Golden Goodies - (DJI)
Be warned. If it looks too good to be true, it is probably not true.
Tried and tested, the old adage still holds good, especially in the world of money.
So you might question the notion that it is worth buying shares in a business based in China where pre-tax profits are predicted to move from a small loss this year to £47m pre-tax for 2017, then to rocket over £130m in 2018, and comfortably top £200m for 2019.
OK. Question away.
Can this really happen? Well, London broker Mirabaud thinks so. It has just initiated coverage of DJI Holdings (DJI), a high-risk favourite here. And Mirabaud reckons the profit projections above make sense, and make DJI shares worth buying at 75p, with a target price of 169p.
Indeed, skimming the twelve page note, it appears that the broker is being conservative. It includes nothing, for example, from the original DJI business of online lottery sales in China. There is currently a ban on such sales throughout China, but DJI has a deal which allows mobile app lottery sales, and it is widely expected that the full online lottery will be allowed to return quite soon. DJI ought then to be among approved operators, and with illegal companies knocked out, the legal boys ought to do very well.
That, though, is a side-line following last week's commercial partnership with Xinhua News Agency, a state-backed monster through which the President talks to his people. Details are in my report on April 21 (Mind-Boggling). It opens the way for a profit-sharing deal which allows the Chinese to pay utility bills, traffic fines, and such online in five major Chinese provinces, with seven more to follow soon.
DJI will end up with a share of a small commission on each transaction, but the potential numbers are so vast that a tiny cut many times over translates into a very large number by UK company standards. Hence the mushrooming profit projections from Mirabaud.
DJI won the deal because it has become well accepted by several Chinese state-backed entities, and because the group's technology platform has impressed. It processed over a billion transactions a month before the online lottery was suspended in the spring of 2015, and is now set to be at the heart of what the broker reckons will be one of the largest mobile apps in China (hence the world).
The deal has been financed by a £10.5m fund-raising at 60p, and all being well, consolidated free cash flow is reckoned to translate from a negative £13.2m in 2016 to a positive £29.9m for 2017 and then on up into the stratosphere.
Original investors have already been taught a hard lesson about the risks of investing in China, with the shares slumping from over 140p late in 2014 to around 30p briefly after the authorities suspended online lotteries across the country. All credit to chief executive Darren Mercer for fighting to keep the company alive. He has secured a string of interesting deals, and there could be more to come.
This is not one of the flimsy, fly-away China crookeries which I warned against almost a decade ago, but anything in China is subject to different rules to the average UK stock. So you buy this with eyes wide open, re-reading the start of this report. But, by golly, If this is half right, the shares are worth buying as a high-risk, high-return punt.
We know DJI is working on a Nasdaq listing this summer, and the Americans could rate this highly. If private investors don't buy DJI, some major player looking to carve out a real presence in China certainly will.
Hopefully I will be able to report more detail from the broker note in the next day or two.
I have a holding in DJI.