Why I Bought C-MER Eye Care Holdings Limited (HKG:3309)

C-MER Eye Care Holdings Limited (HKG:3309)’s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

First, a short introduction to the company is in order. C-MER Eye Care Holdings Limited, an investment holding company, provides ophthalmic services under the C-MER Dennis Lam brand name in Hong Kong and the People’s Republic of China. Founded in 2012, it currently operates in Hong Kong at a market cap of HK$8.25b.

SEHK:3309 Future Profit June 29th 18
SEHK:3309 Future Profit June 29th 18

The company is growing incredibly fast, with a year-on-year revenue growth of 25.16% over the past financial year . Since 2013, revenue has increased by 20.34%, corresponding with larger capital expenditure, which most recently reached HK$65.59m. With continual reinvestment into business operations, a return on investment of 13.90% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to HK$103.00m in the upcoming year, and over the next five years, earnings are expected to rise at an annual rate of 49.76% on average, compared to the industry average rate of 13.92%. These figures illustrate 3309’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.

SEHK:3309 Historical Debt June 29th 18
SEHK:3309 Historical Debt June 29th 18

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. C-MER Eye Care Holdings has an enviable balance sheet, with high levels of cash generated from its core operating activities (7.32x debt) able to service its borrowings. Furthermore, 3309’s debt level is at an appropriate 5.68% of equity. It also generates income from lending its cash which, in turn, is able to cover its annual interest payment to its debtors. Management exhibits strong capacity to effectively utilize capital, increasing my conviction of the sustainability of the business going forward. 3309 has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. 3309 has managed its cash well at a current level of HK$78.03m. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

3309 currently trades at HK$7.94 per share. With 1.03 billion shares, that’s a HK$8.25b market cap – which is too high, even for a company that has a 5-year cumulative average growth rate (CAGR) of 20.34% (source: analyst consensus). With an upcoming 2018 free cash flow figure of HK$69.00m, the target price for 3309 is HK$2.88. This means the stock is currently trading at a massive premium. Moreover, comparing 3309’s current share price to its peers based on its industry and earnings level, it’s overvalued by 385.58%, with a PE ratio of 152x vs. the industry average of 31.35x.

3309’s investment thesis is a positive one. I’m attracted to the company because of its strong fundamentals – financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.