Portfolio Update as at 28/08/2016

It's been quite a volatile last month with a number of companies reporting. Currently up 12.5% after the portfolio pulled back recently.

MBE reported solid growth, but earnings per share was potentially down on what the market was expecting. I was expecting more like 1.5c, but it came in at 1.2c. This was partly due to the treatment of tax and partly due to the need to fund growth. The market still prices it on its current earnings and doesn't give it much credit for the future growth potential. If their international expansion matches the Aussie business then good times are ahead. The UK will be the first hint as to whether they will be successful. This year should provide some good indications.

PRO reported pretty much as expected. They had a hiccup last FY giving guidance that proved a little too bullish. The company is growing well, and the SP has been rerated with limited upside now priced in. Their commentary was encouraging and this year could see the SP resume the upwards trend. Q1 results will be interesting - the company has already hinted they should be strong. Earnings per share were a little bit lower than I expected due to amortisation which I assume is a result of the eMite purchase. Cashflow from operations was very good coming in at 4.9m (7.7cps).

GLH resolved its contract dispute and it was a cracker. $1m per year locked in until 2020 and a lesser amount following that. This resulted in good revenue and 4.2cps in earnings. The company also increased is expenses significantly to position itself going forward. Currently on a trailing PE of 11 with further growth expected this FY.

MOY - I like gold in the current financial environment. MOY is significantly undervalued compared with other miners. It is a turnaround story. Further positive drilling results will increase life of mine which appears to be what is holding back the SP.

MGX - it's a long term game and the good run the SP had has halted for now. I am still considering putting the money to use elsewhere that might have more immediate upside.

ADA - I am glad I sold as the market was expecting a little more than it delivered. The only reason I sold (in the 3.30s) was I thought the SP was getting ahead of itself. I still hold half of my original purchase in my main portfolio. I like the prospects of the company

The Portfolio as at 02/05/2016

Sorry for the lack of updates for those following. It's been an insane month or so and I've had no time to write anything. However, I've still been investing and doing the odd bit of research where I can.

I purchased Global Health Limited (ASX:GLH) on Friday 29 April at opening with a price of 37c because I liked the valuation (based on previous research I've done and then waiting). Over the past two days the SP has moved to 45c (on low volume). It was a complete fluke, nothing more scientific than that! Anyway, I wrote a bit about GLH a while back, and nothing has changed other than an earnings upgrade with guidance now at 3-4cps. There also appears to be a few irons in the fire with things looking positive for the company. 

On another front, I've tossed and turned about whether to add miners to this portfolio. In the end I have decided not to because I will be at the mercy of commodity prices. I can plan my investment around this, but with a one year timeframe it is rather risky if prices stay subdued.

I have added miners to my personal account however. I purchased Silver Lake Resources (ASX:SLR) on 08/03/2016 for 37c. SLR is a gold miner and explorer with no debt and a lot of cash on hand. They are cashflow positive at the current gold price. If the gold price doesn't appreciate they have enough cash on hand to survive in the mean time.

I also purchased Mt Gibson Iron (ASX:MGX) on 26/04/2016 for 22.5c. As they name suggests they are an iron ore miner and explorer. They also have loads of cash (approx 33cps which is more than the SP!) and no debt. They are currently about cashflow neutral with the iron ore price as it stands. They too will be able to survive a subdued market for long enough for the iron ore price to pick up.

Common theme with me and miners - wait until sentiment is rock bottom and valuations are very cheap. Ensure the company has loads of cash and no debt. Buy once there appears to be a resurgence in the underlying commodity price. If you are wrong about the commodity, then the company still has enough cash to survive. Then just wait until the commodity increases and the market starts liking miners again!

Hopefully I'll find the time to write more about these purchases because there's more detail I would like to add to justify my purchases.

Portfolio as it stands (current portfolio value 22k including 5.7k cash currently:

The Portfolio as at 22/03/2016

Latest portfolio position. I haven't had time to write about my recent purchase of Adacel Technologies (ASX:ADA) yet, but I bought on March 17. Once the cricket season is over I will have a lot more spare time! 

It should be noted my cost basis is only around NZD12,500 currently. The strengthening Aussie dollar has positively impacted my portfolio, but Google finance reports the cost basis at spot rates annoyingly. I'm currently in the green around NZD1,900. I need to put the remaining capital to work!

 

Closed Position in TFS Corporation

Today I sold down my position in TFS Corporation (ASX:TFC). 

My main reason for buying the company was for a company with very good long term prospects the share price had been hammered, and there were a lot of near term catalysts. I still believe in the long term prospects of the company (and continue to hold in my main portfolio), but the near term catalysts I listed when buying the company have largely played out.

New end market agreements have been announced, financial results have been announced, and all this years harvest has been forward sold meaning no substantial news post harvest.

The business has its risks which mainly relate to cashflow and debt now. In the long term I am happy with this. However, weighing up the near term catalysts and risks I have decided to lock in my 30% profit and look elsewhere. I held for a couple of weeks hoping for a short squeeze to play out, but have decided I've given it enough time.

All in all I look at this as a successful purchase and prudent sale given my one year horizon. 

I have a number of options I'm looking into and I'm close to purchasing a new company. I will write about these in due course. 

The Portfolio as at 01/03/2016

Latest portfolio summary. A bit of green this time - but that could be taken away just as quickly...

See previous posts for my thoughts on what has caused the price movements.

Prophecy International and TFS Corporation Limited release Half Year Report

Last week two companies I hold in the 20k portfolio released their half year reports. Both company's reports were very pleasing. The market's reaction however has been polar opposite.

TFS Corporation (ASX:TFC)

TFC's results were largely as expected, but there were a few crucial pieces of information that I think the market had flagged as key risks. Plantation sales are up 50%, cash EBITDA is up and royalties from Benzac sales has tripled. The market rewarded it with a 24% increase in the stock price.

The main highlight for me was that both this years and next years anticipated harvest volumes have been forward sold. This included new agreements with Chinese and Indian buyers for heartwood at comparable prices to USD4,500/kg of oil. I think this has reduced a key risk - the significant increase in sandalwood volume over the coming years will actually lead to cash generation. I have always thought this was a concern for the market, because otherwise the forward earnings can be relatively easily estimated and discounted (this isn't the only risk however).

Another thing I had mentioned previously was the amount of shorting of the stock that has been going on recently. This had reached almost 10% of the float. This equates to just over 30 million shares. That is a significant number of shares that need to be bought back at some stage. I think the rise on Friday was largely attributed to these shorters covering their position, leading to a potential short squeeze. There are still approximately 30m shares that need to be covered. I think this could lead to a significant rerate over coming weeks as shorters scramble to buy back shares. Very exciting times for the long shareholder after what has been some pain at the hands of these shorters.

Unfortunately, I decided not to complete my position in TFC for the 20k portfolio, but the 1,700 I picked up could produce a very good return. Especially if the short squeeze continues.

Prophecy International (ASX:PRO)

Prophecy's results were also relatively as expected, however, there was a key piece of information regarding already booked revenue that I assumed the market would reward. This was not the case though!

PRO's guidance for the year is $20m revenue. The half year produced 8m revenue. This was announced previously and some may have been concerned that this indicated they weren't on track to meet guidance. It should be noted guidance is 67% revenue increase for SNARE and eMite products, which even if missed will still represent very impressive growth.

The profit for the half year was subdued, but this was expected and management reiterated previous guidance. Guidance is for 8.8cps. At the current SP this is a forward PE of 16. That is for a company that will double earnings this year and likely continue at a significant growth rate going forward. PRO has the ability to leverage earnings without increasing the cost base. More sales staff have increased the cost base recently, but for a company growing at such a rate it is obvious why they went to do this. Growth funds more growth!

Interestingly, the commentary indicated that 3.8m of sales is already booked regardless of new sales in the half. That puts the revenue for the half at 11.8m. On top of this, a significant amount of existing revenue is reoccurring. Therefore, the new sales required to meet guidance aren't overly onerous. Remember when this report came out we were already two months into the second half. Management obviously like what they see from recent sales.

Management also updated the market on various initiatives such as product development and different sales avenues. This is positive and shows the company isn't resting on its laurels even with their tremendous recent success. To add to that a director has bought in the last few days (albeit a small amount relative to their 7.5m existing shares)!

Moving to the SP, the market has continued to hammer PRO. I put this down to a combination of profit taking (the SP was up around 600% in the past year) and PE contraction due to the global doom and gloom (I am of the opinion the world will not end and good companies will keep making money). PRO's trailing PE will all of a sudden be 16 come the end of June, and it has tremendous growth prospects ahead. I can't see the SP staying low for very long and one positive update could send it back up.

The long term investor in me unfortunately won out and I bought more during the sell off after the report came out. I figured the market would study up and realise it was a buy. This was not to be unfortunately! I will endure some short term pain, but the long term prospects have me licking my lips. I've missed out on this additional upside for the 20k portfolio (I don't want to be too overweight in any company), but I will add more to my personal portfolio if it keeps dropping. I should have used TA here, but the opportunity was too good to resist. I'd rather be in and not miss out on a significant rise given I am a happy purchaser at these levels.

All in all, a good report from both companies, and I'm confident there is significant upside to be had for my 20k portfolio timeframe and well into the future.

Update

I haven't done a post in a while so here is a quick update:

Research

I have been filtering through a list of about 30 (and growing by the day) companies I have come across. These are companies I've encountered in the news, on forums, word of mouth and any other medium. That obviously means there are no gaurentees about their quality and each company needs to be looked at from scratch. I simply use it as a method to discover a company I don't know about.

A few I've come across justify further research. This usually means they are reasonably valued, have a decent balance sheet, have an interesting business and make money. I'll post about them if I consider they are worth pursuing further.

I'm considering investing in a gold miner as a possible turnaround in the industry is apparent. However, I may decide to keep this out of my 20k portfolio as it's likely going to be a lot more volatile and therefore a longer term view may be necessary. 

There's been a good rally this week in the US. A sustained consolidation may bring some money back into riskier assets. As I already predicted, the world doesn't seem as though it will end. Investing in companies growing their earnings is a good place to have your hard earned. Short term pain is tolerable provided you understand a company's risks and take a long term view (more than a year!!). Let others capitulate and sell around you and buy when things are cheap. 

Portfolio Plan

I've reconsidered my original plan of buying shares in 4 companies with 5k in each. I may end up limiting total purchases to 2.5k in some companies and holding another one or two companies. It all depends how my buy list looks. Having said that, PRO released their half year which was a good one (largely as expected but with good commentary around future growth). The market sold down which means I will probably complete this position.

Global Health Limited (ASX:GLH) is a company that lost a big contract and had an eps drop a year ago. Since then they've resumed winning contracts and growing the business. There was recently an independent research report written about them. Rather than rewriting about them please see the link: http://risingstarresearch.com.au/resources/Global%20Health%20.pdf

I've held shares through the rough times and topped up just before Christmas as the forward PE multiple was around 7. Since then it's rerated considerably and warrants further consideration. I will be watching their half year results and commentary closely. Any upgrade will likely see another rerate. If I can get in early enough I would happily add it to the 20k portfolio.

Update on my TFC Position

A quick update on my TFC position:

I continue to bide my time for purchasing my second parcel. The market continues to be very volatile, and given it dropped through support around $1.30 I will wait until a turnaround of momentum looks to be happening before adding to the position. I am still extremely bullish about the company and look forward to buying more!

The Third Purchase

Yesterday I bought my first parcel in Prophecy International (ASX:PRO) for the 20K challenge portfolio. I've written previously about why I like the company, but yesterday's drop where the share price touched $1.50 after opening at $1.70 was an opportunity too good to pass up. The price could still drop further obviously, and I'll wait for a turn around in momentum before I complete the position.

At $1.50 the SP was 40% below its peak of $2.53. Based on guidance for this FY that's a a forward PE of 20. I made my purchase at the closing price of $1.58. The revenue growth target of 67% is on track, and this  growth momentum looks like it will continue. 

Recently, the company announced its revenue for the first half of $8m. This appears on track to achieve guidance of not exceed it slightly. Commentary was positive about the coming quarter.

Given current market conditions it is easily perceivable that the SP will drop further in the short term. However, removing this from our minds, the value on offer is very good for such a high growth, profitable, cash flow positive company. It is also relatively under the market radar. The current entry point looks like a very good one if we look a few years out. I believe due to the news stream in the next year it will also perform well for my 20K challenge portfolio.

The next few days of SP action will be interesting and if it continues to fall I will be grateful for the continued opportunity!

Prophecy International is Looking like a Bargain

I recently wrote a brief post about Prophecy International (ASX:PRO). This is a company I really like. They are experiencing huge growth, and the growth is funding more sales staff to chase more growth.

They are in the business of developing and selling software.

Their two biggest selling (and feature) pieces of software are SNARE and eMite. SNARE is a cyber security monitoring program, and eMite is a business dashboard program. Both are in markets that are growing rapidly. Businesses are increasingly at risk from cyber attack and budgets are increasingly expanding to prevent it. Dashboards are also becoming increasingly used as the amount of data a business produces has expanded hugely in recent years. eMite allows the operations manager to monitor key data and react accordingly. In yesteryear such action wasn't possible until reports were manually produced when the events become historic.

The current SP on offer has prophecy trading on a forward PE of 19. This is for a business growing revenue at 67% and profit by significantly more. That is very good value and looking a couple of years ahead the PE is easily single figures. Their half year results are due to be reported in the very near future which I believe will back up its forecast growth and provide a catalyst to SP appreciation.

Their two primary packages have been acquired in recent years and added to the companies infrastructure. eMite was added last year and is benefiting from the sales network already in place that has proved so successful for SNARE. The company knows how to get the most out of excellent software. It is also on the lookout for earnings accretive additions to its existing portfolio.

Looking at the chart it closed on Friday at its 200 day EMA at 170c. It also bounced off recent support in the low 160s. Monday will be interesting as Wall Street closed heavily in the green on Friday. I expect to see good support and a short term bounce. However, I will wait for a reversal in momentum before getting on board at this stage.

Another thing to consider about the SP is that in appreciated hugely last year. A number of institutions were invested and are likely realising these profits as the world moves into a de-risking phase. Once this pressure alleviates then the relative illiquidity of the shares should see good upwards momentum based on fundamentals.

The value on offer is huge and it is only a matter of time before the SP turns around. Once global concerns stabilise this will be a very interesting proposition. One that I think will end up in the 20k challenge portfolio. While others run and duck for cover, those who can remain rational have the ability to buy solid companies for a lot cheaper than they should be!

MBE Delivers Another Cracker

Yesterday Mobile Embrace Limited (ASX:MBE) announced another cracker of a result. The H1 FY16 results beat previous guidance comfortably. 

The headline figures

Revenue - $28m (up 99%)

EBITDA - $4.1m (up 140%)

NPAT - $2.6m (up 73%)

Key things to note:

$4.2m was spent on OPEX for future growth. This did not materially contribute any revenue to the announced results, but will add meaningful revenue next FY onwards. This means underlying EBITDA is actually $8.3m! That is massive growth.

The company will continue to spend money on acquiring customers which implies the $4.2m sent this period will be continued in some respect. This dampens current profits, but it adds value in years to come. I would much rather the company maximise future growth than squeeze out the most profit possible now so the accounts look nice. Having said that, NPAT still grew 73%!

Based on the reported numbers I am anticipating an EPS of around 1.5c (assuming $3.5m NPAT in the second half). What is more important at this stage is the EBITDA growth and EBITDA margin growth (which we are seeing increase even with additional OPEX). This proves the scalability of the business. Scalability is one of the key factors for a business like this. 

An EPS of 1.5c implies a PE of 20, which is pretty good value for a business growing profits by 73%. As I stated above, underlying EBITDA should be a lot higher than that, and at this stage of the game that is far more important than the EPS number. On an underlying basis we could see an EPS of over 2.5c! That is amazing value. That is saying, if the business stopped pushing for growth by acquiring customers, the PE ratio would be closer to 10.

The current market sentiment towards all stocks with an element of risk is very poor. Therefore we may not see immediate recognition of these stellar results. That does, however, give long term investors the opportunity to buy cheap shares and build their position. The market will take notice once the global volatility cools down a bit.

This is a great result, and I am a very happy holder!

MBE Steps up to the Plate

With the sell-off from the past couple of months fresh in the memories of most, we move into more exciting times for holders. As I have previously described I am hoping a number of catalysts help give momentum to the share price over th year. One of these catalysts is the half year results that are just around the corner (this week or next).

When the market was updated about expected results last year the share price found its way to 44c. MBE are known for underpromising and over delivering. Therefore, I'm expecting some upside to the announced revenue of 27m, EBITDA of 3.5m, and underlying EBITDA of 7.5m. However, we all know the market is forward thinking. The market already knows what's coming and has priced it accordingly. So why the huge retrace?

I think the retrace is the result of a number of things including buying by an institution or two. They have cleverly used the recent market turmoil to try and drive the share price lower while they accumulate a position. This has resulted in a lot of weak hands letting go as the SP drops. After closing below support at around 29-30c the SP swiftly recovered to back above 30c. I can now see a possible rally leading into results as buyers try to build their positions prior to the earnings announcement. I see a decent spike following earnings as this is usually the case for MBE.

In summary, I think momentum will start to turn over the next week leading into results and in a month or so we will have seen a rerate possibly back into the 40s. The current market turmoil may take a bit of steam out though, which could offer buying opportunities for a bit longer. I'm confident by the time the year is out we won't be anywhere near 30c. If we are, I'll be accumulating.

TFC Keeps dropping and MBE has significant close

Today was an all round bad day on the markets. It proved no different for my two 20k challenge stocks.

TFC broke below the 129-130 mark which it had been flirting with for a while. There are a few old support points around the low 120s so will be interesting to see where it stops. Sentiment may start changing when results come out which has happened in the past. I will hold off buying my second parcel for now.

MBE closed on the technically important 29c mark. This marks old resistance and recent support. A bounce from here would almost confirm the near term support point. Whereas if we break below then we are searching for new support. Earnings are coming up, the market already has guidance, but expect a beat as usual from management. I expect even though the market knows what's coming we wil get a good bounce.

As all good investors know - short term price fluctuations mean nothing. The quality will rise to the top.

Prophecy International Tempts

I won't do a full write up on Prophecy International (ASX:PRO), but I will just document that I am very tempted to get on board (again).

Prophecy sells software and has two major products - SNARE and eMite. SNARE is a cyber security program and eMite is an operations dashboard. Both are forecast to grow sales 67% this year (and profit by more). The forward PE is in the low 20s. Based on recent sales figures I believe they are ahead of their forecasts. They have created a virtuous circle where growth funds further growth - the best thing for investors!

I would invest in Prophecy (again) today if it weren't for the significant percentage of my portfolio that it takes up. Even then I am very tempted to increase my exposure in the short to mid term as I think a rerate isn't too far away. The company has had a very good run over the last year and since then has taken a breather. The good run is very much justified based on fundamentals! 

The below chart shows the recent price action and the possible formation of a symmetrical triangle pattern. If it were to breakout of this pattern the price target would be around $2.90.

I only use TA to back up fundamentals, and in this case I like what I see. Even if I don't add Prophecy to the 20k challenge portfolio I hope I've raised awareness of this great company for others. As always do your own research, this is just an idea.

Update on the Research

I haven't had a lot of time to research any new companies lately. I have 20 or so that I have come across (and know nothing about) that I plan to have a quick look at. I'm about to sit down (in front of the Blackcaps chasing down Pakistan's 290) and look at these. Hopefully a couple will warrant a more in depth look and be an option for my 20k challenge portfolio.

A Theory on TFC

A Theory on the TFC Share Price

TFS Corporation (ASX:TFC) as a company has got stronger over the past couple of years. However, after a rerate two years ago the share price has gone backwards. Normally, I only focus on company fundamentals and not worry about the share price. I know if I've done my homework well the share price will take care of itself.

I still have the same belief in TFC. 

This quote from John Maynard Keynes is one of my favourites: "Markets can remain irrational longer than you can stay solvent". So here is me trying to explain what is most likely the market being irrational.

TFC are exposed to commodities. Their specific commodity is Indian Sandalwood. The market price of Indian sandalwood has gone up for the past 20 years. TFC are the only company that own a sustainable source of Indian Sandalwood. They also have long term agreements in place at $4,500/kg of oil (and more to follow), which is almost double the current market rate. And there it is, the word "oil". 

Take a look at the next two graphs. The first is the short rate of TFC. That is, people that are betting the share price will go down. The second is the crude oil price.

It may be a coincidence, but there is definitely a corelation between the two graphs. Does the market actually see a relation between the two? I cannot see any reasonable explanation. However, 8% of the total number of shares have been shorted.

Those that believe in the TFC story have a great opportunity to buy some shares on sale. With the strong fundamentals, and the potential that any significant price movement will force people to cover  short positions we could see a significant rerate in the not too distant future.

Entry Point Support Holding for MBE and TFC... So far

The timing of my purchases of MBE and TFC was based the recent price action. It goes without saying that my purchase price was attractive to me from a fundamental point of view.

MBE

MBE was oversold on the RSI, had just filled at gap between 29 and 29.5c, held above an old resistance line at 29c and bounced off the 200 day EMA. There was also good buy depth at 29.5 and 30.

A few days have passed and support has been tested and held a few times with good buy depth still at 29.5 and 30c. It looks like we have found a temporary bottom and evidence is building that the bottom has been found, however, tomorrow will be telling after today's 30c close.

TFC

TFC was a similar story to MBE. Hit oversold on the RSI after a big sell-off. Support rushed in at 129-130c and has held for a few days. There was a nice bounce today to close at 134c. There has been growing short interest in TFC over the past two years, and any sizeable rally could mean some short covering.

Second Purchase - TFS Corporation Beaten Down to a Buy

I have decided to initiate a position in TFC. I purchased 1700 at 130c. Once again I will split my position over two parcels (this time I will have more than 1 day between purchases!). The timing here involves an element of risk due to the recent substantial fall.

I have outlined the business in a recent post, but here are the facts behind my investment.

Monday’s price drop has potentially marked “capitulation” as the price was beaten down to close at 129.5c. The RSI shows it’s oversold, and there was good support coming in around the 130 level. Today’s pre-market shows very good support around these levels. There also is not a lot on offer on the sell side.

As mentioned in the previous post on TFC, it is very much a long-term play, with the significant future cash flow potential from large harvests still a few years away.

I believe the company is fundamentally undervalued at these levels. They trade on a trailing PE of 3.7 currently (SP of $1.30). Note this includes revaluation of plantation assets as they mature towards harvest. Some believe this is overstated. The revaluation assumes an end oil price that is much lower than what they have achieved with their agreements. I believe they have proved their business model and the revaluation is fair (it is also audited). Trailing Price/Cash EBITDA ratio (excluding non-cash revaluation etc) is 7.3. Cash EBITDA is forecast to grow by 5-10%. I believe reported NPAT will grow by more (last year this was 37% vs cash EBITDA growth of 12%) as it has in the past due to revaluation of assets.

Given my relatively short one-year timeframe (the market may continue to ignore TFC), I need a bit more than that to invest. Catalysts that I believe will have a positive impact on the share price this year are:

·         Announcement of agreements with new end markets

·         Financial results

·         Results of harvesting and subsequent sale of wood/oil

·         High establishment fees for managed plantation investors than prior years

·         Positive results from the pharmaceutical trials and Benzac sales. The reverse applies obviously

·         All the above will continue to prove the business model which will allow build investor confidence.

I will consider closing my position if there is a significant rerate. Normally I wouldn’t do this. I see significant long-term upside for the company, but given the one-year timeframe of this portfolio it will be important to lock in profits for what is otherwise a relatively long-term investment thesis.

Empired - Has the Recent Sell-off Offered an Opportunity?

Empired (ASX:EPD) have been on my radar for a while. I have never committed too much time to researching them because they have appeared to be fully valued.

After the recent drop I decided it could be time to invest. The reported PE ratio is 6-7 and revenue is expected to grow. I read through the reasons for the lower guidance and they say it is all one-off in nature. These are situations that sometimes offer investors a cheap entry due to one bad year and then it's business as usual and the SP recovers.

They indicate H2FY16 will be back to normal. This is always something to be careful about as sometimes management overlook reasons for these events. I am always very sceptical until there is sufficient evidence to prove a one-off is in fact a one-off.

In this situation I don't think I will invest just yet. The reasons for the lower guidance include integration of an acquisition and what appears to be poor contract execution. This may not be the case, but I want to see evidence of their EBITDA margins returning back to their reported target of around 8-10%. Once they prove that it was a one-off hiccup I will look further into the company and consider investing. Until then I will watch with interest.

XPD Soccer Gear - What Gives?

As part of a screen I ran I came across XPD Soccer Gear (ASX:XPD).

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.