Sinomedia Holding Ltd

Sinomedia is a Hong Kong listed company engaged in the provision of television advertising, creative content production, and digital marketing services. It operates through four segments: a) Television media resources management (80% of revenues), b) Integrated communication services and content operations (5%), c) Digital marketing and internet media (9%), and d) Rental income from investment properties (6%).

The company owns China CCTV’s advertising agency business with the clout to place advertising on several of its prominent channels. It also has exclusive advertising agreements with CNBC and Fox Network. Moreover, it boasts a prominent client base in its integrated communication services segment including various national and provincial governments.

The advertising market was weak from the year ended 2019 and this was exacerbated by Covid-19 with sales down 17% over the year. The company reported operating losses over the last 1½ years. Operating cash flows have been positive, however, and capital expenditures are minimal.

The net current asset value as at June 30^th was $609m and dominated by cash. In addition, the investment property (at cost) was held at $659m. The pre-tax rental yield of 10% (10-year government yield: 3.2%) indicates the market value is far higher. Further, the company held liquid stocks in China Feihe worth $87m at market.

Summing these non-operating assets net of all liabilities indicates a value of $1.35bn. The equity was selling at $428m or under one-third of such asset value (and under 25% of net tangible asset value). Excluding the investment property, the stock sells for 62% of liquid asset value.

The operating business is apparently valued at less than nothing.

Turning to the income statement, sales grew to $1.9b in 2018 before dropping off to $1.5b in the last twelve months. Net operating cash flow has averaged about $66m in the last five years (after-tax, including rental income). This yields 15% on the current price. There’s no reason to believe the average earnings can’t be maintained in the future considering the entrenched nature of the company’s business. Investors don’t lose much until the stock finds its ultimate value.

In addition, management have paid out regular dividends and repurchased shares. The latest repurchases were executed at current market prices of $0.90/share. There is a risk that management fritters away cash on unnecessary acquisitions, but on the basis of current facts, investors appear to be obtaining a bargain.