I recently was looking into Sinotel after my cousin asked me for my opinion on it. Sinotel provide wireless telecommunication applications and solutions in China. Their major customers include China Mobile, China Telecom and China Unicom.
I was kind of impressed by the various contract wins awarded by the major telcos in the past few days but realised from a forumer in Valuebuddies.com (thanks MW!) that one must look beyond the contract wins and scrutinize the fundamentals of the company (i.e. the financial statements).
I noticed that their cash flow from operations has been decreasing for the past few years. Their latest Q3FY10 results were released on 9th Nov. Having scrutinized it, I realised a major flaw in this business/industry. Even though they posted a net profit increase of 19.2%, their account receivables has ballooned to high levels and currently stands at RMB532 million. Their revenue for 9MFY10 is only RMB521 million. This means that even though they book revenues in their P&L statements, they have yet to receive these payments from the telcos. The telcos take a long time to pay the companies like Sinotel. Thus, their account receivables turnover days is also on the high side. The business is also capital-intensive with lots of capex involved. Thus, for 9MFY10, Sinotel had negative free cash flow. This was the case for 9MFY09 as well (for 9MFY09, the cash flow from operations was negative to begin with).
Even though Sinotel has higher ROE and net margins than its peers listed in HK, Sinotel is not a good stock from its business perspective due to poor cash flow. It has reiterated in me the fact that positive and increasing cash flow is the most important thing for a company to prosper.