China Star Entertainment Limited (HKG:326) shareholders should be happy to see the share price up 21% in the last month. But that doesn't change the fact that the returns over the last half decade have been disappointing. Indeed, the share price is down 72% in the period. So is the recent increase sufficient to restore confidence in the stock? Not yet. We'd err towards caution given the long term under-performance.
China Star Entertainment recorded just HK$2,055,000 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. Investors will be hoping that China Star Entertainment can make progress and gain better traction for the business, before it runs low on cash.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). It certainly is a dangerous place to invest, as China Star Entertainment investors might realise.
China Star Entertainment had cash in excess of all liabilities of just HK$239m when it last reported (June 2019). So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. That probably explains why the share price is down 23% per year, over 5 years . You can click on the image below to see (in greater detail) how China Star Entertainment's cash levels have changed over time. Look at the image below to see how China Star Entertainment's cash levels have changed over time.
It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of China Star Entertainment, it has a TSR of -58% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
We're pleased to report that China Star Entertainment shareholders have received a total shareholder return of 85% over one year. That's including the dividend. That certainly beats the loss of about 16% per year over the last half decade. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. Keeping this in mind, a solid next step might be to take a look at China Star Entertainment's dividend track record. This free interactive graph is a great place to start.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
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