00:00:00.030 welcome to investing with gyt and it's 00:00:02.14900:00:02.159 been a long long time since I last 00:00:05.30000:00:05.310 published anything yeah so sorry about 00:00:09.95000:00:09.960 that but today we'll talk about Sinopec 00:00:12.91900:00:12.929 shanghai a petrochemical company the 00:00:15.86000:00:15.870 ticker in the US is Shi and for those 00:00:22.09900:00:22.109 that speak Chinese or no painting for 00:00:25.97000:00:25.980 that matter it is somewhat similar to 00:00:34.51000:00:34.520 how we pronounce in Chinese in any 00:00:40.13000:00:40.140 case so this company is a subsidiary of 00:00:46.95900:00:46.969 Sinopec and it's the largest while here 00:00:54.13900:00:54.149 is a twentieth anyway so you can take a 00:00:56.27000:00:56.280 look and here here's a bunch of risks 00:01:02.18000:01:02.190 factors and it actually goes pretty 00:01:05.96000:01:05.970 pretty far down yeah business overview 00:01:09.31000:01:09.320 so there are one of the largest 00:01:12.98000:01:12.990 petrochemical companies in China and 00:01:15.71000:01:15.720 they're based in Shanghai which means 00:01:19.17900:01:19.189 their sales are basically to eastern 00:01:24.49900:01:24.509 China and let's go to Shanghai 00:01:33.70000:01:33.710 alright so eastern China including parts 00:01:39.35000:01:39.360 of Jiangsu and Shanghai and Georgia are 00:01:44.49900:01:44.509 and also ten ways these are the more one 00:01:50.17900:01:50.189 of the more economically vibrant regions 00:01:54.38000:01:54.390 of China and it's not at all surprising 00:01:59.30000:01:59.310 because this is a Yangtze River Delta 00:02:01.70000:02:01.710 and China basically has like whoa this 00:02:06.74000:02:06.750 true town Pearl River Delta here and 00:02:10.46000:02:10.470 then the 00:02:12.10000:02:12.110 youngsil River Delta and in here is 00:02:18.01000:02:18.020 basically Beijing so so yeah so that's 00:02:22.03000:02:22.040 this is like the second economic engine 00:02:25.09000:02:25.100 of China are they kind of Guangdong and 00:02:28.29000:02:28.300 eastern China kind of compete for that 00:02:30.88000:02:30.890 title and this company sells as listed 00:02:37.36000:02:37.370 here they sell some synthetic fiber some 00:02:40.60000:02:40.610 plastics and and then they sell fuel 00:02:44.47000:02:44.480 essentially in terms of the stuff they 00:02:49.87000:02:49.880 sell right here are the stuff that they 00:02:54.46000:02:54.470 sell and mostly in terms of mass it's 00:03:08.35000:03:08.360 mostly just diesel and gasoline and and 00:03:11.77000:03:11.780 then jet fuel and then you have a bunch 00:03:13.69000:03:13.700 of plastic stuff and fibers they also a 00:03:19.03000:03:19.040 are engaged in some trading so 00:03:21.42000:03:21.430 import/export of petrochemical products 00:03:26.14000:03:26.150 but the profit contribution from that 00:03:30.79000:03:30.800 business is quite low so I typically 00:03:33.19000:03:33.200 don't pay any attention to that okay so 00:03:37.33000:03:37.340 let's look at valuation so one thing you 00:03:39.94000:03:39.950 can notice that this thing let me see if 00:03:43.24000:03:43.250 I can change this to English the English 00:03:44.89000:03:44.900 translation on this website is not 00:03:46.87000:03:46.880 perfect but it's better than nothing 00:03:51.66000:03:51.670 okay so dividend yield is about 6% and 00:03:56.89000:03:56.900 then pv is 1.5 but didn't sound awfully 00:04:01.93000:04:01.940 cheap sounds four okay that's because 00:04:07.29000:04:07.300 this is not the one you want to buy you 00:04:11.14000:04:11.150 really want to buy the same shares on 00:04:13.47900:04:13.489 the Hong Kong exchange or the ADR which 00:04:18.52000:04:18.530 is based off the Hong Kong exchange and 00:04:22.54000:04:22.550 when you look at this you can see that 00:04:24.49000:04:24.500 the PB is zero points 00:04:25.81000:04:25.820 9:08 basically dividend is about 15 00:04:29.29000:04:29.300 sorry 12 percent plus now granted that 00:04:34.17000:04:34.180 unlike American companies companies in 00:04:37.84000:04:37.850 in many other regions of the world don't 00:04:40.00000:04:40.010 pay a steady dividend they will just 00:04:41.86000:04:41.870 adjust their dividend based on the 00:04:44.50000:04:44.510 profit of that year so there will be 00:04:46.69000:04:46.700 periods and you can see here there will 00:04:48.94000:04:48.950 be years where they pay zero dividend 00:04:51.43000:04:51.440 this is a dividend yield rate dividend 00:04:54.40000:04:54.410 yield and I think it is basically the 00:04:59.56000:04:59.570 highest averages company's ever been in 00:05:01.69000:05:01.700 terms of different different ratios 00:05:04.75000:05:04.760 given yield okay and here is P 00:05:09.69000:05:09.700 historical P for basically 20 years they 00:05:13.66000:05:13.670 went public in 2001 and this is a sick 00:05:18.82000:05:18.830 little company and I will explain why 00:05:20.74000:05:20.750 this is cyclical slightly later but it's 00:05:24.01000:05:24.020 a very cyclical company and therefore 00:05:27.88000:05:27.890 there will be periods of double periods 00:05:30.43000:05:30.440 where they lose money 00:05:31.99000:05:32.000 hence these large these negative pease 00:05:37.30000:05:37.310 basically so a better metric for 00:05:42.43000:05:42.440 valuation would be PB or PS and in terms 00:05:46.54000:05:46.550 of PB there well back here they were not 00:05:52.42000:05:52.430 really much sure but once they are kind 00:05:55.06000:05:55.070 of mature when broaches 2012 is when 00:05:57.97000:05:57.980 they finished the last round of 00:05:59.95000:05:59.960 expansion you can see this we are 00:06:07.03000:06:07.040 essentially the same the lowest ever the 00:06:12.67000:06:12.680 lowest PB ratio since 2012 basically and 00:06:18.13000:06:18.140 then for anything that is even lower you 00:06:22.27000:06:22.280 have to go to the the depth of the 00:06:25.47000:06:25.480 crisis in that case the PB ratio was 00:06:29.26000:06:29.270 half of what is it now so imagine if we 00:06:32.29000:06:32.300 had what here is actually a double 00:06:34.42000:06:34.430 whammy but 00:06:37.57000:06:37.580 I'll get that into that later why that's 00:06:40.15900:06:40.169 a double whammy and then in terms of 00:06:42.43900:06:42.449 price to sales again you're looking at 00:06:44.86900:06:44.879 here is 0.1 3 now it's zero point two 00:06:49.30900:06:49.319 two and then in 2014 their periods or 00:06:52.58000:06:52.590 0.1 so there's a lot again a 50% 00:06:55.24900:06:55.259 downside dividend ratio and on the other 00:06:57.86000:06:57.870 hand you are at the peak so overall I 00:07:03.20000:07:03.210 would say the company is very cheap 00:07:06.27900:07:06.289 compared to the its past self and what 00:07:12.52900:07:12.539 else has changed for the company 00:07:13.96900:07:13.979 obviously the profit has grown over the 00:07:16.93900:07:16.949 years so you got a hold on if you look 00:07:22.21900:07:22.229 at growth growth growth yeah look just 00:07:29.65900:07:29.669 look at the blue bar and essentially you 00:07:32.48000:07:32.490 can see the upper income has generally 00:07:35.77900:07:35.789 been increasing obvious although it has 00:07:39.18900:07:39.199 not been as high as 2013 now see and net 00:07:45.40900:07:45.419 profit you can see their ups and downs 00:07:48.76900:07:48.779 sick low company and I said but in 00:07:51.86000:07:51.870 general the ups are slightly bigger than 00:07:55.77900:07:55.789 the downs and cash flows are is actually 00:08:03.74000:08:03.750 looking better than profits and you can 00:08:08.57000:08:08.580 see they're consistently building equity 00:08:10.85000:08:10.860 instead of destroying equity obviously 00:08:12.49900:08:12.509 there are periods where they do destroy 00:08:15.92000:08:15.930 equity especially in 2008 but that is 00:08:21.82900:08:21.839 somewhat expected that is after all the 00:08:27.55900:08:27.569 depth of the crisis okay and what else 00:08:33.79000:08:33.800 the other thing that has changed for 00:08:36.80000:08:36.810 this company over the years is its debt 00:08:39.00900:08:39.019 if we look at I think there's a thing 00:08:42.13900:08:42.149 called cost analysis ignore these four 00:08:46.01000:08:46.020 out get into an analysis of its gross 00:08:48.55900:08:48.569 profit but the 00:08:51.51900:08:51.529 the thing I was all gonna show here is 00:08:53.90000:08:53.910 can see the financial expense well I 00:08:59.01900:08:59.029 think it's caught interest expense 00:09:04.31000:09:04.320 most most of the times interest expense 00:09:06.88900:09:06.899 on if you're looking at gap statements 00:09:10.97000:09:10.980 but it's gone down as a percentage of 00:09:18.28000:09:18.290 revenue and now it's negative which 00:09:20.78000:09:20.790 means a company is well I can't release 00:09:26.24000:09:26.250 a snit cash but it has more cash than 00:09:30.55000:09:30.560 interest-bearing debt and that's how you 00:09:33.35000:09:33.360 can end up with a negative interest 00:09:34.87900:09:34.889 expense because you have interest income 00:09:38.11000:09:38.120 yeah and the other thing is if you look 00:09:41.78000:09:41.790 at net margin you're looking between 00:09:47.24000:09:47.250 well the the 20-year average is two 00:09:50.93000:09:50.940 point two seven percent which is 00:09:53.30000:09:53.310 expected of a commodity business you're 00:09:56.80900:09:56.819 never going to make oversight over many 00:10:01.46000:10:01.470 cycles here we're looking at from 2002 00:10:03.50000:10:03.510 over many cycles you are not going to 00:10:05.96000:10:05.970 see a very high margin that's just not 00:10:10.63900:10:10.649 how come on is the business's work and 00:10:12.46000:10:12.470 the peaks of these up cycles corresponds 00:10:17.15000:10:17.160 about ten percent gross mark profit 00:10:19.37000:10:19.380 margin and at the moment we're slightly 00:10:22.34000:10:22.350 below the the long-term average and if 00:10:27.23000:10:27.240 you look at gross profit we are slightly 00:10:29.84000:10:29.850 above the long-term average so does that 00:10:32.03000:10:32.040 bode well for the future gross profits 00:10:36.31900:10:36.329 probably going to decline it could but 00:10:43.87000:10:43.880 you know it has been pretty high for a 00:10:48.25900:10:48.269 couple of years and then even in 2018 00:10:51.68000:10:51.690 when you know gas prices was oil price 00:10:58.06900:10:58.079 was increasing seventeen and eighteen 00:10:59.72000:10:59.730 really oil price was increasing there 00:11:02.42000:11:02.430 they kept 00:11:03.91000:11:03.920 Plus margin fairly well and then there 00:11:05.88900:11:05.899 are some things that I was observed that 00:11:08.36900:11:08.379 also contribute to you know I mean if 00:11:16.32900:11:16.339 you think like a triple expense ratio 00:11:18.97000:11:18.980 but this is really just sgna sgna is 00:11:22.47900:11:22.489 gone down as a percentage of revenue 00:11:24.22000:11:24.230 which is what you want to see so the 00:11:27.28000:11:27.290 company is getting more efficient as 00:11:29.25900:11:29.269 time goes on and the other thing that 00:11:34.53000:11:34.540 people always get a bit hang up on is 00:11:39.11900:11:39.129 state-owned enterprises this is a 00:11:41.71000:11:41.720 state-owned enterprise but there are 00:11:45.18900:11:45.199 many signs pointing to that the 00:11:48.42900:11:48.439 management is trying to improve the 00:11:50.31900:11:50.329 company overall and in many aspects so 00:11:55.92900:11:55.939 so that's the cost and I said mostly I 00:11:58.98900:11:58.999 was just gonna focus on the reduction of 00:12:00.99900:12:01.009 debt and what else oh yes and you know 00:12:10.29900:12:10.309 very high dividend maybe let's say next 00:12:12.24900:12:12.259 years we get cut in half you're still 00:12:14.65000:12:14.660 getting 6% and oh there's one more thing 00:12:18.10000:12:18.110 I want to show there was a very 00:12:22.19900:12:22.209 interesting phenomenon which makes zero 00:12:27.75900:12:27.769 sense to me okay I need to look at the 00:12:34.68900:12:34.699 Chinese one haha 00:12:36.54900:12:36.559 yeah so this is the the Asia right and 00:12:42.47900:12:42.489 there was a mechanism which I've talked 00:12:46.03000:12:46.040 about before which is called Hong Kong 00:12:49.28900:12:49.299 Stock Exchange interconnect or something 00:12:52.84000:12:52.850 essentially that enables people to buy a 00:12:57.87900:12:57.889 shares in Hong Kong and buy eight shares 00:13:02.07900:13:02.089 basically some of the eight share some 00:13:04.23900:13:04.249 of the Hong Kong listed shares in China 00:13:06.97000:13:06.980 and it started in 2017 and this is a 00:13:14.49900:13:14.509 share and then as we talked before Asia 00:13:17.01900:13:17.029 is about 00:13:17.62000:13:17.630 percent more expensive than the issues 00:13:21.45000:13:21.460 dividend is about half and then your PB 00:13:25.27000:13:25.280 is about double and right so it's it's 00:13:28.51000:13:28.520 basically doubly as expensive and for 00:13:32.80000:13:32.810 any normal human for the exact same 00:13:36.61000:13:36.620 share you would not want to pay twice I 00:13:40.54000:13:40.550 mean technically is not exactly the same 00:13:43.60000:13:43.610 because in China if you hold if you hold 00:13:47.02000:13:47.030 an Asia 00:13:47.59000:13:47.600 for more than a year and you're a 00:13:50.02000:13:50.030 Chinese citizen you don't pay dividend 00:13:52.66000:13:52.670 tax and in Hong Kong doesn't matter what 00:13:57.19000:13:57.200 happens you gotta pay at least you gotta 00:13:59.23000:13:59.240 pay twenty percent so it's arguable that 00:14:03.13000:14:03.140 eight shares should have a twenty 00:14:05.92000:14:05.930 percent twenty percent discount compared 00:14:11.47000:14:11.480 to the eight year because you've got to 00:14:12.76000:14:12.770 pay these you're gonna pay that out as 00:14:16.68000:14:16.690 as dividend if you hold the thing 00:14:19.45000:14:19.460 forever and you only live off the 00:14:21.64000:14:21.650 dividend then your coupon is your 00:14:25.99000:14:26.000 dividend is essentially twenty percent 00:14:27.91000:14:27.920 less but this is not twenty percent and 00:14:31.90000:14:31.910 this is this is a fifty percent discount 00:14:34.57000:14:34.580 so this will make any sense and then why 00:14:38.20000:14:38.210 would anyone did the the this orangish 00:14:46.05000:14:46.060 shade that area is represents the amount 00:14:50.47000:14:50.480 the percentage of float that was bought 00:14:53.41000:14:53.420 by people using the Hong Kong exchange 00:15:01.48000:15:01.490 so that makes zero sense to me it's 00:15:05.32000:15:05.330 probably some index fund because why 00:15:09.73000:15:09.740 would anyone pay double to get the same 00:15:12.67000:15:12.680 thing there that's what this is 00:15:15.22000:15:15.230 happening paying double to get the same 00:15:17.38000:15:17.390 thing on the other side if you look at 00:15:20.11000:15:20.120 this this makes sense you you know when 00:15:24.55000:15:24.560 whenever the floodgate opens you would 00:15:26.95000:15:26.960 think that the Chinese would sell or the 00:15:32.10000:15:32.110 the a shares and by the eight shares 00:15:34.02000:15:34.030 because it's higher dividend but this 00:15:37.77000:15:37.780 thing is only representing you know just 00:15:43.04000:15:43.050 one bit more than one percent of the 00:15:46.26000:15:46.270 free float well not the free-flow the 00:15:49.17000:15:49.180 the market cap which is actually 00:15:53.25000:15:53.260 slightly higher in terms of percentage 00:15:56.04000:15:56.050 if you're talking about free float but 00:15:57.60000:15:57.610 still it's very small percentage it 00:16:00.48000:16:00.490 still doesn't make much sense anyway so 00:16:03.60000:16:03.610 that was just something I was gonna rant 00:16:05.37000:16:05.380 because it's quite stupid that people 00:16:10.23000:16:10.240 are paying more for the same thing 00:16:13.17000:16:13.180 that's shown here 00:16:14.37000:16:14.380 okay so what else was there yes so the 00:16:24.92000:16:24.930 cyclicality how to understand the cycles 00:16:31.82000:16:31.830 regarding this particular company so I 00:16:35.28000:16:35.290 got all the data out of other related 00:16:39.02000:16:39.030 related data out so we're gonna take a 00:16:41.55000:16:41.560 look at my excel okay so what I have are 00:16:46.02000:16:46.030 the gross margins and the other thing is 00:16:52.89000:16:52.900 the oil price all right so I got all the 00:16:54.96000:16:54.970 oil price and then gross margin and then 00:16:57.63000:16:57.640 I charted it and this is what you see 00:17:02.33000:17:02.340 the blue line is all your price and the 00:17:08.69900:17:08.709 gray line is gross margin and you can 00:17:13.50000:17:13.510 see that generally whenever oil prices 00:17:17.49000:17:17.500 going up gross margin goes down and when 00:17:19.86000:17:19.870 oil shoots up gross margin shoots down 00:17:22.74000:17:22.750 and here is an anomaly we'll discuss 00:17:24.81000:17:24.820 that later 00:17:25.38000:17:25.390 when both oil price and gross margin 00:17:29.30000:17:29.310 were going up for a period of time but 00:17:34.02000:17:34.030 for basically a year each I mean I 00:17:37.38000:17:37.390 messed up this horizontal axis so never 00:17:40.56000:17:40.570 mind that but 00:17:43.95000:17:43.960 this is quarters these are basically 00:17:45.98900:17:45.999 quarters and then here's another thing 00:17:50.85000:17:50.860 when you have a move in the oil price 00:17:54.88900:17:54.899 going down and the margin goes up and 00:17:57.98000:17:57.990 now in 2000 this is basically 2007 ish I 00:18:03.86900:18:03.879 think sorry 17 18 18 or 19 is the last 00:18:09.33000:18:09.340 quarters 19 so 18 ish when you got all 00:18:14.66900:18:14.679 your price going up your margin goes 00:18:17.03900:18:17.049 down and why is that I mean normally 00:18:23.26900:18:23.279 this is similar more similar to a 00:18:26.03900:18:26.049 refinery in the US right because you 00:18:28.91900:18:28.929 take in the crude oil and then you 00:18:34.52900:18:34.539 produce some fuel and we all know that 00:18:38.66900:18:38.679 whenever oil price goes up you notice 00:18:43.73900:18:43.749 the price at the pump would change and 00:18:46.23000:18:46.240 then how will go up and which means that 00:18:49.35000:18:49.360 these refineries don't really care too 00:18:55.13900:18:55.149 much about the price of oil if price of 00:18:57.72000:18:57.730 oil goes up they increase the price of 00:19:01.64900:19:01.659 their their output and yeah so they 00:19:09.11900:19:09.129 don't really care of me of course you're 00:19:10.59000:19:10.600 gonna get a little bit less sales 00:19:12.89900:19:12.909 because people tend to drive slightly 00:19:15.98900:19:15.999 less when our prices is higher but their 00:19:19.28900:19:19.299 gross margins more or less protected but 00:19:22.59000:19:22.600 in China there's a the government 00:19:26.12900:19:26.139 actually sets the price at which fuel is 00:19:30.65900:19:30.669 sold especially gastly I'm not sure 00:19:33.65900:19:33.669 about diesel yes these are what these as 00:19:37.13900:19:37.149 well may be jet fuel it's free-floating 00:19:40.25900:19:40.269 but diesel definitely diesel and 00:19:43.00900:19:43.019 gasoline definitely are price controlled 00:19:46.28900:19:46.299 I mean the price control is not 00:19:48.29900:19:48.309 ridiculous as in like the state would 00:19:50.58000:19:50.590 subsidize or make a ton of money of 00:19:53.24900:19:53.259 people and they do float 00:19:58.34000:19:58.350 whenever oil price kind of gets out of 00:20:01.37900:20:01.389 whack but there is a lag so instead of 00:20:06.20000:20:06.210 the company is changing their price 00:20:10.22000:20:10.230 daily or weekly you get these changes 00:20:15.20000:20:15.210 some bureaucrat is God to that and then 00:20:18.23900:20:18.249 the bureaucrat will do it maybe once 00:20:21.14900:20:21.159 every three month right and then and 00:20:26.14900:20:26.159 that's what results in these inverse 00:20:30.72000:20:30.730 correlations in terms of cross margin 00:20:33.04900:20:33.059 and yeah so when and the thing is at 00:20:40.16900:20:40.179 this point when the gross margin is 00:20:43.59000:20:43.600 deeply negative in 2000 2009 when gross 00:20:47.66900:20:47.679 margin is deeply negative well let's 00:20:52.13900:20:52.149 first talk about the double whammy so 00:20:54.06000:20:54.070 this is 2008 late 2008 this is when the 00:20:58.64900:20:58.659 stock price was the lowest if you look 00:21:00.59900:21:00.609 at here look at just a stop price 00:21:14.74000:21:14.750 market cap was from the start 00:21:27.93000:21:27.940 this is when it was the lowest if you 00:21:31.40900:21:31.419 look at oh come on 00:21:42.23000:21:42.240 here 00:21:46.34000:21:46.350 is all very messed up usually it follows 00:21:55.22000:21:55.230 that I think it's because I changed it 00:21:57.64900:21:57.659 in English so now it's kind of messed up 00:21:59.41900:21:59.429 but that's 00:22:12.09000:22:12.100 this is the Chinese one I need the 00:22:16.26000:22:16.270 Hongkong one okay 00:22:19.07000:22:19.080 the Hongkong one and I need from the 00:22:22.80000:22:22.810 start 00:22:23.61000:22:23.620 yeah this is that's this line this thing 00:22:28.74000:22:28.75000:22:29.30000:22:29.310 well actually this I think twenty four 00:22:33.18000:22:33.190 ish is when the price was the lowest it 00:22:35.94000:22:35.950 was third quarter of 2008 and the reason 00:22:41.85000:22:41.860 was in late 2000 00:22:43.74000:22:43.750 Wow in the mid of 2008 the oil price 00:22:46.53000:22:46.540 shot up quite a bit from something like 00:22:51.05000:22:51.060 $50 a barrel to more than 120 and 00:22:54.29000:22:54.300 obviously the state is not the 00:22:57.20000:22:57.210 government doesn't change price as fast 00:22:59.84000:22:59.850 so that ended up making a huge loss on 00:23:06.39000:23:06.400 this company and but obviously the 00:23:11.07000:23:11.080 government's got to catch up so they 00:23:12.60000:23:12.610 started adjusting these prices and at 00:23:17.70000:23:17.710 the same time the oil price went all the 00:23:22.38000:23:22.390 way down so that kind of resulted the 00:23:26.61000:23:26.620 gross margin recovery and then still you 00:23:29.25000:23:29.260 got more price increases in oil oil went 00:23:32.97000:23:32.980 all the way down and then your 00:23:34.23000:23:34.240 government price adjusted upwards so if 00:23:36.72000:23:36.730 you can see this kind of overshoots to 00:23:39.48000:23:39.490 be too higher than what was before the 00:23:42.15000:23:42.160 oil price jump the Oh before the oil 00:23:44.40000:23:44.410 price jump you could argue it was you 00:23:46.44000:23:46.450 know somewhere between five was seven 00:23:49.92000:23:49.930 seven percent gross margin and after the 00:23:53.13000:23:53.140 spike and the drop the gross margin now 00:23:56.49000:23:56.500 went to 17 percent so that is because 00:24:04.02000:24:04.030 the government actually increased the 00:24:06.30000:24:06.310 price to higher than what it was sold in 00:24:10.80000:24:10.810 2000 and this was 2000 and I think five 00:24:16.97000:24:16.980 it would be nice if I had data about the 00:24:20.04000:24:20.050 historical price at which 00:24:25.17000:24:25.180 fuel was sold in China but I couldn't 00:24:28.02000:24:28.030 seem to find that so maybe I would think 00:24:30.93000:24:30.940 up dig that up and if I do dig that 00:24:33.15000:24:33.160 about put it in description yeah and 00:24:39.00000:24:39.010 yeah and then that's why I mean that's 00:24:41.70000:24:41.710 for the for the fuel part which is about 00:24:45.51000:24:45.520 40 percent of the business and then the 00:24:47.52000:24:47.530 rest which is plastic and and fibers 00:24:52.14000:24:52.150 these demands are very cyclical in term 00:24:56.27000:24:56.280 they basically is a little bit leading 00:25:05.64000:25:05.650 the overall economic cycle because these 00:25:09.48000:25:09.490 are basically needed for production and 00:25:11.67000:25:11.680 then they are generally not what the 00:25:17.25000:25:17.260 consumer want at the end so they are 00:25:20.58000:25:20.590 basically inventory for somebody as raw 00:25:25.77000:25:25.780 materials and then the demand for these 00:25:29.33000:25:29.340 basically creator whenever your economy 00:25:31.95000:25:31.960 goes down and yeah when the demand 00:25:35.79000:25:35.800 craters and you got the fixed capacity 00:25:38.91000:25:38.920 for for for the production of these 00:25:46.55000:25:46.560 these book essentially war material 00:25:49.50000:25:49.510 almost like raw materials then you 00:25:53.04000:25:53.050 really can't expect very high margins 00:25:56.37000:25:56.380 and you probably can't even expect 00:25:59.54000:25:59.550 positive gross margins because sometimes 00:26:05.94000:26:05.950 people will produce even though they 00:26:08.13000:26:08.140 make a gross loss because they have to 00:26:12.39000:26:12.400 cover for the depreciation and then they 00:26:18.12000:26:18.130 have to have some they have to have some 00:26:25.37000:26:25.380 cash flow to sustain their business they 00:26:28.83000:26:28.840 basically burn down they I mean if you 00:26:33.36000:26:33.370 think about internal accounting terms 00:26:35.07000:26:35.080 they kind of tap into that depreciation 00:26:37.83000:26:37.840 and what has 00:26:38.79000:26:38.800 in part two of the future they differ 00:26:43.94000:26:43.950 they can't defer maintenance expenditure 00:26:48.35000:26:48.360 to the futures to make sure that the 00:26:52.14000:26:52.150 company survives and they were in 00:26:55.82000:26:55.830 somewhat precarious positions back then 00:26:59.04000:26:59.050 in 2008 you can see the there was uh let 00:27:06.03000:27:06.040 me see if we can find it there's a 00:27:08.76000:27:08.770 thinker safety analysis very interesting 00:27:11.15000:27:11.160 long-term solvency they're like yeah you 00:27:15.60000:27:15.610 can see the liabilities was in terms of 00:27:19.89000:27:19.900 total asset ratio was very high in 2000 00:27:23.97000:27:23.980 late 2008 and they also had another bump 00:27:27.69000:27:27.700 in 2012 liquidity wasn't that good 00:27:32.34000:27:32.350 here and there and used as you saw 00:27:37.14000:27:37.150 before their shareholder equity was 00:27:41.66000:27:41.670 fairly low gross analytics yeah the huge 00:27:48.33000:27:48.340 drop of shareholder equity was caused by 00:27:52.47000:27:52.480 that spike in price and then the 00:27:57.32000:27:57.330 slowdown of economic activities during 00:28:00.81000:28:00.820 the financial crisis okay so I have 00:28:07.38000:28:07.390 bought some shares of this company of 00:28:11.73000:28:11.740 your CI pot Shi basically I got it in a 00:28:15.78000:28:15.790 thirty it's now started lower but I'm 00:28:18.60000:28:18.610 not too worried because I am getting a 00:28:21.41000:28:21.420 decent dividend oil price at the moment 00:28:25.53000:28:25.540 I would say is on these slightly on the 00:28:30.48000:28:30.490 upside compared on the house I think 00:28:33.63000:28:33.640 there's basically I think oil has more 00:28:36.56000:28:36.570 probability to go lower than higher and 00:28:39.63000:28:39.640 the company itself is the company itself 00:28:47.49000:28:47.500 is 00:28:49.20000:28:49.210 very unlikely to die because of no debt 00:28:52.11000:28:52.120 so they have plenty of opportunity to 00:28:54.87000:28:54.880 increase their leverage oh yeah and this 00:29:00.15000:29:00.160 thing where I forgot other than this I 00:29:04.68000:29:04.690 also look at I took a look at their 00:29:07.86000:29:07.870 production and I look at one thing that 00:29:14.73000:29:14.740 was most egregious in in terms of low 00:29:18.90000:29:18.910 efficiency in Chinese state-owned 00:29:20.88000:29:20.890 enterprises is the bloated head count so 00:29:25.08000:29:25.090 I looked I took a look at their head 00:29:27.09000:29:27.100 count and you can see the head count 00:29:28.41000:29:28.420 actually went all the way down from 00:29:32.48000:29:32.490 31,000 in 2002 down to just 9000 2018 00:29:37.98000:29:37.990 and at the same time their revenue 00:29:42.45000:29:42.460 increased quite a bit you can see the 00:29:44.91000:29:44.920 revenue was on the you know this is in 00:29:47.78000:29:47.790 twenty two billion and now they're at 00:29:50.34000:29:50.350 one hundred and seven billion and I also 00:29:54.36000:29:54.370 took out their employee cost this is in 00:29:58.11000:29:58.120 terms of billions and then that was two 00:30:00.57000:30:00.580 point eight seven percent of their 00:30:02.94000:30:02.950 revenue it also went down from four 00:30:06.53000:30:06.540 almost five percent now down to like two 00:30:09.63000:30:09.640 and a half percent that is impressive as 00:30:12.66000:30:12.670 the employee headcount decrease but the 00:30:18.90000:30:18.910 averaging salary in China is increasing 00:30:22.05000:30:22.060 so yeah so there's that but you can see 00:30:26.37000:30:26.380 there they are increasing efficiency 00:30:28.47000:30:28.480 right so it's it's they're not just 00:30:30.27000:30:30.280 sitting still and and letting people you 00:30:33.15000:30:33.160 know almost like eat for free and and 00:30:35.82000:30:35.830 and leach off the enterprise the one 00:30:41.28000:30:41.290 thing that you might want to look at and 00:30:43.05000:30:43.060 then this is I think a common problem 00:30:44.76000:30:44.770 for many Chinese companies is the 00:30:47.72000:30:47.730 retired employee count there are some 00:30:50.28000:30:50.290 missing data I couldn't find that but 00:30:52.65000:30:52.660 retired employee count keeps going up 00:30:56.19000:30:56.200 because people I mean they still did the 00:30:59.85000:30:59.860 right thing they retired them so they 00:31:01.71000:31:01.720 pay them less 00:31:02.73000:31:02.740 but these guys are gonna live another 30 00:31:06.60000:31:06.610 years after they retire because 00:31:08.15900:31:08.169 especially woman in China retired 55 and 00:31:12.24000:31:12.250 then they live in two if you retire 55 00:31:14.49000:31:14.500 is very likely you live in to 85 s or 90 00:31:17.03900:31:17.049 and you know that doesn't make sense 00:31:20.43000:31:20.440 because you kind of have no use until 00:31:26.51900:31:26.529 you're 20 and then you work for what 00:31:30.14900:31:30.159 in this case fifty-five year Wow 35 00:31:32.94000:31:32.950 years and then you got another 30 years 00:31:35.78900:31:35.799 of no use 00:31:36.99000:31:37.000 right so you end up with 50 years of no 00:31:40.16900:31:40.179 use and then essentially being 00:31:43.44000:31:43.450 non-productive and then 35 years of 00:31:45.72000:31:45.730 productive years it just doesn't make 00:31:48.06000:31:48.070 sense 00:31:48.45000:31:48.460 I am I think China has to increase his 00:31:52.68000:31:52.690 retirement age to probably something 00:31:55.32000:31:55.330 like 70 instead of just 55 which is 00:32:01.88900:32:01.899 ridiculous like it's it's it's just 00:32:05.78900:32:05.799 ridiculous yeah so this is a thing that 00:32:12.33000:32:12.340 many Chinese companies would face going 00:32:15.09000:32:15.100 back to the conclusion that I was 00:32:17.10000:32:17.110 drawing that I got sidetracked yeah so 00:32:22.40900:32:22.419 the company is cheap relative to itself 00:32:25.71000:32:25.720 its historical self and then you can see 00:32:27.89900:32:27.909 the percentage this is what we want 00:32:35.75000:32:35.760 excuse me well very cold in July we need 00:32:41.01000:32:41.020 to look at the Hong Kong one right so 00:32:42.51000:32:42.520 and then you look at yeah analytics I 00:32:46.23000:32:46.240 think they just want to see analysis 00:32:50.33000:32:50.340 it's at about 20th percentile in terms 00:32:56.51900:32:56.529 of valuation it's not the cheapest ever 00:32:59.26900:32:59.279 P is kind of useless and then in terms 00:33:02.76000:33:02.770 of PS is 26th percentile and dividend 00:33:06.87000:33:06.880 yield it's at the highest ever and I 00:33:11.02900:33:11.039 think this company not only is a good 00:33:15.41900:33:15.429 choice 00:33:16.12000:33:16.130 so it's even better if two as a hatch to 00:33:20.95000:33:20.960 any long oil positions in a portfolio so 00:33:26.89000:33:26.900 if you had something like an EMP company 00:33:31.79900:33:31.809 or anyone with a upstream business then 00:33:37.33000:33:37.340 this guy is a positively carrying hedge 00:33:46.02900:33:46.039 it's an income-producing hatch which is 00:33:48.31000:33:48.320 kind of nice right yeah so that's that 00:33:52.00000:33:52.010 and I hope you enjoyed this analysis and 00:33:59.52900:33:59.539 you know if you have disagreements 00:34:01.87000:34:01.880 thoughts please let me know on the 00:34:04.29900:34:04.309 comments even though I don't post I 00:34:06.37000:34:06.380 still read the comments and I may have 00:34:11.08000:34:11.090 another what another two ideas coming so 00:34:16.10900:34:16.119 see you next time
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