Thursday 5 April 2018

Thoughts on Investing in Wai Kee Holdings(HKEX: 610)

Company Overview

Company's Business includes Construction, Property Development, Toll Road, Quarrying, Construction Materials and Asset Management

Holds 41.53% in Road King Infrastructure (HKEX: 1098) and 55.60% in Build King Infrastructure (HKEX: 0240) as of 31 December 2017.

 Profit Mix

- Most of its profits comes from its contribution of its associate (Road King).
- Wai Kee's share of profits from Road King accounted for 78% of Profit Before Tax
- The rest of the profits comes from Construction, Construction Materials and Property Fund segments.
-However the quarrying segment is loss making but according to management has synergies with its construction segment.

Financial Numbers

As of 3 April the stock trades at $4.60 HKD

PE: 4
P/BV: 0.52
Cash On hand - Borrowings: 0.52 HKD
Current Ratio: 1.16

Liabilities to Equity: 61.5%
Current Yield: 5.71% (3.8 cents interim + 22.5 cents final)

Key Risk/ Concerns
-Exposed to possible property measures taken by government amidst the rising property price in China.
-Toll Roads in China are highly competitive businesses with many other players listed as well.
- Construction and Property Development Sector known to by cyclical, with both Road King and Build King recording record profits, expectations could be high and failure to meet it could affect Wai Kee indirectly

My Case for Undervalued
- Trades at steep discount to market cap of its holdings.
In fact its share in Road King exceeds is current trading price. Which means purchasing Wai Kee gets a discounted Road King share, 'free' Build King and 'free' available for sale financial assets

-Build King Order Book has significantly improved. 
Secured over 12 billion HKD of projects and has outstanding value of work on hand of 18 billion HKD as of 31 December 2017 (31 December 2016: 12 billion) . 
Revenue of 6 billion HKD in 2017, Company should have enough work to get over the next 2-3 years. 

Furthermore gross margins held steady despite provision for losses of 2 projects. The lack of such provisions coupled with increased order book should signify growth in FY 2018

-Repeated Purchase of Build King and Road King in 2018
As of 3 April, Wai Kee has increased its holdings in Build King to 56.01% (previously 55.6%) and holdings in Road King to 42.09% (previously 41.53%) via on exchange transactions. This would have increased the steep discount of Wai Kee to market cap of its holdings as well as bring in additional profit contributions.

It is a known fact that parent companies listed on the HKEX has been trading at steep discount of its holding companies but few have the yield Wai Kee provides which makes it a worthwhile holding as a proxy to both Build king and Road King

Wai Kee has been purchasing shares in Build King and Road King since 2013 and this would definitely contribute more to the bottom line should both companies continue to grow.

Vested at 4.65 HKD

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( 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

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.