Shares in Chinese e-commerce group JQW (LSE: JQW) fell by around 20% when markets opened on Thursday after the company reported its final results.
On the face of it, the news was good: revenue rose by 59% to RMB 783.8m around 81.7m in 2014 (RMB stands forrenminbi, the official currency of the Peoples Republic of China).
Pre-tax profit was 24% higher, at RMB 213.2m, while pro-forma earnings per share rose by 10% from RMB 0.69, to RMB 0.76.
So whats gone wrong? After looking at the firms results, Ive identified three possible problems.
#1: No dividend
Todays results contained some bad news: JQW will not pay a final dividend for 2014.
JQWs decision not to pay a dividend is surprising: according to todays results, the firms reported net cash balance rose by RMB 50.6m to RMB 394.7m in 2014, even after two previous dividend payments totalling 5.2p per share.
The company says that the generous size of last years special dividend is the reason why it isnt paying a final dividend, but to me, this doesnt add up: special dividends are normally paid in addition to ordinary dividends, not instead of them.
Furthermore, JQWs commitment to resume dividend payments seems pretty vague. Todays results note that the Directors intend to resume the payment of regular dividends but does not mention whether this is likely in 2015.
In my view, JQWs decision to cancel the final dividend is a warning flag for investors.
#2: Net cash?
According to JQWs 2014 balance sheet, the group has no debt and a strong net cash balance, a situation that also existed at the end of 2013, and at the time of the companys interim results last year.
Normally, I would expect a firm in this position to report interest income from its cash balance, with little or no financing costs.
However, JQWs cash flow statement for 2014 shows interest income of minus RMB 4,576,000 in other words, JQW paid more interest than it received last year.
One possible explanation for this is that JQWs cash balance varies widely, and at various points in the year, it does use debt facilities, which are subsequently repaid before the next reporting date.
Todays results dont provide enough information to explain this discrepancy, but in my view thiscalls into question the quality of JQWs cash balance.
#3: The P/E is too low
As a value investor, I love buying cheap stocks but I wouldnt buy JQW, despite the firms shares now trading on a trailing P/E of just 1.8, based on the firms reported 2014 earnings per share.
In my view, this is simply too cheap. When the stock market prices a share this low, its usually because the market does not believe the earnings are sustainable or genuine.
I share this view and rate JQW as a strong sell, even after todays falls.
After all, the catastrophic declines of several other Chinese AIM stocks over the last year should serve as a warning: these companies are not necessarily being run to the same accounting standards as UK firms.
Some may be genuine, but it appears that some may not be: why take the risk?
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.