Shineroad International Holdings Ltd

Shineroad (‘company’) is a leading distributor of food ingredients, food additives, and packaging material to customers across China – primarily to Shanghai and eastern China.

The company has long-term relations with established suppliers like Nestle (ingredients) and Mitsubishi (additives), and supplies over 2,000 products to a diversified customer base of over 1,000 customers including food and beverage companies, confectionaries, dairies, bakeries, trading companies, and restaurants.

Selling and distribution activities were hampered when Covid-19 struck, and earnings went down slightly (as short-life products were sold at a discount), but revenues went up.

Sales grew steadily over the years to $675m in the last twelve months (ttm) and net profits fell from $34m to $27m (ttm). Capital expenditures aren’t significant and free cash flows have averaged over $21m annually.

The financial position is very strong and overwhelmed by a net cash balance of $241m. The net current asset value stood at $337m.

Management listed the company on the Hong Kong stock exchange in 2018 at $0.75/share raising $94m. In the previous year, it raised $66m, net of dividends, from its controlling shareholder and paid $45m in dividends in 2015. It hasn’t paid a dividend since listing. The ostensible reason for raising the money was to set up seven branches throughout China, repay borrowings, acquire distribution rights, and purchase inventories. Most of the funds have been utilized.

There is a curious case of an executive director and member of the audit committee with a background in audit – joining and resigning within four months. This raises questions on the accuracy of the accounts though nothing was officially disclosed. The auditors, Ernst & Young, have given a clean bill of health – but their reputation isn’t the best after the Wirecard scandal.

These reasons are grossly insufficient to definitively conclude on the integrity of the financials – we present it here for readers to make up their own minds on the matter.

The equity is selling at $260m, at a 23% discount to net current asset value, 7-8x normal earnings, and 8% free cash flow yield. For a leading distributor in a stable industry, this stock is reasonably priced with the bonus of excess cash that can ramp up shareholder rewards - if used sensibly.