Mobile e-commerce platform company 99 Wuxian Ltd (ASX: NNW) tumbled to fresh record lows despite delivering a more than doubling in full year sales and profit.
It's unusual to see the share price move in such stark opposite direction to profit growth, and you would have missed the subtle selling cues if you blinked.
The Chinese technology firm reported last Friday that net profit jumped 160% to RMB 7 million ($1.3 million) and net revenue increased 113% to RMB 154.2 million for 2014 (its financial year is the same as the calendar year).
However, the results are less impressive than on first blush because the comparative period is only seven-odd months as 99 Wuxian was incorporated on May 7, 2013.
If you accounted for the shortened period, net profit would "only" be up around 50%. Investors were clearly expecting more given the low profit base and the number of key partnerships management has struck.
Investors rushed for the exits on the news with the stock sinking a further 8% to 22 cents in the morning. The stock has shed more than 30% of its value since its full year results last Friday.
But the weaker than headline growth doesn't quite fully account for the sharp destruction in shareholder value. If management can keep growing profits at 50%, surely bargain hunters would be rushing in.
There's a bigger problem with the business, in my opinion. In one word: cash.
The business is bleeding cash even as profits soar. There was a RMB 115.4 million cash outflow from operations in 2014 compared to a RMB 6.2 million outflow in the previous comparative period.
The blowout is primarily caused by the ballooning in trade receivables to a tune of RMB 124.1 million from RMB 17.3 million and that means management required more working capital to fund its business activities.
The company's chief financial officer Ayngaran Kailainathan explained that the increase in receivables is due mainly to payment terms from its banking partners. 99 Wuxian recently struck a deal with China's four major banks to allow bank customers to exchange reward points for goods.
The ASX-listed company pays for the goods upfront and it takes 30 days for the banks to pay the company.
The fear is the company's cashflow cannot support rapid growth in this part of the business, and its business-to-business (B2B) division is a key growth driver for 99 Wuxian. Currently, B2B accounts for 25% of group revenue while its traditional business-to-consumer (B2C) division accounts for the balance.
Kailainathan told me that 99 Wuxian is trying to address the working capital issue by either shortening the payment terms with the banks to two weeks (I somehow don't see this happening), getting merchants to take on the cash burden or using a bank loan.
If management can reassure investors about the quality of its cash flow, the stock will bounce sharply. But until then, I would urge investors to stand aside.
Those looking for a better technology-related investment should look at eBet Limted (ASX: EBT) or Azure Healthcare Ltd (ASX: AZV).
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