Does Guangdong Investment Have a High-Quality Business?

Here’s what investors might want to know about Guangdong Investment Ltd (SEHK: 0270) before investing in its stock. – Dividends

Guangdong Investment Ltd (SEHK: 270) is a conglomerate with businesses than span water resources, property investment and development, department stores, hotel ownership and management, and infrastructure.

The company caught my attention lately after I learned that it’s trading at close to its 52-week low price.

This captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does it have a high-quality business?

This question is important. If Guangdong Investment has a high-quality business, this could be an investment opportunity.

Unfortunately, there’s no easy answer to the question. But, a simple metric can help shed some light on the question: return on invested capital (ROIC).

A brief introduction of ROIC

In a previous article, I explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business.

For convenience’s sake, the math needed to calculate the ROIC is given below.

Generally speaking, a high ROIC will mean a high-quality business while a low ROIC will point to a business of low quality.

This is important for investors as a stock’s performance is often tied to the performance of its underlying business over the long term.

The simple idea behind the ROIC is that a business with a higher ROIC requires less capital to generate a profit. Thus, it gives investors a higher return per dollar that is invested in the business.

Here’s a table showing how Guangdong Investment’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2019).

Source: Guangdong Investment 2019 Annual Results

In its fiscal year ended 31 December 2019 (FY2019), Guangdong Investment generated an ROIC of 10.9%.

This means that for every HK$1 of capital invested in the business, Guangdong Investment earned HK$ 0.109 in profit.

The company’s ROIC of 10.9% is average, based on the ROICs of many other companies I have studied in the past. This suggests that Guangdong Investment has an average-quality business.

The company’s average ROIC is a result of its capital-intensive business of owning assets, properties, and hotels.

Historically, these businesses are relatively stable due to the nature of services/products provided, which are necessities.

Nevertheless, the recent Covid-19 outbreak has caused enormous challenges to the property and hotel businesses, which explains its low share price.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited( 2020

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