Qingmei is now one of the few penny stocks giving extra high dividend yield. Those who buy at 28 cts will get 11.7 cts(RMB) or about 2.34 cts(S) in 3 months’ time. This translates into a yield of 8.3% or annualized yield of 33%.  Those who hold the stock for 15 months would very likely get a yield of 16.7% or an annualized yield of 13.3%.

Unless one is a speculator or trader, any belittling of the importance of fundamentals is a reflection of complacency, if not arrogance. 

 

It is a fact that all stocks, regardless of fundamentals, are liable to go down in price in any severe market downtrend; however, the risks of fundamentally sound stocks getting into trouble or bankruptcy is considerably less. Reliance on fundamentals is just one of the ways of managing or reducing risks.

 

At the lower end of a severe bear market, there would always be some who would “throw out the baby with the bath tub water” because of their disregard for fundamentals.

Everyone knows it is better to keep cash in a downtrend market but not everyone is so smart as to sell at the high end and buy at the low end. THE FACTS REMAINED THAT THE MAJORITY OF THE MARKET PLAYERS DO NOT BUY AT THE BOTTOM END OF A BEAR MARKET. Hence, proper management of risks is an important element to an investor’s success.

S-chips are high risks and high gain stocks best suited for those who have a positive mindset, are willing to do their homework & willing to take calculated risks.  Investing in stocks entails managing risks. For those who are risk averse, it would be best for them to steer clear from such stocks.

 

IMHO Qingmei, at around 20 cents, has relatively low downside but potentially large capital gain for the following reasons.

 

1. The stock is trading significantly below its IPO price of 31 cents. A major shareholder bought 5 million shares at 22 cents on 30/3/10 and a further one million at 17.5 cents on 26/5/10. How low can the price possibly go, as its fundamental is one of the best among S-chips?
   
    
2. The EPS is 12 cents (RMB) for 3Q10 & 38 cents (RMB) for the 9 months of FY 2010. If 4Q results is similar to 3Q, the EPS could reach 50 cents (RMB) or 10 cents(S). This would give a PE of 2x at 20 cents. How many stocks are selling at a PE of 2x?
   
    
3. According to its 3Q results presentation, the current maximum production capacity is 45.6 million pairs of shoe soles; this capacity would grow to 65 million and 84 million pairs in 7 months & 14 months respectively.
   
    
4. Company has borrowings of RMB 75 million and Cash & Cash Equivalent of RMB 407 million. [not a source of concern if the company can declare a generous dividend].
   
    
5. Management has promised to give away 30% of the profits as dividends for FY 2010 & FY 2011. Based on the 9-months profit figure, a 2-cent dividend is already certain. If the dividend is 3 cents, it could mean a yield of 15% at a price of 20 cents.
   
    
6. Unlike China Hongxing, China Sports or China Eratat, Qingmei manufactures mid-end and high-end sports shoe soles and is relatively unaffected by profit margin squeeze affecting the others.
   
    
7. UOB KH has buy call for the stock with a target price of 50 cts. 
   
    

Is the current fear of poor corporate governance among S-chips and the poor market sentiments presenting a golden opportunities to make a killing ….. for those who dare to take the risks?

 

We will know the results in a few months time.