MITT

Earlier this fall I offered competing slogans for the 2016 campaign were Gov. Romney to be the nominee (“Third time’s a charm” versus “Three strikes and you’re out”) but linked to a persuasive post on why he won’t run.

Here‘s another reason it won’t be Mitt: that Gruber guy caught on camera saying that passing Obamacare relied on the stupidity of the American people?  He was Romney’s guy first.  And as he told Forbes:

. . . There’s “zero difference” between Romneycare and Obamacare, he told Pillifant. “This is, to my mind, the most blatantly obvious case of politics trumping policy I’ve ever seen in my life. Because this is an idea, that four or five years ago, Republicans were touting. A guy from the Heritage Foundation spoke at the bill signing in Massachusetts about how good this bill was.”

But, what about when Romney says his law is different from Obamacare? “The problem is there is no way to say that, because they’re the same f***ing bill. He just can’t have his cake and eat it too. Basically, you know, it’s the same bill. He can try to draw distinctions and stuff, but he’s just lying.” . . .

CISG

Last December I suggested switching out of GLD into CISG “because someone much smarter than me thinks gold is headed back to $800 an ounce and that CISG — which sells for $5.40 yet has, he says, $8.50 a share in cash — could one day this decade be valued at more like $20 or $25.”

Today, GLD is almost exactly where it was and CISG is up only 10%, so not much has happened.  But I hold all my shares and was encouraged by this post Monday on Seeking Alpha:

CNinsure Has More Cash Than Its Market Cap And Double-Digit Revenue Growth

Dec. 1, 2014 11:39 AM ET  |  About: CNinsure Inc. (CISG) by: Edward Vranic, CFA

Disclosure: The author is long CISG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)

Summary

  • A failed takeover bid and concern over inflated profit numbers caused CNinsure’s market cap to drop below its working capital in 2011.
  • Three years later CNinsure has settled a lawsuit regarding any alleged impropriety and no additional claims of fraud have been made against the company.
  • When comparing CNinsure’s valuation metrics to China Life Insurance Company Limited, it shows the stock price is under-priced by at least 50%.
  • The CEO has shown a willingness to use excess funds to increase shareholder value, though was vague on how that will be accomplished.

It’s not every day that an investor can find a company with negative enterprise value – that is, more cash than its market cap – which also has double-digit revenue growth and solid profitability. But that is the case when examining CNinsure Inc. (NASDAQ:CISG). Q3 results show a $USD equivalent of $327 million in cash, $117 million in short term investments and $529 million in total current assets against $53 million in current liabilities for a working capital position of $476 million compared to a market cap of $312 million. When investors look at those numbers, they must ask “What’s the catch?”.

In September 2011, a proposed deal to take the company private at $19 fell through. The stock dropped to less than $10 and hasn’t recovered since. The deal was led by the CEO at the time and he blamed challenging market conditions for its failure but there were allegations over the company overstating profits. One of the financial backers, TPG Asia also came to that conclusion. In 2010 OLP Global released a report surrounding concerns over CISG’s equity incentive program to compensate sales reps which resulted in overstated profits. In April 2011, OLP Global raised concerns over CISG’s eCommerce acquisitions and other investments. In October 2011, Yinan Hu resigned as CEO of CISG, succeeded by Chunlin Wang.

In the three years since there hasn’t been much follow-up to the questions over the legitimacy of the company’s business and in August 2014 a lawsuit was settled against the company where it agreed to pay $6.625 million (covered by insurance) for settlement of all claims related to the questionable practices and failed buyout in 2010 and 2011. The company denies all allegations made against it in the lawsuit and only settled it to eliminate further risks related to future proceedings.

Three years have passed and no further allegations of inflated profits or fraud has been made against the company and it has remained in good standing with the regulators. Working capital was $403 million in Q3 2011 and has since improved to the $476 million calculated above thanks to three years of profitable operations. Yet the stock is still punished by the market. Investors who believe that any wrongdoing by CISG is in its past could be getting a bargain by investing at this low price.

The insurance business is robust in China relative to global markets. The overall insurance market in China has grown 16.5% annually over the past decade and is expected to grow around 15% in 2014 and 2015. CISG has bested those figures so far this year thanks to its aggressive online sales strategy. Revenue grew 26% in Q3, exceeding company guidance of 15% and has grown 21% year-to-date. The company increased its guidance for Q4 revenue growth to 20%.

China Life Insurance Co. Ltd. (NYSE:LFC) is the largest life insurance in the country and the most active Chinese insurance company trading in the United States. Below is a chart comparing CISG’s key valuation statistics to LFC’s stats as of market close on November 28. Because CISG has a negative enterprise value at $6.24, its EV/EBITDA has no meaning at that price. In order to come up with meaningful statistics that compare to LFC, a third column has been added showing what CISG’s stats would be with a $13 stock price. Even at more than double the stock price, CISG would still have a favorable EV/EBITDA compared to LFC along with reasonable P/E metrics considering recent revenue growth and continued high growth expectations.

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One key event that needs to take place before more investors take notice is the returning of cash to shareholders either through a dividend or share buyback program. Investors in Chinese companies question how the money earned in the business is able to leave China to reach foreign investors. The company’s hoarding of cash is not having a positive impact on the stock price like it may with US listings so CISG needs to become more proactive in rewarding shareholders.

In the Q3 conference call, an analyst questioned the company on its excess cash and when it plans to use it to increase shareholder value. CEO Chunlin Wang said focus for the past two years was on turning around company fundamentals but now with strategic initiatives in place it may be time to look at some options with respect to the cash, though he was vague on the details. His comments relating to that question were as follows:

The management remains committed to increasing shareholder value. However, probably in the past two years the management has been focused a lot of energy on bringing a turnaround in our fundamentals. And we actually believe that without a turnaround in our earnings or top-line growth any means to — any means that anything we do in a capital market will not be sustainable. But right now as we have our online and mobile initiatives has started to up and running and we are back to the growth chart, probably it’s time for us to sit down and think about what options we have to increase the capital of the stock price, improve the stock price and increase shareholder value and there are a lot of options, several options in front of us and we need to consider about it.

CISG was accused of cooking its books and questionable business decisions in 2010-11 but got through it while maintaining its innocence. There have been no follow up accusations since then and it has remained a company in good standing with the regulators while many listings from China have been suspended from trading due to fraud from then until now. The market is still punishing CISG for its alleged impropriety three years later. If the Chinese stock market moves up as I expect it will as it is undervalued relative to other markets, watch for highly undervalued companies like CISG to move up, especially if it makes good on returning excess cash to shareholders.

I wait in greedy anticipation.

 

 

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