Sitoy Group Holdings Ltd

Sitoy (‘Group’) is engaged in the manufacture and retail of handbags, small leather goods, travel goods, and footwear products – along with property investment.

It generates 75% of its revenues from manufacturing for other brands, 24% from retailing its own brands (five in total), and the balance from rental income from its three commercial properties. It generated 39% of revenues from China, 17% from North America, 21% from Europe, and 20% from other Asian countries indicating good geographic diversity.

The group was hit badly by the social unrest in Hong Kong followed by Covid-19 – reducing demand for the retail segment, and order flow for the manufacturing segment. The retail segment recorded substantial net losses.

Sales declined to $1.8b (2019: $2.4b) and net losses were $133m compared to a profit of $126m last year.

A closer examination of the financials reveals that $138m in losses were a result of write-downs of inventories, and impairment provisions for tangible assets, trademarks, and goodwill - all non-cash charges. Operating earnings before depreciation were $150m (2019: $227m) and net cash from operations after-tax was $197m (2019: $203m).

Capital expenditures for tangible assets have averaged only $22m, significantly below the depreciation charge of $97m. This leaves current free cash flows of $175m.

The net cash position was strong at $340m. The net current asset value stood at $558m. In addition, the investment properties (which generates rental income of $14.5m) were fair valued on June 30^th at $711m by independent appraisers. Furthermore, there were $9.5m in liquid debt investments under non-current assets.

This indicates a total liquid asset value of $1.3b.

The stock was selling for a mere $375m or less than 30% of liquid asset value and just over 2x free cash flows.

In addition, management has been generous with dividends and share repurchases in the past. Although these fell to $48m for 2020 (including $29m to be paid out in December), this yields 12.8% on the current market price.

While covid-19 will continue to adversely impact the business, the group remains substantially cash generating – and the current price appears to discount the future aggressively. Management intends to develop its own brands and concentrate future store openings in China.

This stock appears to represent a clear-cut bargain in relation to asset value and earnings power. The investor seems to have little risk of permanent loss and substantial prospects of profit when the stock finds its fair value.