Analyzing Bargain Stocks

CKW (‘Company’) operates in the construction industry and specializes in a) Foundation Construction (80% of revenues) and b) Drilling and Site Investigation Works (20%). It generates practically all its revenues in Hong Kong via the public and private sectors. The company appears to be well run and operated as demonstrated by its financial track record. The industry is currently subject to severe competition and price wars resulting in a reduction of gross profit margins from 24% to under 19% over the year. Contractual requirements are also getting more stringent and labour costs are rising. Covid-19 didn’t have any impact in the recent period, however, as the company progressed strongly on its major projects according to schedule. It reported sales of $1.5b in the last twelve months with ebitda of $124m and net profits of $63m – backed by cash flows. Ebitda margins have dropped steadily from 14.5% five years ago to 8.4% recently. The financial position is healthy with net cash o

Shenguan (‘Group’) manufactures edible collagen sausage casing products. This comprises over 90% of its sales. It also manufactures collagen-based pharmaceutical, food, skin care, health care, and bioactive products – and conducts research and files patents to expand its product portfolio. It occupies a leading position in the industry supplying major manufacturers of processed meat products and sausages. It serves the higher-end of the nutritional market where collagen casings are preferred over pig casings. Over 90% of its sales are in China though it generates sales in South America, South-east Asia, and the USA as well. It is currently enduring an oversupply situation and greater competition in its industry after pork production declined in China. It is also subject to variations in the price of its major raw material – cattle hide – though this has been stable in the current period. Furthermore, Covid-19 has delayed resumption of activity at its customers, and reduced sales by

NAS Holdings (‘Company’) distributes and services Surface Mount Technology (‘SMT’) equipment, semiconductor manufacturing equipment, and software on manufacturing control. Its customers include major telecom and electronic equipment manufacturers. It generates revenues from sales (97% of total) and leasing of these machines. The company sources most of its supplies (81.5%) from Fuji corporation in Japan – making it sensitive to the Yen (a 3% change in JPY/HKD results in a 10% move in profits). It generates most of its sales from China (92%) and the balance from other Asian countries. The pandemic didn’t adversely impact recent business results but the Sino-American trade war caused a spurt in orders by a major customer abruptly changing its manufacturing process. TTM Sales printed at $3.1b (2019: $2.4b) and ebitda was $213m (2019: $159m). Net profits were $136m (2019: $111m). Earnings were backed by strong free cash flows. The financial position was very strong with net cash of $

China Uptown (‘company’) is  a property developer currently engaged with two residential and commercial properties in Maoming, Guangdong a fast-developing tier-3 city in China. (It is also profitably engaged in trading raw cane sugar, which ends in 2020, but this is not significant.) The properties are: a) 90% ownership of Zhanqian 7 th Road, Yuehua East District – Gross floor area of 245,000 sq.m (fully developed in 2018 and units are currently being sold); and b) 65% ownership of Jixiang-23, Jixiang District – Gross floor area of 118,000 sq.m (acquired in May) This is a cash hungry company that constantly raises funds from banks, directors, and shareholders to purchase and develop properties - and hasn’t paid a dividend. Most recently it consolidated its shares 10:1 and issued almost 40% of its pre-issue share capital to a minority shareholder in September raising $72 m in the process. We have adjusted the share count and the cash receipt to the balance sheet published as

AB (‘Group’) is engaged in construction activities in Macau. It generates revenues from fitting-out works (60-85% of revenues) and structural works (15%-40%) for government as well as private sector customers. Covid-19 has suspended construction activities and brought a halt to tenders of new projects in Macau. The group’s revenues declined almost 40% to $274m and incurred losses of $7m. Average revenues and earnings over the last five years were around $300m and $30m respectively. Operating cash flows averaged $18m due to heavy working capital investments, and free cash flows averaged over $16m/year. The financial position is strong with net cash of $183m. The group raised $61.2m net of fees at $0.67/share in 2018 in an IPO. Of this, $24.7 remained unutilized – to be used primarily for financing operations and $6.1m for potential acquisition candidates in the construction field operating in the Guangdong-Hong Kong-Macau greater bay area. (In September, the group acquired a related par

Sitoy (‘Group’) is engaged in the manufacture and retail of handbags, small leather goods, travel goods, and footwear products – along with property investment. It generates 75% of its revenues from manufacturing for other brands, 24% from retailing its own brands (five in total), and the balance from rental income from its three commercial properties. It generated 39% of revenues from China, 17% from North America, 21% from Europe, and 20% from other Asian countries indicating good geographic diversity. The group was hit badly by the social unrest in Hong Kong followed by Covid-19 – reducing demand for the retail segment, and order flow for the manufacturing segment. The retail segment recorded substantial net losses. Sales declined to $1.8b (2019: $2.4b) and net losses were $133m compared to a profit of $126m last year. A closer examination of the financials reveals that $138m in losses were a result of write-downs of inventories, and impairment provisions for tangible asset

Wuxi Sunlit (‘company’) manufactures and sells equipment for steel wire production lines, which produces steel cords that are ultimately used as reinforcement in automobile tyres. The company sold the following products: a) Brass electro-plating wire production lines (50% of sales); b) Standalone machines (25%); and c) Mould repairing equipment, parts, and accessories (15%) among other related products. It generates 90% of sales within mainland China. Its customer concentration is very high – generating 76% of revenues from just two customers. Further, it is subject to intense competition resulting in lower selling prices for its products. Covid-19 has added to the pain by causing customers to delay testing and purchase of equipment. Sales have fallen to $146m in the last twelve months after peaking at $210m in 2018. Similarly, net profits have fallen to just $4m from $57m in 2018. Taking recent sales and applying 5-year average margins, as the business appears to be cyclical, re