Hengxin Technology Ltd.

Hengxin (‘Company’) manufactures equipment for telecom providers - primarily for 4G networks. It is incorporated in Singapore, and listed in Hong Kong.

It sells Radio frequency coaxial cables (51% of sales), Telecom equipment and accessories (21%), Antennas (24%), and other related products and services. It generates 80% of revenues in China, and 20% abroad (including 3% in India).

The primary issue with this company is that its products are at the tail end of the 4G network life cycle. The key word used in the annual report is business “transformation” to enable it to stay competitive when 5G networks roll out in full flow.

Covid-19 has also significantly disrupted the company’s production and sales with revenues down 28%. Customers have delayed or held up orders during this period.

Sales have declined steadily since 2017 ending at $1.3b (2019: $1.6b) in the last twelve months. Net income printed at $73m (2019: $129m). A conservative (perhaps generous) estimate of current earning power may be around $90-$100m.

The financial position is strong with net cash of $764m. The net current asset value is $1.6b. Apart from cash, this mostly comprised $995m in receivables. The average receivable days outstanding ballooned from 202 days to 264 days over the year. Despite generous credit terms of 90 to 270 days, 32% or $318m of receivables were past due, and not provided for. Management asserts that most of these receivables belong to two major Chinese telecom operators with long-standing payment relationships and presents no concerns.

The stock was selling for $807m or less than half of net current asset value, and 8-9x earnings.

Management have been stingy with dividend payouts – amounting to only about 12% of average annual earnings in spite of hoarding substantial cash balances.

Despite the apparent discount to liquidation value, the earnings yield isn’t large enough to account for the dynamic nature of this industry. We are not confident about the stability of future earning power considering that only a small portion of current orders relate to 5G equipment ($60m or 5% of sales), which requires a “transformation” of the product portfolio in management’s own words.

Therefore, this stock does not meet our investment criteria, after considering its business stability and predictability.