Another exciting week! This week, HRNet caught my attention as it approaches all time oversold RSI level. In addition, it is trading at the lowest price $0.560 since its IPO price at $0.900.
Given the basis below, my personal view is that HRNet may be presenting a favourable risk reward setup for a long trade. Do look at the basis and more importantly, the risks inherent in such trades.
My personal basis
a) Average target price $0.93!
Based on Figure 1 below, average analyst target is around $0.930, representing a potential capital upside 66%. Estimated div yield is around 5.1%. Total potential return (should consensus be correct) is around 71%. There are three buy and one hold calls. Although DBS has a hold call on HRNet, it is noteworthy at the time of their report, HRNet is trading around $0.660. HRNet has since fallen another 15% or $0.10, thus my personal view is that if DBS were to do a write-up now with the same target price $0.75, they are likely to give a buy call instead, as it has more upside potential. In other words, assuming HRNet’s fundamentals have not changed in the past two weeks, all the analysts are arguably likely to have the same BUY calls based on current share price.
Figure 1: Average analyst target $0.93; total potential upside 71%
Source: Bloomberg 29 Aug 2019
b) Trading at a discount to 2-year valuations and Asian peers
Based on Bloomberg, HRNet is trading at 1.7x P/BV and 11.7x PE; vis-à-vis its two-year average 2.5x P/BV and 17.0x PE. I.e. HRNet is trading at a discount to its two-year average valuations. Besides trading at a discount to its own historical valuation, based on a CGS-CIMB Securities research report, HRNet is also trading at almost a 60% discount to its Asian peers which are trading at 28.3x CY19F PE.
c) 40% of its market cap backed by cash
Based on CGS-CIMB Securities research report, HRNet has net cash $228m post Staffline acquisition. I.e. 40% of its market cap is backed by its cash. On an ex cash basis, HRNet is trading at an approximate 7x FY18 PE.
d) Chart looks extremely oversold
HRNet’s technical chart looks interesting on four aspects (see Chart 1 below). Firstly, HRNet’s RSI closed at 12.1 for the past two trading days. This is the most oversold level since IPO. On an absolute level, a RSI reading of 12.1 is also very oversold. Secondly, MACD which usually lags more than RSI, is also at the most oversold level since IPO. Thirdly, indicators such as MFI and OBV are showing bullish divergences which may indicate that the recent slide to $0.560 may not be sustainable. Fourthly, based on observation, there seems to be some buying interest at current level.
Near term supports: $0.560 / 0.550 / 0.525
Near term resistances: $0.570 / 0.595 – 0.600 / 0.610 / 0.625
Chart 1: Entrenched in a strong downtrend but extreme oversold pressures build
Source: InvestingNote 29 Aug 2019
e) Company commenced share buyback since 15 Aug 2019
HRNet commenced its share buyback on 15 Aug 2019 at $0.60. Although the buyback volume is modest, it is noteworthy that the pace and volume of buyback seem to have picked up. HRNet has bought back 100K shares each for the past two days at prices ranging from $0.560-0.565.
As usual, with any trading or investment idea, there are always risks. The list below is not exhaustive.
a) HK protest may affect business and exert selling pressure
Protests in Hong Kong have stretched for three months and there seems to be no end in sight yet. Such protests, besides casting a shadow over the general equity market, may affect HRNet’s North Asia (China + Hong Kong) segment. Based on RHB’s report, they cited that although management expects weakness in 3QFY19F from the Hong Kong branch, management believes that North Asia may still post some growth in 3QFY19F.
b) Strong downtrend
Based on Chart 1 above, it is evident that HRNet is on a strong downtrend as evidenced by its death cross formations and downwards sloping EMAs. In view of this, take profit levels should be measured and realistic.
c) Not familiar with the company
As this basis is based primarily on its technical oversold level, I am not familiar with HRNet’s business and the underlying fundamentals. There may arguably be some reasons known to the market but not to me resulting in the continuous fall in the share price. Readers are encouraged to do your own due diligence. Readers who are not familiar with HRNet can start by looking at its company website HERE and the research reports HERE.
d) Chart reading is subjective; no rule that RSI will not go below 12
There is no rule that RSI cannot go below 12, or even 10. However, on the balance of probability, it is less likely that HRNet can keep on dropping without some form of bounce, as oversold pressures escalate and amid an overwhelming positive analyst base.
e) Markets are buffeted by several headwinds
It is evident that August has been a negative month for the equity markets as we face several headwinds such as recession risk; flip – flop on the trade tensions between China and U.S., geopolitical, Brexit etc. Readers should be careful in making any investment / trading decisions.
f) Illiquid stock
Based on its latest annual report 2018, the top 20 shareholders have about 96.8% of HRNet’s outstanding shares. Average 30D volume amounted to around 375,000 shares only. This is not a liquid company where investors can enter, or exit quickly. Against the backdrop of our volatile markets, HRNet may swing quite a bit if there are sudden sellers, or buyers.
In view of the above, there is no doubt that HRNet is on a strong downtrend. However, it seems likely that near term potential downside may be capped, as oversold pressures escalate. I have initiated a long position in this stock, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement, as oversold pressures escalate and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with HRNet’s business and its fundamentals) which we should be aware of. Furthermore, it is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully. As I have always emphasised, everybody is different hence readers / clients should exercise their independent judgement and carefully consider their percentage invested, returns expectation, risk profile, current market developments, personal market outlook etc. and make their own independent decisions.
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P.S: I have mentioned to my clients on HRNet this morning.
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