Independent Insight Provider

Hao Wang, CFA

Equity Bottom-Up

Huabao International Holdings / Equity Bottom-Up

<a href="http://huabao.todayir.com/attachment/2015081706320100002288183_en.pdf" target="_blank">Profit warning</a> issued by Huabao International on Aug 16th triggered a -16% stock crash on Aug 17th. I have<a href="http://www.smartkarma.com/insights/what-is-safe-to-buy-in-china-now-huabao-international" target="_blank"> highlighted before</a> this value play but also warned that due to market correction it may well retest the previous low of HKD2.85. There are two downside risks in this company:<ul><li>Prolonged high inventory level in tobacco leaves for the next 2 years</li><li>Asset impairment of its RTL business up to HKD1.19bn in goodwill (12% of market cap) and up to HKD0.5bn in PPE (5% of market cap)</li></ul>In short I am expecting more bad news coming from its RTL business to push down share price until inventory level drop to optimized level and see if HKD2.85 can be held (13% from today’s close of HKD3.24)

Profit warning issued by Huabao International on Aug 16th triggered a -16% stock crash on Aug 17th. I have highlighted before this value play but also warned that due to market correction it may well retest the previous low of HKD2.85. There are two downside risks in this company:Prolonged high inventory level in tobacco leaves for the next 2 yearsAsset impairment of its RTL business up to HKD1.19bn in goodwill (12% of market cap) and up to HKD0.5bn in PPE (5% of market cap)In short I am expecting more bad news coming from its RTL business to push down share price until inventory level drop to optimized level and see if HKD2.85 can be held (13% from today’s close of HKD3.24)

What you should know and expect after Huabao's profit warning?