Come Sure Group (Holdings) Limited
Come Sure (‘Group’) is Hong Kong listed and engaged in the manufacture and sale of corrugated paperboards and paper-based packaging products. It occupies a leading position in this industry with a diversified customer base. It generates 80% of its sales in mainland China, 13% in Hong Kong, and 7% in Macau.
The industry has stagnated recently primarily as a result of factory shutdowns
caused by the pandemic and reductions in orders from customers exporting to the
US caused by the Sino-US trade tensions.
Further, the Chinese government has recently instituted stringent
environmental protection regulations, which has placed additional operational burdens
on several smaller players in the industry. This has created opportunities,
however, for larger players like the Group to seize market share and
participate in growth in demand for paper packaging as it replaces plastic
packaging.
The group reported sales of $1b, ebitda of $79m, and net profits of $12m
in 2020. It didn’t operate its factories in January and most of February as a
result of government-mandated shutdowns. Further, it substantially enhanced
production capacity recently, which should generate higher revenues in a normal
operating environment. (The group released unaudited proforma financial statements
on September 23, 2020 following recent capital expenditures and the following
numbers are based off that.)
For conservativism, we presume 2018 sales of $1.3b as achievable and
apply average ebitda margins of 8% (achieved in 2020) indicating normal ebitda
of $100m. From this we deduct updated depreciation of $47m and deduct taxes to estimate
normal earning power at $40m/year.
The group had net debt of $32m (net of cash), which appears minimal. The
financial position is comfortable after including $243m of investment
properties at fair value (rental income of $5m/year excluded from earning power
above), which is incidentally pledged to obtain bank borrowings. The net
tangible asset value is $583m.
Management paid $14m and $25m in dividends in the last two years but
haven’t been consistent before then. They have, however, repurchased shares at
low prices aggregating $10m in the last two years.
The stock is selling at $200m ($0.58/share) or about 5x earnings. This
appears reasonably cheap for a leading manufacturer with consistent operations
and good prospects for demand growth.
Management have been repurchasing stock between $0.50 and 0.80/share.
Further, there are stock options awarded to employees with the lowest exercise
price being $1.05/share. This provides added comfort to acquiring shareholders.