Tag Archives: 3828.HK

David Webb goes activist on Ming Fai

When Ming Fai announced that they had sold their investment property a few months back I wrote that, while that was a welcome development, I didn’t expect that a lot of capital would be returned to shareholders anytime soon. Unfortunate, since Ming Fai’s history of investing outside their core-business is less than perfect. Luckily I’m not the only one who has been thinking that and today, David Webb, a well-known activist investor in Hong Kong, published a letter to the company urging it to return the whole sale proceeds as a HK$0.352/share special dividend (the stock is currently trading at HK$1.11/share after jumping 5.7% today). This would still leave the company massively overcapitalized, and Webb, who owns almost 10% of the company, calls it the minimum that should be distributed. I totally agree with him, and hope management will be cooperative on this. A small quote from the letter:

As I explain below, hoarding cash is not an “improvement” in the cash position – our company is already overcapitalised, bloated with net cash far in excess of what is needed for the core business. Having too much equity drags down the rate of return on equity (profits divided by equity) and depresses the share price as it traps idle cash.

Ming Fai logoThe risk of burning the cash on unsuccessful new businesses beyond your area of expertise and excellence also depresses the share price, particularly given that Ming Fai has a proven track record of losing money in new non-core businesses. In over 25 years in the HK market, I have seen so many successful entrepreneurs list their business on the Stock Exchange and then make the mistake of assuming that they must be good at everything. Expertise in one field is not expertise in another. I hope you have learned from these mistakes, as that is what makes us all stronger.

If you return surplus capital to the market, then the market will repay that trust. Just look at some of my other investees and you will see how this works. For example, Alco Holdings Ltd (0328), of which I own more than 9%, sold its former premises in Zung Fu Building on 29-Dec-2015 and has since then distributed a total of $0.90 per share in dividends. The stock has returned 68.2% since 29-Dec-2015 (the day of the announcement) when it was trading at $2.30, and closed yesterday at $2.90.

Disclosure

Author is long Ming Fai

Ming Fai announces sale of investment property

Ming Fai announced today that the company sold their investment property in Hong Kong for a consideration of HK$263 million. These properties were valued at HK$198 million as at December 31, so this is pretty good news. It’s however not unexpected news. On the 31st of May this year Ming Fai already announced that they were looking to sell the property, and on the 1st of August they signed a letter of intent to sell the property for HK$263 million.

What will be done with the cash that is generated with the sale remains an open question for now. I like that they have sold an investment property that has nothing to do with their main business: the manufacturing and distribution of amenity products. But based on the following language I don’t expect that a lot of capital will be returned to shareholders soon. This is unfortunate since Ming Fai’s history of investing outside their core-business is a bit spotty.

The net proceeds to be received by the Vendor from the Disposal will improve the overall cash position of the Group for general working capital purpose as well as for future opportunities that may arise

While the stock price is up roughly 13% since the company announced the signing of the letter of intent I think Ming Fai is still very attractive today. If I update my valuation model of Ming Fai for the HK$263 million sale price I get the following picture (with a HK$1.04 stock price):

Ming Fai valuation based on updated property price

Disclosure

Author is long 3828.HK

Annual results: Conduril, Ming Fai, Retail Holdings & Rella

The last week of March was a busy month with several of my portfolio companies releasing their results for 2014. My biggest position is Conduril, and they released their results for 2014 yesterday. As usual the annual report is at the moment only available in Portuguese, the translated English version should follow in a couple of weeks.

Conduril

Conduril’s performance for 2014 was satisfactory, but there are a couple of clouds in the sky. Their backlog dropped from €750 million at the end of 2013 to just €450 million at the end of 2014, one of the lowest levels in years. Generating free cash flow also proved a problem in 2014. This wasn’t exactly a surprise since the company announced in their interim report that the Angolan government settled a large outstanding receivable with certificates of public debt. But even when we ignore this item we see that working capital is growing while revenues have been shrinking the past years. The good news is that the company announced that it will pay a €2/share dividend this year and that it is still dirt cheap. It’s trading at a P/E ratio of just 4.2x and of P/B ratio of just 0.6x which is a small discount to NCAV.

An updated summary of their financial performance for the past six years is provided in the table below. A large part of the positive differential between other income and other expenses is caused by foreign exchange gains. Probably repeatable for 2015 given the decline of the euro this year, but of course not sustainable in the long-term:

Historical results Conduril (2014 AR update)

Ming Fai International Holdings

Ming Fai also reported results for 2014. My thesis for the company is based on the fact that the profitability of their core business is ‘hidden’ by two loss-making divisions, but since one of these divisions has been shut down mid-2014 I expected that reported results would soon improve. Reported net income did indeed jump by 67% in 2014 while the dividend was also increased by 29%. While this is, of course, good news there was also some bad news buried in the financials. The profitability of their crown jewel, the amenity segment, decreased while losses in the retail segment only got bigger:

Segment details Ming Fai (2014AR update)

Retail Holdings

Retail Holdings also reported their 2014 results yesterday. Results for 2014 weren’t particularly impressive, but the company continues to trade at a 40% discount to NAV, announced another $1/share dividend while the long-term strategy is still to monetize the value of its assets. It’s for sure taking a long time, but we get paid to wait and intrinsic value can grow in the meantime. The chairman of the company is pretty optimistic:

I remain optimistic about 2015 and later years. I anticipate a marked improvement in Sri Lanka’s performance, reflecting accelerating economic growth, helped by lower oil prices, an improving agriculture picture, an increase in government salaries, and an uptick in consumer confidence, as well as the launch of a major new financial services initiative. In Bangladesh, a lot will depend on political developments, but the Company’s performance should improve in any case, particularly in the second half of the year, as the Company’s new refrigerator factory begins production, and other improvements now under way impact results. Pakistan and Thailand’s performance should also improve as new initiatives impact results. I expect India to continue to grow strongly. Revenue and profits in 2015 and later years will also benefit from the rollout of the new Cambodian business and from the Company’s ongoing investment in new and renovated shops and in new products, brands and services.

The holding company currently consists of the following assets:

Retail Holdings NAV (2014AR update)

What I also found interesting was the following paragraph in the annual report:

During 2014, the Company returned to equity $49,000 of the 2009 distribution, representing unclaimed distributions of non U.S. shareholders; an additional $13,000 was escheated. During 2013, the Company returned to equity $175,000 of the 2008 distribution, representing unclaimed distributions of non U.S. shareholders; an additional $3,000 was escheated.

I’m not familiar with the relevant laws in the US. I’m wondering if shareholders that don’t claim their dividends lose the right to receive them after 5 years? And what will happen if the company eventually liquidates? It appears that approximately 5% of dividends go unclaimed, and if this eventually accrues to other shareholders it could be a nice bonus?

Rella Holding

Since Rella announced that they would sell their stake in Aller and liquidate it doesn’t really matter what the latest results are. Despite that fact, the annual report did contain a couple of interesting items. The company increased the estimated liquidation proceeds from 77DKK/share to 77.5DKK/share. What I also found noteworthy is that the company renewed their share repurchase authorization. I don’t know if they are going to use it, but it would allow Rella to bet on its own liquidation. Could generate a bit of value for remaining shareholders.

Disclosure

Long Conduril, Ming Fai and Retail Holdings. No position in Rella anymore.

Ming Fai International Holdings: 200% upside?

A reader pointed me in the direction of Ming Fai International Holdings. The company is based in Hong Kong and is primarily active in the amenity business. They manufacture and sell products suchs as soaps, toothpastes and towels to hotels and airlines. What makes the company interesting are the solid operating earnings – especially when we look past a loss making subsidiary that has been shut down – in combination with a nice dividend yield, a large cash balance, significant real estate holdings and high insider ownership. As usual first some simple valuation metrics to get an idea of what we are looking at:

Last price (Jul 25, 2014): HK$0.74
Shares outstanding: 697,763,697
Market Cap: HK$516.3M  (US$66.6M)
Free float: 55%
P/B (mrq): 0.40x
P/E (ttm): 12.9x
EV/EBIT (ttm): 3.4x

Financials

Ming Fai appears to be cheap when we look at book value and at the EV/EBIT ratio, but when we look at the current earnings ratio it’s not an obvious bargain. I have compiled an overview of the historical financials in the table below:

Ming Fai historical financials

As is visible earnings/share show a downward trajectory and the dividend has been cut as a result. This probably explains why investors aren’t enthusiastic about the company, but when we dive deeper in the various operating segments we will see that things aren’t as bad as they look. And too be honest: things don’t really look that bad to begin with. The company is currently valued at roughly HK$500 million while it has investment property worth a bit more than HK$200 million and a net cash balance of HK$300 million. You get the operating business for free!

Whether or not the investment property is really worth book value is a good question. The company recorded HK$4.8 million in rental revenue and HK$0.6 million in operating expenses for a NOI of HK$4.3 million which implies a cap rate of just 2.1 percent. Apparently this is normal in Hong Kong, but I wouldn’t buy this stock if the investment case would hinge on the valuation of the real estate. It’s certainly not cheap.

What makes Ming Fai interesting is that the true earnings power of the business is a bit obscured. A relative small issue is that the reported earnings are a bit hard to understand due to the consolidation of the partially owned “Everybody Labo Limited” subsidiary. The company owns just 51% and since this subsidiary is generating sizable losses in most years line items such as operating profit underestimate the earnings that are attributable to equity holders of the company. A quick and dirty estimate of the earnings of the retail segment that are attributable to shareholders of the company:

Ming Fai retail segment after minority interests

What is more interesting is that the profitability of the various operating segments of the company is very different. The core business – supplying amenity products to hotels and airlines – has been pretty solid. Revenue has grown straight through the recession at a 10% CAGR since 2007 while segment earnings before taxes have been a bit more erratic:

Ming Fai amenity segment revenue and profitability

The reason that we don’t see this solid performance back in the earnings statement is the fact that the two other segments: laundry and retail have been a lot worse. The laundry segment is new venture of the company that was started in 2011 in an attempt to expand the range of services they offer to hotels, but it’s fair to say that this has been a failure since it has never been profitable. The retail segment – that includes the 51% stake in “Everybody Labo Limited” – has been profitable in the past, but performed very poorly last year:

Ming Fai revenue and EBT by segment

Luckily management has realized that the laundry business isn’t a good one, and they have decided to exit the venture before 30 June 2014 and this will obviously improve the performance of the group going forward. Note that other income, primarily revenue generated from the investment properties, is also reported in this segment so the laundry business is even worse than it looks in this table.

How the retail business will develop will be though to tell at this point in time, but I do think this has more potential since it has been profitable in the past. Perhaps it will return to profitability, and if it doesn’t it seems that management is rational enough to pull the plug.

Valuation

The value of Ming Fai is the sum of the cash, real estate and of course the operating business. The first two pieces of the puzzle are easy to value: book value should be accurate enough, although the conservative investor might want to add a discount because of the high property values in Hong Kong. The value of the operating business is a bit more complex, because the laundry segment has been shut down while the performance of the retail segment has been erratic.

I think simply valuing the retail segment at zero is a decent choice. Either the retail segment will return to (historical?) profitability and it will be worth a decent amount, or it could struggle and lose money for a couple more years before management shuts it down. The weighted average of those two outcomes is probably not too far from zero.

So what really matters is the value of the amenity segment. While it has shown strong revenue growth the growth in earnings has been mediocre so a 10x multiple seems reasonable to me. A good question is what kind of tax rate we need to apply to the pretax earnings. The effective tax rate last year was 44.4% which is more that double the average tax rate of the previous six years. It’s unclear to me what the exact reason is, but I think this is a temporary phenomenon since the corporate tax rate in Hong Kong is just 17.5% and it’s 33% in China. Using the 27% rate that the company paid in 2012 seems like a better guess.

This creates the following picture:

Ming Fai valuation

I’m the first to admit that this is not the most conservative valuation possible, but with this kind of upside potential there is a large margin of safety when some of your assumptions are a little bit too optimistic. Maybe taxes will be higher in the future, maybe book value overstates the value of the investment property or maybe the retail segment will continue to generate losses and has in fact a negative value. It could all be true and you would still have a decent amount of upside.

Insiders

Insiders own 30.33% of the outstanding stock which is in my opinion a great amount. They own more than enough to care more about the success of the business than their salary, but they don’t own enough to be able to ignore outside investors. Unfortunately their ownership stake is making it hard for the company to repurchase shares because insiders would be required to launch an offer for the whole company if they cross the one-third ownership threshold. Sucks, because repurchasing shares would be an great way to spend some cash.

What I do like is that the company has a solid history of paying out a large percentage of income as dividend since their IPO in 2007. The average pay out ratio is above 40% and even though earnings are currently depressed that still translates to a 4.7% dividend yield. I expect that this will go up next year after the exit of the money losing laundry business.

What’s perhaps the biggest risk is that management will spend more cash on unsuccessful ventures like the laundry business, and the retail business doesn’t look that great in hindsight either. But I don’t know if this is really a big deal. They tried to enter businesses that were adjacent to their main business, and not everything you try will be a massive success. But as long as you are willing to exit when it doesn’t work some diversification isn’t a disaster, and their ownership stake is big enough to give them the right incentive. Would probably be better if they would only focus on the core business though.

Conclusion

There is a lot to like about Ming Fai at the current price. The amenity segment could be worth twice the current market cap of the company, and you also get a bunch of cash and real estate thrown in the mix as well. Of course not everything is perfect when you buy a stock this cheap, but I don’t think there is anything seriously wrong with Ming Fai. It seems to me that a lot of investors simply have trouble looking past the headline revenue and profitability numbers, and don’t give the company credit for shutting down the money losing laundry division and the possibility of turning around, or exiting the retail segment.

Disclosure

Author is long Ming Fai International Holdings