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After looking at Precision Tsugami (China) Corporation Limited’s (HKG:1651) latest earnings update (31 March 2018), I found it helpful to revisit the company’s performance in the past couple of years and compare this against the latest numbers. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is an important aspect. In this article I briefly touch on my key findings.
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How 1651 fared against its long-term earnings performance and its industry
1651’s trailing twelve-month earnings (from 31 March 2018) of CN¥194.1m has jumped 72.4% compared to the previous year. Furthermore, this one-year growth rate has exceeded its 5-year annual growth average of 22.3%, indicating the rate at which 1651 is growing has accelerated. What’s enabled this growth? Well, let’s take a look at if it is solely a result of industry tailwinds, or if Precision Tsugami (China) has experienced some company-specific growth.
Over the past few years, Precision Tsugami (China) grew its bottom line faster than revenue by effectively controlling its costs. This resulted in a margin expansion and profitability over time. Looking at growth from a sector-level, the HK machinery industry has been growing its average earnings by double-digit 39.8% over the past year, and a flatter 1.3% over the past five years. This growth is a median of profitable companies of 24 Machinery companies in HK including Asia Tele-Net and Technology, Ka Shui International Holdings and CRCC High-Tech Equipment. This means that any tailwind the industry is profiting from, Precision Tsugami (China) is able to amplify this to its advantage.
In terms of returns from investment, Precision Tsugami (China) has fallen short of achieving a 20% return on equity (ROE), recording 16.7% instead. However, its return on assets (ROA) of 11.0% exceeds the HK Machinery industry of 4.6%, indicating Precision Tsugami (China) has used its assets more efficiently. Though, its return on capital (ROC), which also accounts for Precision Tsugami (China)’s debt level, has declined over the past 3 years from 48.3% to 24.5%.
What does this mean?
While past data is useful, it doesn’t tell the whole story. Positive growth and profitability are what investors like to see in a company’s track record, but how do we properly assess sustainability? You should continue to research Precision Tsugami (China) to get a more holistic view of the stock by looking at: