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.