Source: Capital Detective

February 15,Fuao Co., Ltd.(000030.SZ) The 6th meeting of the 9th board of directors was held to deliberate and pass a bill to repurchase shares.

According to the buyback bill, “The total repurchase amount is not less than 260 million yuan, no more than 520 million yuan, the repurchase price is not more than 5.2 yuan/share, and the repurchase period is no more than 12 months from the date of review and approval by the board of directors.”

As of the close of trading on March 6, the stock price of listed companies was 4.89 yuan, and PB, PE, and 2017 ROE were 1.44, 10.4, and 15.22%, respectively. Why is Fuao shares undervalued but not sought after? Let's take a look at the reasons behind it.

Side A

The financial data looks good

In the repurchase announcement, the listed company stated that the funds to be used for the repurchase were its own funds.

Therefore, let's first take a look at the monetary capital situation of listed companies: as of September 30, 2018, the company's monetary fund balance was 1.47 billion yuan. Even if the maximum amount of repurchase capital paid was 520 million yuan, the listed company's monetary capital would still have a balance of nearly 1 billion yuan.

Of course, not only monetary funds can prove that a listed company's ability to pay its debts is worry-free.

According to financial data, Fuao's liabilities are mainly notes payable and accounts payable. For example, in the third quarter of 2018, this amount was $2,826 million, accounting for 65.45% of total debt; on the other hand, interest-bearing debt: current short-term loans were $153 million and long-term loans were zero, accounting for only 3.54% of total debt.

In addition to other payables, there are two components of Fuao's remaining major liabilities. One is “estimated liabilities” and the other is “deferred income”. The figures for the third quarter of 2018 were 221 million yuan and 585 million yuan respectively, accounting for 18.66% of current liabilities. So what are these two subjects?

There are few details of the three-quarter report; let's take the interim report as an example. According to the 2018 interim report, Fuao's current estimated debt is 224 million yuan, of which 209 million yuan is for product quality assurance. What is “Product Quality Assurance”? According to the annual report, “This refers to a commitment by a listed company to provide services to customers after selling products or providing services; if the products or services are of quality during normal use:

For volume or other issues within the normal scope, the listed company is responsible for replacing the product, making repairs free of charge or at only the cost; for this reason, if the confirmation conditions are met, the listed company confirms the estimated liability when the sale is established.”

“The formula for calculating the product quality guarantee is: total replacement costs and maintenance costs expected during the future warranty period = sales revenue realized in the current period × the corresponding total claim ratio; among them, the total claim ratio refers to the ratio of the estimated total claim to sales revenue, which is generally calculated by the quality assurance department based on historical data or empirical values.”

According to estimates by Zhonghe Mingle's research team, if the total claim ratio is calculated by dividing the annual product quality guarantee fee by the current year's operating income, then this figure was 2.39%, 2.25%, 2.31%, 2.52%, and 2.75% from 2013 to 2017, respectively.

On the other hand, according to the 2018 interim report, Fuao's current deferred revenue was 594 million yuan, all of which were government subsidies, formed from “financial grants or relocation compensation”.

Therefore, judging from the balance sheet, the financial data of Fuao shares is quite good.

B-side

Related transactions and industry downturn

Judging from the income statement, the net profit of Fuao shares mainly comes from two aspects. One is long-term equity investment income, and the other is Fuao's main business, namely R&D, production and sales of six major series of products, including chassis systems, environmental systems, braking and transmission systems, steering and safety systems, electronic and electrical systems, and engine accessory systems.

Next, we list the data on investment gains and losses and declared cash dividends or profits of listed companies from 2013 to 2017 and the first half of 2018 under the Equity Law. As can be seen from the accounting, the total of the two was 2,381 billion yuan and 2,025 billion yuan respectively, or the dividend payment rate was about 85.02%, which is quite benign.

Next, let's take a look at the main business of listed companies. According to the 2017 annual report, Fuao's top five customers are all related parties to listed companies; in the “Announcement on Expected Daily Related Transactions of the Company in 2018,” Fuao shares stated:

“The amount of daily related transactions involving raw material procurement, product sales, comprehensive services, and financial deposit and loan services between the listed company and related party China First Automobile Group Corporation (“FAW Group”) and its subsidiaries is 5.602 billion yuan.”

Among them, detailed data shows that the amount of goods or services sold by Fuao Co., Ltd. to related parties was 5,022 billion yuan, accounting for 69.82% of the current operating income of listed companies (while the current sales revenue of listed companies was 7.193 billion yuan).

Although Fuao Co., Ltd. is expected to perform well in terms of debt, it is like a listed company in the industryWanxiang Money Wave(000559.SZ) There are almost no anticipated liabilities; however, under such a high proportion of related transactions, listed companies have chosen a relatively aggressive accounts receivable accrual ratio.

As shown in its 2018 interim report, accounts receivable within 6 months were 1,696 billion yuan, accounting for 98.93%. Fuao shares accrued 0%, while accounts receivable for 7-12 months were only 4.06 million yuan, with an accrual ratio of 5%. However, Wanxiang Qianchao uniformly accrues accounts receivable within 1 year at a 5% rate.

We must point out that although related parties are related to the FAW Group, this does not mean that accounts receivable or other receivables are absolutely safe.

For example, since the 2017 annual report, listed companies areFAW Sedan(000800.SZ) Other receivables were $10.79 million, bad debt provisions were $10.25 million, and the accrual ratio was 95%, on the grounds that they were “not expected to be recoverable”. The reason for the 2016 report was “Advance payment for the mold, which is not expected to be recovered.”

Furthermore, the automobile industry itself is worried about the downturn. According to reports at the beginning of this year, in 2018, the Chinese auto market ended 28 years of continuous growth, and the China Association of Automobile Manufacturers announced the production and sales situation of the Chinese automobile industry in 2018.

According to the data, in 2018, national automobile sales were 2.881 million units, down 2.8% from the previous year. This is the first annual decline in Chinese automobile sales in 28 years; the China Association of Automobile Manufacturers expects sales in the Chinese automobile market to be around 28.1 million vehicles in 2019, which is basically the same as in 2018.”