Coastal Greenland Limited [ Stock code 1124 HK]

Coastal Greenland is a mainland Chinese property developer.  Market cap is currently HKD 1.395m or HKD 0.50 /share.

I am investing in this stock because
(i)  Extremely low price to book valuation and (ii) under valued on associates held

As at September 30, tangible book value is  HKD 3.315m. The company also owns 21.3% of  Shanghai Fenghua Group Co. Ltd, (listed on Shanghai Stock Exchange and currently valued at HKD 2.205m).  At market price, Coastal Greenland's holdings in Shanghai Fenghua is valued at HKD 470m.  However, book value in Coastal Greenland is HKD 139m according to the annual report 2009.   This indicates a buffer of HKD 331m which can be added to tangible book value, which gives us an adjusted tangible book value of HKD 3.646m.  Price/adjusted book value is 0.38 times.

(iii) Steady expansion and strong uptick on revenues

The company has steadily expanded its revenues from HKD355m to HKD3,922m over 2001-2010 period, representing a CAGR of 27%.  [According to the research "Guodu Hong Kong", we can expect to see earnings increasing 4.2x to HKD887m in FYE2011 (this implies March 2011... we shall see).  I will try to make my own projection if time permits. [Prepare for edits]


The risk identified is
(i) numbers could be fake or delayed.
Given that this is China, the numbers could be fraudulent but comfort is taken from the auditors being Deloitte.  The chairman, Mr Chan Boon Teong, is a director of Kowloon Stock Exchange, TPV Technology Limited and Cathay United Bank.  There are some major names in the senior management ranks which gives me some assurance that this is not a fly by night operation.

ii) There are quite a number of China property developers whose market caps are priced at these levels, below 0.30% even.  So there is no guarantee that that the company will not be re-rated below.  Maximum loss, all things being equal, is 40%, inferring at P/B ratio of 0.27.  However, I judge this to be unlikely given the China property market is already in its doldrums, with plenty of bears talking about over heating etc.

ii) Leverage
Total bank loans is HKD 6.160m, however, there are additional HKD 4.828m in contingent liabilities in form of guarantees.  I will try to find out more...  Total equity are HKD3.400m, this implies D/E ratio of 1.8x or 3.23x if contingent guarantees are included.   This implied leverage is HUGE and is a risk that I will take into mind if I am going to increase my position.

iii) Warrants cap.

The shares are subject to 111.623m warrants exercisable at HKD 1.23.  This implies 4% dilution to the current shareholder base of 2,791m.  However, noting that free float is 988.61m, this represents 11.3% of the traded stock.  Which really means, I would want to sell before it comes anywhere close to it. 

Conclusion:

Overall, I am unhappy with my investment decision as I did not factor in the huge gearing.  Reading the investment thesis of the broker, I feel the projections are somewhat exaggerated (which I would want to verify).  More importantly, I did not check the comps.  There are other companies out there which trade low P/B values as well but more importantly, have better gearing levels.  I would not have invested after a more thorough analysis.  Fortunately, my investment in this stock is very small and there is enough downside protection in terms of near term catalyst and P/B margin so that my threat of loss is small IMHO.


Amount of return is 0.64 (unless re-rated) X the probability of return is 80%
Less
Amount of capital loss is 0.2 (Assume my P/B is 0.27) X Probability of loss is 20% (Assuming the chinese property market tanks further)

Value of my decision is HKD 0.472 versus my investment of HKD 0.50, implying a loss of 5.6%.