Changan Minsheng APLL Logistics
Changan Minsheng is a Hong Kong listed logistics company that primarily transports finished vehicles, and vehicle components and parts – mainly for related parties of the China South Industries (CSI) Group, one of the four largest vehicle manufacturers in China, and dealers for Ford, Mazda, and Suzuki. The free float is less than 25% of the issued shares.
Sale of vehicles is down substantially in China (16-17% compared to last year) due to weakness in demand, increased competition in logistics, and rising transportation costs.
Revenues have fallen to $4.7bn in the last twelve months (ttm) from a peak of $8bn in 2016. Anaemic net profits during the boom years (sub 5% margins) have turned into losses for 2019 and the six months to 2020. TTM losses amounted to $126m.
Average EBITDA, adjusted for the lower revenue base, amounts to $180m but capital expenditures are substantial. The depreciation and amortization charge amounted to $157m leaving negligible pre-tax earnings. This charge appears conservative as cumulative capital expenditures exceeded this over the last five years. (Amortization of $20m pertained to software and wharf lease rights, which appear to be recurring expenses.)
The company operates with a net cash position of $598m and a net working capital value (after deducting non-controlling interests) of $635m. This is overwhelmingly constituted by dues from related parties totaling $1.75bn though most are less than three months old as on June 30th, 2020. (There were, however, impairments on these related party dues of $25m in 2019.)
The equity sells for a mere $334m, which is just over half of the net working capital value (a proxy for liquidation value).
Though this appears to be very cheap, the related parties don’t seem to be leaving much in earnings for minority shareholders of the company. Further, dividend payouts in the past have amounted to a mere 21% of net profits. This is now eliminated with no final dividend for 2019 and interim dividend for 2020.
Investors may be better off discarding this apparently undervalued stock due to inadequate earnings, and lack of any trigger to unlock value (e.g. through a liquidation) due to the entrenched nature of the business within the CSI Group.
($ represents Hong Kong Dollar)