Seeking Hong Kong-Listed Net Cash Stocks As Deep Value Investment Ideas

|
Includes: BKHOF, CDGXY, CHHGF, CMGLF, CTPCY, DNXHF, HUHIF, JTXMF, NWRLY, OPRGF, PFGHF, RDSZF, TSIOY
by: The Value Pendulum

Summary

Among more than 1,700 Hong Kong-listed stocks, I found 92 stocks with net cash accounting for more than half their market capitalization.

I profile Hong Kong-listed AEON Stores, which is trading below net cash and at its 10-year historical P/B low. In addition, it sports a 4.1% historical dividend yield.

My exclusive research service, Asia/U.S. Deep-Value Wide-Moat Stocks, has profiled 13 potential Asian deep value investment ideas and 6 potential Asian deep value value traps in the past months.

Definition Of Net Cash Stocks

I define net cash as the sum of cash & cash equivalents and short-term investments minus debt or interest-bearing liabilities. This is different from the more common definition of net cash as cash minus total liabilities. I think the former definition (and the one I use) is more useful, because net-nets (trading below net current asset value) already comprise the latter category of stocks. Therefore, my definition of net cash leads to an entire new source of investment opportunities outside of net-nets.

Stocks with high net cash as a percentage of market capitalization are similar to sum-of-the-parts discounts, where net cash (easily quantifiable assets) are backed out from the stock's valuation to get to the stub value of the operating business or businesses. In extreme cases, where net cash is equivalent to the stock's market capitalization, investors are essentially get the stub of operating business for free at current valuations.

First Look At Initial List Of Hong Kong Net Cash Stocks

There were 92 Hong Kong listed companies with net cash representing more than 50% of market capitalization (of which 30 of them are trading below net cash) as of August 14, 2015 and I will like to share some of my findings on these stocks here:

  • 1 of them is too illiquid for certain investors, as its market capitalization is under US$20 million;
  • None of them are in the strange situation of having both high amounts of debt and cash, they all boast debt-to-equity ratios of less than 1;
  • 6 of them last traded a few months ago, implying they are likely to be suspended from trading;
  • 28 of them of them were loss-making in the trailing twelve months period (certain loss-making companies can burn through cash in a short period of time);
  • 15 of them have Beneish M-Scores greater than -2.22, warranting further investigation; and
  • 46 of them have paid out dividends in the most recent financial year. (It is a warning sign if companies have significant cash balances and do not pay dividends)

If I were to remove stocks with market capitalizations below US$20 million, gearing ratios above 1 and those suspended from trading, I will still arrive at a list of 83 investable Hong Kong listed net cash stocks. Even if I were to be more demanding and require the net cash stocks to be profitable and dividend paying in the most recent financial year and have Beneish M-Scores less than -2.22, 24 of them will still meet the criteria. The list of 33 "high-quality" net cash stocks is as follows:

  1. Harbin Electric Co Ltd (HPBWF) (1133 HK)
  2. CITIC Ltd (OTCPK:CTPCY) (267 HK)
  3. China Child Care Corp Ltd (OTC:PFGHF) (1259 HK)
  4. Yorkey Optical International (2788 HK)
  5. AEON Stores (Hong Kong) Co., Limited (984 HK)
  6. Shirble Department Store Hold. (China) Ltd. (312 HK)
  7. New Century Group Hong Kong Ltd. (234 HK)
  8. Datronix Holdings Limited (OTC:DNXHF) (889 HK)
  9. China Machinery Engineering Corp (1829 HK)
  10. Miko International Holdings Ltd (1247 HK)
  11. Sing Tao News Corporation Ltd. (1105 HK)
  12. Changan Minsheng APLL Logistics Co Ltd (OTC:CMGLF) (1292 HK)
  13. Oriental Press Group Ltd (OTC:OPRGF) (18 HK)
  14. Fujikon Industrial Holdings Ltd. (927 HK)
  15. Jingwei Textile Machinery Co. Ltd. (OTC:JTXMF) (350 HK)
  16. Tonly Electronics Holdings Ltd (1249 HK)
  17. Build King Holdings Ltd (OTC:BKHOF) (240 HK)
  18. Alco Holdings Limited (328 HK)
  19. Joyce Boutique Holdings Limited (647 HK)
  20. Boyaa Interactive International Ltd (434 HK)
  21. Baoye Group Company Limited (2355 HK)
  22. Huisheng International Holdings Ltd (1340 HK)
  23. Asia Orient Holdings Limited (214 HK)
  24. Tai Ping Carpets Group (146 HK)
  25. Herald Holdings Limited (114 HK)
  26. New World Department Store China Limited (OTCPK:NWRLY) (825 HK)
  27. Roadshow Holdings Limited (OTC:RDSZF) (888 HK)
  28. Hung Hing Printing Group Limited (OTC:HUHIF) (450 HK)
  29. Chen Hsong Holdings Limited (OTC:CHHGF) (57 HK)
  30. 361 DEGREES INTERNATIONAL LTD (OTC:TSIOY) (1361 HK)
  31. China Dongxiang (Group) Co., Ltd. (OTCPK:CDGXY) (3818 HK)
  32. Get Nice Holdings Limited (64 HK)
  33. Peak Sport Products Co., Limited (1968 HK)

I will not recommend all 33 stocks as individual investment candidates, as some of them either have known corporate governance issues or have been targeted by short-sellers in the past. This shows the need for qualitative analysis to complement quantitative screening, unless one is buying a diversified portfolio of net cash stocks.

Lastly, I will like to share a profile of one Hong Kong listed net cash stock, which was previously only available to my subscribers.

AEON Stores (Hong Kong) Co., Limited (984 HK)

Started in 1987 and listed on the Hong Kong Stock Exchange in 1994, AEON Stores is mainly engaged in the operation of general merchandise stores (GMS). Currently, it operates 8 GMS, 5 independent supermarkets, 26 independent Living PLAZA by AEON, 6 Bento Express by AEON and 2 La Bohéme Bakery in densely populated districts in Hong Kong. It also operates 20 GMS, 6 independent supermarkets and 2 shopping centres in Guangdong Province, the PRC.

Net cash currently accounts for 112% of AEON Stores' market capitalization, suggesting that its retail operations are offered for "free" at current valuations. AEON Stores is also trading at its 10-year P/B (1.12x) and P/S low (0.24x). It boasts a Piotroski F-Score of 8, suggesting improving profitability and efficiency, in addition to financial strength.

The Company's business is turning around, profit attributable to owners more than doubled in FY2014, rising to HK$257.6 million (2013: HK$107.1 million), thanks to the improvement of the operating results for the PRC operations, and lower costs to revenue ratios as a results of effective cost control measures. Notably, the PRC segment results registered a profit of HK$7.1 million in FY2014, a significant turnaround from a loss of HK$56.9 million in FY2013, excluding the impairment loss of property, plant and equipment for both years.

AEON Stores boasts a 20-year dividend payment track record, having paid out dividends in every year since 1994 (listing). It currently sports a 4.1% trailing twelve months dividend yield (excluding special dividends).

One risk factor to take note is AEON Stores' limited public float of 18.2%, which falls below the Exchange's minimum requirement of 25%.

I have also written about Hong Kong-listed net cash stock Harbin Electric (1133 HK) on Seeking Alpha in the past.

Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the 13 potential Asian deep value investment ideas and 6 potential Asian deep value value traps, which include net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts, that I have profiled in the past months.

Disclosure: I am/we are long HARBIN ELECTRIC (1133 HK).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.