Undervalued, Ever-Glory International, Is A Screaming Buy

Sometimes stock analysis is very simple, and we do ourselves a disservice by making things overly arduous and complex. No, I do not mean you want to buy on a whim! I also do not support the chart charlatans that proport that all stock buying can be condensed down to looking for esoteric specific signs, that only they are aware of. If you actually believe something called a ‘Head and shoulder pattern’ is the ultimate buying decision, please get your head checked!

But sometimes, things can be condensed down to the very basics, and a buy is staring at you right in the face.

Take Ever-Glory International ($EVK) for example. What do they do? As mainstay D.C. sportscaster Warner Wolf used to say, “let go to the video tape!” From their own website: “Based in Nanjing, China, Ever-Glory International Group, Inc. is a retailer of branded fashion apparel and a leading global apparel supply chain solution provider… Ever-Glory offers apparel to woman under its own brands “La go go“, “Velwin“,”Sea To Sky” and “Idole” and currently operates over 1,038 retail locations in China. Ever-Glory is also a leading global apparel supply chain solution provider with a focus on middle-to-high end casual wear, outerwear, and sportswear brands. Ever-Glory services a number of well-known brands and retail stores by providing a complete set of services of supply chain management on fabric development and design, sampling, sourcing, quality control, manufacturing, logistics, customs clearance and distribution etc.“

Very good. And I know, I know! Chinese companies are very risky. Limited knowledge, combined with less than stringent reporting requirements, make many of these stocks a crapshoot at best. I still think this stock is worth the risk.

EVK is down over 67% over the past year, with a share price as I speak of $1.07. It is currently riding some very short-term momentum, trading up over 14.4% over the last five market days. Ever-Glory has a very low market cap of 14.33M, and has two business segments, Wholesale and Retail.

The Wholesale segment design products often for international brands, and as of the most recent quarterly report, contributes 44% of all sales.

In retail, which accounts for 56% of all sales (One year ago, in 2019 the mix was 51.8%-48.2%, retail over wholesale), Ever-Glory owns and runs 935 stores in mainland China. They also sell their products on online, Chinese retail website, such as JD.com. As for their products, Ever Glory focuses on clothing, catering to what they call the “high-end,” female consumer. With COVID taking it’s toll on China throughout the year, and certainly still today, the company closed 185 stores, while opening 19. They claim they still plan on opening upwards of 50-100 this year, but we should appreciate that they made a tough, but prudent financial decision in closing so many stores. One can certainly understand why they made that decision, as 2020 retail gross profit has fallen 47.8%, compared to 2019.

		2020 6M		%		2019 6M		%		Growth or (decrease) 2020 vs 2019
Net Sales for Retail		64,104		100.0		99,919		100.0		(35.8)
Production Costs		29,712		46.3		34,286		34.3		(13.3)
Rent		11,767		18.4		19,860		19.9		(40.7)
Total Cost of Sales for Retail		41,479		64.7		54,146		54.2		(23.4)
Gross Profit for Retail		22,625		35.3		45,773		45.8		(50.6)
Total Cost of Sales		77,958		71.9		106,928		64.7		(27.1)
Gross Profit	$	30,483		28.1	%	58,344		35.3		(47.8)

Wholesale income out of China has also been equally bleak this year, falling 52.1% and 68.2% in mainland China, and Hong Kong, respectively, when compared to the first six months of 2019.

	2020				2019
Wholesale business	(In thousands of U.S. dollars)		% of total sales			(In thousands of U.S. dollars)	in 2020 compared with 2019
Mainland China	$	3,111	6.2		$	6,491		%	(52.1)
Hong Kong China		2,054	4.1			6,463			(68.2)
Germany		48	.1			877			(94.5)
United Kingdom		471	.9			2,038			(76.9)
Europe-Other		3,612	7.2			4,224			(14.5)
Japan		2,205	4.4			1,311			68.2

The overall picture on gain or loss from operations, was also equally as bleak. From this same quarterly report: “Loss from operations for the six months ended June 30, 2020 was $7.4 million, a 366.2% decrease from $2.8 million of income for the six months ended June 30, 2019. This decrease was due to decreased sales. “

A 366.2% decrease in net operations! A 166 drop in stores! Retail gross profit losses of 47.8% compared to 2019. Are you on the sauce, how could this possibly be a buy!?

I’m glad you asked. When we pick stocks, we have to know about the past, but primarily be future focused. Ever-Glory, despite being an international company, (The United States actually accounted for the majority of wholesale sales in both 2020 and 2019, with just over $10.5 million in revenue from the U.S. in 2020, compared to over $15.8 million in revenue in 2019) still does the majority of their business in China, and the economic picture in China is decidedly better than most of the rest of the world.

The International Monetary Fund is predicting that China will be the only economy with economic growth in 2020, with GDP expected to expand by 1.9% this year. The IMF is also predicting that the Chinese economy will expand 8.2% in 2021.

But the IMF can certainly get things wrong, what about some information on the ground that things in China are getting better, where is that information?

We actually have that.

The Chinese celebrate what is known as the “Golden Week” holiday from October 1st through October 8th. During that holiday, Chinese tourist typical flock to the tropical island province of Hainan, where products are sold duty-free. That is especially important this year, as Golden Week sales in Hainan rose 148.7% when compared to 2019. In 2019, Chinese consumers spent the U.S. equivalent of 155 million!

That is not all. On the Alibaba e-commerce platform, sales of products from overseas, typically luxury brands, rose 79% this year, compared to during Golden Week of 2019. While China still has a long way to go, much like the United States, the view of many economic experts out of the country is that the Chinese middle class still has the means, and the want, to spend on luxury items. As Ever-Glory is a company that caters to the “upscale” market, they may be a prime position to recover much of their lost Chinese profit from the economic downturn due to Covid, if the fortune of Chinese middle and upper-class, continues to improve.

And if our thesis is correct, and the Chinese economy does in fact continue to improve and expand, Ever-Glory may be in a better position to be able to grow operations.

While Ever-Glory reduced the number of stores in 2020, they also increased cash and cash equivalents. Cash and cash equivalents are now 22% higher than they were one year ago. The company now holds a reserve of $59.2 million, compared to just over $48.5 million, at the end of the second quarter in 2019.

And finally, while the economic picture in Europe is far bleaker than it is in China, with a second-wave of Covid cases causing most Euro-zone economies to stagnate, I would argue that in terms of the EVK share price, this has already been priced in.

Wholesale business in Europe only accounted for 8.2% of all total business that Ever-Glory did, and in the first six months of 2020, sales in Germany collapsed 94.5% and sales in Great Britain fell almost 77%, compared to 2019. The numbers from the Quarterly Report can be seen below.

		2020		% of total sales		2019		% of total sales		% change 2020 vs 2019
Germany		48		0.1		877		1.1		(94.5)
United Kingdom		471		0.9		2,038		2.6		(76.9)

So a slow European economy, simply doesn’t change much.

However, with well more than 55% of Ever-Glory’s business tied to China, if those predictions for an improving Chinese economy, and the good signs on the ground continue (Chinese auto sales are also seeing double-digit growth) I think there is great potential for this company to make up some lost ground, and for gross profit, sales, and net income to all show a dramatic improvement. Furthermore, while it is certainly true that I simply do not have enough information to be able to tell you if this company is even on the radar of the Chinese luxury retail consumer, we do know that Ever-Glory is not without a history of at least being able to scratch out a profit.

From 2016-2019 the company ended the year in the green, managing just over $12 million in net income in 2018, and nearly $12.5 in net income in 2017. Now that’s nothing to shout to the hills about, and this certainly isn’t a stock to sell the farm for, or hold forever. However, for me this a classic potential buy low, sell high proposition. I think it is more than worthy of a very small, opening position, which I made today. I plan on adding depending on how things play out over the next month.

Note: Please do your own due diligence in terms of this company and it’s equity offering. You should know that while I would never intend to mislead or mischaracterize, as I was a buyer today (10/15/20) at a share price of $1.10, I am no longer a neutral party in terms of this company. Thank you for reading!