The stock of CSPC Pharmaceutical Group (HKSE:01093, 30-year Financials) is estimated to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of HK$9.05 per share and the market cap of HK$108.6 billion, CSPC Pharmaceutical Group stock shows every sign of being possible value trap. GF Value for CSPC Pharmaceutical Group is shown in the chart below.
The reason we think that CSPC Pharmaceutical Group stock might be a value trap is because
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. CSPC Pharmaceutical Group has a cash-to-debt ratio of 20.56, which is better than 82% of the companies in Drug Manufacturers industry. The overall financial strength of CSPC Pharmaceutical Group is 8 out of 10, which indicates that the financial strength of CSPC Pharmaceutical Group is strong. This is the debt and cash of CSPC Pharmaceutical Group over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. CSPC Pharmaceutical Group has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of HK$25.9 billion and earnings of HK$0.383 a share. Its operating margin of 20.75% better than 85% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks CSPC Pharmaceutical Group's profitability as strong. This is the revenue and net income of CSPC Pharmaceutical Group over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. CSPC Pharmaceutical Group's 3-year average revenue growth rate is better than 83% of the companies in Drug Manufacturers industry. CSPC Pharmaceutical Group's 3-year average EBITDA growth rate is 20.6%, which ranks better than 74% of the companies in Drug Manufacturers industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, CSPC Pharmaceutical Group's ROIC was 24.84, while its WACC came in at 5.83. The historical ROIC vs WACC comparison of CSPC Pharmaceutical Group is shown below:
To conclude, CSPC Pharmaceutical Group (HKSE:01093, 30-year Financials) stock is believed to be possible value trap. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 74% of the companies in Drug Manufacturers industry. To learn more about CSPC Pharmaceutical Group stock, you can check out its 30-year Financials here.
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