Wecon Holdings

Wecon is a Hong Kong listed company engaged in a) Building Construction Services and b) Repair, Maintenance, Alteration, and Addition (RMAA) Services. It has over 30 years of experience in the industry and made a public offering of $125m in 2019 resulting in 25% free float.

It was engaged in 11 projects, each worth over $10m as on July 2020. Customer concentration is fairly high with 34.1% of revenues generated from a single customer and 77.9% of revenues generated from the top four customers. There were only minor disruptions from Covid-19 and the Hong Kong government’s emphasis on increasing housing supply bodes well for the company’s prospects.

Revenues and profits have grown steadily over the last five years culminating in $1.2bn in revenues and $50m in net profits for the year ended March 31st, 2020.

The cash position is strong with net cash of $166m and net current assets of $255m. The liquid asset ratio stood at 1.88:1 representing a comfortable financial position.

Receivables are fairly concentrated with 50% due from a single customer, and 80% due from the top five customers. The vast majority of dues are, however, less than 90 days old.

The company had posted $83m in performance bonds as on March 31^st, 2020 – disclosed as a contingent liability.

The equity is currently selling $132mn or $0.165/share. This is far below the offering price of $0.625/share in 2019 - and at just over half of net working capital value (a proxy for liquidation value) and less than three times earnings.

Management declared dividends of 1.9c/share or 30% of net profits last year, which doesn’t appear too stingy.

Despite the customer concentration risks, there doesn’t appear to be substantial doubts on realization of the contract assets and receivables. Considering this, it appears that the risks are over-priced into the stock and the current price offers substantial value for stock investors.

$ represents Hong Kong $