Monday, 1 April 2019

Is OUC Holdings (Oriental University City Holdings, Hkex: 8067) worth a purchase?



A friend(Domodaddy) suggested to me that I should get my back into doing research following the booking of a heavy loss in my previous post. I have decided to heed his friendly advice(i guess?)

Today's focus will be on OUC Holdings  (Hkex: 8067)

What's the company about?
The company owns a plot of land at Langfang Development Zone with a medium term lease expiring in 2049 (30 years time). The company has educational facilities on this plot of land which has site area of 487,270 sqm. That's about 68 football fields.     
It then leases education facilities to college, schools and universities. Examples of types of facilities include teaching, dormitory and retail.
To give lay man examples
Teaching = Classrooms, Dormitory = Onsite campus places to stay , Retail = Supermarkets
According to its prospectus, education facilities leasing fees are received based on estimated student enrollment for upcoming academic years. 
Student enrollments are not disclosed in annual results nor annual reports.


Who are its Shareholders?
People might be familiar with Raffles Education, a stock listed on SGX. It holds 25% of OUC Holdings. Overall Mr Chew Hua Seng the Chairman and CEO of Raffles Education owns 75% of OUC Holdings.


Financials (Company first listed on Jan 2015, with financial year ending June 30)

(In RMB'000)
2014
2015
2016
2017
2018
1H 2019
Revenue
59,643
61,588
68,619
60,336
67,311
37,754
Profit before tax
43,958
58,247
71,782
35,348
220,148
20,019
Profit before tax (PBT) without revaluation
34,397
23,492
42,178
12,352
49,742
20,019
PBT excluding revaluation and associate
34,397
23,492
41,258
7280
40,734
20,922
PBT excluding above and govt grant
25,749
23,492
36,258
28,295
40,734
20,722
Margin
43.17%
38.14%
52.84%
46.7%
60.52%
54.88%
Dividend
NIL
8 cents HKD
8 cents HKD
8 cents HKD
12 cents HKD
5 cents HKD
Equity/ Liability Ratio
24.09
12.43
10.48
7.94
7.67
6.59

What I like about the company
- At a trading price of 2.02, its trading at a historical PE of 9 if before tax figures are used. The price to book value is also at 0.3135. Considering there is 30 years to the lease expiry, this valuation is undemanding.

-Revenue has been slowly trending up across the years, this has been accompanied by an increase in profit margins. With 1H 2019 recording a 13.4% increase in revenue compared to 1H 2018, could we foresee a revenue breaking year?

- Dividend has been increasing and consistent in prior years. In fact cash generated from operations has been consistent around 30 million for 2017,2018. A 12 cents dividend would require only roughly 18-19 million.

My concerns for the company

-Customer risk, the largest customer accounted for 64% of the group's revenue.

-Credit risk, 1H 2019 had good results but it came along with a 18 million increase in trade receivables and prepayment. With 16 million coming from trade receivables and 15.6 million is 3-6 months due. A pretty alarming situation considering this has not happened in previous years.

-Acquisition of  Zhuyun Education Land from Raffles Education. This acquisition has the word 'wrong' on all aspects.

1) The price was arrived at a 'willing seller, willing buyer basis'. As mentioned earlier on its shareholding, this sounds like left hand and the right hand doing a puppet show. Although a valuation report is done.

2) Funding of the purchase is largely done by a conversion note(176 million at rate of 2.48%) which entitles the note holder to convert at a price of 2.30 hkd per share. A maximum of 88,565,306 shares can be converted which is a dilution of 49.20% of current shareholdings.

3) The properties generated a net loss of S$251,000 in FY 2018. Anyone in the right frame of mind would probably not acquire something that is loss making unless they are confident in turning around the business although OUC holdings in theory is under Raffles Education?

Conclusion

Q: Would this be the company that sets me in the right foot towards recouping my losses?
A:Maybe

Q: Would this company pass my valuations?
A: It does pass my valuations, though I am not a fan of actions of the company as well as its recent balance sheet concerns in trade receivables.

Q: Would I buy the shares of the company?
A: No, having been through last year, I am more skeptical of taking a 20-80 or 10-90 chance. I would buy the company if trade receivables convert into cash in the next quarterly report and the acquisition does not happen. The big draw is that the price: book value is well below the current rate and the profits have been decent. But it is likely to change should the acquisition happen and it would put a ceiling on the share price as well. 

Food for Thought

Raffles Education has attempted to issue rights in December 2018 to raise 27 million SGD which has been cancelled in March 2019 as the trading price of the share( 9 cents) is below rights price of 10 cents. This rights 'action' would align to why they would sell the properties to OUC Holdings. 

Though i would wonder why did they not want to divest the whole OUC Holdings as its net assets are recorded on balance sheet to be 1,159,632,000 RMB or roughly 234 million SGD. OUC Holdings recorded a 170 million RMB revaluation which is already above the rights amount to be raised.

That concludes the first stock I decided to share. Would try to put up more when I have the time to do more research and writing. 
Currently more busy with watching shows and listening to k-pop........yup you guessed it right, the write-up is done while listening to k-pop as well.



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