Tian Chang Group Holdings Ltd.

Tian Chang (‘Group’) manufactures e-cigarettes on an OEM basis, and plastic moulds and components. Recently it also entered the production of face masks (meeting international standards) under the medical consumables segment.

It generated 59% of its revenues from e-cigarettes, 40% from plastics, and the residue from the nascent medical consumables business.

The group manufactures e-cigarettes for the “Blu” brand owned by tobacco giant Imperial Brands. Blu has the third highest market share in the world at 4.2%. The group has been producing for the brand since 2013. Its ultimate sales are spread across Netherlands, USA, China, and UK among others.

Its plastic components are used in office furniture, electronic products, home appliances, communication products, and automobiles. It boasts of customers such as Canon, Panasonic, Brother, and Herman Miller.

Its revenues fell over 56% in the last six months due to the Covid-19 pandemic as customers delayed or suspended orders. Moreover, there was a three-week production delay due to lockdowns and further delays as laborers couldn’t return quickly.

TTM revenues were $878m (2019: $1.3b) and earnings were $67m (2019: $127m).

The group is currently expanding production capacity with a new factory in Huizhou, which will be operational in January 2021. This factory will enhance e-cigarette manufacturing by 57%, plastic components by 22%, and PET products by 100%.

Therefore, we think the group can conservatively achieve 2019 sales of $1.3b. Applying normal operating margins of about 15% and deducting depreciation and taxes, we estimate normal earning power of $100-110m (which was more than accomplished in 2019).

The balance sheet reveals net debt of $48m, which is minimal. However, the current asset position is weak primarily due to the above-mentioned factory construction. The net current liabilities are $113m. Even so, the group has $204m in unutilized banking facilities, which should tide it over until production returns to normal.

Unfortunately, this isn’t the most shareholder-oriented management. Since listing in 2018, they’ve paid out dividends of only $27.9m in 2019 and cut it to $9.3m this year. Worse, management recently issued 37.84m stock options (6.1% of then issued shares) in May with an exercise price of $0.355 as the share price hit multi-year lows.

The stock currently sells for $214m ($0.325/share) - assuming full dilution without cash input - or just 2x earnings.

Despite a sub-par score on shareholder orientation, we think this is a cheap neglected cigar butt – of the electronic kind.