When Should You Buy China Sanjiang Fine Chemicals Company Limited (HKG:2198)?

China Sanjiang Fine Chemicals Company Limited (HKG:2198), is not the largest company out there, but it saw a significant share price rise of over 20% in the past couple of months on the SEHK. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on China Sanjiang Fine Chemicals’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for China Sanjiang Fine Chemicals

What's the opportunity in China Sanjiang Fine Chemicals?

Great news for investors – China Sanjiang Fine Chemicals is still trading at a fairly cheap price according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that China Sanjiang Fine Chemicals’s ratio of 3.39x is below its peer average of 10.22x, which indicates the stock is trading at a lower price compared to the Chemicals industry. What’s more interesting is that, China Sanjiang Fine Chemicals’s share price is quite volatile, which gives us more chances to buy since the share price could sink lower (or rise higher) in the future. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What kind of growth will China Sanjiang Fine Chemicals generate?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. In China Sanjiang Fine Chemicals' case, its revenues over the next few years are expected to grow by 70%, indicating a highly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? Since 2198 is currently trading below the industry PE ratio, it may be a great time to increase your holdings in the stock. With a positive outlook on the horizon, it seems like this growth has not yet been fully factored into the share price. However, there are also other factors such as capital structure to consider, which could explain the current price multiple.

Are you a potential investor? If you’ve been keeping an eye on 2198 for a while, now might be the time to make a leap. Its buoyant future outlook isn’t fully reflected in the current share price yet, which means it’s not too late to buy 2198. But before you make any investment decisions, consider other factors such as the strength of its balance sheet, in order to make a well-informed investment decision.

So while earnings quality is important, it's equally important to consider the risks facing China Sanjiang Fine Chemicals at this point in time. While conducting our analysis, we found that China Sanjiang Fine Chemicals has 3 warning signs and it would be unwise to ignore them.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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