Does Kowloon Development (HKG:34) Deserve A Spot On Your Watchlist?

Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. But as Warren Buffett has mused, ‘If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.’ When they buy such story stocks, investors are all too often the patsy.

So if you’re like me, you might be more interested in profitable, growing companies, like Kowloon Development (HKG:34). Now, I’m not saying that the stock is necessarily undervalued today; but I can’t shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Kowloon Development

How Quickly Is Kowloon Development Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. Impressively, Kowloon Development has grown EPS by 21% per year, compound, in the last three years. As a general rule, we’d say that if a company can keep up that sort of growth, shareholders will be smiling.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. Kowloon Development’s EBIT margins have actually improved by 59.4 percentage points in the last year, to reach 70%, but, on the flip side, revenue was down 8.9%. That’s not ideal.

SEHK:34 Income Statement, August 20th 2019
SEHK:34 Income Statement, August 20th 2019

While it’s always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Kowloon Development’s balance sheet strength, before getting too excited.

Are Kowloon Development Insiders Aligned With All Shareholders?

Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So we’re pleased to report that Kowloon Development insiders own a meaningful share of the business. Indeed, with a collective holding of 71%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term – something I like to see. At the current share price, that insider holding is worth a whopping HK$8.1b. Now that’s what I call some serious skin in the game!

Does Kowloon Development Deserve A Spot On Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Kowloon Development’s strong EPS growth. Further, the high level of insider buying impresses me, and suggests that I’m not the only one who appreciates the EPS growth. Fast growth and confident insiders should be enough to warrant further research. So the answer is that I do think this is a good stock to follow along with. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of Kowloon Development.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

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