- a substantial dilution in the share base through a combination of non-prorata new issues;
- one off expenses of HKD34 million for one-off fair value loss on deferred consideration shares and share-based payment expenses
- an explosion in selling and marketing expenses to HKD249.7 million (from HKD73.2 million)
It was not surprising that the shares fell sharply on opening - a continuation of a downward trend which has seen the share lose about 55% of their value since my purchase at HKD2.36 in September 2010. VODone is currently the worst performing investment in the portfolio.
However, the gross profit more than doubled on the back of a significant jump in revenue and the balance sheet remains clean with no borrowings and modest cash balance of HKD342 million.
IMHO, the second half profit has potential to be significantly better than the first half. The non-repitition of the one off items alone would produce a material lift in EPS (although not one that I can precisely quantify because of the effect of minority interests). More importantly, if there was a combination of further growth in revenue and a reduction in the selling and marketing expenses, then the bottom line profit could increase significantly.
Accordingly, I added to my position this morning paying HK$1.05 per share.
5 comments:
I'm interested in your decision on this one - usually my read is that you like transparency.
To me Vodone is not transparent - yes its revenues have grown - but the main part of this half's growth is a receivable from its own subsidiary "Vodone Datamedia" (who incidentally don't appear to have actually paid - they're a significant debtor)
This coupled with the complexity of a spinoff that the stock exchange has been resisting looks messy.
Just curious, how much time do you usually spend looking into a company like thus before you buy?
@Anonymous
Thanks for the comments - as a "trainee" observations like yours are very welcome.
I noticed the large receivable from the subsidiary but didn't attach any particular significance to it - should I be concerned?
I wasn't aware that the spin off was facing difficulties. I'll look into that.
@Anon2
For the first time I invest in a company, I will read at least the last two annual reports, the most recent interim report (if more recent than the last annual) and any announcements (including disclosure notices). I will also look at other companies in the same industry and do some general reading on factors that are relevant to the industry. Where possible, I will also look at an brokers' reports I can get my hands on. For some companies, I will do a very simple spreadsheet.
Once I've invested, monitoring takes a lot less time - reviewing results announcements, other announcements and financial news generally.
Cheers
traineeinvestor
I don't like companies who appear to be gaining significant revenue from a related party but where the cash doesn't appear to be flowing from one to the other: It potentially leaves a lot of room for profit manipulation.
Now in the case of Vodone, there's probably a very simple reason related to the complexity of its legal structure and the involvment of a couple of mainland government/quasi government institutions at the subsidiary level.
However, purely from the accounts the reason is not transparent - and this was why I asked you the question - I myself will not invest in it without understanding the reason.
These two research reports seem to shed lights on 1H2011 results of Vodone.
http://ir.vodone.com/attachment/201108271526132_tc.pdf
http://ir.vodone.com/attachment/201109141147432_tc.pdf
Vodone, like all media listed companies from China, has adopted a VIE Structure. The “variable interest entity” structure (the “VIE Structure”) has been the investment structure of choice for foreign investors to navigate through the grey areas of Chinese law on foreign direct investment for over a decade. The VIE Structure was first made famous by Sina.com in its 2000 listing on NASDAQ as a workaround structure in the value-added telecom services sector where FDI is subject to substantial PRC regulatory restrictions. The receivables of Vodone seems to be as a result of this structure.
Heard from the street that Vodone's spin off of its mobile game business is still on track.
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