Companies rarely do well across all StarMine models; some perform well on valuation metrics, while others may perform strongly on momentum factors. We looked at the Asian region to find a company that performs well on most of our models, and a good starting point is one that scores highly on the StarMine Combined Alpha Model (CAM), which incorporates most of our StarMine models to generate a single score. We narrowed down our search to stocks that trade on the Hang Seng, given that the index is down almost 10% year to date. We also wanted to make sure that the stock is not over valued by looking only for those that score well on our valuation models. Only two companies came through our screens.
Source: Thomson Reuters Eikon/StarMine
Small crowd
Normally we’d screen only on the CAM, which incorporates all of the StarMine alpha models. But, for this story, we’ve narrowed the search further, looking for just those rare larger companies that also have especially strong underlying financial fundamentals and low valuations. We screened for companies that have market cap greater than $3 billion. We then took only those that have a CAM score of over 90, placing them in the top decile of companies in the region.
We further looked for companies that have strong earnings quality by screening for companies with Earnings Quality score of over 80 (top quintile). Finally, we weeded out those that may already be expensive by screening for companies with a Relative Valuation model rank score of over 70.
As you can see above, only two companies came through the screen. Let’s take a look at Nine Dragons Paper Holdings Ltd. (2689.HK) in more detail. The company makes linerboard, high-performance corrugating medium and certain types of coated duplex board and printing and writing paper — and is seeing strong demand for its products.
Source: Thomson Reuters Eikon/StarMine
Scores across the board
The chart above shows that the company scores well on almost every component of the Combined Alpha Model and gets an overall score of 99, which puts it firmly in the top decile of all companies in the region. It scores well on the Earnings Quality model, the valuation models and has strong analyst revisions momentum going for it.
Source: Thomson Reuters Eikon/StarMine
Value indicators
The chart above shows that historical P/E for Nine Dragons and the forward 12M P/E is below the 10 year median. The current F12M P/E is 8.8 compared to the historical median of 10.9. Based on the current stock price, we back into the StarMine Intrinsic Valuation model to determine the five year market implied growth rate which is 5.4%. That seems overly pessimistic and would put the company in the bottom quintile of the industry in terms of growth rate.
So we looked at the StarMine SmartGrowth rate, which systematically accounts for analyst biases. That’s considerably higher at 16.3%. Keep in mind that over the last three months, analysts have been raising earnings estimates, which is one reason Nine Dragons scores so well on our Analyst Revisions model. There are more buy and fewer sell recommendations than there were just 90 days ago, another sign of analyst optimism.
Source: Thomson Reuters Eikon/StarMine
Cash picture is brighter
Look at the improving cash flow at Nine Dragons. After many years of heavy investments and negative free cash flow, the last two years have seen those investments pay off. Free cash flow has been positive and exceeded net income in each of the last four semiannual periods and have been steadily increasing. When earnings are backed by strong cash flows they tend to be more sustainable going forward.
Nine Dragons scores highly on the operating efficiency component of the Earnings Quality model. It has seen return on net operating assets improve over the last five years and reach a five-year high of 8.2% in the last reported period. This has been driven by improving margins as well as improving operating asset turnover. That is a sign of strong operational performance, and contributes to strong earnings quality.
If you are looking for a stock in Hong Kong that performs well across our models, then Nine Dragons might be breathing fire.
