people. We want to know whether they can deal with the obsticles ahead of them.

Mr Tsai Eng-Meng, aged 50, hold 50.93% of the company, is Chairman and Chief Executive Officer. He was the general manager of I Lan Foods Industrial Co. Ltd, a wholly owned subsidiary of Want Want established to pioner the Group’s food and beverage production and distribution business in Taiwan. He succeeded his father to become the Group’s Chairman in April 1987. Mr. Tsai joined the Group and began his career in the food and beverage industry in 1976 and has more than 30 years of experience in the industry.

Mr Tsai Eng-Meng is the second generation entrepeneur. We prefer first generation because they are the strong pioneers. But second generation is not too bad there are many successfully second generation business owners. Mr Tsai Eng-Meng led Want Want since 1987 to become very successful in China and gone IPO. I can conclude Mr Tsai Eng-Meng has done very well. He is a Taiwanese doing business in China. Taiwan has just elected a new President who will help Taiwanese to do business in China. This is good for the company because this is one of Mr Tsai Eng-Meng’s concern in his prospectus.

Share Price

Even good company’s share price can go down due to external circumstances. For example, Shenhua 1088.HK is an extremely good company with good future earnings but its share price fall because of the U.S subprime crisis. This is also why Want Want share price fall below its offering price.

The big question is will it go up and if so when.

The Hong Kong Hang Seng index might have reached it bottom or it might have not.