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.