Global Sources Ltd. (GSOL) is currently a selection of GuruFocus’ Historical Low P/S Screener. With rapidly slowing revenue growth, GSOL shares have fallen to near all-time P/S lows.
Margins and returns have remained strong, however, so the compression in valuation looks to be primarily concerned with lagging revenue growth.
The business:
GSOL operates as a business-to-business (B2B) company, providing information and integrated marketing services, with a particular focus on the Greater China market. The company aims to facilitate global trade between buyers and suppliers by providing export marketing services and sourcing information. Essentially, they help connect global buyers to products and suppliers in Asia through online marketplaces, magazines and trade shows.
GSOL has a diversified presence across a number of industries but is particularly strong in facilitating China’s two-way trade of electronics, one of China’s largest import and export sectors.
Online transactions accounted for 46% of 2013 revenues while exhibitions such as trade shows generated a close 43%. With a decline in print (trade magazine) revenues, the company can be thought of as primarily a trade show organizer and online marketplace. From its regulatory filings, GSOL describes its segments as the following:
- Online Services – “Our primary service is creating and hosting marketing websites that present suppliers’ product and company information in a consistent and easily searchable manner on GlobalSources.com. We also offer banner ads and publish digital magazines.”
Operators of online marketplaces generate most of their business from selling marketing services to suppliers, such as publishing and hosting a supplier’s website and product catalog, and from advertising.
- Exhibitions - Trade Shows and Seminars – “Our primary revenue stream is selling booths to suppliers. Our exhibitions offer international and domestic buyers direct access to manufacturers based in China and other Asian countries.”
Trade show organizers generate most of their business from selling booth space to suppliers. Trade shows play a unique role in the sales process since they allow sellers to make face-to-face presentations to buyers and to negotiate and take orders at the booths. In international trade, face-to-face interaction is viewed as vital by many buyers and is something that cannot be accomplished by online or print media.
- Other Media Services – “We publish printed trade magazines, which consist primarily of advertisements from suppliers and our independent editorial reports and product surveys.”
As of this year, the company's primary website (GlobalSources.com) listed more than 319,000 suppliers serving a buyer community of over 1,000,000 active members in more than 200 countries. GSOL currently generates the majority of its revenues from suppliers in Asia with China being the largest market at approximately 83% of total revenues during 2013.
The industry:
China has become a major manufacturer and exporter of a wide range of products, due to its significant labor cost advantages, large population, improving quality controls and increasing amounts of foreign investment. GSOL believes it plays a key role in helping global suppliers and buyers find, connect and transact with each other. To facilitate this, GSOL provides online marketplaces, magazines and trade shows.
Companies such as GSOL thrive best in developing markets where the fragmentation of buyers, sellers and intermediaries presents significant challenges. With thousands of geographically dispersed manufacturers, it is difficult for buyers and suppliers to identify and communicate with one another. Additionally, the search and evaluation costs involved, along with the suppliers’ advertising and marketing expenses can be substantial.
As GSOL’s management team explains:
“Buyers need to find, qualify and visit tens of thousands of suppliers and then assist them to promote their products to the global marketplace. Building a sales force to contact these suppliers is a significant undertaking and typically requires substantial financial and manpower commitments and resources. In particular, there is a huge challenge to effectively and efficiently hire, train and manage a network of sales representatives across such an immense area, where multiple jurisdictions have varying legal requirements, languages, currencies and customs.”
By using a B2B company like GSOL, buyers can quickly identify and pursue new suppliers while comparing both pricing and product quality with their existing suppliers.
Competitive advantages:
The B2B market is highly fragmented and competition varies greatly in terms of the range of services provided, geographic focus and the industry sector served. Some competitors only offer trade shows and other competitors only offer online services.
It is becoming increasingly commonplace for suppliers to introduce new products and actively seek new buyers and markets through B2B intermediaries to ensure their products are seen by as many potential buyers as possible, and sold to reputable and verified buyers.
As you can imagine, the business has significant network effects. GSOL looks to be attractively positioned. The company has a 43-year operating history with the industry’s broadest multi-channel platform (online and trade shows), long-term relationships with large buyers (see customer sample list below) and a proven high-quality community of verified suppliers.
The company has a long list of documented testimonials form customers. Reference the company's webpage Here for both written and video reviews from real businesses working with GSOL.
Management:
While it's notoriously difficult for management’s integrity (particularly with companies operating in China), GSOL does appear to have retained executives that have been with the company for many decades of profitability.
Valuation:
If the company’s financials can be trusted (GSOL has been audited by PricewaterhouseCoopers since 2008), the shares look attractive. Even with slowing GDP growth in China, there remains a need for B2B providers. GSOL looks positioned to continue capitalizing on this need.
GSOL has no long-term debt and roughly half of its market cap in cash.
Adjusting for cash, this would imply the actual underlying business is trading at ~6.6x earnings (13.3x for the entire market cap). Theoretically, if the company paid out its cash, investors would have an earnings yield of >15%.
Chinese small-caps are hit hard every few years, especially in the wake of the latest accounting scandals or fraudulent shell companies. GSOL does appear to operate a real business, however. If the financials and management can be trusted, it could be worth a look.
For more ideas like GSOL, take a look at GuruFocus’ Historical Low P/S Screener.
