I bought a few HK stocks and China stocks during the past month when I sensed a positive change in the market mood. HK market turned for the better on 31Aug2021.
One of the HK stocks I bought was ...
China Everbright Environment 257.HK
257.HK is a growth stock. Since 2018, both earnings and revenue are on an upward trajectory.
|Net profit annualized growth rate over past 4 years (round up from 3.92)||Sales annualized growth rate over past 4 years|
Earnings grew 25.86% at an annual compounded growth rate over the past 4 years. Revenue grew 31.33% at an annual compounded growth rate over the past 4 years. I like this.
In between the past 4 years, growth was smooth and pointing upwards. No jerky, up-down, volatile growth. I like this.
Given the good growth over the past 4 years, one would expect the stock valuation to be expensive. You will be shocked to learn about the cheap valuation. Price/earnings ratio is only 4.8. Price/book ratio is only 0.7. Where do you get such cheap growth stock in the U.S market today? I like this.
With wonderful growth and valuation at the same time, this stock looks too good to be true. When a stock's fundamentals look too good to be true, I like to look at its past dividend payment record. Earnings and sales can be manipulated (quite normal when management wants to hit their targets) or even fabricated from thin air if executives are desperate enough. Not dividends. Dividends don't lie. A company has to pay dividends from cold, hard cash.
So, let's see the dividend record of 257.HK.
|Date||Dividends per share HKD|
Dividends also enjoyed good growth like earnings and sales, though not as much but good enough. Dividends grew 14.56% at an annual compounded growth rate over the past 3.38 years. Another feature I like about 257.HK dividend growth is that growth has been steady and stable over the past 3 years. There was no drastic cut in between.
Dividends have grown enough over the years that it provides a mouth-watering dividend yield of 7.01% today.
With such a generous yield, one worry is whether the dividends are sustainable. The dividend payout ratio (dividends/earnings) is only 31.3%. It is more sustainable than REITs which are forced to pay at least 90% of their earnings to shareholders.
The good dividend growth, high dividend yield (7%) and dividends paid at a sustainable level (31.3% payout ratio) make 257.HK an attractive dividend play, though there are concerns about the negative operating cash flow. I will discuss this later.
Now, look at the price action of 257.HK
Despite the impressive earnings and sales growth since the beginning of 2018, did the share price shoot up in response? No.
Viewed from a multiple year perspective since 2018, the share price is in a downtrend. This is unfortunate for investors who bought in early 2018 and held till today as they will be nursing losses of over 50%. However, if you are buying the stock today, it will look like you are buying on the cheap at a bargain price.
Let us shift to a shorter time perspective. Viewed from a multiple month perspective, it is a momentum stock that recently hit a 52-week high on 13Aug2021.
This recent price action shows that Mr. Market has finally begun to recognize the true substance of 257.HK. As a stock market timer, this is what I want to see before I bet my money.
Since my own money is on the line, it is fitting to warn readers that I write this blog article as a biased speculator. I will naturally try to talk up my own book.
Nevertheless, I try to be unbiased by looking at the negative aspects of the stock. Nothing is perfect. There will be some flaws somewhere.
There has been recent insider selling by an Executive Director, Hu Yanguo. He sold about HKD1.3m worth of stock in the middle of August at around HKD5.25. This is about 30.95% of his HKD4.23m annual compensation. I am not so worried when insiders sell when stock price has gone up. HKD5.25 is about 30.6% higher than the recent low of HKD4.02. It is natural to want to take some profit when price has gone up. It is more worrying when insiders sell on the way down.
Another aspect about 257.HK that I don't find comfortable is its negative operating cash flow over the past 4 years. While dividends look sustainable based on earnings payout ratio, it does not look sustainable based on the negative operating cash flow. Dividends are paid from cash, not accounting earnings. Therefore, cash flow is a more important factor to consider for dividend sustainability. The negative operating cash flow is also a concern when it comes to debt repayment. Debt interest, like dividends, is also paid from cash and not accounting earnings. The rising debt levels over the years, combined with multiple years of negative operating cash flow, is a warning sign that dividends may be cut soon. I will be concerned if I were buying 257.HK to be placed in my dividend portfolio. However, since I am mainly buying it as a stock market timer for its price momentum today, I am not too discouraged by the consistent negative operating cash flow.
I have put my money down on 257.HK on Friday(3Sep2021) 2 days ago.
Note: Data source for fundamental data taken from SimplyWallSt
EDIT: I got a lucky break. 257.HK surged 14% one day after I bought the stock and blogged about it.