Perfect Group International Holdings Limited

Perfect (‘Group’) is in the business of a) designing, manufacturing, and exporting fine jewellery; and b) property development.

It manufactures high-end fine jewellery products primarily mounted with diamonds. Its product range includes rings, earrings, pendants, bangles, necklaces, and bracelets. The group sells its wares in Hong Kong and Dubai; and has a jewellery trading operation in China via a 19% interest in an associate (loss-making so far).

The group is also developing an industrial park in Foshan, China and leasing/selling completed units.

Covid-19 has severely impacted the jewellery segment with sales dropping 67% over the year. This was offset by property sales.

The group reported TTM sales of $746m (2019: $787m), ebitda of $253m (2019: $232m), and net profits of $173m (2019: $171m).

The jewellery segment generates normal sales of around $320m and average profits before taxes of $40-$50m.

The property segment is represented by $207m of properties held for sale under inventories. In addition, it has $139m classified as fair value of investment properties leased out and currently generating $6m/year in rental income.

The balance sheet is strong with no bank borrowings and cash of $104m. The net current asset value plus investment properties amounts to $463m.

The stock is selling for $328m - at a 29% discount to minimum realizable asset value (without including the jewellery business).

Normal earnings, excluding asset sales/revaluations, amounts to $50-55m before taxes or 6-7x pre-tax earnings, which isn’t spectacular but acceptable in conjunction with the discount from asset value.

Management have paid out minimum dividends of $27m in the last few years yielding 8% at market, which is satisfactory.

The investor can obtain a substantial discount from asset value with this stock and reasonable earnings and dividend yields – not the best of bargains, but a bargain nonetheless.