Futong Technology Development Holdings Limited

Here’s a company selling at less than cash net of all liabilities – let’s examine whether the stock is worth the price.

Futong is a Hong-Kong listed provider of Enterprise IT infrastructure products, cloud computing, and artificial intelligence (AI) solutions. All of its customers are in China. It generates its revenues from “Enterprise IT products” (60% of revenues), and “Provision of services” (40%).

IBM terminated its partnership with the company in May for unspecified reasons – IBM products contributed 25% of revenues in 2019. Customers have also pared back spending after Covid-19 struck.

Sales have declined precipitously from a peak of $4.2b to just $769m in the last twelve months. Profitability has been anorexic with wafer-thin margins of 1% in the best of years. Profits in the last six years aggregated just $26m.

In addition, we suspect the recent quarter doesn’t reflect all expenses as $10m in staff costs were abruptly capitalized as an intangible asset, supposedly for development of its cloud computing and AI applications.

It aims to develop its own brand of cloud computing services and is also engaged in developing AI solutions for the medical and transport industries. Much of the company’s prospective earnings appears speculative as it currently possesses no discernible competitive advantage in the areas it intends to pursue. Furthermore, management haven’t disclosed the orders in hand.

The cash balance is over $440m. The question is why this hasn’t been distributed to shareholders as it is clearly excessive in relation to the business now being done. Only $6.8m was distributed in dividends last year.

The equity sells at $155m, which is below net cash of $223m. Will shareholders ever see this cash? – the evidence indicates no.

In addition, management shamelessly feast at the trough by issuing themselves stock options at these low prices – most recently in April 2020 with an exercise price of $0.57, not far from the current price. Instead of profiting at the expense of shareholders, why couldn’t they use the cash hoard to pay market-linked remuneration? They are permitted to issue options up to 30% of issued shares, which is above average.

It’s worth asking what price is low enough for this security – ultimately, with the lack of earnings, lack of assurance on cash distributions, a management willing to exploit shareholders, and speculative business prospects, we are inclined to avoid this situation entirely.