Mis-pricing in China Lilang corrected

Two and a half months ago, I wrote a post about mis-pricing in China Lilang. The mispricing was due to improved operating performance (better trade fair result) that was not factored in the share price yet.

Two weeks ago, Lilang released its first half result of FY17. Revenue was down nearly 13% yoy, while net profit was up 1.6% yoy. Revenue was down because Lilang was closing the L2 brand business. Operating margin improved slightly because existing Lilanz brand has higher margin than the L2 brand that was winding down. The net profit increased because of both higher margin and lower tax rate. Overall, the result was ok, and its share price was relatively flat on that day.

Lilang - 17H1 result
Source: Lilang’s FY17 H1 report

But management remains bullish with its near-term prospect and highlighted that summer trade fair result could see low double-digit growth. A day after the result release, the market became bullish on Lilang, bidding up its share price from 5.17 to 6.27 at the peak last week. Today, the market is probably taking profit, hence, Lilang is down 3-4% today.

My own estimation of Lilang’s fair value is between 5.50 and 6.0. While it’s currently gaining momentum and probably releasing good summer trade fair result in next two weeks, I think current share price is at upper end of fair value, and we should really take profit by selling out. The mis-pricing has already been corrected.

Going forward, I have no clue whether Lilang will be able to sustain its business performance, and, therefore, I will not bet on that. I’d prefer to buy when there is mis-pricing again, and hope it will occur every now and then.

Lilang - Share price - YTD-2017-08-28
Source: Google Finance

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