Chinney Alliance Group Limited

Chinney (‘Group’) is engaged in the provision of building-related contracting services (42% of revenues), foundation piling/ground investigation (31%), building construction (14%), and trading plastic/chemical products (8%) among others (5%).

This group owns 74.5% of Chinney Kin Wing Holdings Limited (CKW), which we covered here: https://analyzingbargainstocks.blogspot.com/2020/10/chinney-kin-wing-holdings-limited-ckw.html.

The group’s revenues fell as a result of Covid-19 and social unrest in Hong Kong, which delayed several projects. Further, its major projects were at their initial stages impacting revenue recognition. Moreover, the plastics/chemicals business was badly affected by US tariffs.

The group reported TTM revenues of $4.9b (2019: 5.2b), ebitda of $241m (2019: $286m) and net profits of $98m (2019: $131m). This compares to peak revenues of $6.1b in 2018.

We think enhanced revenues due to government focus on new housing supply, and slightly lower margins due to competition, would result in normal ebitda of $300m and net profits of $150m, which is lower than the company has achieved in the recent past.

The balance sheet is healthy with net cash of $338m and a net current asset value of $925m. In addition, the group has investment properties worth $39m and debt investments of $5m.

The stock is currently selling for $550m, which is 57% of liquid asset value, and less than 4x earnings.

Management has been stingy with dividends paying only 22% of average earnings. Nevertheless, the latest $36m payment yields 6.5% on the current price.

Management will lay out $190m for CKW’s depot (see link) – of which $126m will be deferred over three years. It will also deploy $97m to acquire more investment properties, and $47m to buy out a minority shareholder of a subsidiary. These would materially reduce the net cash balance, though it’ll be topped up by earnings. The group also has access to $2b in undrawn bank facilities.

The group doesn’t follow best practices in corporate governance – the Chairman/MD (who owns 73.68% of shares) is not subject to retirement by rotation, there is no tenure limit for non-executive directors, and the Chairman didn’t even attend the AGM due to “engagement in his own business”. While not influential to our thesis, these are worth bearing in mind when considering the group.

The group currently has $9.3b of orders in hand, and the demand for housing supply should bode well for the group.

Overall, the current stock price appears to offer good value for money for the prospective investor.