HPC Holdings

HPC Holdings is a Hong Kong listed company with operations in Singapore. It is engaged in civil engineering and general building construction. It has two segments – Industrial buildings, and Infrastructure with Industrial accounting for the vast majority of revenues. The top two shareholders own 75% of the company stock resulting in a relatively low free float. 

Construction activities in Singapore have been largely curtailed due to Covid-19 and the recent operations of the business has suffered as a result.

The company generated consistent sales of $1.2bn and average annual net profits of just over $100m. Recent twelve-month sales and profits have tumbled to $1.1bn and $55m respectively.

The financial position is strong with net cash of $210m. Net working capital value is $414m and net tangible asset value is $540m. Net working capital value consists largely of receivables, contract assets and net cash.

Except for a secondary share issuance of $156m in 2018 priced at $0.45/share, the company paid out over $100m in dividends in the last three years before it cut the dividends entirely this year. The share price currently trades for just $0.08/share.

This market valuation of $125m is just 30% of net working capital value and 2.3x depressed earnings. The customer base is fairly well diversified with the top customer not accounting for much more than 20% of revenues. Receivables of $161m are over three months old and haven’t been provided for. Even assuming all turned out bad, net working capital value would still be double the market price.

This value doesn’t include the leasehold land and building under construction of $80m and other investment properties. Further, the order book as on June 30th appears to be 1.4x annual revenues.

There doesn’t appear to be any other material adverse factor from public filings – and it appears that the negative outlook on the industry has beaten down the company’s share price to absurdly low levels, providing an ample margin of safety to buyers minimizing the risk of ultimate loss on this investment.

(Note: $ represents Hong Kong Dollar)