Three Below Book Bargains from Hong Kong

Stepped Up To Be The Second Largest Broadband Provider WE DREAM. To be the largest IP Service Provider in HK by 2016 WE ACHIEVE. We are now the second largest broadband provider in HK

Coherent or not (read it a few times, I had to), the opening statement in City Telecom's (CTEL) 6 month report is confident and entertaining. This full service telecom business, based in Hong Kong, has improved operations each of the last four years. 2005-06 resulted in losses and 2008 was the Company's first year with a noteworthy EPS, so this stock was not on many people's radars during the last sustained bull market. With net income up 57% year-over-year in the first half of FY2009, it's on mine now.

CTEL is diversified, with operations in Canada and China, and paid dividends to shareholders in 2007 and 2008. What I like best is that it trades below book value, something I believe investors take too lightly. A profitable and growing company selling at book value is like a gold coin selling at face value, albeit to a lesser extreme. Buying shares of CTEL today means obtaining $1 worth of their net assets, ignoring future profits and growth, for 93 cents. This principal is ultimately what makes stocks a good long term investment. Price matters!

There are other profitable Hong Kong operations that trade below book value, including Alliance Fiber Optic Products (AFOP), which has turned a profit for 12 straight quarters and gives a strong guidance for the remainder of FY09. AFOP is incorporated in California, which makes its valuation even lower relative to peers.

Telestone Communications (TSTC) recently announced first quarter results less boastful, yet nearly as profitable as CTEL's, and trades at half of book value.

Something I've noticed with these 3 stocks is that they barely suffer from market pullbacks. They are thinly traded and not volatile, as most owners see value from being oversold or recent growth. Being so thinly traded, I believe a temporary lack of international interest in stocks is the only thing keeping them down.

With negativity and uncertainty surrounding the value of the dollar and Hong Kong among analysts' favorite markets, companies like these should be considered seriously.

Lastly, unless you're a world traveler, every international investor should read "Opportunity for China's Domestic Private Equity Industry," by Rob Abbanat, for a first hand understanding of the current state of investing around the globe.

Disclosure: Long AFOP & TSTC, Planning to enter CTEL Long

Comments

[Smallcap Brian:]

there are a few more, GFRE for one,

May 27 08:13 AM

[Danny Furman:]

GFRE is a Chinese natural resource company. These are Hong Kong telecom providers. The latter traditionally earn higher valuations and, while GFRE may be cheap, these companies are cheaper relative to their international counterparts (not that any other telecoms are seeing 57% EPS growth).

May 27 08:50 AM

[Alphameister:]

Good low-beta stock picks, Danny, in an attractive sector. TSTC is a major position for me, and AFOP, a former holding, has been back on my shopping list. Suggest you also check out ORS which I've been accumulating.

May 27 09:32 AM

[Danny Furman:]

Thanks Alphameister, I believe a comment of yours introduced me to TSTC. ORS is a former holding and a great value, perhaps a future holding as well. It does run the risk of losing its rural market to China's telecom giants, but for now it's a gold mine.

May 27 09:55 AM

[stubaby:]

My favorite is chcg book around 1.70 eaned .51 last year

May 27 12:28 PM

[Ocotillo:]

I have been long CTEL for more than a couple years now. The big negative I have with this company is some of the costs. Advertising costs have gone up from around HK$220m in 2006 to HK$341m in 2008. Furthermore, CAPEX costs will run north of HK$300m for the next to years, and they now see the network expansion running into 2011/2012. (They had always targeted 2010 as the completion date). All the top line growth has been eaten up by these costs, shareholders get very little.

They offer a great product and service to Hong Kong, they are probably a great company to work for. But as a stock, it is an under performer. (And it did get taken down with the market last year. In October 2008, it was trading under 2 bucks a share, despite the fact that their business was going great).

May 29 11:33 PM

[Danny Furman:]

Ocotillo,
Thanks for the feedback. If ad costs weren't rising I'd be concerned. WE DREAM....
If they are going to be #1 it won't come cheap. Operating more profitably than ever before and increasing their client base during the worst economic time I've seen has me on board. Dividends are small, but for a growth company like this any dividend is great. I watched their last shareholder meeting and am very impressed.

May 30 12:51 AM

[Ocotillo:]

Fair enough on the ad costs, as the last three CTEL earnings reports have shown that broadband revenue (FTNS) increased about HK$60m every six months. Not bad in an environment that incumbent PCCW described as "challenging" during their last earnings report.
CTEL offers the best broadband value in the world. They are growing their business despite going up against much bigger competitors and a recessionary business climate, and the stock trades at a very cheap multiple. (If one assumes they have HK$560m of long term debt, over $HK500m in cash, and produce annual EBITDA of HK$460m, the EV/EBITDA ratio would be in about 2.5. That is despite the increases in promotional spending, which may finally have flattened out).


On May 30 12:51 AM Danny Furman wrote:

> Ocotillo,
> Thanks for the feedback. If ad costs weren't rising I'd be concerned.
> WE DREAM....
> If they are going to be #1 it won't come cheap. Operating more profitably
> than ever before and increasing their client base during the worst
> economic time I've seen has me on board. Dividends are small, but
> for a growth company like this any dividend is great. I watched their
> last shareholder meeting and am very impressed.

May 31 04:43 PM

[wyn:]

(TSTC) & (GRRF) have both seen strong PPS increases! There are so many factors right w/ these companys. Good heads-up!

I think both will continue to increase...

Aug 17 01:45 AM