Sanbase Corporation Limited
Sanbase is a small Hong Kong listed company that is a leading provider of
one-stop interior fit-out solutions for Grade A offices – primarily in Hong
Kong, and also in mainland China.
It listed in January 2018 and is operationally well run with a
consistent track record of revenues and profits. It operates with an array of
subcontractors and concentrates on quality as well as cost control.
As a result, it has generated higher earnings despite a 19.3% fall in
revenues as a result of Covid-19. Customers have delayed or suspended fit-out
activities and further, the company faced intense pressures in winning new
contracts and collecting payments.
It reported sales of $604m and earnings of $17m in the last twelve
months. We consider 2019 sales and earnings of $650m and $28m, however, to
reflect normal operating conditions.
The balance sheet was strong with excess cash of $35m and a liquid asset
ratio of 1.2:1.
The stock recently sold at $92m ($0.46/share) or just over 3x normal earnings
with the bonus of $35m in excess cash, which appears very cheap.
Management suspended dividends this year though it paid $6.2m in the previous
year. This suspension seems unnecessary considering the excess cash. Furthermore,
the non-controlling interests were paid $4m in dividends (by subsidiaries) in
the last three months.
The more disturbing development is the company’s recent acquisition of a
subsidiary (albeit small at less than $3m) engaged in the mortgage lending
business to “diversify industrial risk” and earn “stable interest income”. The
shareholder-oriented action would’ve been to return excess cash to shareholders
and leave the diversifying to them.
Moreover, two independent directors and the company secretary resigned
in the last twelve months. Though nothing unusual is revealed in the filings
(which could be made more meaningful to shareholders), it’s somewhat unusual.
Near-term prospects are bleak with lower expected demand for office
space. Management foresees offsetting growth in demand for fit-out work from
Chinese companies seeking to list in Hong Kong, and other companies who want to
exploit the low rents. They also plan to expand into other South-East Asian
markets.
Though this stock meets our quantitative tests for investment, we would
temper our allocation due to the governance concerns described above.