Hingtex Holdings

Hingtex Holdings is a Hong Kong listed manufacturer of denim fabrics for sale primarily to US customers via several countries such as Vietnam, Bangladesh, and Taiwan. It also sells to customers in China and Japan. Their manufacturing facilities are based in China.

Their sales have declined markedly in the last six months due to Covid-19 and also due to the 25% tariffs imposed on their products by the US government.

Previously their track record of sales and profitability had been steady peaking at $648m and $127m in sales and net profits in the year ended December 31st, 2017. Since then, sales have declined to $347m in the last twelve months with losses, primarily due to inventory write-offs.

Cash flows for 2019, however, has been positive with $70m in operating cash flows and $30m in free cash flows used to repay borrowings. Though it used $33m in operations in the last six months, this was largely on account of faster payment of payables.

The result is a balance sheet that indicates $245m in net current assets (net of long-term liabilities, and a proxy for liquidation value) consisting largely of inventories (after write-offs) and net cash. Inventory turns over almost twice in a year based on trailing twelve-month sales.

The equity is selling for $118m or less than half the net working capital value of the stock.

The company has over 30 years of operational experience, and listed in 2018 at $1.12/share. It paid a dividend of $12.8m in 2019 but scrapped the interim dividend in 2020. The current market price languishes at a mere $0.185/share.

The company appears to have negotiated a sharing of the tariff burden with customers and there doesn’t appear to be a material curtailment of operations. Furthermore, online sales appear to have mitigated some of the adverse impact.

Considering this, it appears evident that the pessimism on this stock has taken it to absurdly low levels. At less than half the net working capital value, this stock appears to possess that margin of safety patient investors would demand. 

(Note: $ represents Hong Kong Dollar)