Ming Fai International Holdings Limited

Ming Fai (‘Company’) manufactures hospitality supplies (86% of 2019 revenues), trades operating supplies and equipment (7%) – both segments catering to hotels - and manufactures healthcare and hygiene products (7%).

Its hospitality supplies segment is diversified across the world with sales to China (33% of 2019 segment revenues), North America (21%), Hong Kong (16%), Asia Pacific (15%), Europe (12%), Australia (2%), and others.

The above segment was badly impacted by Covid-19 and US-China trade tensions. Hotel occupancy fell dramatically, and customers deferred purchase orders. Further, tariffs impacted the North American operations. Revenues for the hospitality and operating supplies segments were down 52% and 32% respectively.

However, the company deftly switched production lines to manufacture various healthcare products to counter the pandemic such as alcoholic disinfectant hand sprays, wet wipes and anti-epidemic travel kits – all meeting Hong Kong regulatory quality standards.

As a result, the healthcare segment contributed 37% of revenues in the last six months. Hence, despite an overall fall in revenues of 27%, the company posted a marginal increase in operating profits.

TTM sales were $1.8b (2019: $2b), ebitda was $195m (2019: $182m), and net profits were $107m (2019: $98m).

The financial position was strong with $236m in net cash and net current assets of $565m (including investment properties worth $13m).

The stock is selling for $531m, which is below net current asset value, and 5-5.5x earnings.

Management have paid out consistent dividends - averaging 50% payouts in the last two years. Though the recent interim dividend was cut by one-third, normal dividend yields are above 8%.

The hospitality business faces other headwinds – primarily environmental regulations emanating from China and the EU discouraging single-use plastics. This has led the company to focus research efforts into manufacturing environmentally friendly dispensers, and shampoo/conditioner/body wash/lotion bars.

The company is also shifting production activity to Cambodia to counter the US tariffs, and better serve its South East Asian customers.

Moreover, due to the success of its healthcare segment during the pandemic, the company will expand its product range to manufacturing anti-bacterial hand soaps, and other personal hygiene products.

The above factors, along with the stellar performance during the pandemic, gives us reasonable confidence that the company can at least maintain its recent earning power. We think the current price provides enough of a margin of safety for investors to take their chances on this stock.