Goldpac

Above average business and net-net with a 13% dividend yield

• Trading at around 6x earnings with very high dividend payout

• 30% ROIC

• Possible tailwinds ahead providing unbanked parts of China with cards

• Growing segment hiding behind declining segment

• Negative EV with HK$2-2.3 per share in net cash mostly from IPO

This is one of those Chinese stocks that I would not touch if it wasn’t for the steady high dividend payout. Their main line of busines is in well… bank and ID cards and machines that process the making, giving out and customization of said bank cards. And some other lines of business that I cannot make out exactly, but more on that later.

The card business seems to be in decline, while the rest of their business seems to be nicely growing, with higher gross margins as well. Possibly providing a nice inflection point in the coming years where overall revenue will go back to growth again, possibly rerating this to a higher multiple.

Run down of their numbers since IPO (note how they have paid out nearly 50% of their market cap in dividends in past 4 years):

So clearly the platform & service business is the jewel here. Higher gross margins and fast growing. Although it does appear that their Cards business was impacted by Covid. As H2 revenue was higher than H1 revenue. And is possibly impacted by a growing number of Chinese people paying with their phone over the past decade.

It should not be hard to explain why this is a nice business, selling cards and card issuing equipment to banks and governments is a small part of their costs, it is sensitive to potential hacks and frauds. So high barrier of entry and customers should not be all that price sensitive. Since if something goes wrong it will have large consequences. And revenue is recurring.

Growth ahead?

It appears that China is addressing their large population of unbanked people that is still in the 100’s of millions, who often have no smart phone. They are planning to do this by issuing a Central bank currency combined with biometric bank cards. IDEX is providing the biometric scanner tech, and Goldpac is making the rest of the card. IDEX is publicly traded as well, on the Oslo stock exchange and has a market of $235 million and barely any revenue. But analysts expect a rapid ramp up in revenue in the coming years for IDEX (source: TIKR estimates, currency: USD):

Not sure how much of an impact this will have on Goldpac, or if this will actually happen, but it appears bullish, to have an entire potential market of several 100 million customers opened up.

Why is it cheap?

So what is the catch here? A stock that could see growing revenue in even their (so far) declining segment, has nice margins and high ROIC, paying a 13% dividend, that is trading at a 30% discount to its net cash value that came from their IPO. Why is it this cheap? Well one reason could be that on most screeners it shows a lower dividend yield, something to do with only counting the final dividend and not the special dividend?

But maybe a more important reason is that their reports are very cryptic. It makes my head hurt reading them. I can barely make out that one of their business lines is selling bank and ID cards. Take this for example, written by the Chairman (2020 AR):

Looking from the perspective of finance, payment and credit have been the basic need of human societies across the millennium and an everlasting theme of the financial industry. It is also a guarantee for the sustainable and steady development of the Group’s business. Banks, credit card organizations and individual consumers are the main players of the credit card industry and have launched a series of economic activities around payment and credit. At the same time, they are constantly eager for innovation. This enables the industry to seek breakthroughs, such as technology and business models, and provides a sustained impetus for the development of the industry.

Sounds like someone is trying to reach his word count in a book report. I don’t see Coca Cola mentioning in their AR that consumable liquids have been the basic need of human societies across the millennium.

And in the same 2020 AR the chairman mentions a new UMV platform, which could bring great shareholder profits and prosperity to the group. But at no point is it mentioned what exactly UMV stands for. But luckily the term UMV gives 86 search hits, so maybe I can decipher it from context:

Facing the potential innovative breakthrough for the global financial payment industry, the UMV platform will focus on innovating the inherent nature of the industry. The UMV platform will provide a series of solutions empowered with Artificial Intelligence (“A.I.”), image processing, Internet of Things and other innovative technologies. These will gradually introduce and link key constituents in the industry, bringing together the combined strength of even more industry participants. In turn, these will promote multifaceted interactions between participants along traditional business models and cultivate the innovation industry’s ecosystem and industrial value chain.

Well that could not be more vague. Maybe this will make it clearer:

The UMV platform will enhance the digital transformation and on-line linkage with the Group’s core business, making customer interaction and product deliveries more efficient, provide greater support to customer business development, and effectively enhance the Group’s future business value creation ability. The UMV platform will accelerate the development of digital equipment, focusing on the self-service needs of key application industries such as government, finance, social security, transportation and healthcare. The Group will promote digital equipment to a wider range of “non-contact” use cases, and will look specially to capitalize on the development opportunities happening under intelligent transformation in financial services branches.

It is some sort of new software that goes into their kiosks that allow banks to issue cards without any human imput? Reading Goldpac annual reports really feels like playing a game of charades.

The portion written by the CEO seems a bit more clear:

The pandemic has accelerated the global trend for development in intelligent and digital technologies, and an increasing number of financial and governmental services are being provided through unmanned and platform-based means. The Group firmly capitalized on the development opportunities under the pandemic, deepening fintech innovation to promote its digitalization and platform-based strategy.

So it is kiosks that are more automated? I thought they were selling those already? It does not help my confidence that this new mythical UMV platform is owned by Goldpac through a VIE structure. Although apparently this is not yet a significant part of their revenue.

Then there is the rapidly growing data processing segment which is part of Platform and Service revenue (although it had a large Covid related dip in H1, it recovered nicely in H2 2020). It is still very unclear to me what that exactly is. Is it software that sends data from cards that are being scanned at point of sale to a central database? If so that is probably a pretty nice recurring revenue stream right? right??

And a recent press statement mentions their new Goldaudit software platform for banks, which apparently makes heavy use of AI. Which Goldpac has a unique competitive advantage in (according to the press release). From the above press release:

GoldAudit Content Audit System Solution successfully integrates A.I. technology with the online requirements of bank card business. Through the A.I. application, it can solve the massive picture compliance audit challenges faced by banks. It can accurately identify and flag illegal videos, pictures and texts in various fields such as violence and terrorism, pornography and copyright infringement according to the needs of customers. The identification scope, accuracy and processing speed are among the leading levels in China, which can help banks effectively control risks, reduce labor costs and risks, facilitate the development of banks' core businesses and in turn create excellence. GoldAudit utilizes independent intellectual property rights and a number of invention patents, and was recognized as the "2020 Zhuhai Best Software Technology Innovation Product”, which has been successfully implemented and has been deployed at many large banks.

Despite being a bit less cryptic, it does not lower my confusion much. Flag illegal videos? Copyright infringement? Terrorism? Is it software used to spy on their employees? Is it security software that scans security camera footage? Is it part of the above mentioned UMV platform? Is it a plane? Is it a bird? This sounds like software that YouTube would use to automatically remove videos, not some audit system for banks. When I try to search their website through Google for this Goldaudit system, only the above press release shows up.

So yeah, I would not touch this if it wouldn’t be so quantitatively cheap. And if it wasn’t for those fat dividends. And for the possibility of strong revenue growth in the coming years. Maybe something got lost in translation here? Long at an average price of HK$1.63 per share. And I may sell it at any time so DYOW.