Stock Analysis

Here's Why I Think Zhongyu Gas Holdings (HKG:3633) Might Deserve Your Attention Today

SEHK:3633
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For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

So if you're like me, you might be more interested in profitable, growing companies, like Zhongyu Gas Holdings (HKG:3633). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. 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 Zhongyu Gas Holdings

Zhongyu Gas Holdings's Earnings Per Share Are Growing.

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. We can see that in the last three years Zhongyu Gas Holdings grew its EPS by 8.5% per year. That growth rate is fairly good, assuming the company can keep it up.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. On the one hand, Zhongyu Gas Holdings's EBIT margins fell over the last year, but on the other hand, revenue grew. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

earnings-and-revenue-history
SEHK:3633 Earnings and Revenue History January 21st 2022

While profitability drives the upside, prudent investors always check the balance sheet, too.

Are Zhongyu Gas Holdings Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Although we did see some insider selling (worth -HK$51m) this was overshadowed by a mountain of buying, totalling HK$1.3b in just one year. I find this encouraging because it suggests they are optimistic about the Zhongyu Gas Holdings's future. It is also worth noting that it was Vice Chairman Chi Shing Yiu who made the biggest single purchase, worth HK$1.1b, paying HK$5.80 per share.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Zhongyu Gas Holdings insiders own more than a third of the company. Actually, with 36% of the company to their names, insiders are profoundly invested in the business. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. And their holding is extremely valuable at the current share price, totalling HK$8.3b. Now that's what I call some serious skin in the game!

Is Zhongyu Gas Holdings Worth Keeping An Eye On?

One important encouraging feature of Zhongyu Gas Holdings is that it is growing profits. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. However, before you get too excited we've discovered 2 warning signs for Zhongyu Gas Holdings (1 can't be ignored!) that you should be aware of.

As a growth investor I do like to see insider buying. But Zhongyu Gas Holdings isn't the only one. You can see a a free list of them here.

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

Valuation is complex, but we're helping make it simple.

Find out whether Zhongyu Energy Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.