Thesis on 306 HKEX. Kwoon Chung Bus Holdings Limited . (My Latest Purchase)

Company Introduction

Kwoon Chung Bus Holdings is a transport operator in HK and China. Its main line of business are as follows

1) Operating of Public Bus Service in HK (Under New Lantao Bus 'NLB')

2) Operating of Non-Public Bus Service in HK (Under the Kwoon Chung Brand)

- An example of this would be providing bus services to transport kids to school and from school to a stop near their home.

3) Operating of Cross-Border Transport Services (Bus / Private Vehicle) (HK - Macao - China)

-An example can be from Hong Kong to Shenzhen / Macau / Zhuhai / Qian Hai / Zhongshan

4) Operation of the Bipenggou Tourism Site and a Hotel in China.

-Bipenggou is a tourism site in Sichuan. 

Company Financials

A look at financials and folks can tell that it has not been good for them in the past years

Revenue (2.1B in 2024 vs 2.97B in 2019) is still lower than pre-covid and profitability (32m in 2024 vs 253.6m in 2019) is far lagging behind. 

Thesis

A turnaround play riding on an interesting theme. It is worth betting that the half year result ended 30 September 2024 would surprise on the upside.

This theme is known as 北上 . It is a phenomenon that has hit Hong Kong in recent times , which is HK Folks heading up to parts of China during weekends and even on normal days to spend time / money there.

The reason for heading up to parts of China can be broken into 2 parts. 

Part 1: Things are cheaper there and are more value for money. 

(Dentist and Food is much cheaper there)

(Even meds is much cheaper there)

I am sure folks from Singapore will resonate to this because of neighboring effect.

Part 2: Accessibility has greatly improved

There are now many ways to go into China. With the HK Macau Zhuhai Bridge as well as the Zhongshan Shenzhen Bridge, these has improved accessibility for folks to go into China.

Reasons for Buying into this Thesis.

1) Cross Border Numbers has greatly increased.

Macao Crossing Data from April 2024 to July 2024 is the highest since Covid.

(Shenzhen Bay Crossing Traffic has increased in general the past 4 months as well.)

(Lok Ma Chau Crossing Traffic has increased in general the past 4 months as well.)

(Trend still going strong)

2) NLB Bus Ridership has recovered.

While it is not back to 2019 levels, it is getting close. From April 2024 to July 2024, the numbers are much higher than the same period in 2023 as well.

3) Price increase still seen in Non-Public Bus Segment. International School Population in HK has hit record high.

(23/24 $17810)

(24/25 $18830) An increase of 5.7%

It is good to see that there is still price increase in the services each year. Although the company does not provide a breakdown to which how much does transport services for student make up for this sector.

(While it might not be a strong link, it is good to hear that there has been higher amount of students in the segment that the non-public bus segment operates in)

Conclusion

I think it will be a better half for Kwoon Chung. But it might be really difficult to estimate the revenue because how much it will be able to capture in the cross-border demand.

 If it is able to go back to its pre-covid profitability or even exceed it, it is definitely cheap  as i think the trend of folks going up to China to spend will continue. 

I think there might be some concerns because of its balance sheet being some more levered as it is a business that has high operating leverage (buses) and it is funded via borrowings as well.

 As such, the execution might not be as easy as it seems but i still see it as a business with high operating leverage that should benefit much more from increased ridership.

Considering the above factors and my portfolio as a whole, i have decided to allocate some % to this stock. 

I am capping my exposure for this stock at a max of 15% of my assets. But as of now, it is not at double digits in terms of weightage.

Other stocks that could ride this theme that i have considered are as follows.

Travel Expert (1235 HKEX) - Tour Package Operator. However, unsure how much it benefits from cross-border travel even though it runs a platform that sell cross-border related packages. Its packaged tour has recorded good growth and September Tour Group is a record high.

Faces problems of ultra low liquidity and 1H / 2H 's revenue and gross profit margin has high variations. As such I am unsure if it would benefit from higher revenue.

Transport Intl (62 HKEX) - Operator of KMB. While KMB does serve cross border, it still has a much larger focus in domestic operations

Hans Energy (554 HKEX) - Recent acquisition of Citybus in HK makes it a relevant play. However, gearing becomes rather inflated after the acquisition of Citybus and Citybus falls under the same category as KMB so the cross border exposure is smaller.

MTR Corp (66 HKEX) - Considering this stock is up 20+% in the past months and also a large cap that is related to the market sentiments. I had my reservations. However, its patronage data does indicate a better 2H and it also has a good pipeline of property revenue to recognize.

At 18 PE.......it is almost priced for growth in the 2H as well. Though I have to say this is definitely a much direct beneficiary from the 北上 theme and it is a safer company (structure of shareholding , ease of tracking the patronage data etc)

HSI PE.

(MTR Patronage Figures) As you can see, Jul and Aug Cross boundary and HSR figures have improved. I believe Sept figures should be much higher due to golden holiday effect.

K-Pop Pictures Spam Time😂

It has been way too long since i saw this group.

Also some spam of photos from my recent trip

(IN-N-OUT is really good)

(Panda Express is decent)

(BCD Tofu at where it started.......LA)

Seems like a photo spot for many

As usual, if you can stand the Pictures spam and reach here.....i would provide my non accurate prediction of the revenue of the company

I think the China tourism segment should see around 10% growth. 

Limousine and Non-franchised bus should see around 20% growth.

Franchised Bus would see slight decline of around 3-5%. 

The hardest to predict would still be Nonfranchised Bus and Limousine as well as how much of this increased revenue seeps into profit.

With the opening of Shenzhen -Zhongshan bridge on 30 June 2024 and the strong outbound travel from HK to China figures seen in Sep.....it makes the forecast difficult.

Short Thoughs on Recent HK Market Rally

 

HK and China Markets have gotten a lot of interest / writing and video coverage in the past weeks.

2800 HKEX the tracker fund has rised by 22% in the past month. There has been many reasons given for this increase..........from fiscal stimulus / under allocation to HK / China to covering of short interest and buying power increased as China Financial Institutions are given the 'free-pass' to buy stocks / golden holiday strong demand...... the list goes on

My personal thoughts are that the focus should still be on individual stocks. Perhaps one should ask if there is a fiscal stimulus, does that affect your company.....if your company is Link Reit for example, will fiscal stimulus affect the HK Property Demand?

Or maybe another example will be Mainland Holdings where at least 85% of revenue is from US. It is unlikely to benefit from any fiscal stimulus from China

I think trying to understand the link between policy to individual companies will be more key.

I think it is rather scary if you have a company that trades at 20 PE and after a 30% rally now it trades at 26 PE. There is more focus needed to think about the link and whether this company can deliver growth because if it does not, the sell down will likely happen.

However if you have a company that is 4 PE...a 30% rally gives the stock a 5.2 PE....which will probably be cheap if it is not cyclical or still represents a lesser risk compared to a 26 PE. 

The level of growth being priced in for both cases are likely to be different.

From a more abstract POV, China's PE after the recent increase is still 10% lower than the 10 years average

But if you look at HK PE, it seems to be slightly overvalued around 8%

In my watchlist, there is still companies that show negative share price performance this year while the tracker fund has rallied 29% this year

(The green figures on the right indicate the negative share price performance year to date)

Perhaps i will start some dumpster diving for some stocks that have underperformed the market this year and might show good results.

As a whole, the rally is good and perhaps some small cap stocks might catch the eyes of investors who wants to invest in the hk markets but does not want to go into the large caps like the rest

But on a company business / financial performance level, policies have to be actually in place , well articulated and approved before we know if they will see growth from the policies.

(September 2024 Results) How i would invest in the singapore stock market if i had 100k of spare money

 

September 2024 Returns: 9.22%

Year to Date Returns: 23.54%

Since Inception (9 Sept 2020) Returns: 115.37%

Main Drivers of Returns in September....basically close to the whole portfolio, which lead to a 9.22% returns.

The main drivers are Wee Hur, Money Max, Centurion , China Sunsine.

Overall, nothing much to be unhappy or to change apart from probably Huationg Global which i would rotate out this month to indicate a more reflective thought on the whole situation.

Recent Thoughts and Updates on Portfolio (Returns Slip to 4.52%)

 

(Portfolio was at 4.52% Returns YTD at 5 August)

Recently I have not been updating much, there is just too much firefighting to be done first before i could post.

Before i begin, the September 'How I would Invest' SG Portfolio Update will be slightly delayed as i will only be available to update it a few days after the start of October.

From the chart above, you can see that the returns have dropped sharply to 4.52% from a peak of above 25% before recovering back to around 20% currently.

What led to 25% returns before June?

Dream International recording good FY 2023 Results. Share Price was at $5 around that period

Huationg Global held steady at $0.16 on the back of decent FY 2023 Results

Saint Miguel HK Share Price was at $0.90. A YTD Gain of around 14%

What happened after that? (June to August)

Dream International Plunged to close to $4 after results showed profit and revenue fall but gross margins improved slightly and dividend is maintained. It was around 50% of my portfolio so the returns attribution was close to 10%

Huationg Global decided to issue a profit guidance to inform investors they did not manage to renew their contract for the management of the dormitory. Share Price went from $0.16 to $0.124 in the next few days. It was around 30-40% of my portfolio so naturally i took a 6-8% loss in returns attribution.

San Miguel went up to around 1.10, 20% gains before correcting back to $0.85 levels after poor results.

Although Centurion went up to $0.6 and subsequently $0.7 levels, it did not really helped much because it was only 4% of my portfolio on initial purchase. It is now about 7% of the portfolio.

IGG continued to tank and tank and tank. I made 4 tranches of purchase during this period and the share price has actually reached a low of around 2.5 levels before its results release in August. A

To give a rough estimation, each purchase was around the same value in total. Therefore, the first 2 tranches at 3.09 and 3.14 already suffered a 20% loss in just less than 3 months.

The above factors lead to a record low of 4.54% at 5 August.

The first thing i thought about was .....is this a repeat of 2018. That trauma has always been in my mind whenever i get a good start to the year as i will always remember how i went from 25% to -8%.

The process has always been largely similar / consistent this year.....very different from how i would have done things in 2018.

The probable thing i done more as the returns went down was to do more research and also think about some other stocks that i would be keen to allocate to.

Fortunately, things went well after that

Huationg recovered around 10% after a solid 1H 2024 Results

Dream showed some recovery but many headwinds still persist (will talk about this later)

New Initiated Position Wee Hur showed some quick gains.

IGG Bounced over 40% from its Low on the back of Solid Financial Results and Desirable July Figures.

All of the above steered the return up again.

Thoughts and Likely Actions

Looking forward, the earnings season is coming again for stocks that are going to report September financial year end results. Something that i would have to look at again 

1 ) IGG was meant for a quick burger flip but the excellent July figures means i would likely track its games on a monthly basis and make a decision again. There has been addition by management as well.

2) Dream is a tough one. July and August Export Figures from Vietnam is really decent and China Disneyland seems to have been resilient.

But the typhoon hitting Vietnam in September seems to have derailed some export momentum and Shanghai is also hit by the typhoon recently which would likely affect theme park demand. At Japan, a recent bloomberg article mentioned about the heat resulting in lower numbers. Something that i have observed as well as it seems like figures might be 10-25% lower in August.

As such, October to December will be crucial and also to see if the US Toy Companies have good results or indicate that de-stocking is over.

After a lot of hype about Pop Mart, it still plays too small of a part to influence anything really. Funko and Spinmaster will be more crucial

Operations at the company seems to have improved with margin improvement and business operations improvement like robotic arms and automation etc . This is a good sight as wages have went up around May/June Period (10-20%) so this would likely be seen in 2H 2024. Fortunately wages make up around 25.5% of revenue in 1H 2024 compared to 23.9% in 1H 2023.

The in theory right investor would probably find something that is worth more in the meantime in terms of risk reward ratio and opportunity cost.

The better ones in theory will be able to be right in the short term. As for myself, i would have to start having a list of alternatives while continuing to monitor the situation in 2H 2024. As the revenue usually is much higher in 2H, there is more pressure on 2H to perform than 1H.

3) Continued Trimming down of Huationg and sourcing for possible additions. Continued monitoring of Wee Hur.

This is purely a favourable view towards workers dormitory and student housing while Huationg will transit back to a construction and related play.

As at current moment, any cash will likely be from selling of Huationg(continued trimming) or selling of Dream(due to really bad data seen from its related peers). Unless any other positions have takeover or bad things happening, it is unlikely it will be sold as of now......

On a deeper level that i have to think about as well, Dream is around half of the portfolio. Is the risk return worthwhile for this positioning? Although on the dividend end, it has maintained and it has paid a good yield last year such that the current yield is around 13% while balance sheet is heavy and payout ratio is around 45%.

(August 2024 Results) How i would invest in the singapore stock market if i had 100k of spare money

 

August 2024 Returns: 5.29%

Year to Date Returns: 13.11%

Since Inception (9 Sept 2020) Returns: 97.20%

August turns out to be good and portfolio records a positive return

Main Attributers would be Centurion, Huationg, Moneymax

There is just too much results reporting in August so i will just point out a few.

UMS = Cyclical in Nature, continue to await the upturn

Moneymax = 64% increase in profit YOY. No surprises there as gold prices soar.

Tat Seng Packaging = Gross Profit Improvement and better net profit is in line as this is seen in its China Peers already

Haw Par = 1H 2024 better than 2H 2023. Dividends still the same unfortunately. 

Centurion = Pretty In-Line Results. The expectation is that growth will be higher in 2H due to more positive rentals revision seen down the road. 

Wee Hur = Need a bit more time to break this down, it is decent but will need more time to decide if this can be a potential 2025/2026 multibagger

Overall, due to a rather busy August, I have decided to keep things as they are for the time being. But for sure I have been thinking abt 1 or 2 changes here and there.

Recent Positions Thoughts (Huationg , Dream)

Recently have not been posting often so i will post an update on my thoughts on the 2 positions that i have held and have reported results

Huationg - Nothing too surprising as results will likely be the best it will be for some time unless construction and inland transports margins outshine and cover up the dormitory shortfall in 2H 2024.

2H 2024 will probably show a closer normalized earning of life after dormitory or life assuming no new dormitory business is found.

Company has also turned a corner by having finance income > finance expense. Something that is really unimaginable for construction companies if you ask me 5 years ago.

Strong Cashflow has always been the case for this company in recent times, this continues to be the case.

My few points that I would take note of will be

1) Subcontract Cost. This has tripled even though contract works revenue has only doubled. This has also slightly affected segment result margin. From 8.7% to 7.5%. However, if revenue keep increasing, I am ok with the 7.5% margin actually

2) Sale of Construction Material Segment. Perhaps a less talked about segment. It has recorded the following results

(In’000)	1H 2023	2H 2023	1H 2024
Revenue	1,985	4,473	6,235
Segment Result	36	570	963
Depreciation	193	393	468

To be honest, i think this is pretty remarkable although I have little idea what they are selling but to record a 68% gain in segment result on the back of increased depreciation is something worth keeping an eye on.

3) Inland Logistics Segment

(In’000)	1H 2023	2H 2023	1H 2024
Revenue	8,327	9,646	8,646
Segment Result	79	1,931	632
Depreciation	192	438	1103

Perhaps a slight disappointment will be the results being not as consistent. 

Conclusion: If the Construction Material Segment and Inland Logistics Segment are tightly related to the construction revenue, there is a good chance of earnings improving in these segments in 2H 2024. To say that it will be enough to cover the shortfall of the dormitory is still being too optimistic.

I would still look to reduce my position and redeploy in other counters. But I would be okay with holding another half year and re-assess its results again to see if the other 2 segments can pick up along with the construction segment and also to see if the company has managed to make traction in the dormitory business.

Dream International

Key Highlights

Revenue Fell 7%

Net Profit Fell 17%

HK, China show improvement in revenue while USA and Japan recorded lower revenue

Slight Margin Improvement 23.16% to 23.99%

Segment Margin Decreased for Plush and Plastic Figures

Plush Stuffed Toys Segment Breakdown

(In’000)	1H 2023	2H 2023	1H 2024
Revenue	1,239,913	1,487,878	1,186,083
Segment EBITDA	377,703	427,504	306,266
Segment Margin	30.17%	28.73%	25.82%

Plastic Figures Segment Breakdown

(In’000)	1H 2023	2H 2023	1H 2024
Revenue	1,007,115	1,216,890	936,337
Segment EBITDA	110,500	241,666	98,003
Segment Margin	10.97%	19.85%	10.47%

Dividend Maintained

It is rather tough to talk about this set of results as being bad. This is because gross margin actually is better. If it was worst off, it would have been easily a story of lower revenue lower margin lower economies of scale / pricing pressure.

But 1H 2024 was not the case. Automation was also mentioned so it seems to have left some optimism for 2H 2024.

Japan has recorded close to 20% drop in revenue and at the same time Plush Margins fell from 30% to 25%. My instant hunch is that the juicer margins definitely comes from Japan.

USA recorded around a fall of 18% in revenue. No surprises there as my estimate from Funko is around 16-20% based on its COGS / Inventory Additions.

2H 2024 has always been traditionally a stronger result for Dream (On Average 15 to 50% Revenue Increase compared to 1H depending on which year is being looked at). Therefore, i think it will be important to see how its partners are doing in 3Q 2024 and also cross-reference to some of the export statistics for Vietnam and reassess again. 

My current concerns will be the weakened Japan Revenue. Would have to see if I get any response from the IR.

There will be some level of waiting and patience needed. However if the automation and strong gross margins push through with the increased revenue in 2H 2024 compared to 2H 2023, there is always every chance to make up the 17% net profit shortfall.

If partner numbers show a double digit shortfall in 3Q 2024, it probably is time to consider exiting and reassess but until then, i think i am ok holding on for the time being.

(July 2024 Results) How i would invest in the singapore stock market if i had 100k of spare money

 

July 2024 Returns: -3.44%

Year to Date Returns: 7.44%

Since Inception (9 Sept 2020) Returns: 87.30%

Nowhere to hide as July proves to be a poor month for the portfolio and for my health as well. Had a bad fall and my right hand is currently unable to even hold my phone for 2 minutes.

GKE did really badly, i am surprised with the logistics margins especially considering there is increase in dangerous goods storage in 2H.

Haw Par surprised as there is a research report on it. Centurion continues to be appreciated by some investors(i guess) which led to its share price to appreciate close to 9%.

Huationg Global did badly, i talked about it in my previous post titled 'Biggest Loss in A Day' as such i will still continue to hold at least 1 more month and reassess the results.

So......the question will be..........is there any changes to be made to the portfolio again? Especially with the earnings season on the horizon.

Yup, lets make a change......after all with -3.44% in July......i doubt it will get worst.

I think the change will be to remove GKE and add a familar name back. Tat Seng Packaging will be added to the list as the china listed peers have done well for 1Q 2024 and currency remained stable within 1% in the past 6 months.

Dividend have been increasing in past years and finance income has went above finance cost in 2023.

In 2024, Corrugated Paper Prices remain low but stable 2600-2900 levels. Compared to pre-covid where it was 3000-4500 and during 2020/2021 prices were from 3200-4700.

With that, hoping for a better august.