Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

CHINA SHOTO (LON:CHNS) – amazing turnaround in ‘cash’ fortunes!

The China based producer of industrial batteries and power supply systems, today announced its preliminary results for the year ended 31st December 2008 which came with a quite unexpected surprise.

The big increase in revenue of 70% to £183m was much as anticipated as was the increase in net profit of 79% to £10.07m. Diluted earnings per share were up 76% to 43.14p.

However, the big surprise for me from this China based business was the quite unexpected turnaround in cash generation. China based small caps have earned a reputation for poor cash management and credit control and China Shoto’s previous results implied that it too was going the same way as many of its China based peers. I acknowledge that a business whose turnover has risen over 800% over the past 4 years is bound to experience growing pains, however, there is no excuse for poor cash management in the current climate! The results from 2007 showed an operating profit of £8.5m yet an operating cash outflow of £2.1m.

Today’s 2008 results present a very different picture with operating profit of £14m converted into a net operating cash inflow of £40m – no I haven’t slipped a ‘0’ in there by mistake! This resulted in the group finishing the year with net cash of c£18m compared with the previous year end where there was net debt of c£12m.

Congratulations to management for clearly having made a concerted effort to improve credit control with debtor days having fallen from 57 to 69. Stock management also appears to have improved.

Unfortunately the cash turnaround is just so unexpected that I am having trouble believing it – that’s the cynic in me!

The final dividend for 2008 of 3.5p per share combined with the interim payout of 1.5p leaves the shares yielding just under 3% at the current share.


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