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

Goldpac had announced its six months results for period ended 30 June 2017. Its revenue had a rather flattish growth of 1.4%. While this growth rate may seem to be negligible, it represented a stabilization of the revenue after suffering a 17% last year decline due to the issues mentioned in the initial write-up here.

 

However, the net profitable attributable to shareholders decreased by 15% compared to the corresponding period last year. This was mainly due to the exchange loss of RMB20.3M resulted from the currency translation of its huge cash balance in USD as RMB strengthened against USD. Excluding the effect of exchange loss, the net profit would have improved by 21.5% to RMB101.5M.  The company has been maintaining large cash balances in USD for potential M&A and overseas investments.

BUSINESS RESULTS 

While the revenue remained flat, it is notable that the expenses had reduced by 17% due to higher marketing channel development expenses for new products and solution business in same period last year. Management of cost structure improved this year and there were rental savings after acquiring a property for office use in HK instead of leasing it. Other income had been boasted by an increase in VAT refund in China. Overall, its operating results improved by 16.3% against same period last year.

 The GP% was maintained at 30% despite the competitive pricing for card shipments due to cost efficiency from volume scale and efforts in production automation. The huge exchange loss had caused the net profit margin (%) to drop by more than 3% when compared to last year. Despite this, the Trailing-Twelve-Month (TTM) ROE was still above 10%.

Balance Sheet:



Goldpac remained debt free and had a significant amount of cash that is more than 79% of its market capitalisation at the current share price.

Key Financial Ratios:

  

The company maintained healthy current ratio and cash ratio and the cash conversion cycle improved significantly.

Dividend

An interim dividend of 4.0 HK cents per share for the six months ended 30 June 2017, which is the same as last year.

BUSINESS COMMENTARIES

Compared to the interim results in 2016, the performance of the Group’s two operating segments for the period was relatively stable.

Embedded Software and Secure Payment Products

-       Turnover of was RMB561.0 million, representing an increase of approximately 2.0%. The Group witnessed an increase of 11% payment card shipments and a surge in credit card shipments of 38% in the first half of 2017.

-       Shipments for overseas banking card organizations increased by approximately 15.0%

-       While card shipments had increased, the turnover value had raised by a slower pace mainly due to the competitive pricing strategy adopted by the Group to win market share as it was able to maintain its GP% by having economies of scales and greater automation in manufacturing.

Platform and Service

-       Turnover was about RMB130.0 million, representing a slight decrease of approximately 1.3%

In the first half of 2017, the Group realized a notable achievement with regards to the diversification of payment product range:

-       Luxury GPS payment watch achieved a turnover of nearly RMB10.0 million

-       Stylish LED card saw a turnover of over RMB10 million

-       Smartphone case with an embedded payment chip was delivered for an internationally recognized non-banking brand client. The stylish while practical smartphone case enables this client to set up its own payment ecosystem. Since the launch of the case as a seasonal gift, it has received widespread recognition.

MANAGEMENT’S VIEW ON BANKING CARD INDUSTRY & COMPANY’S PROSPECTS FOR 2017

-       At present, the diversification of payment methods is mainly limited to the small payment amount domain, and does not pose a challenge to the current banking card system. Third-party payment platforms (such as AliPay and WeChat Pay) should play a complementary role with banks in the small amount payment domain. The synergies between banking card payments and third-party payments, both online and offline, will boost the robust development of China’s financial payment industry.

-       According to Nilson Report published in January 2017, global card transaction volumes in 2025 are projected to increase by 2.7 times compared with that of 2015 while the increase in the Asia-Pacific region will be even higher at 3.9 times. This suggests a steady and sustainable growth potential for the banking card payment segment.

-       At the end of the first quarter of 2017, the credit card per capita in China was approximately 0.32, which was only 1/10 of that of developed countries and regions. The continuous development of the consumer credit system in China contributes to fast-growth phase of China’s credit card segment. In the first quarter of 2017, total amount of credits on credit cards in China amounted to approximately RMB9.85 trillion, an increase of 32.2% compared to same period last year. Based on these observations, the diversification of payment methods did not bring major changes to payment system, which remains dominated by banking card.

-       At present, China UnionPay (“CUP”) is accelerating its development within China’s “Belt and Road Initiative” countries. The Chinese government, adhering to its WTO commitments, is gradually opening up the banking card clearing market. Consequently, overseas organisations start to build their banking card business in China independently with VISA being the first applicant to apply for establishing a banking card clearing organisation in China. It is anticipated that crossover expansion of CUP and overseas card organisations internationally and domestically will create more business opportunities for the Group.

Company’s Chinese commentary on future prospects (click link here):

The Group is very confident of its future developments. The China Government has increased its emphasis on financial security and will further improve its financial monitoring and control systems. This will provide more opportunities for the Group. Credit card business is expected to sustain its steady growth. The Group will provide innovative and customized solutions to its customers in the banking sector to create enhance value for them.

COMPANY’S EFFORT IN DRIVING GROWTH

1.    Driving growth through innovative Research and Development

-       The Group achieved major breakthrough in the R&D of its national security chip by successfully passing the 2016 annual review by Ministry of Industry and Information Technology of China and it outperformed the 2016 objective of this national project. The Group is currently entering into strategic cooperation with China’s leading domestic secure chip manufacturers to further enhance the R&D and application of the national financial IC chip, but will also accelerate the pace of overseas expansion.

-       Strong R&D capabilities of the Wuhan University - Goldpac Joint Laboratory, the Group made significant progress in the development of IoT (Internet of Things) secure chip. The Group’s proprietary SuperCOS secure chip can be deployed in a number of segments including wearables, machine authentication, ID authentication, smart home and smart city. It is expected to attract favorable and expansive business opportunities with the rapid rise of the IoT industry, laying the cornerstone for the development of the Group in the future.

-       The Group will accelerate its application in intelligent manufacturing and cloud technology to strengthen and expand its leading advantage in the smart secure payment. Integration with operating systems of financial institutions, government and other organisations through its cloud platform will be speed up in order to form a strong bond to strengthen customer viscosity and provide wider range of service. Intelligent operation will be implemented to reduce the use of manpower, increase operation efficiency and decrease operating cost through the systematic and digital integration of operation facilities.

Capitalizing on its cloud platform, the Group will establish its financial data personalization center in the northern China to improve the Group’s geographical presence as well as the Group’s support and deliver capabilities.

2.    Focusing on developing overseas markets

-       Goldpac will accelerate its overseas expansion efforts in sync with CUP’s expansion plans. Currently, the Group is providing products and services to 23 countries and areas. It has currently has presence in Philippines and Singapore.

(Source: www.emvco.com)

-       South Asia region provides vast market potential given the large population of the area and the slow card migration rate to EMV (Europay, MasterCard and Visa) according to the EMVCo statistics. The migration is expected to pick up as deadline approaches. In Philippines, BSP, the Central Bank of Philippines has issued an order on 16 June 2017 that all banks there have to issue EMV compliant card by Jun 2018 or face a fine.

-       Goldpac is setting up a representative office in Mongolia, which allows the Group to be closer to Central Asian markets which is still largely untapped.

3.    Developing Goldpac Fintech Innovation Hub

-       Goldpac is actively driving Fintech innovation, exploring creative financial service models and accelerating mergers and acquisitions. The Group believes that Fintech has become one of the mainstream drivers for the financial industry. More financial institutions are embracing Fintech actively and integrating cutting-edge technologies such as the Internet, Big Data and Cloud Tech.

In 2016, the group acquired a piece of land in Zhuhai City, located at the heart of the Guangdong-Hong Kong-Macau Greater Bay area, to develop Goldpac Fintech Innovation Hub (“Hub”). Construction of the Hub has commenced and is expected to start operation in 2020. With this Hub, the Group will build up the following three innovative centers:

(a)   Smart Secure Payment Industry Chain Center

To develop strategic cooperation and integration among the upstream and downstream industry along the value chain, in order to put forward the innovation of the smart secure payment industry and to build a regional industry center.

(b)  Fintech Center

To focus on new development in Fintech innovation and the integration of creative models in the financial industry, the Group will leverage modern technologies, such as Artificial Intelligence and Big Data, to establish new models for data platforms, data processing and creative services, and to create synergies within the Group.

(c) Guangdong-Hong Kong-Macau Greater Bay Innovative Talents Center

The Group will leverage the geographical advantages of the Guangdong-Hong Kong-

Macau Greater Bay and capitalize on the governmental support to attract creative talents from all over the world to the Guangdong-Hong Kong-Macau Greater Bay Innovative Talent Center.

OTHER DEVELOPMENTS SUBSEQUENT TO JUNE 2017

(i)            In August, JD.com announced the cooperation with Industrial Bank to issue bank debit cards. This marked the first move by a major e-commerce player to issue payment cards for off-line use. Goldpac was awarded as a major provider of solution for this first-ever internet savings bank card in China, which offers comprehensive financial services inclusive of savings, wealth management and commerce for cardholders. Could other internet banking giants like Alibaba and WeChat follow the suit to issue bank cards as well?

(ii)           On 13^th September, Goldpac announced strategic cooperation with Infineon Technologies help to further elevate the smart operation capabilities of Goldpac through the leveraging of their experience and knowledge of Germany’s implementation of industry 4.0.

VALUATION

* Inclusive of 6 cts HK special dividends paid. Dividend yield will be about 4.8% excluding special dividends

(RMB/HKD exchange rate: 1.19)

Based on the Discounted Cashflow Model (DCM), assuming an ultra-conservative growth rate project of ZERO percent based on TTM (which includes RMB20.3M exchange loss) and a discount rate of 4% over the 10 year period, the IV is worked out as follows.

 

 

Given its long working relationships with many major banks and Financial Institutions, it should be watched closely if Goldpac’s Fintech initiatives, such as its award winning GCaaS Cloud platform which offers one-stop-shop integrated business management, centralized data task processing as well as smart card application services, could be adopted by them and if so, this would propel the company into the next phase of growth and business domain.
 

For a company that is ranked first in China and fourth in the world in the financial cards industry, Goldpac is trading at just 2x ex-cash PE (TTM) at current price.

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07 October 2017 - Goldpac: Discussion Points And Comments

Hopefluent: Profit Increased 32%, Insiders Continued To Buy Shares After Half Year Results

Following the initial write-up in August,  Hopefluent has announced a pretty decent set of results for six months ended 30 Jun 2017. Sales turnover increased by 29% to HK$2,247mil while profit attributable to shareholders of the company increased by 32% to HK$122M.

 BUSINESS RESULTS

On a trailing twelve month basis, the company continued to experience growth in its businesses.

Net profit Margin was maintained along with ROE.

Its financial position continued to be strong with HK$1.3 billion cash in hand which is more than 50% of its market capitalization based on the share price of HK$3.50.

The pleasant surprise was the 50% increase of interim dividends from 3cts to 4.5cts, which provide an annualized dividend yield of 3.8% at current share price of HK$3.50. With a net cash per share of HK$2.18, there is no foreseeable difficulty for Hopefluent to maintain such a dividend payout.

BUSINESS COMMENTARIES

For six months ending June 2017, all business segments experienced growth over the same period last year.

1.       Primary Property Real Estate Agency Service Business

Business performance in core cities such as Guangzhou, Shenzhen, Foshan, Dongguan and Hefei grew notably, which further consolidated Hopefluent’s industry leadership advantages. The Group allocated its sales teams of primary and secondary property real estate agency businesses with flexibility and strived to accelerate the business development in second- and third-tier cities such as Nanjing, Wuhan, Zhengzhou, Jinan, Guiyang, Nanning, Zhongshan and Zhuhai, and further capture the market share in those areas. As of 30 June 2017, turnover of the segment amounted to HK$1,383.7 million (2016: HK$1,069.4 million), an increase of approximately 29% from the last corresponding period.

2.       Secondary Property Real Estate Agency Service Business

Turnover increased by about 34% to about HK$597.3 million as compared with the corresponding period last year (2016: HK$444.9 million) from handling around 32,500 secondary property transactions (2016: 26,400). In the past six months, although the property policies in China have become moderately more restricted, the Group has won the trust of customers and delivered outstanding results for this segment with its quality and reliable services and nationwide business coverage. The number of branches of the Group increased from around 400 at the end of 2016 to 430 during the review period, and the number of staff also grew from 7,200 to 7,600.

3.       Financial services

As at 30 June 2017, loans originated from financial services exceeded HK$1.5 billion and turnover was approximately HK$52.3 million (2016: HK$39.4 million). The Internet financial service platform has been operating for nearly two years and has performed so well that it has become the Group’s growth spotlight. The Group has continued to enhance its strong cooperation with various renowned and reputable financial institutions. It also worked closely with partners from different sectors such as offline points-of-sale, secondary branches and community resources to build an extensive financial customer base. It has strived to meet the demand of consumers through optimizing the O2O sales model and increasing the value of the transaction chain. The Group’s financial service products feature small amounts, diverse targets, short cycles and controllable risk, and these products have gained the widespread recognition from customers since their debut.

4.       Property Management Services

In the first half of 2017, this segment’s turnover increased from approximately HK$188 million in the same period last year to approximately HK$214 million. The Group has provided property management services to about 300 residential, office and commercial properties in Guangzhou, Shanghai, Tianjin and Wuhan with a total gross floor area of approximately 30 million square meters.

SHARE PURCHASES BY DIRECTORS

Mr Fu, Executive Chairman, and Ms Ng Wan, Executive Director, continued to purchase shares from the open market subsequent to the company’s half year results announcement in August and September, spending a total of HK$9.9M on share purchases this year.

The amounts these two founders spent on share purchases were significantly higher than their remunerations received in whole of FY2016 (Mr Fu: HK$2.4M, Ms Ng: HK$1.8M). Is this a testament of their confidence in Hopefluent’s future?

MANAGEMENT’S VIEW ON PROSPECTS FOR 2017

-          Chinese economy is expected to maintain the steadily upward momentum in the second half. The property market will progress under the macroeconomic control and adjustment.

-          Although a tighter financing environment may affect the rapid expansion of the property market, market demand is still expected.

-          To suppress rising property prices, local governments have started to increase land supply this will lead to further expansion of the market provide opportunities for the group

-          The development of the national policy of Guangdong-Hong Kong-Macau Greater Bay Area has accelerated. Given that Hopefluent’s has a core business focus in this key development area and that it occupies a key position in the market, this provides enormous business opportunities for the Group.

VALUATION

Based on the Discounted Cashflow Model (DCM), assuming a ultra-conservative growth rate project of ZERO percent and a discount rate of 4% over the 10 year period, the IV is worked out as follows.



From DCM calculation, Hopefluent seems to be grossly undervalued at current share price. This is without taking into account the value to be unlocked from the potential listing of its Property Management Business.

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2 August 2017 - Hopefluent: 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?



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