Richard Hemming August 29, 2012
The land of small caps can throw up some interesting opportunities for investors, and sometimes this involves throwing caution to the wind - rather than digging too deeply into the detail.
This is the case with technology group, come property developer, come mini-resources house ASF Group (AFA).
ASF stands for Aus-Sino-Fortune, and we're talking about one of the few listed companies that can claim to have links to some of the deepest pockets in the world in China. Not bad for a company, which at 19 cents, has a market cap of $60 million.
This week ASF should report a full-year profit of $20 million plus, all on revenues of just $2 million. This is because the vast bulk of its profits come from developmental projects, which are dictated by its clients, says its chairman Min Yang. We're in her office, which is a few doors down from an old Radar haunt, The ECQ Bar, which overlooks Circular Quay.
Says Yang: “Twenty years ago Australia was riding on the sheep's back, but now it is sitting on a mine. As we identify resource synergies we incubate them for our clients.”
The group started off in property, but is now looking at resources, and this year has purchased substantial stakes in coal explorer Rey Resources (REY) and Activex (AIV). The group's chairman Min Yang says that after the sell-off in listed small cap miners, ASF's “pipeline” of opportunities has increased exponentially.
Min Yang grew up in the south-eastern Chinese province of Fujian and won a singing competition but gave that up to make a fortune in property development.
She and her husband David Fang founded ASF in 2008 after raising $5 million at 25 cents a share. They and other, mainly Chinese investors, recapitalised a technology group previously known as CMC Power Systems. Seed investors included CITIC Group, one of China's biggest state-owned enterprises.
ASF has no debt and in Min Yang's words, “very few costs” but in its short life has made losses totalling about $10.5 million prior to booking this year's $20 million profit.
But when you have access to deep pockets, you can think long-term.
Yang tells me that she met Mr Chao in 2009, who is the head of the China Huaneng Group, the country's biggest power provider.
“He asked if he could invest money and I didn't want to tell him something like $15 million, when he wouldn't be interested unless it was $15 billion,” she says.
Now that her company sees opportunities in Australian small cap miners that have done much of the preliminary geological work, she says that she might give Mr Chao a call.
Expectations are everything
Companies are learning to control expectations this reporting season, says Adam Smith Asset Management's Peter Mouatt. “We're seeing the game played where in general this year's results are being revised down, while last year's results are meeting expectations.”
Companies clearly have learned from their past mistakes, and aside from not paying their executives big bonuses, they're also aware of not wanting to be in the headlines for a profit warning.
“In general companies are giving less and less guidance about the future because they're realising that it's a trap. During the year their performance varies and they don't want to be in the position of downgrading.”
It just goes to show that business executives and politicians are not so different.
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