The China Star Entertainment (HKG:326) Share Price Has Soared 309%, Delighting Many Shareholders
For us, stock picking is in large part the hunt for the truly magnificent stocks. Mistakes are inevitable, but a single top stock pick can cover any losses, and so much more. One bright shining star stock has been China Star Entertainment Limited (HKG:326), which is 309% higher than three years ago. Also pleasing for shareholders was the 129% gain in the last three months.
See our latest analysis for China Star Entertainment
With just HK$2,055,000 worth of revenue in twelve months, we don't think the market considers China Star Entertainment to have proven its business plan. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. Investors will be hoping that China Star Entertainment can make progress and gain better traction for the business, before it runs low on cash.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). Of course, if you time it right, high risk investments like this can really pay off, as China Star Entertainment investors might know.
When it reported in June 2019 China Star Entertainment had minimal cash in excess of all liabilities consider its expenditure: just HK$239m to be specific. So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. It's a testament to the popularity of the business plan that the share price gained 58% per year, over 3 years , despite the weak balance sheet. You can click on the image below to see (in greater detail) how China Star Entertainment's cash levels have changed over time. You can click on the image below to see (in greater detail) how China Star Entertainment's cash levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. Given that situation, many of the best investors like to check if insiders have been buying shares. If they are buying a significant amount of shares, that's certainly a good thing. You can click here to see if there are insiders buying.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for China Star Entertainment the TSR over the last 3 years was 514%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It's nice to see that China Star Entertainment shareholders have received a total shareholder return of 251% over the last year. Of course, that includes the dividend. Notably the five-year annualised TSR loss of 1.8% per year compares very unfavourably with the recent share price performance. This makes us a little wary, but the business might have turned around its fortunes. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Like risks, for instance. Every company has them, and we've spotted 7 warning signs for China Star Entertainment (of which 4 are concerning!) you should know about.
We will like China Star Entertainment better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
