Chinney Kin Wing Holdings Limited (CKW)

CKW (‘Company’) operates in the construction industry and specializes in a) Foundation Construction (80% of revenues) and b) Drilling and Site Investigation Works (20%). It generates practically all its revenues in Hong Kong via the public and private sectors.

The company appears to be well run and operated as demonstrated by its financial track record. The industry is currently subject to severe competition and price wars resulting in a reduction of gross profit margins from 24% to under 19% over the year. Contractual requirements are also getting more stringent and labour costs are rising. Covid-19 didn’t have any impact in the recent period, however, as the company progressed strongly on its major projects according to schedule.

It reported sales of $1.5b in the last twelve months with ebitda of $124m and net profits of $63m – backed by cash flows. Ebitda margins have dropped steadily from 14.5% five years ago to 8.4% recently.

The financial position is healthy with net cash of $61m. The liquid asset ratio is adequate at 1.7:1 and returns on equity (net of cash) surpass 15%.

Management have paid out steady dividends averaging over 50% of earnings.

The equity is selling for $263m or less than 2x ebitda, 4x earnings, and sports an 11.4% dividend yield.

Apart from shrinking margins in the industry, management proposes to lay out $190m to acquire 50% of a company that owns 150,000 sq ft of storage space – for use as a depot for maintenance of machines and equipment, storage of idle machinery, etc. The company’s existing lease facility will expire in 2021 and it currently spends about $10m a year in lease expenses. The new arrangement will provide a 13-year lease at a nominal rent.

The $190m consideration includes $126m to be deferred over the next three years. This appears feasible based on current earning power.

Though competition is strong, prospects for growth are satisfactory with the government’s push for housing supply, and large-scale infrastructure projects.

The fear may be the curtailment of dividends – but overall, this appears a well-operated business and its current valuation seems less than the debt that can be safely issued against it – giving entering stockholders the assurance of safety with satisfactory returns.