HM International Holdings Ltd

HM (‘Company’) is listed in Hong Kong (HK) and provides integrated printing services for corporates. This includes financial printing services (95% of revenues), marketing collateral printing services (for fund houses and insurance companies), and related services. It has a diversified customer base generating recurring orders, and prospers with the growth of listed companies on the HK stock exchange.

Covid-19 has caused delays and cancellations in various projects resulting in revenue declines of 20% over the last year.

The company listed early in 2017 raising $40m after listing expenses - at $0.60/share.

Revenues have declined since 2016 from a peak of $160m to $115m in the last twelve months (ttm). Ebitda, a proxy for cash earnings, declined from $27m in 2016 to $11m ttm. The company generated small net losses (ttm) after deducting interest on lease liabilities.

Current operating earning power appears to be around $12m conservatively. After deducting depreciation and taxes, indicated after-tax earning power is around $6m/year. Free cash flow generation backs up this earning power.

The financial position is very strong with $57m in net cash (mostly in HK$ earning paltry interest income). Net current asset value (including lease liabilities) amounts to $50m. Receivables accounted for $31m. The credit period provided by the company is 30 to 90 days. Apart from $5m, all receivables are under 90 days old. Deducting this, net current asset value is $45m.

The stock is selling for $21m or $0.05/share. This is less than half of adjusted net current asset value (a proxy for liquidation value) and just over 3x earnings.

Management have been stingy with dividend payouts – last paying $10m in 2018, which accounts for 50% of the current market cap.

They have made a couple of acquisitions – the most recent being a $5m purchase of 70% of a small financial printing business with the payment tied to lofty earnings targets. There is also an $8.7m investment in an associate company in Luxembourg engaged in translation services. These businesses appear to be complementary and don’t appear to be unreasonable in rationale.

This seems to us a clear case of significant undervaluation. Investors don’t have much to lose in this situation and the potential for significant upside as substantial value accrues at the current price. Although tiny in size and illiquid, this stock seems to be an attractive component of a diversified portfolio.

$ represents Hong Kong $