Tongfang Kontafarma Holdings Limited (SEHK:1312), a HK$2.59B small-cap, operates in the basic materials industry, which can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. Basic material analysts are forecasting for the entire industry, a highly optimistic growth of 41.12% in the upcoming year , and an enormous growth of 65.03% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the Hong Kong stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Tongfang Kontafarma Holdings is a laggard or leader relative to its basic materials sector peers. View our latest analysis for Tongfang Kontafarma Holdings
What’s the catalyst for Tongfang Kontafarma Holdings’s sector growth?
Altogether the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be highly competitive and consolidation seems to be a common theme. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth of over 100%, beating the Hong Kong market growth of 11.06%. Tongfang Kontafarma Holdings lags the pack with its lower growth rate of 43.69% over the past year, which indicates the company will be growing at a slower pace than its construction material peers. As the company trails the rest of the industry in terms of growth, Tongfang Kontafarma Holdings may also be a cheaper stock relative to its peers.
Is Tongfang Kontafarma Holdings and the sector relatively cheap?
The construction materials industry is trading at a PE ratio of 14.74x, relatively similar to the rest of the Hong Kong stock market PE of 14.01x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 5.78% compared to the market’s 9.57%, potentially indicative of past headwinds. Since Tongfang Kontafarma Holdings’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Tongfang Kontafarma Holdings’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:
Tongfang Kontafarma Holdings has been a construction material industry laggard in the past year. If Tongfang Kontafarma Holdings has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although it delivered lower growth relative to its materials peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. However, before you make a decision on the stock, I suggest you look at Tongfang Kontafarma Holdings’s fundamentals in order to build a holistic investment thesis.