Weiqiao Textile Company Limited

Weiqiao (‘Company’) is engaged in the manufacture and sale of fabrics (66.2% of sales), and generation and sale of electricity and steam (33.8%).

In its fabrics segment, it sells cotton yarn (over 400,000 tons constituting 38.8% of fabric sales), grey fabric (over 830m meters - 55.4%), and denim (over 60m meters - 5.8%). The company sells 2/3rds of its fabrics within China and the balance is exported - mostly throughout Asia. This division has generated losses since 2018 due to the declining price of cotton and sluggish demand in the domestic and overseas markets.

The electricity and steam segment generates all the profit currently – and 45% of it is sold to the parent company. It has an installed thermal power generation capacity of 2760 megawatts, generates about 17,000 million kWh and sells about 15,000 million kWh.

The pandemic has further reduced sales in both segments as a result of delays/suspensions in orders of fabrics and lower downstream electricity demand.

The company generated TTM revenues of $14b (down from a peak of $19b in 2018), ebitda of $1.4b (2019: $1.8b), and net profits of $184m (2019: $248m).

2019 included the effects of US tariffs on textiles, but excluded the effects of the pandemic (which should be temporary). Moreover, there’s no reason the fabrics segment should remain perennially unprofitable considering the cyclicality of cotton prices, and basic stability of demand.

Therefore, a minimum ebitda of $1.8b should be achievable. Capital expenditures have run materially lower than depreciation in the last five years (by almost half). Even after deducting conservative depreciation of $1b and taxes, the company can generate $600m in earnings, which is lower than 2018 earnings of $763m.

The balance sheet is strong with net cash of $8.8b. Cash, net of all liabilities, is $4.9b.

The stock currently trades for $2.1b or 43% of net cash asset value and 3.5x conservative earnings.

This valuation seems extraordinarily cheap to us.

Further management have paid out consistent dividends of over $200m in each of the last four years, which yields over 10% on the current price.

We haven’t seen any information that casts doubt on the financial statements. Further, there is no indication that the cash is going to be dissipated on ill-conceived ideas.

Fortunately, the investor doesn’t need to be very accurate about the future to take his/her chances on this stock at this apparently subnormal price.