Stock Sniper's Portfolio For August 2017

 

Read about Stock Sniper's Portfolio HERE

 

 

 

Stock Sniper's Mock-up Portfolio was initiated on 31st Jul 17 with the additions of:

1. Goldpac based on the initial analysis done Is there Gold in Goldpac? 

Reasons for purchase:
- Relatively low valuation compared to its A Share peer despite its no.1 position in the financial card industry in China 
- Strong financial position, high net cash per cash
- High dividend yield


2. Hopefluent based on the initial analysis Co-founders cum Directors Spent 1.72x of Their Annual Income In Just One Month (July 2017) to Buy Its Shares. Is There Hope in Hopefluent?

Reasons for purchase:
- Relatively low valuation compared to its A Share peer
- Strong financial position, high net cash per cash
- Potential share price catalyst from listing of its property management company
- Significant insider buying
- Strong financial position, high net cash per cash

Quick Review of News during the month:

Goldpac:
- Half year results was announced. Revenue was relatively flat at 1.4% growth which could signal the end of declining trend. However, the net profit was hit by a huge exchange loss of RMB20.3M due to depreciation of USD denominated bank deposits against RMB. Excluding this impact, profit would have increased 21.5% compared to same period last year.
- Mr Market did not like the headline loss and the share price retreated rapidly, and yes, my maiden share purchase for this portfolio suffered an unrealized loss (haha)!
- The small consolation was that Goldpac maintained and paid an interim dividend of HK 4cts.
- I plan to do an analysis of this half year results before deciding if any action is necessary.

Hopefluent:
-  Half year results was announced as well. Revenue grew 29% while profit attributable to shareholders grew even faster at 31.6%. Interim dividend was increased 150% to HK 4.5cts.
- Mr Market liked this news and the share price was moving up quite rapidly and I liked the part on dividend :)
- The husband and wife co-founders continued with their share purchases.
- Same plan, will need to do an analysis of the half year results to decide if any action is necessary.

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Hopefluent: Significant Insider Buying. Is There Hope in Hopefluent?

Hopefluent Group has a long history as a public company, having listed its shares since July 2004 in the Hong Kong Stock Exchange where it raised HK$50M in IPO. Hopefluent is co-founded in Guangzhou by the husband & wife team, Mr. Fu Wai Chung & Ms. Ng Wan and Ms. Fu Man, sister of Mr. Fu in 1995 and has been engaging mainly in the property agency market in China, earning  commissions from primary (new property launches) and secondary (resale market) property transactions. Over the years, Hopefluent has increased its market territory from Guangzhou to more than 150 China cities and has set up around 400 branches around China to scale its secondary property real estate agency service business. It also has further expanded its business scopes to provide financial services & property management services and started a full time R&D department to design and promote various Internet products that can support the online-to-offline operations of its business segments. Since IPO, its profits attributable to shareholders has grown from HK$26M in 2004 to HK$302M in 2016, a whopping 11.6x!

The business segments of Hopefluent can be divided into:

1. Primary property real estate agency is the provision of first hand real estate services to property developers.
2. Secondary property real estate agency is the provision of secondary real estate services.
3. Financial services is the provision of mortgage referral and loan financing services to individuals or companies.
4. Property management is the provision of building management services to property owners and residents.

In 2016, the group handled over 1,000 property launches in more than 150 cities. Through the years, Hopefluent has become the close partner of renowned developers such as Sun Hung Kai Properties, Vanke, Evergrande, Poly, China Resources Land, Citic, Kingold, China Merchants Property Development, R&F Properties, Agile Property, KWG Property, Star River, Gemdale, New World China Land and Country Garden. The Group is continuing its efforts to expand its customer base and services and secure more agency projects in different regions, reinforcing its leading position in China’s property service market.

Given the prevalence of internet technology, Hopefluent has also integrated mobile network and online financial services with its traditional service so as to improve the operational mode of the industry and create room for sustainable development, thus ultimately providing more comprehensive services to customers.

Hopefluent Revenue and Profitability

 With the urbanization and growth of property market in China, the revenue and profits of Hopefluent have grown at a CARG of 22%p.a. and 13%p.a. since 2009. Notably, the segment profit from Financial Services business that was started in 2015 has growth from HK$22.6M to HK$62.6M in less than two years. The steadily growing Property Management business also provides a stable stream of income to smoothen out the vagaries of the property market cycles.

The share price of Hopefluent has been going sideways for quite a while. This could be attributable to the investors’ lingering concerns on the property cooling measures that the China Government might be imposing due to the persistently fast rising property prices in China cities. In first half of 2017, some China cities have introduced measures to curb property speculations and this have resulted in drastic drop in the number of property transactions.

So does that spell the end for property agency companies like Hopefluent?

Well, it should be commonly known that Governments across Asia, often intervene the property markets to prevent the risks of market overheating by introducing temporary cooling measures like minimum holding period for property before resales, buyers & sellers stamp duties, restrictions on mortgages etc. But no government with sanity would want to crash its property market by creating unnecessary control measures. When the property prices slowed or corrected, those restrictive measures on property transactions would most likely to be lifted.

In the long run, the growth of the property prices should correlate to wealth of the people and economy of the country. Given China economy is still growing and its population of middle class increasing, one would expect that there will be continuing demand for properties going forward. Hence, the number of property transactions in China is likely to normalize once the cooling measures are lifted in due course.

On a separate note, Hopefluent announced on 30^th June 2017 its plan for a possible listing of its Property Management business in A Share market. This spin-off of its Property Management business could be aimed at accelerating its growth as a more independently run listed entity, as well as for Hopefluent to realize its value of investment in this business.

Valuation:

(Based on December 2016 Financial statements)

Share price as at 1^st August 2017: HK$3.16.

Exchange rate RMB/HKD: 1.16

1. Financial Position

Net Cash value per share: HK$2.13

Net Book value per share: HK$3.57

 2. Discounted Earnings Method

(using discount rate of 4% for 10 years)

Base Case:

(a) assuming zero growth: HK$3.32

(b) assuming 5%p.a. growth: HK$4.10

3. Relative Valuation Method

The table below compares various financial matrix between Goldpac and its close competitor, Shenzhen World Union (002285) listed in Shenzhen Stock Exchange.

 

At a single glance, one might think that Hopefluent might seem inferior in terms of OP margin and ROE. However, with double digits for OP Margin % and ROE, the operating matrix of Hopefluent is still respectable, considering that 60% of its book value is made up of net cash. More importantly, it is trading at a significantly lower valuation than Shenzhen World Union which is more than 4 times its PE and 6 times its book value. In fact, the ex-cash (net) PE for Hopefluent is less than 2.5x as compared to 25.2x for Shenzhen WorldUnion.

With strong operating cashflows, Hopefluent has been able to generate high level free cashflows in the recent few years.               

As Hopefluent has announced its plan for a possible listing of its Property Management business in A Share market, it might worth a look at a simple calculation on how this business might be valued by examining the valuation of similar listed companies.

Using an average PE of 25x for similar companies listed in HK, and assuming the PAT of Hopefluent’s Property Management business at HK$38M in 2016, this business listing is potentially worth HK$950M and quite likely a listing in A share market is likely to fetch a higher valuation than in Hongkong market due to scarcity of such listed companies there. Based on HK$950M, it is around 45% of Hopefluent’s current market capital of HK$2,111M or adds about HK$1.42 value per share to its book value.

Earnings Growth Catalysts:

• Continue growth of China’s economy, urbanization and middle class size would simulate the demand for housing
• Lifting of property cooling measures in China cities

Risks:

• Prolonged property market downturn
• Erosion of commission margin on property agency business due to competition or regulation changes
• Increasing credit risk exposure from its financing business

Conclusion:

Hopefluent is trading at great value judging from its high net cash position and discount to book value and its ex-cash (net) PE for Hopefluent is less than 2.5x.

If zero to 5% growth in net earnings is assumed for the next 10 years, then it should trade at around HK$3.32 to HK$4.10.

While World Union is trading at 28.9x PE, if we assume a more conservative PE of 10x, Hopefluent should then be valued at HK$4.5

From the above table, based on the different assumptions used for valuing Hopefluent, we get a discount to current share price of 5.1% to 57.9% or an average of 29.6%.

Since the announcement of the A Share listing plan for its Property Management business, Mr Fu and Ms Ng, the two co-founders and Directors of Hopefluent, whom collectively owned more than 36% of the company, had bought shares in Hopefluent from open market aggressively, spending a combined HK$8.4M to acquire 2.778M shares at price ranging HK$2.795 to HK$3.184 in the month of July 2017. This amount represented 1.72x their combined annual income as Executive Directors/employees of the company.

Company’s Directors and Management team tend to deeper insights into the company they run. Are these share pruchases a signal that the co-founders think Hopefluent is undervalued? Or are they increasing their shareholdings as counter-measure to corporate takeover (about 64% shares of Hopefluent are held by non-Fu family)?

Notably, Soufun (NYSE:SFUN), a New York Exchange listed company operating real estate internal portal in China, had subscripted for 91M new shares at HK$3.00 in July 2014 for a potential collaboration and partnership in internet and real estate financing businesses. This shareholding has since subsequently been increased to 111.9M or 16.76% through open market purchases, but there seemed to be little mention of the progress in the cooperation between the two companies. The question is what does Soufun intend to do with such a huge shareholdings in Hopefluent?

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New Post:
12 September 2017 - Hopefluent: Profit Increased 32%, Chairman Continued To Buy Shares After Half Year Results

Goldpac: Is There Gold in Goldpac?

  Goldpac Group Limited
  3315 HK

 

Goldpac's origin can be traced to 1993 when the founder, Lu Run Ting, started the business to provide financial cards to banks. In 1995, it commenced its first operating centre in Zhuhai. In 1999, its first card personalization centre in China was opened during which Gemalto, a global leader in digital security solutions, became a strategic investor with a substantial stake in the firm.

In 2005, Goldpac became the first company to produce the first EMV (Europay MasterCard Visa) card issued in China. As an early player in the financial card industry in PRC, today Goldpac is the only card manufacturer in China that is certified by all the 6 leading card issuance organisations (Visa, Mastercard, Amex, Unionpay, Diners, JCB).

 

 

In late 2013, Goldpac launched its IPO in Hongkong Stock Exchange, offering new 200M shares at price of HK$5.39, raising more than HK$1B.

 

Since the establishment of the Group, it has developed expertise in the business of card manufacturing and providing card production solutions relating to these products. Currently, the business primarily consists of two segments, namely,

 

(i)  Embedded software and secure payment products

 - Embedded software and secure payment products for smart secure payment

(ii) Platform and service

 - Provision of personalisation service, system platforms and other total solutions for customers in a wide business range including financial, government, healthcare, transportation and retails by leveraging Innovative Fintech

 

 

 According to 2016 annual report, it is the market leader in China with a market share of 15% of China UnionPay IC Card Shipment. It is also the world’s 4^th largest supplier of payment card with chips in 2015, according to the Aug16, Nilson Report.

 

Driven by the high growth of China's economy and ongoing migration from magnetic strip cards to smart cards (such as EMV) for better security and functionality, Goldpac was able to enjoy rapid growth in its business in years prior to 2015. Due to the stringent security, qualification and certification requirements, this industry can be said to have high barrier to entry. Goldpac's customers are mainly financial institutions.

(Source: Zhitongcaijing) 

However, initiatives taken by China government in first half of 2016 to rectify and regulate the Internet financial market, especially irregularities involving third party payments, has pushed the banking industry into improving its risk management and slowdown in both the IC card migration and growth of the payment card. Coupled with the deceleration of China's economic growth, Goldpac reported its post-IPO declines of sales by 17% and net profit by 15%.

Recently, the emergence of mobile payments and rapid growth ewallets such as Alipay, WeChat Pay in China has casted a dark shallow in the minds of the investors on the relevance of physical bank debit and credit cards producers such as Goldpac .

  

 

 
With all these negative factors lingering, the share price of Goldpac took a big hit and tumbled from the historic high of HK$9.50 in 2014 to below HK$2 in late 2016.

  

While  it is understandable that the China Government regulation of the internet banking and payment is aimed at providing a more secured and orderly growth of the banking industry in the longer term, are the substitution threats from mobile payment such as ewallets, as well as P2P ecommerce and NFC (Near field communication) devices going to eliminate the use of bank cards, in particularly the credit cards?

Without doubts, the rise of the different types of internet & mobile payments will provide an array of different payment modes that the consumers can choose from, which will help to accelerate the transition into a cashless society. More importantly, these new payments modes are currently not targeted to replace an important function of the credit card, at least not at this moment, that is, to provide the CREDIT (lending) function in the payment process.  

In addition, debit and credit cards are not only used to facilitate payments, they also serve as a marketing tools for the banks, clubs and merchants, by portraying income and status differentiation via the criteria used for qualifying each type of credit cards (in Singapore context, e.g. OCBC Premier card, DBS Treasures, UnionPay Diamond,  UOB Professional Platinium). It is also used for branding, promotion of loyalty and group identity, local examples are M1,Takashimaya, Metro, Esso Mobil, SIA, NTUC, NUS Alumni card).

Currently, the credit card penetration rate in China is still very low at less than one card per capita. The low penetration rate provides ample opportunities for expansion as China's middle class size  and urbanization continues to grow. Since Apr 2015, China allow VISA and MasterCard to clear domestic China payments which might promote further growth in credit cards market as these two card networks expand in China.

Outside China, the continued globalisation of RMB, accelerated overseas expansion of China UnionPay & China banks may also provide growth impetus for credit cards. The on-going migration to EMA compliant card in Asia is yet another avenue for card providers to grow. To capture these opportunities, Goldpac has set up operations in both The Philippines and Singapore recently. 

 

Goldpac has also won numerous awards over the years. For example, in 2016 & 2017, it was awarded:

• China Securities Golden Bauhinia Award – the Best Listed Company in Technology Innovation
• Best Employer Award for Three Consecutive Years since 2014
• Innovation Award at China Soft Expo for Goldpac GCaaS for second consecutive year
• Winner of seven ICMA Elan Awards for categories such as Unique Innovation, Best Secure Payment Card, Best Personalization & Fulfillment, The People's Choice Award, based on the ballots as cast by ICMA EXPO delegates & Loyalty, Promotional and Gift Cards  

 

Notably, ICMA Elan Awards casts a spotlight on the best of the best in the global card industry, honoring world-class achievements in both card design and technological innovation. Widely acknowledged as the most recognized award platform, the Elan Award is the Oscar’s equivalent for card development excellence. In 2017, Goldpac was honored for awards in five categories out of a total of seven. The Elan Awards recognition demonstrates Goldpac’s commitment to design quality and technical advances that drive the future of the global card industry, and is a testament to Goldpac’s technology leadership and ability to innovate.  

As a matter of fact, Goldpac has been increasing its investments in R&D over the years and in 2016, it invested about 7% of its sales revenue on secured payments, wearable product lines that cover payment jewelry, GPS, payment watches & payment wristbands and is now actively developing its Fintech capability. In 2016, it was honored with the Innovation Award at the 20th China International Software Expo (China Soft Expo) for its GCaaS cloud platform.

Goldpac's GCaaS platform integrates four key modules: Cloud Operations, Cloud Lab, Cloud Payment and Cloud TSM (Trusted Service Management), enabling a onestop solution for e-commerce, data task processing and smart card applications. These services are targeted at global card issuers, merchants and cardholders and other one-stop shop capabilities such as e-commerce, integrated business management, centralized data task processing as well as smart card application services. 

 

Other than being recognized as an innovator, Goldpac has also been recognized as being "shareholder friendly" by winning 2016 Golden Hong Kong Stock Awards, the Best Shareholders' Return & the Best Social Responsibilities. Since its listing in 2013, Goldpac has been increasing its dividend payments to shareholders at a CGAR 52%, and a total of HK$390M in dividends has been paid during the period.  

 Valuation:
(Based on December 2016 Financial statements)

Share price as at 28 July 2017: HK$2.56.

Exchange rate RMB/HKD: 1.16

1. Financial Position

Net Cash Value per share: RMB2.12 or HK$2.46

Net Book Value per share: RMB2.25 or HK$2.61

 

2. Discounted Earnings Method

(using discount rate of 4% for 10 years)

Base Case:

(a) assuming zero growth: HK$2.59

(b) assuming 5%p.a. growth: HK$3.20

 

3. Relative Valuation Method

The table below compares various financial matrix between Goldpac and its close competitor, Hengbao Co. Ltd. (002104) listed in Shenzhen Stock Exchange.

 

Clearly, Goldpac is trading at a much lower valuation than Hengbao, although it has superior net profitability, ROE and no debts.

Note also that under the negative factors described above, Hengbao had suffered a revenue decline of 26% and profit drop of 61% in 2016 as compared to a more moderate decrease of 17% and 15% for Goldpac. This could show that Goldpac is more resilient in managing its business.

Based on the discussion above, Goldpac should in fact justify a higher PE valuation than Hengbao given Goldpac's leadership position in China. Assuming using a exaggerated 70% discount to Hengbao's PE of 49.6x, we should derive a PE of 15x for Goldpac or a share price of HK$4.35.
 

Growth Catalysts:
 

1. Increase in credit card issuance in China market as credit card adoption rate increases as well as entry of foreign players such as VISA & Master Card into China market

2. Further inroads into foreign markets through the Road and Belt initiatives of UnionPay and PRC banks

3. Continue migration to EMA cards in overseas markets

4. Increase adoption rate of PRC banks using Goldpac Fintech solutions 

5. Take-off in sales for wearable payment products

Risks:

1. Intensification of competition among the existing domestic players during bidding for financial card shipments resulting in lower pricing and profitability 

2. Regulatory changes that might affect the financial card issuers

3. Slow down of China economy and consumer market

4. New payment technologies, such as NFC or even virtual credit cards, that could reduce demand for physical financial cards as a payment method

5. Competition from P2P lending and other Fintech products  that might reduce the demand for credit cards as the source of lending

Conclusion:

So is there gold in Goldpac?

The valuation of Goldpac looks undemanding, considering that it is trading at near its cash and book values.

When compare to its close competitor, Hengbao, which is listed in Shenzhen Stock Exchange, Goldpac looks much like an undervalued bargain especially with a mouth-watering dividend yield of 6.6%p.a.

From the above table, based on the different assumptions used for valuing Goldapac, we get a discount to current share price of ranging from 1.2% to 67.2% or an average discount of 21.4%. 

In July 2017, Goldpac announced that its first half 2017 smart card shipments saw an uplift of 10.6%, to 91.392 million units (82.621 million units in H1, 2016) and a 38% year-on-year surge in credit card shipments. Is this the start of the earnings recovery for Goldpac? Its half year report card for 2017 will be keenly watched.

 

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New Posts:

16 September 2017 - Goldpac: Operating Profit Increased 16.3% For First Half 2017, But Net Profit Hit By Exchange Loss

30 September 2017 - Goldpac: Scored Double First As Selected Provider for New OTO Initiatives To Improve the Banking And Payment Ecosystem

07 October 2017 - Goldpac: Discussion Points And Comments

 

 

Launch of Stock Sniper's Model Investment Portfolio

Please read the disclaimer before you proceed with the rest of the article.

This portfolio is a mock-up model to test the investment thesis of the author for illustrative and educational purposes. The stock transactions in this portfolio may or may not reflect the actual actions of the author.

The Stock Sniper's Portfolio:

Initial size: S$100,000

Investment objectives:
1. Capital gains by investing in:
(i) undervalued stocks with high margin of safety;
(ii) stocks that are mispriced due to one-off events or temporarily out-of-favour by Mr Market; and
(iii) tactical trades that may use technical analysis (TA) to identify entry points into great stocks in long-term bull run
2. Generate passive income through dividends received

Investment allocation & assets:
- To form portfolio with 5 to 8 stocks based on stocks featured in Hunting For Value
- Equity, REITs and ETFs in all markets, including Singapore, Malaysia, Hongkong, US etc

Assumptions:
- Transaction costs, which are expected to be insignificant, are ignored for simplicity of recording
- Dividends are recorded on ex-date

Click THIS LINK to view Monthly Stock Sniper's Portfolio

 

 

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