Tianyun International Holdings Limited

Tianyun (‘Company’) is a leading player in the business of manufacturing processed fruit products and trading of fresh fruits. It manufactures processed fruit products under its own brands in China and also for OEMs on five continents.

Its approximate revenue split is: Own brands (52%), OEM (39%), Trading fresh fruits (9%).

The coronavirus pandemic dented sales in the first quarter of 2020 by dampening retail demand and disrupting manufacturing and logistics. Operations were fully halted between late January and late February. This resulted in a 33% decline in revenues in the first half of the year and similar declines in earnings.

Sales in the last twelve months were $1b compared to a peak of $1.2b in 2019. Net profits were $163m (ttm) and $192m (2019). Ebitda margins have been fairly stable at about 25%.

The company has been constantly adding production capacities (next batch operational in late 2021) and implementing operational efficiencies. Considering this and the stable nature of the business, we think ttm earnings are temporarily depressed and that 2019 earnings of $192m is an achievable and conservative estimate of normal earning power.

The company’s competitive strengths are reflected in its fairly high returns on tangible assets of 25%+ after-tax.

The financial position is strong with excess cash of $279m. The current and liquid asset positions are strong.

Perhaps the only sore point from a financial perspective is the conservative dividend payout averaging 30% of net profits. This may be forgiven due to the high returns on tangible assets and reasonable expansion of the business.

The stock is selling for $926m ($0.94/share), which is under 5x earnings.

There is a slug of 3.85m employee stock options with an exercise price of $0.97/share and this may be hanging on the stock. We have assumed full dilution, however, in the valuation above.

Management is looking at further expansion in developed economies, and partnering with enterprises possessing large distribution networks including e-commerce capabilities to exploit online demand. It is also expanding into the beverage market with offerings of fruit juices with vitamins.

The Chairman has been buying stock in the market up to $0.96/share (on October 12^th) through his holding company. An insider buying stock with his own funds is one of the most convincing reasons that a stock is undervalued, and this assessment is consistent with the evidence we’ve presented above.