Buying Good Companies- Perfect Shape (HKEX:1830)

From my list of "Super Companies" earlier, I dived into a couple of them and found this company called "Perfect Shape."

I also blogged about this earlier ; earlier on, I did not reveal the name of this company as I still wish to accumulate my holdings.

Unfortunately, the company probably attract more than a few attention today with its profit guidance last night and a 14% or so surge in share price. Perhaps for the sake of education (and profits, since I am vested). I shall go through why purchasing this stock is a little compelling.

A) Consistent return in assets with little leverage
Looking at its profile in Stocks.cafe here , the returns on asset (asset light company) is pretty consistent over the years. I am keen to know why they are able to achieve this. After reading a few years of annual report, the strategy is to make headway into cities that are affluent. The key to this company is the branding.

This moat is likely to persist unless the company loses its reputation (which I would say is pretty easy and permanent once it does).

B) Most important reason: Adjusted Price to Earnings based on assets.

 

The highlighted items are highly reliable assets.
Reproducing the items below (with adjustments for ball park figure)
AFS financial assets (mainly stocks of tencent tech) - 50m
Deposits and pre-payment- 28
Trade Recv- 80
Other Recv. deposits - 38
Term Deposits (no discount needed) - 70.206
Pledged bank deposits - 29.117
Cash and eq - 226.199

Total reliable assets :  521.522m

Total liabilities: 323.757m
Net reliable assets: 197.765m

Market cap is now, as I write: 1.46b or 1460 m

Taking market cap of 1460 - 197.765 = 1262.235

Assuming earnings is not improved: 96m in profits last year
This works out to be a price-earnings of 13.1 (1262.235 / 96).

Since there is a large increase of about 100% in operating profit (to be subjected to a tax of 22% thereabouts), we talking about 140.4m in post-tax earnings.

At the current market cap of 1.46 billion (closing stock price 1.33), The PE of this company, without considering its high-reliable assets, is about 10. There are still avenues for growth for this company.

This company was trading at about 15 PE yesterday. That means this company should be trading at, at least, 2.1B market cap. This presents a price discrepancy of just over 40 percent. Of course, there is a tendency for the market to be "forward-looking."

 A good idea without possible pitfalls is a bad idea
There are things to look out for: a possible dividend cut due to declining business, and a damage to reputation that will be harder to control with more branches.

There are also trade receivables that one should look out for, along with the usual checks on cashflow.

Good luck.