Tag Archives: 0684.HK

End of year portfolio update

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The end of the year is always a good time to look back, and even though I started this blog a little bit more than a month ago there is actually something to talk about since two of the three companies in the blog portfolio have released new financial reports.

Asta Funding (ASFI)

Asta Funding reported its results for the fiscal year 2011, and financial performance was roughly as expected. The cash flow from the zero basis portfolio’s remains strong and predictable and the company had as of 14 December $108.8M in cash and securities versus a market cap of 122M right now.

What they are doing with the cash is a more mixed story though. The results of the share buyback program have been very disappointing so far: they practically didn’t buy any shares back. On the conference call the CFO indicated that this was because of liquidity and legal constraints, but personally I find that hard to believe. If this doesn’t improve next quarter I’ll probably reduce my position a bit, since the share buy back for $20M was originally one of the attractive points of the stock. At the same time 13M of cash has been moved in securities, and 3.5M has been invested in the litigation funding business, something the company had never been active in previously. While it’s hard to know how this is going to work out I think it’s positive that the company is starting relatively small.

Allen International Holdings (0684.HK)

Allen International released it’s Interim Report 2011/2012 in the beginning of this month, and while sales for were up 5% compared to the previous period net profit was down 43.5% (but still above the 5yr average) due to the following factors:

The increase in raw material costs, double-digit increase in labour wages in Guangdong Province, the PRC and the continuing appreciation of Renminbi were amongst the adverse factors that contributed to the erosion in the gross profit margin. On top of this, the shortage in both electricity and labour supply had further increased the difficulties and challenges in our operations.

Most of these factors would also impact competitors and should not permanently impact the viability of the underlying business. We should never expect great profit margins from a commodity business like this, but there is also no reason to be overly negative, and the company remains cheap with a very strong balance sheet.

Urbana Corporation (URB.TO/URB-A.TO)

The discount between NAV and share price has increased a bit more the past month. The share price for URB-A.TO is currently 0.88 while NAV/share is 1.73. Even though it currently doesn’t look pretty in my portfolio it’s actually positive news. The company is steadily buying back shares, and the bigger the discount the better for remaining share holders. I bought the company less than a month ago and since then the share count has already been reduced from 75.5M to 74.4M (December 16 report date).

Disclosure

Long ASFI, 0684.HK, URB-A.TO

Allan International Holdings (0684.HK)

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Another of my favorite idea’s is Allan International Holdings Ltd (0684.HK). The group is engaged in the design and manufacturing of a wide range of household electrical appliances such as blenders, mixers, deep fryers and kettles.

Some key statistics about the company:

Last Price: 2.21
Shares outstanding: 335.43M
Market Cap: 737.95M
Trailing P/E (ttm): 4.53
Price/Book (mrq): 0.9
EV/EBIT: 2.2

All amounts in this write-up are in HK$, so it’s actually a pretty small company with a market cap just under 100M USD. The company is controlled by the Cheung family that owns 60%, and has been a net buyer of shares over the past years. I don’t have any special insight on the workings of the company, growth prospects, and the small appliance industry, so I thought it is best to just look at past performance. For some insights on the competitive advantages of the company and margin sustainability I recommend you to read the write-up on VIC.

The company has been very profitable the past 10 years, and seems to be growing at a healthy rate: not what you would expect with a 4.5x PE ratio. On average 50 percent of the income goes directly towards shareholders, giving it currently a dividend yield of 9.5 percent, already a nice return. With investing in companies in a far away country seeing a healthy dividend stream is especially a good sign because it basically means that the cash flows reported by the company have to be real, and we are not looking at a fraud.

When we look at the assets on the balance sheet the company appears even cheaper. It currently has 316M in cash on the balance sheet: almost 43 percent of the total market cap (small part of that has been used to pay the latest dividend). If we would subtract this from the market cap and adjust the PE ratio for the cash on the balance sheet we would get a PE of just 2.6x. The business looks to be priced as if it’s heading towards extinction, while the numbers show a growing and profitable business.

There are of course some risks to the investment, but I have been unable to find anything on the company that would warrant such a low valuation. The company has not reported anything material since the release of the latest annual report (7 June 2011), and on Google, Yahoo Finance and Reuters there is no news worth mentioning. There are some risks though that do warrant some discount:

  • The customers of the company are very concentrated. The largest five customers account for 94% of all sales while the biggest customer is good for 45% of all sales.
  • The Cheung family controls the company, and the other share holders don’t have a strong position.
  • The products the company produces are commodity products: competition is intense, and competitors might emerge that are able to produce the same products at a lower cost.
  • The macro-economic outlook, especially for Europe, has worsened throughout this year, and consumer demand and thus sales, will probably fall if we enter another recession. Europe accounts for 54% of sales, Asia 27% and America for 14%.

A positive note is that David Webb is a big share holder owning 10% of the company. He is a well-known activist for shareholder rights in Hong Kong, and the wikipedia article about him also notes that he seems to be a capable investor:

From 1999 to 2008, Webb made an annual Christmas share tip where he recommends a single undervalued but well-run company. His picks are believed to have strongly influenced the price of selected stocks. However, The Standard criticised Webb after reporting that he himself owned holdings in his own Christmas share tip (which he has always disclosed), in one case giving himself almost a 40% unrealised profit on his holdings the following day after the tip was published. In December 2009, he announced an end to the “Christmas Pick” after a 10-year run in which they returned a cumulative 1118%, compared with an 87% return in the Hang Seng Index over that period., saying that the success of the picks “has become something of a distraction” to the main goal of raising the standards of Hong Kong’s corporate and economic governance.

Conclusion

Allan International seems to be a hugely undervalued company, and to be honest; the biggest risk I see is that I’m missing something. Sure it’s small and not followed by any analyst, but is that enough to explain the current valuation? The balance sheet and income statement of the company are pretty straight forward and easy to understand.

That said: I do have to put some faith in my own analysis and Google skills. If we would be conservative, and apply a 10x multiple on the average earnings from the past 5 years (basically giving no value to potential growth, and discounting the growth in the past two years) we get a share price of 3.53. If we add the cash on the books to this value, we end up with a share price of 4.41: a double from current levels and if the company continues to grow it should actually be a lot higher.

A slight negative is that the company only reports results twice a year, but next month the Interim Report for 2011/2012 should be released. That should confirm if we missed anything, or not.

On a scale from 1 to 10 I give the stock a 8.5; there are some risks and uncertainties, but it’s ridiculously under priced giving it a wide margin of error and I really like that a large part of the income goes towards paying the shareholders a dividend.

Disclosure

Author is long 0684.HK.