Sinopec Shanghai Petrochemical - 12% yielding hedge

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Kind: captions
Language: en

00:00:00.030
welcome to investing with gyt and it's
00:00:02.149 00:00:02.159 been a long long time since I last
00:00:05.300 00:00:05.310 published anything yeah so sorry about
00:00:09.950 00:00:09.960 that but today we'll talk about Sinopec
00:00:12.919 00:00:12.929 shanghai a petrochemical company the
00:00:15.860 00:00:15.870 ticker in the US is Shi and for those
00:00:22.099 00:00:22.109 that speak Chinese or no painting for
00:00:25.970 00:00:25.980 that matter it is somewhat similar to
00:00:34.510 00:00:34.520 how we pronounce in Chinese in any
00:00:40.130 00:00:40.140 case so this company is a subsidiary of
00:00:46.959 00:00:46.969 Sinopec and it's the largest while here
00:00:54.139 00:00:54.149 is a twentieth anyway so you can take a
00:00:56.270 00:00:56.280 look and here here's a bunch of risks
00:01:02.180 00:01:02.190 factors and it actually goes pretty
00:01:05.960 00:01:05.970 pretty far down yeah business overview
00:01:09.310 00:01:09.320 so there are one of the largest
00:01:12.980 00:01:12.990 petrochemical companies in China and
00:01:15.710 00:01:15.720 they're based in Shanghai which means
00:01:19.179 00:01:19.189 their sales are basically to eastern
00:01:24.499 00:01:24.509 China and let's go to Shanghai
00:01:33.700 00:01:33.710 alright so eastern China including parts
00:01:39.350 00:01:39.360 of Jiangsu and Shanghai and Georgia are
00:01:44.499 00:01:44.509 and also ten ways these are the more one
00:01:50.179 00:01:50.189 of the more economically vibrant regions
00:01:54.380 00:01:54.390 of China and it's not at all surprising
00:01:59.300 00:01:59.310 because this is a Yangtze River Delta
00:02:01.700 00:02:01.710 and China basically has like whoa this
00:02:06.740 00:02:06.750 true town Pearl River Delta here and
00:02:10.460 00:02:10.470 then the
00:02:12.100 00:02:12.110 youngsil River Delta and in here is
00:02:18.010 00:02:18.020 basically Beijing so so yeah so that's
00:02:22.030 00:02:22.040 this is like the second economic engine
00:02:25.090 00:02:25.100 of China are they kind of Guangdong and
00:02:28.290 00:02:28.300 eastern China kind of compete for that
00:02:30.880 00:02:30.890 title and this company sells as listed
00:02:37.360 00:02:37.370 here they sell some synthetic fiber some
00:02:40.600 00:02:40.610 plastics and and then they sell fuel
00:02:44.470 00:02:44.480 essentially in terms of the stuff they
00:02:49.870 00:02:49.880 sell right here are the stuff that they
00:02:54.460 00:02:54.470 sell and mostly in terms of mass it's
00:03:08.350 00:03:08.360 mostly just diesel and gasoline and and
00:03:11.770 00:03:11.780 then jet fuel and then you have a bunch
00:03:13.690 00:03:13.700 of plastic stuff and fibers they also a
00:03:19.030 00:03:19.040 are engaged in some trading so
00:03:21.420 00:03:21.430 import/export of petrochemical products
00:03:26.140 00:03:26.150 but the profit contribution from that
00:03:30.790 00:03:30.800 business is quite low so I typically
00:03:33.190 00:03:33.200 don't pay any attention to that okay so
00:03:37.330 00:03:37.340 let's look at valuation so one thing you
00:03:39.940 00:03:39.950 can notice that this thing let me see if
00:03:43.240 00:03:43.250 I can change this to English the English
00:03:44.890 00:03:44.900 translation on this website is not
00:03:46.870 00:03:46.880 perfect but it's better than nothing
00:03:51.660 00:03:51.670 okay so dividend yield is about 6% and
00:03:56.890 00:03:56.900 then pv is 1.5 but didn't sound awfully
00:04:01.930 00:04:01.940 cheap sounds four okay that's because
00:04:07.290 00:04:07.300 this is not the one you want to buy you
00:04:11.140 00:04:11.150 really want to buy the same shares on
00:04:13.479 00:04:13.489 the Hong Kong exchange or the ADR which
00:04:18.520 00:04:18.530 is based off the Hong Kong exchange and
00:04:22.540 00:04:22.550 when you look at this you can see that
00:04:24.490 00:04:24.500 the PB is zero points
00:04:25.810 00:04:25.820 9:08 basically dividend is about 15
00:04:29.290 00:04:29.300 sorry 12 percent plus now granted that
00:04:34.170 00:04:34.180 unlike American companies companies in
00:04:37.840 00:04:37.850 in many other regions of the world don't
00:04:40.000 00:04:40.010 pay a steady dividend they will just
00:04:41.860 00:04:41.870 adjust their dividend based on the
00:04:44.500 00:04:44.510 profit of that year so there will be
00:04:46.690 00:04:46.700 periods and you can see here there will
00:04:48.940 00:04:48.950 be years where they pay zero dividend
00:04:51.430 00:04:51.440 this is a dividend yield rate dividend
00:04:54.400 00:04:54.410 yield and I think it is basically the
00:04:59.560 00:04:59.570 highest averages company's ever been in
00:05:01.690 00:05:01.700 terms of different different ratios
00:05:04.750 00:05:04.760 given yield okay and here is P
00:05:09.690 00:05:09.700 historical P for basically 20 years they
00:05:13.660 00:05:13.670 went public in 2001 and this is a sick
00:05:18.820 00:05:18.830 little company and I will explain why
00:05:20.740 00:05:20.750 this is cyclical slightly later but it's
00:05:24.010 00:05:24.020 a very cyclical company and therefore
00:05:27.880 00:05:27.890 there will be periods of double periods
00:05:30.430 00:05:30.440 where they lose money
00:05:31.990 00:05:32.000 hence these large these negative pease
00:05:37.300 00:05:37.310 basically so a better metric for
00:05:42.430 00:05:42.440 valuation would be PB or PS and in terms
00:05:46.540 00:05:46.550 of PB there well back here they were not
00:05:52.420 00:05:52.430 really much sure but once they are kind
00:05:55.060 00:05:55.070 of mature when broaches 2012 is when
00:05:57.970 00:05:57.980 they finished the last round of
00:05:59.950 00:05:59.960 expansion you can see this we are
00:06:07.030 00:06:07.040 essentially the same the lowest ever the
00:06:12.670 00:06:12.680 lowest PB ratio since 2012 basically and
00:06:18.130 00:06:18.140 then for anything that is even lower you
00:06:22.270 00:06:22.280 have to go to the the depth of the
00:06:25.470 00:06:25.480 crisis in that case the PB ratio was
00:06:29.260 00:06:29.270 half of what is it now so imagine if we
00:06:32.290 00:06:32.300 had what here is actually a double
00:06:34.420 00:06:34.430 whammy but
00:06:37.570 00:06:37.580 I'll get that into that later why that's
00:06:40.159 00:06:40.169 a double whammy and then in terms of
00:06:42.439 00:06:42.449 price to sales again you're looking at
00:06:44.869 00:06:44.879 here is 0.1 3 now it's zero point two
00:06:49.309 00:06:49.319 two and then in 2014 their periods or
00:06:52.580 00:06:52.590 0.1 so there's a lot again a 50%
00:06:55.249 00:06:55.259 downside dividend ratio and on the other
00:06:57.860 00:06:57.870 hand you are at the peak so overall I
00:07:03.200 00:07:03.210 would say the company is very cheap
00:07:06.279 00:07:06.289 compared to the its past self and what
00:07:12.529 00:07:12.539 else has changed for the company
00:07:13.969 00:07:13.979 obviously the profit has grown over the
00:07:16.939 00:07:16.949 years so you got a hold on if you look
00:07:22.219 00:07:22.229 at growth growth growth yeah look just
00:07:29.659 00:07:29.669 look at the blue bar and essentially you
00:07:32.480 00:07:32.490 can see the upper income has generally
00:07:35.779 00:07:35.789 been increasing obvious although it has
00:07:39.189 00:07:39.199 not been as high as 2013 now see and net
00:07:45.409 00:07:45.419 profit you can see their ups and downs
00:07:48.769 00:07:48.779 sick low company and I said but in
00:07:51.860 00:07:51.870 general the ups are slightly bigger than
00:07:55.779 00:07:55.789 the downs and cash flows are is actually
00:08:03.740 00:08:03.750 looking better than profits and you can
00:08:08.570 00:08:08.580 see they're consistently building equity
00:08:10.850 00:08:10.860 instead of destroying equity obviously
00:08:12.499 00:08:12.509 there are periods where they do destroy
00:08:15.920 00:08:15.930 equity especially in 2008 but that is
00:08:21.829 00:08:21.839 somewhat expected that is after all the
00:08:27.559 00:08:27.569 depth of the crisis okay and what else
00:08:33.790 00:08:33.800 the other thing that has changed for
00:08:36.800 00:08:36.810 this company over the years is its debt
00:08:39.009 00:08:39.019 if we look at I think there's a thing
00:08:42.139 00:08:42.149 called cost analysis ignore these four
00:08:46.010 00:08:46.020 out get into an analysis of its gross
00:08:48.559 00:08:48.569 profit but the
00:08:51.519 00:08:51.529 the thing I was all gonna show here is
00:08:53.900 00:08:53.910 can see the financial expense well I
00:08:59.019 00:08:59.029 think it's caught interest expense
00:09:04.310 00:09:04.320 most most of the times interest expense
00:09:06.889 00:09:06.899 on if you're looking at gap statements
00:09:10.970 00:09:10.980 but it's gone down as a percentage of
00:09:18.280 00:09:18.290 revenue and now it's negative which
00:09:20.780 00:09:20.790 means a company is well I can't release
00:09:26.240 00:09:26.250 a snit cash but it has more cash than
00:09:30.550 00:09:30.560 interest-bearing debt and that's how you
00:09:33.350 00:09:33.360 can end up with a negative interest
00:09:34.879 00:09:34.889 expense because you have interest income
00:09:38.110 00:09:38.120 yeah and the other thing is if you look
00:09:41.780 00:09:41.790 at net margin you're looking between
00:09:47.240 00:09:47.250 well the the 20-year average is two
00:09:50.930 00:09:50.940 point two seven percent which is
00:09:53.300 00:09:53.310 expected of a commodity business you're
00:09:56.809 00:09:56.819 never going to make oversight over many
00:10:01.460 00:10:01.470 cycles here we're looking at from 2002
00:10:03.500 00:10:03.510 over many cycles you are not going to
00:10:05.960 00:10:05.970 see a very high margin that's just not
00:10:10.639 00:10:10.649 how come on is the business's work and
00:10:12.460 00:10:12.470 the peaks of these up cycles corresponds
00:10:17.150 00:10:17.160 about ten percent gross mark profit
00:10:19.370 00:10:19.380 margin and at the moment we're slightly
00:10:22.340 00:10:22.350 below the the long-term average and if
00:10:27.230 00:10:27.240 you look at gross profit we are slightly
00:10:29.840 00:10:29.850 above the long-term average so does that
00:10:32.030 00:10:32.040 bode well for the future gross profits
00:10:36.319 00:10:36.329 probably going to decline it could but
00:10:43.870 00:10:43.880 you know it has been pretty high for a
00:10:48.259 00:10:48.269 couple of years and then even in 2018
00:10:51.680 00:10:51.690 when you know gas prices was oil price
00:10:58.069 00:10:58.079 was increasing seventeen and eighteen
00:10:59.720 00:10:59.730 really oil price was increasing there
00:11:02.420 00:11:02.430 they kept
00:11:03.910 00:11:03.920 Plus margin fairly well and then there
00:11:05.889 00:11:05.899 are some things that I was observed that
00:11:08.369 00:11:08.379 also contribute to you know I mean if
00:11:16.329 00:11:16.339 you think like a triple expense ratio
00:11:18.970 00:11:18.980 but this is really just sgna sgna is
00:11:22.479 00:11:22.489 gone down as a percentage of revenue
00:11:24.220 00:11:24.230 which is what you want to see so the
00:11:27.280 00:11:27.290 company is getting more efficient as
00:11:29.259 00:11:29.269 time goes on and the other thing that
00:11:34.530 00:11:34.540 people always get a bit hang up on is
00:11:39.119 00:11:39.129 state-owned enterprises this is a
00:11:41.710 00:11:41.720 state-owned enterprise but there are
00:11:45.189 00:11:45.199 many signs pointing to that the
00:11:48.429 00:11:48.439 management is trying to improve the
00:11:50.319 00:11:50.329 company overall and in many aspects so
00:11:55.929 00:11:55.939 so that's the cost and I said mostly I
00:11:58.989 00:11:58.999 was just gonna focus on the reduction of
00:12:00.999 00:12:01.009 debt and what else oh yes and you know
00:12:10.299 00:12:10.309 very high dividend maybe let's say next
00:12:12.249 00:12:12.259 years we get cut in half you're still
00:12:14.650 00:12:14.660 getting 6% and oh there's one more thing
00:12:18.100 00:12:18.110 I want to show there was a very
00:12:22.199 00:12:22.209 interesting phenomenon which makes zero
00:12:27.759 00:12:27.769 sense to me okay I need to look at the
00:12:34.689 00:12:34.699 Chinese one haha
00:12:36.549 00:12:36.559 yeah so this is the the Asia right and
00:12:42.479 00:12:42.489 there was a mechanism which I've talked
00:12:46.030 00:12:46.040 about before which is called Hong Kong
00:12:49.289 00:12:49.299 Stock Exchange interconnect or something
00:12:52.840 00:12:52.850 essentially that enables people to buy a
00:12:57.879 00:12:57.889 shares in Hong Kong and buy eight shares
00:13:02.079 00:13:02.089 basically some of the eight share some
00:13:04.239 00:13:04.249 of the Hong Kong listed shares in China
00:13:06.970 00:13:06.980 and it started in 2017 and this is a
00:13:14.499 00:13:14.509 share and then as we talked before Asia
00:13:17.019 00:13:17.029 is about
00:13:17.620 00:13:17.630 percent more expensive than the issues
00:13:21.450 00:13:21.460 dividend is about half and then your PB
00:13:25.270 00:13:25.280 is about double and right so it's it's
00:13:28.510 00:13:28.520 basically doubly as expensive and for
00:13:32.800 00:13:32.810 any normal human for the exact same
00:13:36.610 00:13:36.620 share you would not want to pay twice I
00:13:40.540 00:13:40.550 mean technically is not exactly the same
00:13:43.600 00:13:43.610 because in China if you hold if you hold
00:13:47.020 00:13:47.030 an Asia
00:13:47.590 00:13:47.600 for more than a year and you're a
00:13:50.020 00:13:50.030 Chinese citizen you don't pay dividend
00:13:52.660 00:13:52.670 tax and in Hong Kong doesn't matter what
00:13:57.190 00:13:57.200 happens you gotta pay at least you gotta
00:13:59.230 00:13:59.240 pay twenty percent so it's arguable that
00:14:03.130 00:14:03.140 eight shares should have a twenty
00:14:05.920 00:14:05.930 percent twenty percent discount compared
00:14:11.470 00:14:11.480 to the eight year because you've got to
00:14:12.760 00:14:12.770 pay these you're gonna pay that out as
00:14:16.680 00:14:16.690 as dividend if you hold the thing
00:14:19.450 00:14:19.460 forever and you only live off the
00:14:21.640 00:14:21.650 dividend then your coupon is your
00:14:25.990 00:14:26.000 dividend is essentially twenty percent
00:14:27.910 00:14:27.920 less but this is not twenty percent and
00:14:31.900 00:14:31.910 this is this is a fifty percent discount
00:14:34.570 00:14:34.580 so this will make any sense and then why
00:14:38.200 00:14:38.210 would anyone did the the this orangish
00:14:46.050 00:14:46.060 shade that area is represents the amount
00:14:50.470 00:14:50.480 the percentage of float that was bought
00:14:53.410 00:14:53.420 by people using the Hong Kong exchange
00:15:01.480 00:15:01.490 so that makes zero sense to me it's
00:15:05.320 00:15:05.330 probably some index fund because why
00:15:09.730 00:15:09.740 would anyone pay double to get the same
00:15:12.670 00:15:12.680 thing there that's what this is
00:15:15.220 00:15:15.230 happening paying double to get the same
00:15:17.380 00:15:17.390 thing on the other side if you look at
00:15:20.110 00:15:20.120 this this makes sense you you know when
00:15:24.550 00:15:24.560 whenever the floodgate opens you would
00:15:26.950 00:15:26.960 think that the Chinese would sell or the
00:15:32.100 00:15:32.110 the a shares and by the eight shares
00:15:34.020 00:15:34.030 because it's higher dividend but this
00:15:37.770 00:15:37.780 thing is only representing you know just
00:15:43.040 00:15:43.050 one bit more than one percent of the
00:15:46.260 00:15:46.270 free float well not the free-flow the
00:15:49.170 00:15:49.180 the market cap which is actually
00:15:53.250 00:15:53.260 slightly higher in terms of percentage
00:15:56.040 00:15:56.050 if you're talking about free float but
00:15:57.600 00:15:57.610 still it's very small percentage it
00:16:00.480 00:16:00.490 still doesn't make much sense anyway so
00:16:03.600 00:16:03.610 that was just something I was gonna rant
00:16:05.370 00:16:05.380 because it's quite stupid that people
00:16:10.230 00:16:10.240 are paying more for the same thing
00:16:13.170 00:16:13.180 that's shown here
00:16:14.370 00:16:14.380 okay so what else was there yes so the
00:16:24.920 00:16:24.930 cyclicality how to understand the cycles
00:16:31.820 00:16:31.830 regarding this particular company so I
00:16:35.280 00:16:35.290 got all the data out of other related
00:16:39.020 00:16:39.030 related data out so we're gonna take a
00:16:41.550 00:16:41.560 look at my excel okay so what I have are
00:16:46.020 00:16:46.030 the gross margins and the other thing is
00:16:52.890 00:16:52.900 the oil price all right so I got all the
00:16:54.960 00:16:54.970 oil price and then gross margin and then
00:16:57.630 00:16:57.640 I charted it and this is what you see
00:17:02.330 00:17:02.340 the blue line is all your price and the
00:17:08.699 00:17:08.709 gray line is gross margin and you can
00:17:13.500 00:17:13.510 see that generally whenever oil prices
00:17:17.490 00:17:17.500 going up gross margin goes down and when
00:17:19.860 00:17:19.870 oil shoots up gross margin shoots down
00:17:22.740 00:17:22.750 and here is an anomaly we'll discuss
00:17:24.810 00:17:24.820 that later
00:17:25.380 00:17:25.390 when both oil price and gross margin
00:17:29.300 00:17:29.310 were going up for a period of time but
00:17:34.020 00:17:34.030 for basically a year each I mean I
00:17:37.380 00:17:37.390 messed up this horizontal axis so never
00:17:40.560 00:17:40.570 mind that but
00:17:43.950 00:17:43.960 this is quarters these are basically
00:17:45.989 00:17:45.999 quarters and then here's another thing
00:17:50.850 00:17:50.860 when you have a move in the oil price
00:17:54.889 00:17:54.899 going down and the margin goes up and
00:17:57.980 00:17:57.990 now in 2000 this is basically 2007 ish I
00:18:03.869 00:18:03.879 think sorry 17 18 18 or 19 is the last
00:18:09.330 00:18:09.340 quarters 19 so 18 ish when you got all
00:18:14.669 00:18:14.679 your price going up your margin goes
00:18:17.039 00:18:17.049 down and why is that I mean normally
00:18:23.269 00:18:23.279 this is similar more similar to a
00:18:26.039 00:18:26.049 refinery in the US right because you
00:18:28.919 00:18:28.929 take in the crude oil and then you
00:18:34.529 00:18:34.539 produce some fuel and we all know that
00:18:38.669 00:18:38.679 whenever oil price goes up you notice
00:18:43.739 00:18:43.749 the price at the pump would change and
00:18:46.230 00:18:46.240 then how will go up and which means that
00:18:49.350 00:18:49.360 these refineries don't really care too
00:18:55.139 00:18:55.149 much about the price of oil if price of
00:18:57.720 00:18:57.730 oil goes up they increase the price of
00:19:01.649 00:19:01.659 their their output and yeah so they
00:19:09.119 00:19:09.129 don't really care of me of course you're
00:19:10.590 00:19:10.600 gonna get a little bit less sales
00:19:12.899 00:19:12.909 because people tend to drive slightly
00:19:15.989 00:19:15.999 less when our prices is higher but their
00:19:19.289 00:19:19.299 gross margins more or less protected but
00:19:22.590 00:19:22.600 in China there's a the government
00:19:26.129 00:19:26.139 actually sets the price at which fuel is
00:19:30.659 00:19:30.669 sold especially gastly I'm not sure
00:19:33.659 00:19:33.669 about diesel yes these are what these as
00:19:37.139 00:19:37.149 well may be jet fuel it's free-floating
00:19:40.259 00:19:40.269 but diesel definitely diesel and
00:19:43.009 00:19:43.019 gasoline definitely are price controlled
00:19:46.289 00:19:46.299 I mean the price control is not
00:19:48.299 00:19:48.309 ridiculous as in like the state would
00:19:50.580 00:19:50.590 subsidize or make a ton of money of
00:19:53.249 00:19:53.259 people and they do float
00:19:58.340 00:19:58.350 whenever oil price kind of gets out of
00:20:01.379 00:20:01.389 whack but there is a lag so instead of
00:20:06.200 00:20:06.210 the company is changing their price
00:20:10.220 00:20:10.230 daily or weekly you get these changes
00:20:15.200 00:20:15.210 some bureaucrat is God to that and then
00:20:18.239 00:20:18.249 the bureaucrat will do it maybe once
00:20:21.149 00:20:21.159 every three month right and then and
00:20:26.149 00:20:26.159 that's what results in these inverse
00:20:30.720 00:20:30.730 correlations in terms of cross margin
00:20:33.049 00:20:33.059 and yeah so when and the thing is at
00:20:40.169 00:20:40.179 this point when the gross margin is
00:20:43.590 00:20:43.600 deeply negative in 2000 2009 when gross
00:20:47.669 00:20:47.679 margin is deeply negative well let's
00:20:52.139 00:20:52.149 first talk about the double whammy so
00:20:54.060 00:20:54.070 this is 2008 late 2008 this is when the
00:20:58.649 00:20:58.659 stock price was the lowest if you look
00:21:00.599 00:21:00.609 at here look at just a stop price
00:21:14.740 00:21:14.750 market cap was from the start
00:21:27.930 00:21:27.940 this is when it was the lowest if you
00:21:31.409 00:21:31.419 look at oh come on
00:21:42.230 00:21:42.240 here
00:21:46.340 00:21:46.350 is all very messed up usually it follows
00:21:55.220 00:21:55.230 that I think it's because I changed it
00:21:57.649 00:21:57.659 in English so now it's kind of messed up
00:21:59.419 00:21:59.429 but that's
00:22:12.090 00:22:12.100 this is the Chinese one I need the
00:22:16.260 00:22:16.270 Hongkong one okay
00:22:19.070 00:22:19.080 the Hongkong one and I need from the
00:22:22.800 00:22:22.810 start
00:22:23.610 00:22:23.620 yeah this is that's this line this thing
00:22:28.740 00:22:28.750 00:22:29.300 00:22:29.310 well actually this I think twenty four
00:22:33.180 00:22:33.190 ish is when the price was the lowest it
00:22:35.940 00:22:35.950 was third quarter of 2008 and the reason
00:22:41.850 00:22:41.860 was in late 2000
00:22:43.740 00:22:43.750 Wow in the mid of 2008 the oil price
00:22:46.530 00:22:46.540 shot up quite a bit from something like
00:22:51.050 00:22:51.060 $50 a barrel to more than 120 and
00:22:54.290 00:22:54.300 obviously the state is not the
00:22:57.200 00:22:57.210 government doesn't change price as fast
00:22:59.840 00:22:59.850 so that ended up making a huge loss on
00:23:06.390 00:23:06.400 this company and but obviously the
00:23:11.070 00:23:11.080 government's got to catch up so they
00:23:12.600 00:23:12.610 started adjusting these prices and at
00:23:17.700 00:23:17.710 the same time the oil price went all the
00:23:22.380 00:23:22.390 way down so that kind of resulted the
00:23:26.610 00:23:26.620 gross margin recovery and then still you
00:23:29.250 00:23:29.260 got more price increases in oil oil went
00:23:32.970 00:23:32.980 all the way down and then your
00:23:34.230 00:23:34.240 government price adjusted upwards so if
00:23:36.720 00:23:36.730 you can see this kind of overshoots to
00:23:39.480 00:23:39.490 be too higher than what was before the
00:23:42.150 00:23:42.160 oil price jump the Oh before the oil
00:23:44.400 00:23:44.410 price jump you could argue it was you
00:23:46.440 00:23:46.450 know somewhere between five was seven
00:23:49.920 00:23:49.930 seven percent gross margin and after the
00:23:53.130 00:23:53.140 spike and the drop the gross margin now
00:23:56.490 00:23:56.500 went to 17 percent so that is because
00:24:04.020 00:24:04.030 the government actually increased the
00:24:06.300 00:24:06.310 price to higher than what it was sold in
00:24:10.800 00:24:10.810 2000 and this was 2000 and I think five
00:24:16.970 00:24:16.980 it would be nice if I had data about the
00:24:20.040 00:24:20.050 historical price at which
00:24:25.170 00:24:25.180 fuel was sold in China but I couldn't
00:24:28.020 00:24:28.030 seem to find that so maybe I would think
00:24:30.930 00:24:30.940 up dig that up and if I do dig that
00:24:33.150 00:24:33.160 about put it in description yeah and
00:24:39.000 00:24:39.010 yeah and then that's why I mean that's
00:24:41.700 00:24:41.710 for the for the fuel part which is about
00:24:45.510 00:24:45.520 40 percent of the business and then the
00:24:47.520 00:24:47.530 rest which is plastic and and fibers
00:24:52.140 00:24:52.150 these demands are very cyclical in term
00:24:56.270 00:24:56.280 they basically is a little bit leading
00:25:05.640 00:25:05.650 the overall economic cycle because these
00:25:09.480 00:25:09.490 are basically needed for production and
00:25:11.670 00:25:11.680 then they are generally not what the
00:25:17.250 00:25:17.260 consumer want at the end so they are
00:25:20.580 00:25:20.590 basically inventory for somebody as raw
00:25:25.770 00:25:25.780 materials and then the demand for these
00:25:29.330 00:25:29.340 basically creator whenever your economy
00:25:31.950 00:25:31.960 goes down and yeah when the demand
00:25:35.790 00:25:35.800 craters and you got the fixed capacity
00:25:38.910 00:25:38.920 for for for the production of these
00:25:46.550 00:25:46.560 these book essentially war material
00:25:49.500 00:25:49.510 almost like raw materials then you
00:25:53.040 00:25:53.050 really can't expect very high margins
00:25:56.370 00:25:56.380 and you probably can't even expect
00:25:59.540 00:25:59.550 positive gross margins because sometimes
00:26:05.940 00:26:05.950 people will produce even though they
00:26:08.130 00:26:08.140 make a gross loss because they have to
00:26:12.390 00:26:12.400 cover for the depreciation and then they
00:26:18.120 00:26:18.130 have to have some they have to have some
00:26:25.370 00:26:25.380 cash flow to sustain their business they
00:26:28.830 00:26:28.840 basically burn down they I mean if you
00:26:33.360 00:26:33.370 think about internal accounting terms
00:26:35.070 00:26:35.080 they kind of tap into that depreciation
00:26:37.830 00:26:37.840 and what has
00:26:38.790 00:26:38.800 in part two of the future they differ
00:26:43.940 00:26:43.950 they can't defer maintenance expenditure
00:26:48.350 00:26:48.360 to the futures to make sure that the
00:26:52.140 00:26:52.150 company survives and they were in
00:26:55.820 00:26:55.830 somewhat precarious positions back then
00:26:59.040 00:26:59.050 in 2008 you can see the there was uh let
00:27:06.030 00:27:06.040 me see if we can find it there's a
00:27:08.760 00:27:08.770 thinker safety analysis very interesting
00:27:11.150 00:27:11.160 long-term solvency they're like yeah you
00:27:15.600 00:27:15.610 can see the liabilities was in terms of
00:27:19.890 00:27:19.900 total asset ratio was very high in 2000
00:27:23.970 00:27:23.980 late 2008 and they also had another bump
00:27:27.690 00:27:27.700 in 2012 liquidity wasn't that good
00:27:32.340 00:27:32.350 here and there and used as you saw
00:27:37.140 00:27:37.150 before their shareholder equity was
00:27:41.660 00:27:41.670 fairly low gross analytics yeah the huge
00:27:48.330 00:27:48.340 drop of shareholder equity was caused by
00:27:52.470 00:27:52.480 that spike in price and then the
00:27:57.320 00:27:57.330 slowdown of economic activities during
00:28:00.810 00:28:00.820 the financial crisis okay so I have
00:28:07.380 00:28:07.390 bought some shares of this company of
00:28:11.730 00:28:11.740 your CI pot Shi basically I got it in a
00:28:15.780 00:28:15.790 thirty it's now started lower but I'm
00:28:18.600 00:28:18.610 not too worried because I am getting a
00:28:21.410 00:28:21.420 decent dividend oil price at the moment
00:28:25.530 00:28:25.540 I would say is on these slightly on the
00:28:30.480 00:28:30.490 upside compared on the house I think
00:28:33.630 00:28:33.640 there's basically I think oil has more
00:28:36.560 00:28:36.570 probability to go lower than higher and
00:28:39.630 00:28:39.640 the company itself is the company itself
00:28:47.490 00:28:47.500 is
00:28:49.200 00:28:49.210 very unlikely to die because of no debt
00:28:52.110 00:28:52.120 so they have plenty of opportunity to
00:28:54.870 00:28:54.880 increase their leverage oh yeah and this
00:29:00.150 00:29:00.160 thing where I forgot other than this I
00:29:04.680 00:29:04.690 also look at I took a look at their
00:29:07.860 00:29:07.870 production and I look at one thing that
00:29:14.730 00:29:14.740 was most egregious in in terms of low
00:29:18.900 00:29:18.910 efficiency in Chinese state-owned
00:29:20.880 00:29:20.890 enterprises is the bloated head count so
00:29:25.080 00:29:25.090 I looked I took a look at their head
00:29:27.090 00:29:27.100 count and you can see the head count
00:29:28.410 00:29:28.420 actually went all the way down from
00:29:32.480 00:29:32.490 31,000 in 2002 down to just 9000 2018
00:29:37.980 00:29:37.990 and at the same time their revenue
00:29:42.450 00:29:42.460 increased quite a bit you can see the
00:29:44.910 00:29:44.920 revenue was on the you know this is in
00:29:47.780 00:29:47.790 twenty two billion and now they're at
00:29:50.340 00:29:50.350 one hundred and seven billion and I also
00:29:54.360 00:29:54.370 took out their employee cost this is in
00:29:58.110 00:29:58.120 terms of billions and then that was two
00:30:00.570 00:30:00.580 point eight seven percent of their
00:30:02.940 00:30:02.950 revenue it also went down from four
00:30:06.530 00:30:06.540 almost five percent now down to like two
00:30:09.630 00:30:09.640 and a half percent that is impressive as
00:30:12.660 00:30:12.670 the employee headcount decrease but the
00:30:18.900 00:30:18.910 averaging salary in China is increasing
00:30:22.050 00:30:22.060 so yeah so there's that but you can see
00:30:26.370 00:30:26.380 there they are increasing efficiency
00:30:28.470 00:30:28.480 right so it's it's they're not just
00:30:30.270 00:30:30.280 sitting still and and letting people you
00:30:33.150 00:30:33.160 know almost like eat for free and and
00:30:35.820 00:30:35.830 and leach off the enterprise the one
00:30:41.280 00:30:41.290 thing that you might want to look at and
00:30:43.050 00:30:43.060 then this is I think a common problem
00:30:44.760 00:30:44.770 for many Chinese companies is the
00:30:47.720 00:30:47.730 retired employee count there are some
00:30:50.280 00:30:50.290 missing data I couldn't find that but
00:30:52.650 00:30:52.660 retired employee count keeps going up
00:30:56.190 00:30:56.200 because people I mean they still did the
00:30:59.850 00:30:59.860 right thing they retired them so they
00:31:01.710 00:31:01.720 pay them less
00:31:02.730 00:31:02.740 but these guys are gonna live another 30
00:31:06.600 00:31:06.610 years after they retire because
00:31:08.159 00:31:08.169 especially woman in China retired 55 and
00:31:12.240 00:31:12.250 then they live in two if you retire 55
00:31:14.490 00:31:14.500 is very likely you live in to 85 s or 90
00:31:17.039 00:31:17.049 and you know that doesn't make sense
00:31:20.430 00:31:20.440 because you kind of have no use until
00:31:26.519 00:31:26.529 you're 20 and then you work for what
00:31:30.149 00:31:30.159 in this case fifty-five year Wow 35
00:31:32.940 00:31:32.950 years and then you got another 30 years
00:31:35.789 00:31:35.799 of no use
00:31:36.990 00:31:37.000 right so you end up with 50 years of no
00:31:40.169 00:31:40.179 use and then essentially being
00:31:43.440 00:31:43.450 non-productive and then 35 years of
00:31:45.720 00:31:45.730 productive years it just doesn't make
00:31:48.060 00:31:48.070 sense
00:31:48.450 00:31:48.460 I am I think China has to increase his
00:31:52.680 00:31:52.690 retirement age to probably something
00:31:55.320 00:31:55.330 like 70 instead of just 55 which is
00:32:01.889 00:32:01.899 ridiculous like it's it's it's just
00:32:05.789 00:32:05.799 ridiculous yeah so this is a thing that
00:32:12.330 00:32:12.340 many Chinese companies would face going
00:32:15.090 00:32:15.100 back to the conclusion that I was
00:32:17.100 00:32:17.110 drawing that I got sidetracked yeah so
00:32:22.409 00:32:22.419 the company is cheap relative to itself
00:32:25.710 00:32:25.720 its historical self and then you can see
00:32:27.899 00:32:27.909 the percentage this is what we want
00:32:35.750 00:32:35.760 excuse me well very cold in July we need
00:32:41.010 00:32:41.020 to look at the Hong Kong one right so
00:32:42.510 00:32:42.520 and then you look at yeah analytics I
00:32:46.230 00:32:46.240 think they just want to see analysis
00:32:50.330 00:32:50.340 it's at about 20th percentile in terms
00:32:56.519 00:32:56.529 of valuation it's not the cheapest ever
00:32:59.269 00:32:59.279 P is kind of useless and then in terms
00:33:02.760 00:33:02.770 of PS is 26th percentile and dividend
00:33:06.870 00:33:06.880 yield it's at the highest ever and I
00:33:11.029 00:33:11.039 think this company not only is a good
00:33:15.419 00:33:15.429 choice
00:33:16.120 00:33:16.130 so it's even better if two as a hatch to
00:33:20.950 00:33:20.960 any long oil positions in a portfolio so
00:33:26.890 00:33:26.900 if you had something like an EMP company
00:33:31.799 00:33:31.809 or anyone with a upstream business then
00:33:37.330 00:33:37.340 this guy is a positively carrying hedge
00:33:46.029 00:33:46.039 it's an income-producing hatch which is
00:33:48.310 00:33:48.320 kind of nice right yeah so that's that
00:33:52.000 00:33:52.010 and I hope you enjoyed this analysis and
00:33:59.529 00:33:59.539 you know if you have disagreements
00:34:01.870 00:34:01.880 thoughts please let me know on the
00:34:04.299 00:34:04.309 comments even though I don't post I
00:34:06.370 00:34:06.380 still read the comments and I may have
00:34:11.080 00:34:11.090 another what another two ideas coming so
00:34:16.109 00:34:16.119 see you next time
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