The price chart shows that Hengyuan has been dropping from Rm 18 to around Rm 7.20 per share in the last 3 months. Many people ask me for my opinion. Some wanted to know if they should bottom fish and hope for the down trend reversal to make money. Some said that they wanted to buy because its EPS for last year which was Rm 3.03 per share and it is selling at P/E less than 3 and they could not find any other good respectable company share sell[ng at such ridiculously low P/E.
All I can say is that it does not comply with my share selection golden rule as follow:
The company must have reported increasing profit in the last 2 consecutive quarters and it must have good profit growth prospect which is the most powerful catalyst to push up share price.
Although Hengyuan has reported increasing profit in the last few quarters, it does not have good profit growth prospect. All the smart shareholders know that the company has to stop operation for 2 months to upgrade its refinery and it also has to pay the income tax for the profit it made last year. It has no profit growth prospect for the whole of this current year. That is why they are selling so aggressively. As a result, the price is falling so rapidly
Many experts based on financial report would recommend you to buy because the reported accounts for last year is so beautiful.
Remember accounts is only showing historical facts but it does not tell you anything about the future profit growth prospect of the company. Also, P/E ratio 3 is based on last year’s earnings.
After my publication of this article, I expect many will ask me if they should sell to cut loss and utilise the sale proceeds more effectively to buy stocks with better profit growth prospect.
My answer is that Hengyuan will surely report less profit for this current year and until it can report increased profit the share price will remained depressed.
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