Sun Hing Printing Holdings Ltd

Sun Hing (the ‘company’) is a Hong Kong listed company that serves as a one-stop printing service provider.

It operates across five segments: a) Package printing (corrugated boxes, etc.) – 61% of sales; b) Paper gift set printing (booklets, etc.) – 20%; c) Card printing (warranty cards, etc.) – 11%; d) Smart package printing (RFID labels, etc.) – 5%; e) Other printing (stickers, etc.) – 3%.

The company’s production facilities are based out of China and it sells to Hong Kong (52% of sales), Europe (22%), USA (13%), as well as mainland China itself (7%).

Though Covid-19 affected customers’ willingness to spend on printing and promotion, the company increased revenues and profits across all segments over the year through optimization of orders and cost control.

Key risks faced by the business include rising raw material (paper, etc.) and labour costs, as well as stricter environmental requirements in China. Customer concentration is fairly high with three customers accounting for 58% of revenues.

Revenues have been stable and growing – printing at $312m in the last year, and earning $70m in ebitda and $45m in net profits. Ebitda margins have been fairly steady averaging about 20% over the last five years. Depreciation appears very conservative at $20m when capital expenditures have averaged only $12m in the last six years.

Management raised $124m via listing in 2017. $73.4m remains unutilized and will be used to relocate a factory and purchase four printing presses, which will result in higher sales and earnings. Returns on tangible assets appear to be outstanding at 30%+ after-tax.

The balance sheet is overwhelmed by the cash balance of $204m, mostly accrued from the above listing, and zero borrowings. Current and liquid asset ratios are well over 3:1 indicating a very strong financial position.

The equity currently sells for $260m, which is below 4x ebitda (or 6x earnings) - and the operating business trades for less than 1x ebitda after backing out cash. It’s hard to argue that debt equal to the entire market capitalization could not be safely issued against this company.

In addition, management have been steady with dividend payouts of $20m every year. This yields about 8% on the current market price.

There’s every indication that this is a reasonably priced stock meeting our investment criteria with a reasonable expectation of increased earnings as cash is deployed for expansion of the business at promising incremental rates of return.