Stock Analysis

As Sichuan Expressway (HKG:107) ascends 8.1% this past week, investors may now be noticing the company's five-year earnings growth

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SEHK:107
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Sichuan Expressway Company Limited (HKG:107) shareholders should be happy to see the share price up 13% in the last month. But that doesn't change the fact that the returns over the last five years have trailed the market. Specifically, the share price is down 32% whereas the market is down , having returned (-9.3%) over the last half decade.

On a more encouraging note the company has added CN¥428m to its market cap in just the last 7 days, so let's see if we can determine what's driven the five-year loss for shareholders.

Our analysis indicates that 107 is potentially undervalued!

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

While the share price declined over five years, Sichuan Expressway actually managed to increase EPS by an average of 12% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.

Because of the sharp contrast between the EPS growth rate and the share price growth, we're inclined to look to other metrics to understand the changing market sentiment around the stock.

We note that the dividend has remained healthy, so that wouldn't really explain the share price drop. It's not immediately clear to us why the stock price is down but further research might provide some answers.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

earnings-and-revenue-growth
SEHK:107 Earnings and Revenue Growth December 1st 2022

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Sichuan Expressway, it has a TSR of -11% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Sichuan Expressway shareholders have received a total shareholder return of 12% over one year. Of course, that includes the dividend. Notably the five-year annualised TSR loss of 2% per year compares very unfavourably with the recent share price performance. We generally put more weight on the long term performance over the short term, but the recent improvement could hint at a (positive) inflection point within the business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 2 warning signs for Sichuan Expressway you should be aware of, and 1 of them doesn't sit too well with us.

Of course Sichuan Expressway may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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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