Wuxi Sunlit Science and Technology Company Limited

Wuxi Sunlit (‘company’) manufactures and sells equipment for steel wire production lines, which produces steel cords that are ultimately used as reinforcement in automobile tyres.

The company sold the following products: a) Brass electro-plating wire production lines (50% of sales); b) Standalone machines (25%); and c) Mould repairing equipment, parts, and accessories (15%) among other related products. It generates 90% of sales within mainland China.

Its customer concentration is very high – generating 76% of revenues from just two customers. Further, it is subject to intense competition resulting in lower selling prices for its products. Covid-19 has added to the pain by causing customers to delay testing and purchase of equipment.

Sales have fallen to $146m in the last twelve months after peaking at $210m in 2018. Similarly, net profits have fallen to just $4m from $57m in 2018. Taking recent sales and applying 5-year average margins, as the business appears to be cyclical, results in average earnings of $10m/year (same as 2019 before the pandemic struck).

The financial position is very strong with net cash of $197m, net of all liabilities. (We include cash, time deposits, restricted cash, and principal-protected wealth management products sold by banks within the definition of cash.)

Further, the company had $556m in net current asset value. Receivable and inventory turnover were abysmal, though – exceeding one year in both cases. Offsetting these were investment properties at fair value of $44m earning rental income of $2m/year and other properties held for sale costing $56m after impairment provisions. Net tangible asset value stood at $693m.

The equity was selling at just $106m or about half of net cash alone and about 10x average earnings.

Management have paid dividends of over $7m in each of the last three years yielding nearly 7% on the current price.

The recent performance is undoubtedly lackluster. Car ownership in China, however, is on the rise and the market for tyre replacement should grow with it. Management intends to maintain a stable market share. Considering these factors, it doesn’t appear unreasonable to expect a return to the company’s average earning power in the near future.

Even if management falls short, the investor is obtaining this stock at less than half of net cash resources with the bonus of a 7% dividend yield – offering minimal downside and the potential of substantial profits when the stock finds its fair value.