Xinhua Winshare Publishing & Media Co. (HKSE:00811, Financial), a 17.8 billion Hong Kong dollars ($2.28 billion) Chinese publishing company, delivered 11% revenue growth to 6.4 billion Chinese yuan ($937.2 million) and flat profit growth to 647.5 million yuan for fiscal 2016, a 10% margin compared to 11% in 2015.
The company reported higher overall operating costs at 11% on a year-on-year basis therefore resulting in lower profitability in the recent fiscal year.
“Looking into 2017, the group will seize the opportunities arising from the IPO of A shares, focus on its core businesses of publishing and media and capitalize on the advantages being the only PRC enterprise with a dual listing (A+H) status and the existing sector advantages to meet the needs of great cultural consumption.” –Â He Zhiyong, chairman
Â
Total return
Xinhua local Hong Kong shares failed to delight its shareholders so far this year providing 5% total losses compared to 19.6% total gains from its country’s exchange traded fund (iShares MSCI Hong Kong ETF; Morningstar). The company outperformed the local index representative, though, having generated 17.8% total gains vs. the index’s 11.3% gains in the past five years.
In comparison, the broader Standard & Poor's 500 returned 7.2% and 15.4% total gains in one- and five-year time frames.
Valuations
Xinhua seemed to be undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 10.9 times vs. the industry median of 18.8 times, a price-book (P/B) ratio of 0.9 times vs. 1.4 times and a price-sales (P/S) ratio of 1.14 times vs. 1.
The company also had trailing dividend yield of 4.9%.
Xinhua Winshare Publishing & Media Co.
Xinhua is a China-based company principally engaged in the editing, publishing and sales of publications and the development of a multicultural industry.
The company is mainly engaged in the editing and publishing of publications, the retail and distribution of books and audiovisual products and the release of textbooks and learning materials.
In 2016 Xinhua generated 77% of its revenue within China’s Sichuan province while the remaining came from outside the region.
According to filings, Xinhua has two segments: publication and distribution.
Publication
Xinhua’s publication segment is responsible for books, periodicals, audiovisual products and digital products; provision of printing services and supply of printing materials.
Under publication, Xinhua has several subsegments: Textbooks and Supplementary Materials, General Books, Printing and Supplies and Others. Texbooks, in particular, grew 5.7% in revenue and generated 65% of the entire segment’s business. Textbook recorded a gross profit margin of 39.7% – 1.18% higher than in 2015.
In 2016 overall sales in Publication grew 5.7% to 1.74 billion yuan –Â 23% of total unadjusted Xinhua sales –Â and delivered a gross profit margin of 33.7% compared to 32.2% in 2015.
Distribution
The segment is responsible for distribution of textbooks and supplementary materials to schools and students and provision of education service to primary and secondary school students; and retailing, distribution and online sales of publications.
Similar to Publications, Xinhua’s Distribution segment has several subsegments, and Textbooks and Supplementary Materials generated most of the segment’s revenue. For 2016 Textbooks grew 4.8% and contributed 58% of Distribution’s revenue while delivering a gross profit margin of 39.69% (similar profitability with 2015).
In 2016 overall sales in Xinhua’s Distribution segment grew 10.8% to 5.7 billion yuan –Â 76% of total Xinhua unadjusted sales –Â and delivered a gross margin of 30.17% compared to 31.71% in 2015.
In the past three years Xinhua had sales growth average of 7.4%, profit growth average of 1.3% and profit margin average of 11.3% (Morningstar).
Cash, debt and book value
As of December, Xinhua had 946 million yuan in cash and cash equivalents and negligible (if any) debt. Intangible assets also were negligible having had a book value of 8 billion yuan vs. 7 billion yuan in 2015.
Cash flow
In 2016 Xinhua generated 683 million yuan –Â 33% lower than its 2015 cash flow. As observed, the publishing company received markedly lower tax refunds and higher cash outflows from its operating activities.
Capital expenditures including intangible assets acquisition were 341.7 million yuan leaving Xinhua with 341.8 million yuan in free cash flow compared to 818 million yuan in 2016. Further, Xinhua allocated 70% of its free cash flow in dividends to shareholders and noncontrolling interests.
The company also placed 797.5 million yuan in investments, net disposals in 2016. In addition, Xinhua received 681.3 million yuan in capital contributions for the period while it spent 8.64 million yuan in "listing expenses."
Last, Xinhua reported 18.96 million yuan in cash receipt from government grants in 2016.
Conclusion
Xinhua demonstrated steady business growth in recent years. Despite online or ecommerce advancements to the publishing business, the company was able to deliver growth in its textbooks businesses year over year and even improve its corresponding profitability.
Nonetheless, potential investors definitely would want to read more regarding Xinhua’s Others component in both of the company’s segments (Publication and Distribution), through which the former reported 40% to 103% revenue growth and gross margins ranging from 5% to 65%, according to filings.
In addition, Xinhua has an admirable balance sheet and has been rewarding its shareholders without the need to raise debt, but the company seemed to have a preference in raising some cash through capital contributions.
Meanwhile, asking a 30% margin after applying three-year sales growth and P/S multiple averages would indicate a value of 4.8 billion yuan or 5.4 billion Hong Kong dollars –significantly lower than today’s market capitalization of 17.8 billion Hong Kong dollars.
In summary, Xinhua is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
