North Asia Strategic Holdings Limited (NAS)
NAS Holdings (‘Company’) distributes and services Surface Mount Technology (‘SMT’) equipment, semiconductor manufacturing equipment, and software on manufacturing control. Its customers include major telecom and electronic equipment manufacturers. It generates revenues from sales (97% of total) and leasing of these machines.
The company sources most of its supplies (81.5%) from Fuji corporation
in Japan – making it sensitive to the Yen (a 3% change in JPY/HKD results in a
10% move in profits). It generates most of its sales from China (92%) and the
balance from other Asian countries.
The pandemic didn’t adversely impact recent business results but the
Sino-American trade war caused a spurt in orders by a major customer abruptly
changing its manufacturing process. TTM Sales printed at $3.1b (2019: $2.4b)
and ebitda was $213m (2019: $159m). Net profits were $136m (2019: $111m). Earnings
were backed by strong free cash flows.
The financial position was very strong with net cash of $617m, net
current assets (net of all obligations) of $575m, and net tangible assets of
$714m.
The stock is selling for $172m ($0.63/share) or less than one-third
of net current asset value (a proxy for liquidation value) and at one to two
times earnings.
Management have paid a dividend only once in the last five years. This
dividend of $115m, however, amounted to 67% of the current market
capitalization. The equity has grown substantially since then.
In addition, management awarded themselves stock options amounting to
12.7% of issued shares, which can go up to 30%. The lowest exercise price is $0.82,
however, which is 30% above the current market price. Even if all remaining options
were issued for free, the low valuation is still startling.
While declines in demand for smartphones and other electronic products
adversely impacts the company’s business, this is offset by the prospective
demand for telecom station equipment and mobile devices compatible with 5G
technology, which is being rolled out aggressively in China. Further, the
company opened a new office in Singapore to expand sales in South East Asia.
Another clue to management’s optimism is the lack of impairment of $374m
in goodwill despite using a 14% pre-tax discount rate.
On balance, this appears to be a grossly undervalued stock suitable as part of a conservative
investor’s portfolio.
Notes:
$ represents Hong Kong $
TTM: Trailing twelve months
EBITDA: Earnings before interest, taxes, depreciation, and amortization