GDH Guangnan (Holdings) Limited

GDH (‘Group’) is a Chinese state-controlled entity, listed in Hong Kong, and engaged in the following segments: a) Tinplating (84% of revenues); b) Distribution of Fresh and live foodstuffs (15%); and c) Property leasing.

It generates 53% of its sales from mainland China, 20% from Hong Kong, and 29% from other Asian countries.

It conducts its tinplating business via a 66% subsidiary in which, Posco (the prominent Korean steel manufacturer) is the other partner. This business is subject to the typical cyclicality associated with excess capacity and fluctuations in tinplate prices.

In its foodstuffs business, it has a 47% market share of distribution of live pigs into Hong Kong, which is profitable. It has enjoyed a recent surge in the prices of pigs as a result of the African swine flu and limited domestic supply. It also trades in corn starch via a 40% associate, which is loss-making. It intends to dispose the corn-starch business via a public tender (as it is state-controlled) with an initial offer of $180m.

It owns investment properties worth over $450m: $300m in Hong Kong, and $150m in mainland China, from which it generates rental income. These are revalued regularly by independent appraisers and changes recorded in the income statement.

The group generated revenues of $2.3b in the last twelve months and normal ebitda and operating cash flows – averaging recent cyclical margin fluctuations - of about $130m. Capital expenditures equate depreciation of $60m. Net earnings after taxes amount to about $50m per year.

The financial position is very strong with $947m in cash. The net current asset value stood at $1.2b.

The equity sells for $608m or about half of net current asset value, and 12x earnings. Once we add in the most recent appraisals for investment property to the net current asset value, we obtain a net tangible asset value of $1.6b, which indicates a market appraisal for the group at less than 40% of its worth.

Management pays consistent dividends of $36m a year – yielding 6% at market.

It appears to us that this group is selling at market for less than the debt that could be safely issued against its assets – with the bonus of an attractive dividend yield while the market re-appraises the group towards a fairer valuation.