Update on active Ideas

China edition (mostly)

This post will provide some updates on the following active ideas:

• NOAH, DADA, LU, SBSAA, HSBK, 2283:HK, 2222:HK, DOYU, GHG

Readers of this blog should do their own due diligence before buying or selling any of the mentioned stocks, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. I may buy or sell the above mentioned stocks at any time. I am not your financial advisor. Past success is no guarantee for future success.

Noah Holdings (NOAH)

I mentioned Noah holdings as a trade to buy before earnings since I anticipated an announcement of significant capital returns. This has worked out well with over $2 in dividends announced. Half of that dividend will be recurring. So I sold out all of my shares at just under $12. This was never a high conviction investment, but merely a trade. Marking it as a 18% return.

Dada Nexus (DADA) 

So far buying Chinese stocks before earnings has worked out ok. The only big stinker so far is DADA with a 15% drop after earnings, but I continue to hold. I am surprised it sold off that much since their core business Dada Now actually saw accelerated growth of 38% in Q4 vs the previous quarter. And a $40m buyback at the current valuation basically means a reduction in float by 20-25%. Still think we are at the early innings of a Chinese bull market. I continue to be heavily concentrated in Chinese stocks. Current set-up reminds me of oil stocks in 2020. 

Lufax Holdings (LU)

I continue to like this one, but despite that I sold out at ~$4.70. And got back in at $4.27 and will add more at high $3’s. Lufax is moving towards guaranteeing 100% of their loans, which means a total turnover in their loan book towards much more low risk loans (which will be substantially complete by the end of 2024), which means more cash will be freed up. Some parts of their Q4 earnings call piqued my interest:

“At the end of 2023, the leverage ratio of our guaranteed subsidiary was 1.8x, far below the regulatory limit of 10x. Our consumer finance capital adequacy ratio stood at approximately 15.3%, well above the required 10.5%.”

And:

“With the strong capital position and visibility into our business growth in the medium term, we are well positioned to further respond to our shareholders' consistent feedback to increase shareholder returns. And on top of the regular dividend and share buybacks that we have performed over the past 3 years, our Board of Directors has approved, subject to shareholders' approval, a special dividend of USD 2.42 per ADS or $1.21 per ordinary share with a total estimated size of approximately RMB 10 billion.”

So it seems the $2.42 special dividend comes on top of further regular dividends. Judging by the above quote more special dividends might be forthcoming. Net cash is currently about 35 billion RMB or $4.8 billion. Vs the current market cap of ~$2.5 billion.

Interestingly on the same day as earnings release new regulations with regard to consumer finance companies was issued by the CCP:

“The rules, changed after a decade, require consumer lenders to have more than 1 billion yuan ($138.91 million) in registered capital - more than triple the previous minimum - and to secure a major investor holding a stake of at least 50% of its equity.

Of China's 31 consumer lenders, 10 fall short of the capital requirement, Reuters checks showed. And roughly half of all the companies do not have a major investor that would qualify them under that standard, according to Han Kun Law Offices, which compiles an annual report on the sector for the China Banking Association (CBA).”

This means Lufax will benefit from consolidation and reduced competition. Furthermore Ping An owns ~41% of shares, and a group of Ping An executives (not Lufax) own a further ~27%. This means Ping An will likely take at least a large portion of their dividend in shares to get over 50% ownership. So after the dividend net cash will still be roughly $4bn. Due to the unwinding of their loan book net cash generation is much higher than actual earnings. So another $1bn may be added to that by the end of this year. Vs a ex-dividend market cap of roughly $1.5 billion (assuming a ~$2 share price and 700 million shares outstanding). 

It also means the company will come very close to breaking the 25% float requirement on the Hong Kong market. Since Ping An + Tung Kung (the Ping An executive holding co) are not part of the float. It might be tempting to just buy out the remaining 25% if shares keep trading at this valuation? It doesn’t really make sense to stay public if shares keep trading where they are now.

Forward TIKR analyst estimates have Lufax returning back to growth in 2025 with a completely new mix of loans and $600m of earnings. So despite this being a Chinese consumer finance company in one of the greatest real estate bubble unwindings the world has seen, I like the setup here. Potentially more special dividends, and a dirt cheap valuation. And if those estimates are correct a 10-15% recurring dividend yield (at a payout of 40% of earnings). 

Spanish Broadcasting (SBSAA, 9.75% bonds)

SBSAA recently settled with Voz media for an undisclosed multi million $ amount plus the $3.8 million deposit SBSAA had received from Voz. Kind of strange they did not disclose the amount, but ok. The sale price was $64 million, so maybe they can quickly offload their TV segment for $30-40 million this year?

CFO and COO are both gone, 9.75% bonds are due in 2026 and trading for $0.50c on the dollar and there is no way they can refinance this unless 2024 miraculously brings amazing results. It seems pretty likely that bond holders get another year of interest payments. Station OIBDA was $60 million in 2022, but 2023 so far not great. Bonds value the business at around $120-140 million if we assume TV can be sold for a half decent amount. So I bought some more of the bonds. It will be curious what happens if the company isn’t sold. Alarcon is 68, radio revenue wasn’t growing the first 3 Q’s of 2023 and he doesn’t really have a successor. The wise thing here would be to sell. Or at least sell off some radio stations.

Another possibility is that he has built a significant position in the bonds, and he lets this go into bankruptcy to gain control of an unlevered company to keep it in the family. If that happens + another 2-3 years of interest payments bond holders are getting the business for $75-105 million. Unless there is a complete implosion, this seems rather cheap, so I added to my bond position. 

Halyk Bank (HSBK)

The company recently reported $1.5 billion in net income and a 50% dividend payout (but from reading the call transcript I kind of got that it could be higher). Which means a minimum of $2.75/share in dividends this year with 2 payouts. Guidance for 2024 net income is nearly $1.8 billion. So stock is still trading at 2.7x earnings or about 2.3x after dividend payments. After tax this year I will have received back almost 40% of my initial purchase price after 1.5 years of holding this stock, not bad. I don’t think this co deserves a 8x or 9x earnings multiple, but it should at least trade at 4x? In hindsight BGEO would have been a better pick as it outperformed HSBK (BGEO now trades at about 5x earnings).

TK Group (2283:HK)

The company reported good results and total dividends of HK$0.175/share. Outlook for 2024 was pretty upbeat. Gross margins of Mold fabrication segment (⅓ of revenue) increased from 26 to 37% but Plastic components segment (other ⅔) didn’t do as well but is expected to see growth and an improvement in margins in 2024 (in their commentary on Plastic components segment in their latest earnings report):

“The Group expects that the global inflation situation will continue to improve in 2024, economic tightening policies will slow down, spending power will increase, higher volume of orders will be placed and the increase in the number of new projects will help improve the capacity utilization rate, allowing further growth in gross profit margin.”

Currently at a market cap of HK$1.23 billion, 2023 depressed net profit of HK$200 million, and a net cash position of HK$1.1 billion the shares continue to be attractive. Analyst estimates of net profit are expected to come in at HK$300 million this year reaching 2019 levels again. I hold a sizable position. 

NVC International (2222:HK)

The company came out with a positive profit alert. Adjusted net profit is expected to be no less than US$15 million for 2023. This compares to their current US$65 million market cap. The stock still only trades at 17% of book value and at about a 50% discount to net cash and investments. The main catalyst remains a sale of NVC China hopefully this year or next year. See my previous write-up on NVC here for more info on this. 

Douyu (DOYU)

This is a trading stock for me until the CEO situation is resolved. No special dividend at the earnings report unfortunately. But the company did reiterate that they will repurchase $20 million worth of shares before the end of the year. Which is just under 10% of their current market cap at $0.70/share. 

The amount of active users at least seems to have stabilised quarter on quarter and advertising revenue grew by 226% and is now 13% of revenue. If they do hover up $20 million worth of shares in the low $0.70’s, then discount to net cash and investments will be nearly 80% by year end. With a real chance of more significant capital returns when the CEO situation resolves. Of course it is quite a speculative bet, but upside % probably makes up for it.

GreenTree Hospitality (GHG)

Hotel results were as expected, but restaurants were a bit disappointing. Adjusted EPS of $0.47/share, FCF/share of $0.51 with 7-12% revenue growth expected in 2024. No dividend, which I didn’t like. But there were some tiny share buybacks done. 

Stock trades at 6.7x earnings, has $180m in net cash on a $320 million market cap. My spidey sense continues tingling with this one that there will be a buyout at some point. But who knows, it might be a value trap in the meantime? 

Hotel franchising is a very nice capital light business to be in, and the company’s metrics look good, balance sheet is rock solid and I don’t think this is a fraud. This used to trade at $10+ while results are pretty similar as they were pre-pandemic and shares now trade at only $3. So I think it is a good long term hold.