Wong’s Kong King International (Holdings) Limited

Wong’s Kong King (‘Group’) is a Hong Kong listed group engaged in two activities: 1) the trading and distribution of chemicals, and materials used in the manufacture of printed circuit boards and electronic products; and 2) Manufacture of electrical and electronic products. In a normal year (2019), the revenue is split 40/60 for trading/manufacturing activities.

EBITDA margins for both segments are below 5% but manufacturing activities have been harder hit during the Covid-19 pandemic resulting in losses for the segment in the last six months. Customers couldn’t visit the manufacturing facilities to finalize orders as a result of border closures. After finance costs, the group reported overall losses for the last six months.

Sales have been steady at about $5bn and ebitda of $140m-$200m over the last five years. Ttm print for sales and ebitda were $4.8b and $138m. After depreciation and taxes, normal earning power averaged $80m.

The group’s financial position is healthy with $571m in cash offsetting $559m in borrowings. Net current asset value, net of all liabilities, amounted to $1bn. The liquidity ratio stood strong at 1.28:1.

The net tangible asset value is $1.6b. The non-current assets included $458m in property, plant and equipment – mainly factory premises in China (at cost) - and a grab-bag of miscellaneous assets including unlisted and listed equity interests, and debentures amounting to $50m.

The equity is currently trading for $394m or $0.54/share. This is below 40c on net current asset value, 25c on tangible asset value, and 5x normal earnings.

Management have paid regular dividends averaging 60% of profits, though the most recent interim dividend was cancelled. The normal dividend yield is 10%+.

There are also options outstanding to directors/employees amounting to just under 10% of issued shares (authorized limit), though 75% remain unvested, and the exercise price is $0.906/share – which means current shareholders have to earn a 67% profit before any options are exercised.

Though immediate prospects are negative, there’s no reason to believe the group cannot regain its former earning power before the pandemic. The stock appears to us to have over-priced the recent results and immediate prospects, and seems to represent full value for money at the current market price.

TTM: Trailing twelve months

$ represents Hong Kong $