Due to the effort into researching the company and the time to write my previous article on Hong Leong Asia (OTCMKTS:OTC:HLALF, SGX:H22), as well as time for the editorial team of Seeking Alpha to review, the article was published a couple of hours after the Singapore market closed. Critics might say that I was speaking after the "fact" as my previous article was published after the price first spiked yesterday (January 11). However, the volume transacted was concentrated in the afternoon and other authors in Seeking Alpha could attest to the fact that it would take a day to write an article of that depth. Personally, it took me three days, as a relatively new author, from conceptualizing the investment thesis to submitting the article for editorial review. In any case, the case to buy the shares of Hong Leong Asia remains valid in spite of the initial price increase of 16% yesterday. For those who bought into the shares traded on the Singapore Exchange (SGX:H22) at the open today at S$0.82, you would still make a gain of 19.5%, based on the price of S$0.98 at the time of writing. Not bad for half a day's work.
While I had confidence that the share price would eventually appreciate after researching the company, based on the various reasons cited in my previous article, I did not expect the dragon stock (Hong Leong Asia's corporate logo depicts a dragon embracing a globe) to awake from its share price slumber that quickly, given the inaction for the past year. Hence, I only started a small position at the beginning of the week and I had intended to increase gradually. Nevertheless, I am more than happy with the quick gains, at least on paper.
(Source: Company website. Corporate logo of Hong Leong Asia)
(Source: Google Finance)
In my previous article, I highlighted the forgotten value of China Yuchai (NYSE:CYD) when you realize that the value of the 39% stake that Hong Leong Asia owns in China Yuchai already surpassed the market capitalization of Hong Leong Asia itself. After the appreciation in the past two days, the market capitalization of Hong Leong Asia has risen to US$254.5 million, just a tad higher than the US$227 million that the 39% stake in China Yuchai is worth.
If the improvement in the business of China Yuchai comes to fruition in 2017, resulting in the market capitalization of China Yuchai returning to that in the first half of 2015 (~US$325 million), then the value of that 39% stake at around 80% again would imply an upside in the share price of Hong Leong Asia at slightly above 220%. This is not unrealistic as the corresponding share price would still be less than one-third of the peak in 2010.
Given that the 39% stake in China Yuchai used to only constitute 23% of Hong Leong Asia's market capitalization in 2010, there is definitely much more room for the share price to go. However, as we need to factor in the deterioration in the other businesses such as Xinfei (products of Xinfei are branded as "Frestec"), the non-listed subsidiaries are not going to be valued as they did in 2010. Nevertheless, going back to 2014 level when the 39% stake in China Yuchai corresponded to 82% of Hong Leong Asia's market worth, the share price of Hong Leong Asia still have another 9% room to go higher. In that year, the company reported a net debt to equity of 0.171. Based on the latest quarterly report, Hong Leong Asia has turned net cash positive to the tune of S$0.50 per share. Hence, perhaps the price could have even more room for appreciation than the supposed 9%.
(Source: Tabulated by ALT Perspective)
Hours after the Singapore market closed, the company responded (see snapshot below) to a query by the Singapore Exchange regulatory committee with regards to the sudden share price movement. The reply alluded to the fact that no major corporate action was underway though "efforts to improve the Group's performance" were ongoing. Such replies would typically dampen frivolous attempts to play up a company's share price. However, the day after the announcement, Hong Leong Asia's share price continued to advance, with a volume more than four times that the day before, implying market interest beyond just that of speculative nature.
(Source: Company press release)
Perhaps the company has indeed caught the attention of activist investors. It could also be purchases by funds looking at deep-value stocks. If it is the former, then there could be more purchases ahead to push the price higher, as they would probably muster at least 2% of the company's outstanding shares for a decent clout, and that would mean an ownership of around 7.5 million shares. The transaction volume today and yesterday combined is only less than three million. If it is the latter, the share price could take a breather, as fundamental investors do not chase prices up. In any case, the "dragon" has awakened from its slumber. I would look to add to my position if the price pulls back to below the psychological S$0.90 level, which is also the support-turned-resistance level established in the second-half of 2015. For those who has no position at the moment, below S$0.90 would also be an ideal level to start.
(Source: Google Finance)
Disclosure: I am/we are long SGX:H22.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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