Ft Cesg Discussion Threads

[siwel100] 23/8/2008 21:24

0rb1t - 23 Aug'08 - 17:52 - 212 of 213

I have investigated further and here are some new points:

1) Track record - CESG was founded out of the in-house IT department of ZRCC that is part of Sinopec. Therefore the company was successfully providing IT services a long time before 2003 when the China Eastsea group was formed.

2) Enterprise p/e - If you remove exceptionals and interest payments received you get a net profit of £1.4m for SFT against a EV of £6.93. This equates to a EV/E of 4.95 which is not that different from CESG's of 4.92. Also CESG has net trade receivables of £5.4 as opposed to SFT's £3.5m. If these were taken into account then CESG's EV/E value would be lower.

3) Margins - Gross profit margins at SFT are slightly overstated as they include the VAT rebate in the turnover figure. They are still higher at 66% compared to CESG's of 46%. But if you look at the Profit after tax (excluding exceptionals) SFT's margin is then 26.4% compared to CESG's of 31.4%.

4) Dividends - SFT does pay a dividend which is good but it does ask the question that shouldn't they be using their cash for expanding their business.

5) Work mix - The main difference between the two companies is the work mix. CESG's is predominatly industry based (ie petroleum, power, telecoms) where as SFT is government based. One of Warren Buffet's rules is not to invest in companies that rely on government spending as your company's fate is then in the hands of the government.

6) Risks

a) SAT project - The amount of customistation for each provence could be understated. They say that 90% can be reused and only 10% needs to be modified. Quite often in IT that last 10% takes the most effort!

b) Equity exposure - SFT appears to be investing the spare cash in listed companies in China. This has lead to one-off gains which have not been treated as exceptionals. This year their headline profit could go down if they do not repeat their investment success. Even worse investment losses could affect the group profits.

7) Future prospects - SFT could be successful as they have opened their Beijing office and are winning outsourcing contracts. They are still priced cheaply. CESG could encounter problems from expanding too fast but their strategic direction so far seems to be good. IMO.

[glasshalfull] 22/8/2008 16:33

...and now 30p on the offer at the death.
Nice finish to the week.

Regards,
GHF

[glasshalfull] 22/8/2008 16:21

Here is a copy of the Washot tip dated 22.07.08.
I think it acceptable to post it after the passage of a month.

22 July 2008 – Watshot.com

Buy China Eastsea at 23p

There has been a lot of concern over the health of the Chinese economy lately. Inflation has hit hard, mainly because the goods and commodities that are rising the most - food, fuel etc - make up a much larger portion of average household expenditure in developing countries such as China. However, the situation in China has been hugely exacerbated by poor harvests and natural disasters - the price of pork doubled last year, for example - which are essentially one-off factors, so underlying inflation might not be as bad as it seems. We are already seeing a decline in Chinese inflation - it fell to 7.7% from 8.5% in May - and the underlying growth dynamics of the Chinese economy remain appealing.

China Eastsea is an established player in the rapidly growing Chinese IT outsourcing market with clients in a broad range of sectors including government, petrochemicals, power and telecoms. Revenue growth is expected to be at least 50% over the next two years - a target that could easily prove conservative, especially if the company chooses to use its large cash pile for acquisitions. China Eastsea has a good track record on delivering contracts and operates in a fragmented market that is growing at a compound annual rate of around 38%. As if this isn't enough, the shares trade on a dirt cheap rating and the company is cash generative to the tune of around £1.5-£2.5 million a year.

Background

China Eastsea began life as the IT department of oil firm Sinopec and was created through a management buyout in 2003. It focuses on the petrochemical, government, telecom and power industries, providing IT consulting, project work and enterprise-wide outsourcing. Mainly through its connection with Sinopec, the company is currently the second largest IT outsourcing company serving the petrochemical industry. Although Sinopec remains the company's largest client, it did not account for more than one third of revenues at any time during the last three years. After a brief spell on Ofex (now PLUS), the company transferred to AIM in January 2008.

Chinese outsourcing market

Chinese industry has entered a transitional phase. The years of easy, rapid growth in export dominated markets is stalling as wage inflation erodes Chinese competitively and other countries such as Vietnam and Thailand entice manufacturers out of the country. To maintain a competitive edge Chinese businesses will have to evolve through cutting costs. One particular sector that could benefit from such a trend is the IT outsourcing market. The IT service industry in China is very fragmented with thousands of companies, overwhelmingly small in size, while even the biggest, IBM, only has an 8% share of the market. The sector is growing rapidly, so there is considerable scope for consolidation as the larger players scramble for market share.
Where does China Eastsea come in...?

With around 450 staff, and with partnerships with many of the leading IT brands such as IBM, HP, Dell and Cisco, China Eastsea is edging towards being a mid-tier player. The IT companies mentioned above are China Eastsea's suppliers for its systems integration business - the relatively boring side of the business which attracts modest margins (typically between 10-15%) because of the higher levels of competition. The software and IT consultancy business, however, is much more profitable. This is because China Eastsea either develops its own proprietary software, or buys in software packages and customises them for business solutions, thereby adding value. For example, the company has
developed a suite of proprietary software specifically for the petrochemical industry, which includes production and dispatch management systems. This technology has put China Eastsea at a firm advantage within the Chinese petrochemical industry. Typical software and IT consulting gross margin is a hefty 40-60%.

Given the company's background, it is not surprising that petrochemicals remains the company's strongest sector, although there has been a widening of scope in terms of revenues recently. In addition to the company's all-encompassing contract to provide Sinopec ZRCC's IT support (which has a remaining 15 years to run), the company has contracts with CNOOC, one of the three dominant oil and gas exploration and producer in China; Chalco, the largest Chinese aluminium producer; and BP Ningbo, one of the Chinese subsidiaries of the BP group.

Through the company's acquisition of Beijing Huashen Huizheng (we'll call it BHH) in July 2006, Eastsea also has significant exposure to the government sector and is now actually one of the top 30 IT suppliers to the Chinese government. It has particular strengths in secure document management, interdepartmental communication and digital encryption. It also has a proprietary search engine approved for use in government applications.
The company also has the advantage of being an indigenous organisation: most of the work is politically sensitive and is as yet barred to foreign competitors.
Eastsea strategically positioned itself for an opening up of the IT outsourcing markets for the Chinese telecoms and power sectors through its acquisition of Infa Group at the beginning of June 2008, a company that has a strong business focus on these two sectors. The company's knowledge and expertise acquired in the petrochemical sector can easily be transferred into these areas, and by positioning itself now Eastsea is investing in what is already proving to be a rewarding market, with large contract wins already beginning to materialise. Expect to see increasing levels of activity from this area as Chinese companies in the sector wake up to the attractions of IT outsourcing in their bid to cut costs.

The company's move into the government, telecoms and power sectors have enabled it to significantly broaden its revenue base. In 2005 three quarters of revenues came from the petrochemical sector; in 2008 it accounted for only 38% of revenues, while power & telecoms made up 35% and government accounted for 27%. Meanwhile, the company's reliance on its largest customers has also decreased. In 2005 its top 5 customers accounted for 93% of total revenues; in 2008 that figure was 48%. Crucially, its largest customer, Sinopec ZRCC, now accounts for just 20% of total revenues compared with last year's 42%. These trends are expected to continue.

Financials

For starters, the company has net cash of just over £4 million, which aint half bad for a company that has been making acquisitions. This compares favourably with a market cap of just £16.5 million, giving us an enterprise value of £12.5 million. It also means that the company is well placed to make acquisitions from its own internal resources.
For the year to end-February 2008, in its first results since it floated on AIM, the company reported a 40% increase in net profits to £2.8 million on revenues up by 23% to £10.8 million, giving earnings per share of 4.5p. During the current year those figures should rise to £4.9 million, £16.4 million and 7.3p, respectively, putting the shares on a current rating of just 3.2. If you like you can strip out the cash and the rating would fall even further.

Summary

China Eastsea is at the forefront of what looks like the beginning of a wave of industry migration towards IT outsourcing in China. It already has a strong position in its traditional petrochemical market and is rapidly growing into other markets and expanding its revenue base. The company is cash generative with tons of net cash, and the shares look undervalued. Speculative buy, at 23p.

Regards,
GHF

[glasshalfull] 22/8/2008 16:14

Now unable to get inside the spread for my latest batch.
Take from that what you will.

David Tsui intimates that he is in contact with the company NOMAD's re. a trading statement.
I would like to see one released shortly to reflect trading and performance of acquisitions for the interim period which ends next week.

I also note that the weakness in sterling in comparison to the RMB will also have a material effect on the company forecasts going forward.
I haven't yet carried out a detailed breakdown on the translation effect but would estimate that it could be in the range of 10%-15% uplift in conversion to sterling.

All bodes well IMHO.

Regards,
GHF

[explorer88] 21/8/2008 23:14

no problem GHF. it would be good to meet them in October. From what i hear they are very ambitious on the acquisition front - which i like. There are certainly some interesting takeover opportunites around at the moment...

[glasshalfull] 21/8/2008 23:03

Apologies for asking explorer.
I was simply trying to work out how the mm's were running their books with this company...and whether they were holding back the reporting of a trade until the next day.

I've been adding periodically :o) and now noticing that even small buys are starting to move the share price. Doesn't necessarily mean anything but like Art I've a feeling that there isn't much loose stock around at the moment.

I also remain in contact with David Tsui who intimates that representatives of the company have penciled in the 1st week in October to visit the UK to meet with investors.
I've asked a range of other questions and will get back with any relevant information in due course.

Kind regards,
GHF

[explorer88] 21/8/2008 18:34

hi GHF - just a small amount for me today after your 20k

[glasshalfull] 21/8/2008 17:48

explore88 - Has your trade still to show?
I'm responsible for the 2 x 10k buys 1st thing.

Regards,
GHF

[arthurly] 21/8/2008 08:58

MM's don't seem to have much stock at all. Any good news and this will really rocket imho.

[explorer88] 21/8/2008 08:51

topped up with a few more CESG this morning.

CESG just coming to the end of H1 where broker forecasts FY eps of over 7p (my estimate is 8p).

pe of 10 would give share price of 70-80p on current year's eps, and share price of 100p-120p for next year (plus any further acquisitions)

(edit: Seymour Pearce suggests pe of 14, which would give share price 100p-112p for this FY and 150p+ for next year, excluding growth through further acquisitions ...)

[masurenguy] 21/8/2008 08:06

Why the MM mark up at the open ?
L2 currently 2 v 1 @20k v 10k !

[longsight] 19/8/2008 11:56

not really, messing around with currencies - my ideas are brilliant but my timing is pretty woeful

[explorer88] 19/8/2008 11:45

thanks longsight. any other interesting investment opportunities caught your eye recently?

[longsight] 19/8/2008 11:38

explorer, don't want to be a meanie - so good luck

[explorer88] 19/8/2008 11:32

longsight - looks to me like all buys this morning (including the last delayed buy of 77,802 at 9p), hence the share price rise of 16% so far today ...

[longsight] 19/8/2008 11:28

explorer88 - looks like your "takeover bid" for SFT is proceding in a rather unusual manner - i.e. mainly small sells. Smells more like someone trying to get out at a better price.

[explorer88] 19/8/2008 09:14

Morning Art / Orb1t - looks like there may be some action over on SFT today

[arthurly] 18/8/2008 16:41

explorer - yes it would make a lot of sense imho.

[0rb1t] 18/8/2008 14:23

Thanks ex88. SFT would be useful to CESG as it would strengthen its government offering and also provide a presence throughout the whole of China.

Should be interesting times ahead what ever happens.

[explorer88] 18/8/2008 13:53

hi Orb1t - i know that CESG are actively searching for funding sources for acquisitions. i don't know what targets they have which are private or trading on overseas markets. i do know that they have (at least) one target which trades on a UK market, however i don't know the identity of the target.

Art - Ms Xin has a controlling stake (51%) in SFT. She is relatively young and ambitious. The CP of the PRC have specific aims in their "march overseas" business strategy. The CP has leverage (contractual and political) over both CESG and SFT. Subject to availability of funding (which, i believe, will be secured), i would therefore not be surprised to see CESG table an agreed bid for SFT. (I note that SFT's placing in 2006 was at 19p)

I hold CESG, SFT and GNG.

[0rb1t] 18/8/2008 11:45

Hi explorer, is that your assumption or have you heard it somewhere? It does look like they are trying to raise capital after the chairman's comment about a second listing on the Shezchen stock market.

[arthurly] 18/8/2008 11:40

explorer - SFT ?

[explorer88] 18/8/2008 11:28

hi riv / art

i think you'll find that CESG are trying to access capital to make a couple of acquisitions, one of which, i believe, is another Chinese company listed on AIM ;-)

[arthurly] 18/8/2008 11:14

riv - extremely odd. Makes no sense at all.

[rivaldo] 18/8/2008 11:05

Anyone notice this and make sense of it? Why would CESG be interested in a UK corporate finance house/broker? :o))



"St Helen's Capital at the crossroads
Companies: SHCP
05/08/2008
Moves are afoot behind the scenes at St Helen's Capital, the small company broker and corporate finance house which helped raise £115 million last year for the bombed-out electric vehicle hopeful Tanfield and is now also in the doldrums after its own shares have plunged on AIM.

In one case, a group of City players close to the situation is understood to be plotting a possible £1 million bid for parts of the business of St Helen's, whose directors include Jon Pither, chairman of beleaguered franchising group Myhome International, and the formidable financier and ex-MP Howard Flight.

Other groups are also believed to be taking a look at the operations of St Helen's, whose chairman Mark Warde-Norbury replaced PLUS Markets investment enthusiast Tony Drury in that post last year. Ruari McGirr, St. Helen's chief executive, says no proposal has been put forward as yet and discounts suggestions that one St Helen's director is also scouting a deal.

He suggests present comings and goings are 'no more than chats. Everyone is having lunch and talking', while one company rumoured to be considering backing a deal, AIM-quoted China Eastsea Business Software, says it has no such plans.

McGirr, who joined St Helen's last year from investment firm Daniel Stewart and has seen its shares fall from more than 15p to 8.12p, describes the current market as 'enormously frustrating. There is no shortage of interesting deals, but getting investors enthused is very hard.'"