Anhui Conch: Opportunity With Cement Solid Cash Flows
Valuation: Projections behind the magic
All investments are worth the present value of all future cash flows, a saying I can repeat until I am blue in the face. In the case of Anhui Conch, we can take a look at the following projections to derive such cash flows:
All said and done, these assumptions and projections will yield a DCF (Discounted Cash Flows) valuation of $40 USD per share.
Are these prices reasonable?
For the sake of running a sanity test, we ask the question "are these assumptions crazy?". As we all know, meme-stock markets aren't the norm.
To Pay or Not to Pay
Now that we understand what this company could be worth, could investors time a better possible purchase? Value investors understand that timing the market is a painful and often times catastrophic venture. However, industry titans like Warren Buffett, Mohnish Pabrai, Seth Klarman and others advocate for keeping cyclicality in mind when buying or selling a business.
More metrics pointing to Cyclicality:
As a final note on the purchase margin of safety, the following calculation may come in handy:
The business has total assets (net of debt and goodwill) valued at
RMB 195,253,961
Dividing this value by the total shares outstanding of 5,299,303 and converting from RMB to USD, we arrive at a NAV per share value of $25.50
Buying this stock below the above conclusion would imply a near-risk-free scenario for common equity holders.
Technical Analysis and Expectations
Stock is currently trading in the 61.8% to 78% Fibonacci level, also known as the "Golden Ratio" Just proved strong support and demand zones at the $13-$15 range, pushed by a weekly RSI breakout from "oversold" Recent Downtrends in Stochastics, MACD, and RSIs on weekly charts provide reasonable expectations for investors to purchase at better prices, namely the $13-15 range mentioned above.The above image provides a conclusion to the technical timing of volatility. The top chart represents the stock price and its recent advance, with an almost mirror image of compressed volatility in the bottom chart.
There is reason to believe, mainly through catalysts in Chinese economic data and/or announcements in the company, that investors can expect a volatility breakout causing the price to decline. Ideally, this decline will bring us into the $13-$15 range where a purchase may be more sensible to avoid further price structure declines.
Investing in Anhui Conch Cement
Investors can virtually buy this business below NAV; however, as shown above, in the cyclicality and volatility breakout section, it would be prudent to wait for lower prices in the $13-$15 range. There are strong reasons to believe buyers can see upsides to the $40 and $60 range, as long as cooler heads prevail in the face of OTC market volatility and often low liquidity in entry-exit.
Source MarketBeat