Duoyon Printing- Cheap For A Reason?

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Dec 142010
 

Since I haven’t done any individual stock analysis in the last little while (or a post about anything for that matter) I figure I’ll entertain you guys with my thoughts about a Chinese company trading on the NYSE called Douyon Printing (DYP). DYP makes printing equipment for primarily Chinese customers, including printing presses and laser printers for commercial clients.

Why Is It Cheap?

Well, brace yourselves, because this one isn’t for the faint of heart. The company was merrily trading along in the $10 range until they decided to fire their auditors after an accounting dispute over just $3 million. Both the CEO and CFO clearly didn’t agree with that decision, announcing their resignation nearly immediately after. The stock fell off a cliff, settling in the $2.5o range. The company has traded in the $3 range over the past week or so.

Industry Outlook

Obviously you’ve heard about the trend for newspaper to go to the internet. Even in China, that risk is still a huge one. Yet printing is hardly going away soon with demand still there from things like books, junk mail and all sorts of other products that just haven’t gone digital yet. Just how much will a country like China skip the mountains of paper that North America has had to deal with for so many years?

Dividend

Nope. They do have some decent earnings, so one in the relatively near future isn’t out of the question. Considering the company’s small market cap though, it would be safe to assume the company is still in growth mode and doesn’t plan on issuing a dividend any time soon.

Balance Sheet

I’m not going to lie. I’m almost sexually attracted to this company’s balance sheet. Let that mental image sink in for a minute!

The company is sitting on $91M worth of cash, while the market cap is in the high $80M range after a bit of a run up over the last two weeks. Debt is almost non-existent. The balance sheet is stocked full of current assets, meaning all sorts of stuff that could, in theory anyway, be quickly liquidated to cash.

One negative about the balance sheet is that accounts receivable is slowly going up, rising from 32M in the second quarter of 09 to 46M in the second quarter of 10. This isn’t a good trend.

All in all, what a pristine balance sheet. The company is trading for less than cash! The market is valuing the company at nothing! I realize there’s been an accounting issue, but at what point does a stock get ridiculously cheap?

Earnings

2006- $0.68

2007- $0.61

2008-  $1.06

2009- $1.30

Earnings haven’t been reported yet for the 3rd quarter (which ended on June 30th) thanks to the accounting snafu. The company has made $0.32 for the first half of 2010, which includes their typically weak 1st quarter. Analysts have an estimate of $1.32 for this year’s earnings and $1.33 for next year’s. The market isn’t buying those numbers and considering the accounting scandal surrounding this company, I don’t blame it.

Insider Activity

According to Yahoo!, insiders own 17.56M out of the 30.56M total outstanding shares. There hasn’t been any major insider buying disclosed in the past year, not surprising considering all the stuff going on with the company. Insiders sure do own a bunch of this company. I like when management has a large stake in the business, it means they’re just as motivated as anyone to lift the share price.

Price Appreciation

The company hasn’t been trading publicly for that long, so that’s why I put the one year chart up there. If the company can sort out the accounting mess, a price target near the 2009 IPO price of $10 isn’t out of the question. That’s an increase of over 300% over yesterday’s close.

Summary

The company is cheap, trading right around the level of cash on the balance sheet. I like fact that they’re in China, a fast growing economy that should continue to outperform North America, even with a slowdown. I love the balance sheet and the lack of debt on it. Earnings look great as well, the company trades at less than 3 times expected 2010 earnings. The only issue is the accounting scandal. Normally I stay away from stocks that have the taint of cooking the book, but this one is so cheap I just may have to make an exception.

Disclosure: I do not own shares of DYP at the time of this writing, however I may in the future. If I do, I will update you guys.

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 Posted by Nelson Smith at 11:22 pm
  • http://www.holypotato.net Potato

    "Trading for less than the cash on the balance sheet" is my siren call. I'll try to have a look at it as well, but I would be exceptionally cautious with a small Chinese company that has a dispute with their auditor. It's looking like there are a lot of China-based frauds on the go right now. John Hempton has written about one on his blog (brontecapital.blogspot.com), and there have been a few others I've heard about.

  • http://www.holypotato.net Potato

    I had a quick look at it: they're late filing, but from the last report I could find on the SEC's page, they're sitting on something like $90M in cash, yet still carry a line of credit of over $14M. The cash is earning less than 50 bp in interest income. Add in late filing, a fired auditor, and a slew of lawsuits, and I have to say I don't like the risk profile. Maybe it's not a scam, maybe it'll go right back up to $10 and then some with that balance sheet and earnings growth… but there are far too many red flags for me to touch it. If they were local I might do some more hands-on research, but they're not, so all I have to go on are their reports, and those are now suspect.

    Don't forget Buffett's first and second rules when swinging for the fences.

    • financialuproar

      Thanks for the research Potato.

      This one definitely isn't for the faint of heart. It could very easily trade for half what it's at now, or it could easily double. Since insiders own so much of the stock (over 50% if I remember right) they have incentive to see the price go up. Of course, you could make the argument that's the whole reason for the fraud in the first place.

      If there's any semblance of truth to the balance sheet or the earnings, it's tremendously undervalued. I think the market has punished it too severely. It's definitely a risky one.

  • Anonymous

    Thanks for sharing your great post.

    Cheap print

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