Manuel Schlabbers of Accudo Capital presented his in-depth investment thesis on Ming Fai (Hong Kong: 3828) and Hengdeli (Hong Kong: 3389) at Asian Investing Summit 2018.
Ming Fai is a leading supplier of amenity products to high-end hotels and airlines with more than thirty years of history. It exhibits a low valuation for a growing, cash-generative core business with “activist” potential around the excess cash. 40+% of the recent market cap of HKD 910 million is in net cash. Management has been closing points of sale for the loss-making retail business. Manuel believes that in the next one to two years we will see those losses eliminated as management exits the business. Based on his FY17 estimate, the shares trade at a P/E of ~6x for the core business (core P/E ex-cash of less than 4x). This appears attractive for a cash-generative core business that Manuel expects to grow by 5-10% annually over the next five years. Management recently entered the Indian market. They are in the process of diversifying the production base to Cambodia. The management team has executed well from a corporate governance perspective in recent years (examples include the closing of loss-making business lines; selling investment property in Hong Kong and paying out some of the proceeds; not renewing the employee option scheme but implementing an employee trust instead). Capital allocation could be significantly improved as they sit on excess cash – something that has drawn the attention of activist shareholders in the past.
Hengdeli is the holding company for two luxury watch retail chains, Hengdeli and Elegant Watch & Jewelry, which operate shops in Hong Kong and Taiwan. The company transformed in 2017 when it sold its mid to high-end watch retail business in mainland China (Xinyu), together with a low-end watch and jewelry business in Hong Kong (Harvest Max), for RMB 3.5 billion to the controlling shareholder. The company used the proceeds to pay a special dividend and retire USD-denominated debt. At less than 0.4 HKD per share, the shares recently traded at a 25% discount to net cash and at one-third of tangible book value. For a business in an industry that is seeing operational improvements (it almost broke even in H1 2017), this seems attractive. The shareholder base includes business partners such as Swatch Group and LVMH, which mitigates some of the corporate governance concerns around the large cash position.
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About the instructor:
Manuel Schlabbers is the Founder and Chief Executive Officer of Accudo Capital Limited as well as the Fund Manager of the Accudo Asian Value Arbitrage Fund. He is licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) in Asset Management activities and is a Chartered Financial Analyst. He started his trading career at Morgan Stanley in London where he was in charge of European ETF Trading. In 2009 he left Morgan Stanley to join Credit Suisse and build out their ETF and index trading business in Europe. Two year later he was appointed as Head of the APAC D1 Index and ETF trading desk at Credit Suisse in Hong Kong. In this role he was a member of the CS Prime Services APAC Management Committee. He holds a 1st class degree in BSc Investment, Finance and Risk Management from City University Cass Business School, London. He is one of the Mentors of the Henley Business School Hedge Fund Program as well as a former Member of the City University UG Finance Advisory Board. With effect from 1st April 2017, Manuel Schlabbers was appointed as a member of the Public Shareholders Group (PSG) by the Securities and Futures Commission (SFC) in Hong Kong. The PSG was established by the SFC in 2001 with the goal to enhance shareholders’ rights and investor protection.