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Long: AMVIG Holdings - Leading Cigarette Packaging Company In China

|Includes: AMCRF, Amvig Holdings Ltd. (AMVGF)

We initiate a position on AMVIG Holdings Limited (SEHK:2300), one of the largest cigarette packaging companies in China with ~13% market share. The company has 6 cigarette packaging printing plants and 2 transfer paper and laser film manufacturing plants across China. The company serves major cigarette brands such as Hongta Group (红塔山 brand), Hunan Industrial Corporation (白沙 brand) and Hongyun Tobacco Group (云烟 brand).

China consumes 2.5 trillion cigarettes per year or roughly 45% of global consumption. The market had a 20 year period of uninterrupted growth (1995-2015), and 2016 market the first time in 20 years when the market declined (-2.4% y-on-y).

In 2015, the company generated HK$3.6 billion in revenue and HK$556 million of operating EBITDA. During the first half of 2016, revenue, gross profit and operating EBITDA declined by 30%, 31% and 42%, respectively. The reasons for the decline are (NYSE:A) depreciation of the RMB (trading currency) vs. HKD (reporting currency), (NYSE:B) continued decline of the tobacco market in China coupled with excess industry inventory build at the end of 2015 and (NYSE:C) changes in health warning requirements on cigarette packaging that has not been finalized during the first half of 2016.

The company currently has a net debt of HK$634 million and a market capitalization of HK$2.5 billion. Over the past 6 years, the company generated an average of HK$532 million operating cash flow and spent an average of HK$95 million of CapEx.

Australian listed packaging company, Amcor Limited, owns 47.63% of the company. Other substantial shareholders include Prudential plc, FMR LLC, FIL Limited and Ameriprise Financial.

AMVIG's shares are currently trading at HK$2.66 per share, vs. 52-week high/low of HK$3.68/HK$2.60. Dividend yield is ~4.6% although the company pays special dividends from time to time.

We believe that the significant decline in revenue and profit is temporary as the change in health warning requirements has been finalized in Q3 2016, and this will, in turn, drive further requirements for new packaging as the "grace period" for cigarette manufacturers to continue using old health warning labels expire. As such, we view the recent decline in share price as temporary and gives us an attractive entry point (8x LTM EBITDA on a depressed EBITDA) for a quality company.

Disclosure: I am/we are long AMVGF.