Goodbye Dapai!

I’ve just realised that I’ve made a few mistakes by investing in Dapai. Thus, I have fully divested my shares in Dapai. I have only held on to Dapai for around 2 weeks and luckily, I have realised my mistake early.

Reasons for divestment

1) Company did a share placement in May 2010 even with lots of cash in hand and negligible debt. It raised money and diluted shareholders holdings without the need to.

2) Company has been postponing opening of 500 new stores and I’m not comfortable with this.

3) Net profit margins, ROE, ROA have been decreasing throughout the 3 years. Maybe I was blinded by various rosy pictures painted by the company.

Lessons learnt

Even with all the “negatives” of the company, I went on to invest in the company. I broke a major rule in value investing – “When in doubt, never invest!”.

Also, I almost broke Warren Buffett’s main rule – “Rule No.1: Never lose money; Rule No.2: Never forget Rule No.1”. I almost lost money on Dapai. Luckily, I managed to sell it off at a slight profit after deducting commissions. How to make sure one doesn’t lose money? By researching on the company thoroughly and when there are “negatives” in the company, investigate why is that so. I guess I was plain lazy at times to research thoroughly on Dapai and still went on to invest in this company. I was afraid of “missing the boat” as Dapai was very undervalued at time of purchase. It just hit the support level after profit warning was released and I went in to invest (at least, I’m not fearful to invest when stocks plunge. Haha!). One of my mentors told me once, “To me, losing opportunity is better than losing money” and that’s a tenant to invest by. I would rather lose opportunity (not getting in at a cheaper price) when researching Dapai then invest in it and lose money in the end.

In value investing, being disciplined is very critical. I wasn’t disciplined enough to research thoroughly. All the criteria (eg profit margins, ROE, balance sheet, cash flow, etc) must be perfect/near perfect and then only, valuations and MOS will make sense. When the analysis is skewed, no amount of valuations and MOS will transform the company into a good buy. Warren Buffett’s quote “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” comes to mind.

In the future, I’m going to research thoroughly on a company before even putting a single cent in the company like how I did for Kingsmen, Super, TMC and HLS. A thorough research and understanding the company inside out (at least to the best of my abilities) before putting money on the company is another “margin of safety” for me. I’ll also try to not look at the price of the company while researching it, so that my research and thoughts will not be not skewed/biased. This blog makes me accountable for my actions and without such a blog, I feel that it will be hard to take my investment skills to the next level. I also strive to give a good analysis on companies as some of my readers rely on my posts for their own research (note that doing your own thorough research is paramount before ploughing money into any company).

Future course of action on Dapai

I will KIV this company and see if things improve. I would closely scrutinize the profit margins, ROE, whether management is keeping its word on opening of new stores and dual listing and whether building of new luggage factory takes off. There is possibility that I would re-invest in this company when things turn out better.

P.S. You might think I’m being hard on myself, all these are not warranted for and that Dapai is still a great company. Please note that this post is purely my own thoughts and Dapai might still be a good investment to many. This post does not serve as a sell recommendation to any of the shareholders of Dapai. This post serves merely as a personal reflection.

Dapai Analysis – Part 4

In this part of the analysis, we will look at the SWOT analysis and intrinsic value of the company.

SWOT Analysis

Intrinsic value

I did a DCF intrinsic value calculation. I used average free cash flow growth rate as 0% (to be ultra-conservative) and discount rate as 9%. The intrinsic value I got was $0.35. The latest quarter NAV is at $0.30. Thus, it is around 32% undervalued when using the NAV.

Even with 0% CF growth rate, the stock is very much undervalued with very high MOS. I feel buying Dapai is almost a risk-free purchase as the company is debt-free, has lots of cash and intrinsic value is high.

Dapai Analysis – Part 3

Thus far, we looked at the overview of the business and the cash generating ability of the business. Now, I will delve into the qualitative part of the company and also address the future growth avenues of the company.

Qualitative analysis

Economic moat: I would not say the economic moat of Dapai is wide but rather satisfactory. It is the No.1 backpack company in China with 35.8% market share. The 2nd company, Jinhou, is very close with around 30% market share. The competition is quite intense in this business.

Competitive strengths and advantages:

• Leading brand and good branding
• Sponsors for big competitions such as Beijing Olympics
• Large market share of 35.8%
• Market survey shows that Dapai is a market leader
• Able to leverage on Tian Liang and gradually raise ASP to increase profits
• Huge cash hoard
• Lots of FCF generated

Insider buying and/or share buybacks: Cheng Xizhong, Executive Chairman and founder, has 53.65% stake in the company. The company has not done any share buybacks till date. I feel that it should as it’s stock is grossly undervalued.

Is management transparent, honest and competent?: Yes, I have confidence in the management. On 12th Oct 2010, the company released a profit warning statement saying that the next quarter net profit will take a suffering as the luggage segment is facing some supply issues. They had sub-contracted all their luggage manufacturing to a number of suppliers, of whom two major suppliers were unable to meet the orders due to their labour shortage problems. As a result, Dapai’s luggage sales had been adversely affected. The company has concluded that to prevent such problems in the future, it will build a new luggage manufacturing plant. This shows that the management is transparent and honest instead of sweeping the problem under the carpet. Also, on 22nd Oct, it released a statement saying they have acquired a land for luggage manufacturing facility and the facility will be completed by 4QFY2011/1QFY2012. Once complete, the factory will produce four million pieces of luggage per year. This shows competence of management and they have resolved the issue swiftly.

Also, in May 2010, the management thought of doing a share placement exercise. However, the shareholder’s went against this plan at the AGM. Even though, Chen Xizhong has the majority share of the company, he didn’t use his power to override the decision of the minority.  He listened to the shareholder’s and didn’t undertake the share placement. This shows that the company has the interest of the shareholder’s at heart.

Future growth

• Plans to dual list in another exchange
• New factory to be built to make luggages
• Total of 500 new stores to be opened by end of the year
• Company to leverage on the internet for online shopping (http://dapai.taobao.com/). Revenues set to increase once this kicks off in full force
• Company is looking into acquiring an international brand
• China consumerism and travel will go up with the economy picking up

What I don’t like about this business? Highly competitive and fragmented. Thus, high MOS demanded (another MOS: current price below NAV)

Dapai Analysis – Part 2

In this part of the analysis, I will present the financials of Dapai and do a quantitative analysis on them.

Financials

As Dapai is a China-based company, its financials are based in RMB. So, I had to convert to SGD and the rate I used was 1RMB=0.2SGD. This rate is just an approximate.

Firstly, the revenue is increasing from FY2007 to FY2008 and then dips in FY2009. The reason cited for this in the annual report is that there was softer demand from first-tier cities, especially Beijing and Guangzhou, due to its higher dependence on domestic consumption. Overall domestic consumption was weakened due to the global financial crisis.

The gross profit and gross profit margin decreased from FY2008 to FY2009 as the average-selling price (ASP) was decreased to fuel demand.

Looking at the Q2FY2010 results which were released on 11th Aug 2010, the revenue, gross profit, GPM, net profit, NPM all increased when compared to Q2FY2009 as the ASP went up and new models were released. Thus, I feel the dip seen from FY2008 to FY2009 is only temporary.

Looking at the balance sheet, Dapai is cash-rich with zero debt! The CCE stands at S$108.4 million for FY2009. The ROE and ROA is also high. Shareholder’s equity is also seen increasing. The NAV as at Q2FY10 is $0.30. The current share price is around $0.20.

Looking at the cash flow part, cash flow from operations is increasing throughout. Capex in FY2009 was at S$39 million due to cost of construction of new office cum factory building purchased in 2008. Dapai has low capex requirements and thus produces lots of free cash flow.

Dapai Analysis – Part 1

I recently purchased a company called “Dapai” and will present the overview of the company, its financials and quantitative analysis, qualitative analysis, SWOT analysis and intrinsic value calculation in 4 different parts.

This first part will cover the overview of the company.

Overview of Dapai

Dapai is a Chinese company that is involved in designing, developing, manufacturing and selling of backpacks and luggage under the Dapai brand in China. It is the No.1 backpack company in China with a 35.8% market share.  Dapai was previously known as China Zaino.  The name change was done in May 2010 to allow consumers of Dapai products to identify the brand name with the listed company.

Its products are sold through distributors in over 3,000 concessionary retail outlets in 26 provinces, autonomous regions and municipalities throughout China. Most of these outlets are located in major department stores such as Beijing Wangfujin Department Store, Beijing Xidan Department Store, Dalian Department Store, Jinan Silver Shopping Plaza, Nanjing Zhenjiang Taihe Store and Qiangdao Parkson, and supermarkets and hypermarkets such as Carrefour, Darunfa, Haoyouduo, Jizhidao, Oushang and Renrenle.

Strategically located in Quanzhou City (Fujian Province), Dapai has a total of 64 production lines with an annual production capacity of approximately 26.1 million units of backpacks and luggage.

Dapai targets the mid-range mass market consumer segment between 13 to 50 years of age in China, and are viewed by consumers as a premium brand focusing on quality and affordability. This is evident when Dapai was named “2007 Top 500 Asia Valuable Brand Award” by Supervision and Management Centre of Asia International Brand Certification; “Top 12 Bags Brand in China in 2006” by the China Leather Industry Association, and “Top 100 Favourite Youth Brands in Quanzhou 2006”.

In addition to appointing China’s Olympic celebrity Tian Liang as Dapai’s brand ambassador, Dapai also sponsors prominent sporting events such as the national gymnastics team in the 2008 Beijing Olympics, and the 2007 – 2008 China Women’s National Basketball Tournament. It is the only backpack company in China to do TV advertisement as well. You can watch the advertisement featuring Tian Liang below.

Dapai has its own extensive R&D team to ensure that it produces good quality products whilst keeping up with the latest trends and design products suitable for our target consumers. As a testament to its commitment to the quality the products, Dapai has been awarded ISO 9001 in 2007.  Every year, the R&D team comes up with between 800 to 1,000 new backpack and luggage designs of which approximately 200 are selected for commercial production.

The range of products Dapai carries can be found at http://www.chinazaino.com/products.html. However, I believe this website has not been updated for some time. You can also visit http://www.dapai-bag.com/ to look at the products Dapai carries.