Jan 8, 2023

Updated: 14 August 2023


2023 August: Ajisen (China) 0538.HK purchased at an average price of HKD 1.15 operates a chain of fast casual Japanese restaurants in China and Hong Kong. On December 31, 2019, it had a retail network of 799 restaurants and 7.31m members on their membership platform. In FY2022, 0538 operates a much reduced 597 restaurants with a 24.63m members on their membership platform.

The thesis is that 0538 is that the closing of sub-optimal outlets meant that the 0538 is left with the higher performing outlets, which operates at a much higher revenue per outlet, leading to lower operating cost and higher net profit margin on a group level.

In the latest profit alert dated on 2023 4th August, 0538 has indicated that profit should range between RMB 80m - 140m. Assuming that the profit stands at the midpoint of RMB 100m (6 months), the PE will be around 6x. 0538 pays around RMB 0.10 (FY2021) per share in dividend in a normalised year and we should expect a similar level of dividend for FY 2023. Net cash holding should be around RMB 1,400 which is already more than the current market cap of RMB 1,100m (HKD 1,200).

The bet here is that there is a good chance that the full year earnings would be closer to FY2019 than FY2021. In addition, we could be getting RMB 0.10 (HKD 0.11) in around 6 month time.

0538 will definitely be a sell if they start to irrationally open up new restaurants or start to put all their newly minted cashflow into new investment.

[Exited at HKD 0.99 for a -11.59% on 2023 August as the profit for 2023 1H is choke full of other income gains and not from operation!]

TANG PALACE 1181.HK - HKD 0.58

2023 June: Tang Palace 1181.HK purchased at an average price of HKD 0.54 is an operator of multiple brand restaurants in China. The company operates restaurants under the Tang Palace Seafood Restaurant, Tang's Cuisine, Tang Palace, Social Place, Canton Tea Room, Pepper Lunch, Soup Delice, and PappaRich brands.

1181 has been profitable every year since 2008 except for FY2022 (It takes a lockdown in China to throw them into losses). In the past, 1181 has been great dividend payers while growing their topline from RMB 393m (FY2008) to RMB 1,492m (FY2018) and bottomline from RMB 25m (FY2008) to RMB117m (FY2018). ROE in FY 2016 - FY2018 averages above 20%. If history is any indication of the future, think there is a good chance that this trend continues post FY 2022.

The bet would be that the revenue will look a lot more like FY2018 than FY 2022. There is also a possibility to underwrite a rebound in revenue back to FY2017 margin level.

1181 will be a sell if the new CEO prove to be incapable to maintaining 1181 quality of food throughout China or if the e-commerce business instead of providing float became a “giant sucking sound”.

Ocean One (8476.HK) - HKD 0.80 [CLOSED]

2023 June: Ocean One (8476.HK) purchased at an average price of HKD 0.678 is a importer and wholesaler of frozen seafood in Hong Kong China. Seafood include 1. Crab and roe, 2. Fishes, 3. Octopus and cuttlefishes, 4. Prawns, 5. Processed seafood products, 6. Scallop, oyster and surf clams. Prawns, Scallop, Oyster and Surf clams makes up more than 50% (FY 2023) of their revenue.

On the short term, the easing of the pandemic, the improvement in inbound travel from Mainland China and the general rebound in sentiment in Hong Kong should provide a continual improvement in mid-high end restaurants which should benefit niche importers like 8476. On the longer term, 8476 seems capable to grow their revenue through growing their revenue in their other categories like Crab and roe, Fishes, Octopus and cuttlefishes and processed seafood products.

8476 is currently valued at HKD 201m, earning HKD 50m on equity of HKD231m. Equity is backed by cash of HKD 79m, cold storage plant bought in 2019 for HKD 52m, networking capital of HKD 100m.

8476 would be a sell if the gross margin compresses significantly due to an intensification of competition or if the 8476 starts ignoring logical capital allocation and start to accumulate excess cash on its balance sheet.

[Exited at HKD 0.80 for a +17.99% on 2023 August as Ocean One experience a drop in gross margin.]

Essex Biotech (1061.HK) - HKD 3.00

2023 January: Essex Biotech $1061.HK (Essex) purchased at an average price of HKD 3.689 is primarily selling ophthalmology and surgical (wound care and healing) in China. The defensibility of their product comes from the patent and their willingness to price their goods in an affordable manner.

With Covid ending, sales should normalise to the pre-covid era. If the assumption is a normalisation of earnings for FY2023, then net profit should be around HKD 302m (2019) and HKD 345m (2021). Taking a median of these two number - HKD 323.5m meant that Essex trade at 6.6x PE. Since Essex has consistently average more than 20% in ROE every year except the 2 Covid years of 2020 and 2022, this look undervalued even for Hong Kong “standard”. In addition, there are multiple options within Essex. New drugs like SkQ1 with Miotech, anti-VGEF with Henlius could provide the long term growth prospect. Newly acquired drug like Iodised Lecithin Capsules should provide some growth in the medium term. The biggest worry is the possibility of write down of goodwill - SkQ1 (HKD 354m), anti-VGEF (HKD 215m) and Iodised Lecithin Capsules (HKD144m), otherwise FY 2023 should be a much better year for them.

Betting that the FY2023 numbers would be closer to FY2019 than FY 2022. Share buyback could help to support share prices.

Essex will be a sell if there is increasing evidence that there would be a write down in their goodwill or if they are facing formidable-new competitors in their traditional segment of ophthalmology and surgical care.

Codan (CDA.AX) - AUD 6.96 (+78.21%) [CLOSED]

2022 November: Codan Ltd $ASX:CDA purchased at an average price of AUD 3.908 (+78.21%) develops, manufactures, and markets metal detection equipment, such as handheld metal detecting technologies for recreational, gold mining, de-mining, and military markets. Their main profit driver is the artisanal mining in Africa. With political headwinds within the parts of Africa and the end of covid, the sales of high end handheld metal detector had dropped. Their recreational division could also be affected as more people goes back to work. Codan have recently started to build up another division known as the communication division. This division supplies critical communication equipments for companies and the military. With conflict potentially brewing all over the world, the communication business should be satisfactory? Overall, there is some risk that there is diworsification but the new CEO Alf Ianniello is taking over a company which have been very well managed and he seems intend to continue doing so. Valued at 10x PE, this may be the chance to pick up a high ROE, decent growth company for the long term?

Betting that Codan would be revalued by the public either due to rising gold price rising or rising defence spending.

Codan will be a sell if the communication division could not get any tractions or the artisanal mining division continue to shrink.

[Exited at AUD 6.965 for a 78.21% on 2023 March as Codan seems to be price for a perfect execution on the metal detection and communication division.]

Fleetwood Ltd (FWD.AX) - AUD 1.97 [CLOSED]

2022 November: Fleetwood purchased at an average price of AUD 1.37 seems to be right smack within the sector to provide for the booming mining sector. They provide housing for the mining sector (Searipple Village in Karratha) and is a manufacturer of modular building. They had overbid for their previous projects and have failed to deliver them with profitability. The new CEO Bruce Nicholson has worked on bringing in a new team, moving towards a manufacturing mindset (instead of a construction mindset) and is only bidding for simpler projects. They also have a RV solution division which have been rolling in the buck during the pandemic due to the increase in travel within Australia. That division should be the dampener this year since everyone could now travel abroad now. Market cap of AUD 136m, coupled with AUD 55m in cash meant that the commitment to payout 100% of their FCF would looks like a home run if the business could be turned around. Another good news is that the share registry is starting to look like a activism hedge fund hotel. Some form of collective shareholder activism activity may be brewing there.

Betting that the modular building division will turn around, the RV sector will remain profitable and the housing for the mining sector will continue to grind out growth and decent profit.

Fleetwood will be a sell if there is a change in the capital allocation policy that have been set up or if there is indication that the modular building could not be easily turnaround.

[Exited at AUD 2.064 for a 50.23% on 2023 September as Fleetwood seems to be price for a full recovery.]

Pico Far East (0752.HK) - HKD 1.41 (+23.68%) [CLOSED]

2022 October: Pico Far East $0752.HK (Pico) purchased at an average price of HKD 1.14 (+23.68%) is one of the bigger event management player in China and should benefit from having more events organised within China. Normalised earnings should be around HKD 250m - 300m. Valued at HKD 1,770m, this would be valued around 5.9x to 7x PE. With HKD 1,300m in cash and HKD 700m in debt, this looks cheap to me. The only potential worry is the write down of their intangible (HKD 500m) which will indicate that management is kitchen sinking for the year. Otherwise, the coming year should be a better year for them.

Betting that the revenue post-covid would become much better leading to a rerating in the company.

Pico will be a sell if there is clear indication that new competitors are out manoeuvring them in their core segment of MICE and they are not going to benefit from the recovery of China.

[Exited at HKD 1.41 for a 23.68% on 2023 March as there are better opportunities around in Hong Kong/China.]

Activation Group (9919.HK) - HKD 1.48

2022 June: Activation Group $9919.HK (Activation) purchased at an average price of HKD 0.99 is the event management company that works only with luxury brands. The opening of China meant that Chinese consumers will start travelling and spending which also meant that the budget for luxury event marketing within China will rise. The management has shown an inclination to continue returning cash to shareholders by share buybacks and dividends. The return of event should bring them back to profitability next year. With a potential to earn a return of ROE > 20% and good earning growth, there is a chance to hold this for a long term.

Betting that the Chinese will continue to spend on luxury and that more and more shows would need to be held in China to hold on to the Chinese $$$.

Activation will be a sell if there is clear indication that they are losing their competitive edge to their local or oversea competitors (serving the luxury segment) in China.

TASTE GOURMET (8371.HK) - HKD 1.46

2021 December: Taste Gourmet 8371.HK purchased at an average price of HKD 0.773 is a operator of multiple brand restaurants in Hong Kong. Their stated aim is to the next Meixin of Hong Kong. Usually, I would be worried if someone states their aim to be the Starbucks or something. But stating Meixin is another matter for most do not know who or what Meixin is.

In the short term, 8371 is executing to plan by signing more leases and creating more concepts during the pandemic. 8371 has continued to shift to more “effective” concepts such as having concepts that have better use of labour and have a higher spend per customers. This provided an overall lift in revenue, gross margin and net margin. Over the long term, there are options that some of their newly formed concepts in Hong Kong could be exported to China through their JV,

8371 is currently valued at HKD 636m, earning around HKD 68m on equity of HKD189m. The revenue for FY2024 should be much better judging from 1Q.

8371 would be a sell when the growth spiral out of control where outlet growth did not result in adequate revenue growth or that administrative and HQ cost starts to spiral up and take a life of its own.

NETDRAGON (0777.HK) - HKD 14.74

2020 October: NetDragon 0777.HK purchased at an average price of HKD 16.16 is develops online and mobile games in China. 0777 also owns an education segment which produces flat panel for educational purposes which is the current leader in United States, Germany, the United Kingdom, Italy and the U.A.E.

In the short term, you would expect 0777 to continue to distribute out excess cash from their operations. You could expect 0777 to spinout their education segment in 3Q2023. Over the long term, expect a rerating of their gaming division from a 4x PE to 7x PE?

0777 is currently earning around RMB 1,800m on their core gaming business on an equity of RMB 6,789m.

0777 would be a sell if the growth of their gaming business tapered out or if they start to hoard cash and disregard their current capital allocation policy.

Do your own research and I may buy and sell the above mentioned stocks at any time.