On the face of it, this company ticks a lot of boxes. For starters it is growing quickly and has a PE of only 6, and has plenty of cash to cover its debts. This got me excited so I continued with my research.
The company is a Chinese company that listed on the ASX through a holding company in Hong Kong. They are in the business of selling soccer gear to the rapidly growing Chinese market (great, right?).
They listed on the ASX last year to raise $5-15m to fund growth. This is a relatively common thing to do. However, before listing, the company already had around $20m cash on the balance sheet. They are also highly profitable. So why go to all the effort of listing and diluting ownership to raise such a small amount? The short answer is I don't know. I simply cannot come up with a good reason for this. They seem to have plenty of cash to fund their own growth, so why go to the market now?
They reported they were to build another factory to allow for growth, however, this has been pushed back without reasonable explanation.
There is a history of some Chinese companies overstating things to their overseas investors. There's been cases where financial results have been completely fabricated. I'm not saying this is the case here, but we should proceed with caution. Getting money out of China to overseas investors can be difficult.
Trying to justify what the market is doing is not usually recommended as it will lead to bad investment decisions. However, I ask myself why it has applied a low multiple to the company. I can only assume this is due to the risks I am worried about.
Everything could be OK with XPD, I have no evidence to prove otherwise. There are just a few things that smell a bit to me and that's enough to stop me from investing. I will periodically look up the stock to see how it's tracking. Is it be too good to be true? Only time will tell, and I will find out, either way, from the sidelines.
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