When CHTC Fong’s International Company Limited (HKG:641) announced its most recent earnings (30 June 2018), I did two things: looked at its past earnings track record, then look at what is happening in the industry. Understanding how CHTC Fong’s International performed requires a benchmark rather than trying to assess a standalone number at one point in time. Below is a quick commentary on how I see 641 has performed.
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How Did 641’s Recent Performance Stack Up Against Its Past?
641’s trailing twelve-month earnings (from 30 June 2018) of HK$270.7m has jumped 69.3% compared to the previous year. Furthermore, this one-year growth rate has exceeded its 5-year annual growth average of 16.9%, indicating the rate at which 641 is growing has accelerated. What’s the driver of this growth? Let’s see if it is only a result of an industry uplift, or if CHTC Fong’s International has seen some company-specific growth.
Over the past few years, CHTC Fong’s International expanded its bottom line faster than revenue by successfully controlling its costs. This brought about a margin expansion and profitability over time. Scanning growth from a sector-level, the HK machinery industry has been growing its average earnings by double-digit 23.9% in the previous twelve months, and a flatter 1.3% over the past half a decade. 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 shows that whatever uplift the industry is benefiting from, CHTC Fong’s International is capable of leveraging this to its advantage.
In terms of returns from investment, CHTC Fong’s International has fallen short of achieving a 20% return on equity (ROE), recording 16.2% instead. However, its return on assets (ROA) of 6.2% exceeds the HK Machinery industry of 4.6%, indicating CHTC Fong’s International has used its assets more efficiently. And finally, its return on capital (ROC), which also accounts for CHTC Fong’s International’s debt level, has increased over the past 3 years from 7.5% to 14.5%. This correlates with a decrease in debt holding, with debt-to-equity ratio declining from 113% to 95.0% over the past 5 years.
What does this mean?
CHTC Fong’s International’s track record can be a valuable insight into its earnings performance, but it certainly 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? I recommend you continue to research CHTC Fong’s International to get a better picture of the stock by looking at: