Tuesday, 3 April 2018

Thoughts on Investing in Mainland Holdings (HKEX:1100)



Company Overview

Mainland Head-wear Holding's business can be classified into 3 arms.

Manufacturing- Mainland produces for customers such as New Era(https://www.neweracap.com/) which sells caps through its rights in NFL, NBA, MLB and many others.

Trading- Distribution rights of headwear products from leading soccer teams in the English Premier League (EPL) as well as high end women head wear market through its 3 subsidiaries

Retail- Through its NOP outlets and Sanrio stores


Revenue Mix



Revenue and Profits are largely driven by Manufacturing arm, Top 2 customers coming from the manufacturing business as well. 
Compared to previous year,
Manufacturing Sector has improved by 20.64%
Trading Sector has performed badly compared to FY 2016, with profits falling over 77%.
Retail Sector continued its loss making trend, with losses gaining another 32.34%


Financial Numbers

As of 3 April 2018 the stock trades at 1.18 HKD. Using this as a reference.


PE: 6.32
P/BV: 0.71
Cash  On hand - Borrowings: 0.1832 HKD
Current Ratio: 2.1
Quick Ratio: 1.44

Key Risk/ Concerns

- US Trade Wars. This might result in tariffs imposed on imports into USA and Mainland's key revenue region is from USA.

-Deepening Retail Business Loss.

-Key Customer Risk. Top 2 Customers occupy 54.1% of total revenue and 68.66% of Manufacturing Revenue

- Currency Appreciation risk- 1% appreciation of Renminbi and Bangladesh Taka would reduce Manufacturing gross margins by 0.2% and 0.1%

My Cases for Bull

- Management has said that one of its trading subsidiaries H3 has seen double digit growth in orders from a US multinational retail enterprise customer and expects contribution to be seen in 2018.

- Increasing technical expertise at its Bangladesh Factory(Manufacturing arm) would allow for more high-end orders and increase profitability

-Plans for a new factory to double current productions in Bangladesh(Manufacturing arm) in place

-High Utilization rates (more than 90%  in general) of production capacity

-Growth in demand from 2 largest customers from 2016 to 2017

-New Era has about 9% shares in Mainland and this cross-holding could allow for future collaborations with current one scheduled to end in 31 December 2019.

-Management has around 66% of shares and has been adding at 1.43-1.5 HKD in October 2017

Conclusion
The recent mini panic in the markets has seen some selldown in small volumes for this counter and despite picking it at 1.36 2 weeks back, i have picked up again at 1.18 on 3 April and I would be interested to see how things pend out in the 1st 6 months when it releases its 6 months results in August.
Whether there will be a continued increase in Manufacturing profits and revenue and a turnaround result in the trading arm as stated by management.



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