Ada Lau presented her in-depth investment thesis on China Dongxiang (HKG: 3818) at Asian Investing Summit 2017.
China Dongxiang operates a branded consumer business that includes the Kappa casual sportswear brand in China and Macau. In 2008, China Dongxiang bought Phenix Co, a multi-brand ski and outdoor wear company based in Japan. China accounts for 78% of Dongxiang’s sales.
The shares collapsed from 2010-2012 following the peak of China’s sportswear market, inventory problems, foreign competition, and the departure of a CEO who had been on the job for less than a year. The number of Kappa stores in China has declined accordingly but has rebounded slightly since 2014. Today, the industry is much healthier after four years of inventory de-stocking and store rationalization. Competition remains fierce and operating performance can be divergent. Dongxiang is in a better position due to its foreign brand, “more fashion than function”, and a strong balance sheet.
In 2011, Dongxiang’s Chairman made an important decision to invest US$100 million in Alibaba via Yunfeng Fund. In 2014, Dongxiang sold 30% of its Alibaba stake and recognized a profit of RMB 686 million. Adjusting for the remaining stake in Alibaba, net cash and other investments, Dongxiang trades at slightly negative enterprise value, i.e., investors get the Kappa and Phenix brands for “free”. With insiders buying and the Beijing Olympics slated for 2022, the company appears to have a favorable longer-term outlook. The headline valuation numbers include a P/E of 10x, P/B of 0.7x, and a dividend yield of 6%.
About the instructor:
Ada Lau has over 16 years of experience in the asset management industry. Prior to establishing Pickers, Ms. Lau was a Senior Fund Manager at Value Partners, where she was involved in portfolio management, investment research and leading a team of investment professionals from 2006 to 2013. She was ranked #3 in the Thomson Reuters 2010 Extel Asia Pacific Survey – All Buyside Individuals, General Equities/Strategy. Ms. Lau started her career at Credit Agricole Asset Management, where she was an investment manager focusing on Hong Kong, China and India equities. She holds a Bachelors degree in Commerce (Finance) from the University of British Columbia and is also a Chartered Financial Analyst (CFA) charterholder.
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