Is Now The Time To Look At Buying Sinotrans Limited (HKG:598)?

Sinotrans Limited (HKG:598), might not be a large cap stock, but it saw a significant share price rise of over 20% in the past couple of months on the SEHK. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s take a look at Sinotrans’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Sinotrans

Is Sinotrans Still Cheap?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 3.97x is currently trading slightly below its industry peers’ ratio of 8.12x, which means if you buy Sinotrans today, you’d be paying a reasonable price for it. And if you believe that Sinotrans should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Sinotrans’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

Can we expect growth from Sinotrans?

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. However, with a negative profit growth of -4.7% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Sinotrans. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Currently, 598 appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on 598, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on 598 for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on 598 should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Sinotrans at this point in time. When we did our research, we found 2 warning signs for Sinotrans (1 shouldn't be ignored!) that we believe deserve your full attention.

If you are no longer interested in Sinotrans, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.