With EPS Growth And More, Tiangong International (HKG:826) Is Interesting

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Tiangong International (HKG:826). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

Check out our latest analysis for Tiangong International

How Quickly Is Tiangong International Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. I, for one, am blown away by the fact that Tiangong International has grown EPS by 47% per year, over the last three years. Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Unfortunately, Tiangong International's revenue dropped 7.4% last year, but the silver lining is that EBIT margins improved from 8.7% to 13%. That falls short of ideal.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Tiangong International?

Are Tiangong International Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Insider selling of Tiangong International shares was insignificant compared to the one buyer, over the last twelve months. Specifically the Executive Chairman, Xiaokun Zhu, spent CN¥10m, paying about CN¥3.41 per share. To me, that's probably a sign of conviction.

Along with the insider buying, another encouraging sign for Tiangong International is that insiders, as a group, have a considerable shareholding. Notably, they have an enormous stake in the company, worth CN¥3.8b. That equates to 31% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Suojun Wu is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between CN¥6.5b and CN¥21b, like Tiangong International, the median CEO pay is around CN¥3.3m.

The CEO of Tiangong International only received CN¥743k in total compensation for the year ending . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.

Does Tiangong International Deserve A Spot On Your Watchlist?

Tiangong International's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The incing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest Tiangong International belongs on the top of your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Tiangong International (at least 1 which doesn't sit too well with us) , and understanding these should be part of your investment process.

The good news is that Tiangong International is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

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

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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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