Huisen Household International Group Limited
Huisen (‘company’) is engaged in
the manufacture of panel-type furniture (cabinets, shelves, coffee tables, etc.)
as well as upholstered furniture and outdoor furniture.
It is China’s largest exporter of
panel-type furniture and 2/3rd of sales was generated in the US. Most
of its revenues are concentrated among five customers including Walmart, which
has been a customer since 2012.
Rising interest rates and the
inflationary environment is expected to dampen property purchases and
therefore, furniture buys.
The company raised equity
financing of over HK$ 1.2b (~1b rmb) via an IPO in December 2020 at a price of HK$
1.77/share.
Revenues and e have grown
steadily culminating in FY21 figures of 5.1b rmb (FY20: 3.9b) and 888m rmb (FY20:
541m) respectively. (FY21 was a year when Trump-era tariffs on China were in full
effect.)
The balance sheet is overloaded
with net cash (net of all liabilities) of 2.2b rmb.
The equity is currently selling
for 1.4b rmb i.e., at a 36% discount to net cash, and <2x 2021
earnings.
These figures are extraordinary,
and unless the accounting figures are materially fabricated, this represents
quite a bargain.
Management declared a dividend of
216m rmb for FY20 (in the year of the IPO) but cut it completely in FY21. To be
fair to management, they warned against using the initial dividend as a
reference for future payouts in the IPO prospectus.
The IPO proceeds are expected to
be utilized by 2023 for expanding production capacity (by at least 50%) including
manufacturing facilities for particleboards. Even after this, there appears to
be substantial cash left over for buybacks of stock at these subnormal prices.
Management has issued stock
options for under 10% of the outstanding shares to a few key employees but
these have an exercise price of $1.878/share, which is over 3x the current
market price.
The business is exposed to risk
of additional tariffs, and it may not be worth too much above tangible book
value due to these uncertainties (the IPO valuation was at ~1.3x book).
We haven’t seen evidence suggesting
fraud at this company, and the business appears to be worth a lot more than the
current market price.