The continuity and stability of the dividend policy is of course important, but definitely not the most important. Conch Cement is extremely well-funded and fully capable of giving investors higher returns.

Special researcher Sun Xudong / article

Helicopter Cement (600585.SH) 2020 annual profit distribution program: cash dividend of RMB 2.12 per share (tax included), not the implementation of the provident fund to increase share capital.

Evaluated on a 5-point scale, I give this program 2 points.

Many investors are not too satisfied with Conch Cement's dividend, and in the 2021 Anhui listed company investor collective reception day, an investor asked this question:

Conch Cement's gearing is very low, and the cash reserves on the books, including wealth management products are more than adequate, which we, as a long term investor, are very happy to see. But also questioned why Conch Cement large amount of money lying on the account, but do not raise dividends or reinvestment and other matters, so whether it will affect the efficiency of the use of funds on the books.

The company's answer is as follows:

The company will maintain the continuity and stability of the dividend policy, pay attention to the reasonable return on investment to investors, and take into account the sustainable development of the company.

The continuity and stability of the dividend policy is certainly important, but definitely not the most important. Otherwise, investors directly invest in treasury bonds well, why buy stocks? At present, Conch Cement is extremely well-funded and fully capable of giving investors higher returns.

Another investor asked:

Does the company have any dividend distribution program or plan for the next three years?

The company replied as follows:

The company does not have a specific plan for profit distribution in the next three years. The company will continue to maintain the continuity and stability of the dividend policy, emphasize the reasonable investment return to investors, and take into account the sustainable development of the company, to maintain the dividend rate in a reasonable range.

To be honest, at first I suspected a clerical error in the above answer. Dividend yield is the ratio between dividend and stock price. So here's the question - first of all, to keep the dividend yield within a reasonable range, what day's share price should be used to calculate the dividend yield here?

Second, even if the stock price on a particular day or period is chosen as the denominator for calculating the dividend yield, and its reasonableness is widely recognized, it is not desirable to keep the dividend yield stable. For example, the current share price of Conch Cement is depressed, and as of July 9, 2021 has fallen by more than 20%. If by the time the company's board of directors discusses the 2021 profit distribution plan in 2022, the company's share price remains unchanged, does it make sense to reduce the cash dividend for 2021 by 20% compared with 2020? It is important to know that Conch Cement's low share price is more or less the reason why the company's dividend is too small and the use of funds is too inefficient. Then again, if the environment has changed dramatically, the market expects that Conch Cement is about to embark on a major merger and acquisition, which will lead to a sharp rise in the share price. Then, Conch Cement will have to increase its dividend substantially?

However, from the snowball online a titled "stingy money printing machine, cement leading undervalued? The content of the interview, the above answer may not have been a mistake. A guest in the interview answered questions like this:

Conch Cement's dividend mainly depends on the share price, and Conch Cement's management is aiming to maintain the dividend yield. In other words, the higher the share price is, the more profit they will share. The aim is to maintain the stability of the capital market, as well as to encourage long-term holding.

When the stock price is low, there's less snow to send charcoal, and when the stock price is high, there's more icing on the cake, so can this really encourage investors to hold on for the long term? I am very skeptical.

What I didn't expect was that the Conch Cement dividend program was passed by the shareholders at the general meeting - 99.90% of the votes were in favor of it. You should know that the motion on the renewal of the financial and internal control auditor only had 99.03% of the votes in favor.

I was very confused. So I tried to find the reasons why small and medium-sized investors agree with Conch Cement's dividend program. The following three reasons may be more typical.

Lack of financial analysis

First of all, some investors misunderstand the financial situation of Conch Cement, which may be due to the lack of sufficient knowledge of financial analysis. An article titled "Conch's capital utilization analysis" said:

From the strength, Conch does have the ability to increase dividends. But from the numbers to calculate, it seems to be able to increase the degree is not very big. 2020 net profit of 35.1 billion, excluding 15 billion planned investment spending, the remaining 20 billion, equivalent to 3.77 yuan / share, compared with the current 2.12 yuan / share, 77.83% more.

But in this way, Conch is equal to the money earned last year, all accounted for, they did not stay a little, there are other additional needs how to do? This is unreasonable and impossible!

Obviously, this author does not know the concept of free cash flow and how to calculate it, nor does he know that in case of additional expenses, the company has retained earnings from earlier years available in addition to last year.

Readers should not think that the mistake this author made was too low-level for the average person to make. The fact that I noticed this article because it appeared on Snowball's "Topic of the Day", that it was recommended by Snowball, and that no one pointed out these mistakes in the comments after the article, speaks volumes about the lack of adequate financial analysis skills among many investors.

Not enough independent thinking

In the Snowball interview mentioned above, one of the guests couldn't help but say the following because the issue of dividends was raised too much:

I believe that the management is smarter than we are, and wants to pay more dividends than we do, and to keep more money, so the management must have a longer-term view than we do.

I believe management is smarter than us and wants to pay more dividends and keep more money.

Earlier, the guest also said the following:

With so much cash on the account of Helicopter Cement, the dividend is only RMB 2.12/share, and the dividend rate is only 4%, as a minority shareholder, we are not very satisfied. But who benefits most from higher dividends? The most beneficial is the management and old staff of Conch Cement (except for the chairman of the board of directors), the major shareholder of Conch Cement is Anhui Conch Cement Group, of which Anhui State-owned Assets Supervision and Administration Commission (SASAC) is holding 51%, and Hai Chuang is holding 49%, at the same time, Hai Chuang is also holding 0.77% of the shares of Conch Cement directly, in fact, Hai Chuang is the real first major shareholder of Conch Cement. In fact, Hai Chuang is the real largest shareholder of Conch Cement. Hai Chuang is a Hong Kong listed company which is held by Conch Cement Employee Stock Owners Association. Most of the members of Hai Chuang Employee Stock Ownership Association are the old employees of Conch Cement who joined the company before 2002. At present, most of these old employees are in the management positions at different levels, so the equity incentives of Hai Chuang Cement are the best in the industry. With more dividends, the backbone of the income will be more, and the incentive for the backbone employees will be greater. So why doesn't Conch Cement increase its dividends?

The implication of this guest is that investors, as minority shareholders, should trust the company's management and staff, and believe that the company's dividends are justified. However, although the same as the stakeholders of Conch Cement, small and medium-sized investors and major shareholders, management, staff interests may not be completely consistent, otherwise, there will not be "corporate governance" this study.

Before this, Gree Electric Appliances (000651.SZ) 2017 annual profit distribution launched a program without dividends, was opposed by many investors. But there are also voices that Dong Mingzhu is the tenth largest shareholder of the company, high dividends are very favorable to herself, in this case, the company does not share dividends must be justified. A few years have passed, I think more people should see clearly at that time Gree Electric does not dividends have no reason.

Warren Buffett advocates independent thinking, which, I think, should be a value investor must not forget the faith.

Expectations of M&A are too high

The guest of the aforementioned snowball interview has high expectations for the future mergers and acquisitions that may be carried out by Conch Cement, and his explanation for Conch Cement's failure to increase its dividend is as follows:

Conch needs to spend money on a lot of places, and there is still a lot of growth potential in the future, and even more importantly, the future of the capacity of the mergers and acquisitions, and I think that the management has their considerations. I think, the management has their consideration, maybe holding a big move, due to information confidentiality reasons, now inconvenient to the public announcement. The most likely, is a major asset acquisition, perhaps the time is not mature, perhaps the price has not been negotiated, still have to wait, for example, the acquisition of Western Cement, this in 2016 to engage in a, due to the antitrust review did not pass, did not come to pass, 2021, Tianshan shares reorganization of the successful demonstration effect of the cement assets of the China Building Materials, will be an opportunity to restart the acquisition of the possibility.

I noticed another guest answering the question "Conch Cement left too much cash on the books, pulling down the yield, so the purpose or benefit in the end where is it?

This question is asked every year to Mr. Yu, the secretary of the board of directors, and has been discussed from 18 years to 21 years. The discussion basically did not have any results, basically is that now the market can invest in things are more expensive, not in line with the psychological price of the conch.

From this, I recalled an article by Dr. Du Lihong, "Counter-cyclical cash mergers and acquisitions," in which Dr. Du argued, "From Shell to Mittal, it is not difficult to see that the arbitrage undervalued cash mergers and acquisitions strategy is not only applicable to the petroleum industry, the steel industry, but also to other cyclical industries. As long as the volatility of product prices is greater than the 'waste' of financial efficiency due to reserving financial resources, the strategy of 'reserving financial resources and arbitrage industry undervaluation' can enhance the profitability of a company's capital, and thus enhance shareholder returns. "

From the point of view of retaining a large amount of cash, very low gearing and a long-term search for low-priced assets, it is likely that Conch Cement has adopted a counter-cyclical cash M&A strategy. However, there is one question that must be clarified - how cyclical is the cement industry? Let's take a look at the views of several guests in the Snowball interview:

After the supply measurement reform in 16 years, cement is no longer a strong cyclical industry.

The cyclical attributes of cement are a bit bigger than long power, but specifically for Conch, its cyclical attributes are a bit weaker than other cement companies due to its superb cost control ability and strong profitability and cash flow.

Cement's cyclical attributes have been getting weaker and weaker, and how you can make money on valuation enhancement mainly depends on how the market perceives it.

If the cyclicality of the cement industry is true, then Conch Cement's strategy of implementing counter-cyclical cash mergers and acquisitions may not be successful. According to Dr. Du:

Counter-cyclical cash mergers and acquisitions to enhance the return on assets actually take advantage of the cyclical industry's product and asset price fluctuations: in the downturn due to the sharp decline in product prices, resulting in the industry's companies generally in financial difficulties, cash flow shortages, assets were sold cheaply, and at the same time, the abandonment of investors in the capital market aggravated the depreciation of the assets. The market value of assets is seriously below the replacement value, which gives rise to M&A arbitrage opportunities - low-priced assets acquired at the peak of the industry will unleash great profitability and potential market value, and in the long run will reduce production costs.

Cement industry in the future trough will be the scene of widespread financial difficulties of enterprises? It seems hard to imagine. If the industry is not highly cyclical, the loss of retaining large amounts of financial resources for a long period of time cannot be compensated by the fall in asset prices during the downturn.

In addition, Mr. Yu Shui, the secretary of Conch Cement, had this to say during the investor reception day:

Cement prices depend on changes in industry supply and demand, and it is expected that the industry supply and demand pattern during the 14th Five-Year Plan period will remain relatively stable. The company will continue to do a good job of production and operation and project development, continue to focus on the main business of cement, while accelerating the extension of the industrial chain, vigorously develop the aggregate project, and actively and steadily promote the development of mixed projects.

That is to say, even if the cement industry is a strong cyclical industry, Conch Cement can take a counter-cyclical cash merger and acquisition strategy, according to the company's judgment, the next five years is also likely to have no suitable mergers and acquisitions opportunities.

At present, the share prices of some cement industry listed companies are not expensive. Conch Cement's current price-to-book ratio is only 1.24 times, and Western Cement (02233.HK) is only 0.5 times. I think, if it's just a purely financial investment, Conch Cement should already be ready to go. Buying shares of some cement-industry listed companies at the current price won't yield too low a return in the long run.

The problem is that Conch Cement probably doesn't want to make a purely financial investment. Mr. Yu Shui said in the investor reception day activity:

The company will continue to focus on the development of the main industry, actively promote mergers and acquisitions and integration in the country, and actively and steadily push forward new projects overseas. At the same time, we will extend the upstream and downstream industrial chain, vigorously develop the aggregate project, and steadily push forward the construction of the commercial mixed project.

A simple financial investment is obviously difficult to promote M&A integration.

Based on the above analysis, I don't think we should expect too much from Conch Cement's merger and acquisition.