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Net-Nets From Hong Kong

- By Tuomo Saarnio

The Hong Kong market has been among the cheapest in the world since the end of 2015. There is still big valuation gap between mainland China and Hong Kong, but a turnaround is in process.

A lot of money from China is flowing to Hong Kong because it's an easy choice for Chinese investors who seek exposure to overseas assets but face challenges bringing money out of the country. The biggest and the most famous stocks are no longer trading at rock-bottom prices. Most investors expect the trend to continue for awhile longer as valuations in Hong Kong are attractive. However, not everyone agrees. Others are already warning of overheating markets. Is it already too late to participate?


Especially the H-share market has been very popular and recently profitable. H-shares are the Hong Kong-listed shares of Chinese companies. They fall under the jurisdiction of Chinese law but are denominated in Hong Kong dollars and are traded just like any other stock traded on the Hong Kong exchange. I recommend care with these stocks.

Behind the big and famous companies there are still large selections of net-nets in Hong Kong. Often smaller and less followed stocks react more slowly to rises in market prices. But the overall market enthusiasm can be a good catalyst for "sleeping" bargain stocks. It might be lucrative to pick up the best quality net-nets from Hong Kong.

Tai Cheung Holdings (HKSE:00088)

Tai Cheung Holdings is a Hong Kong-based investment holding company principally engaged in the property businesses. The company's main businesses include the development and management of office, industrial and residential properties as well as hotel operation. The group has established a reputation for developing prestigious properties including office towers, industrial and residential buildings.

  • Market cap: 4.51 billion Hong Kong dollars ($580.67 million).
  • Price: 7.32 Hong Kong dollars (net cash 3.50, net-net working capital 5.27, net current asset 10.70).
  • Price/NCAV: 68%.
  • F-Score: 6.
  • Z-Score: 8.88.
  • Debt to equity: 0.02.
  • Dividend yield: 4.1%.
  • EV/EBIT: 11.3.
  • Lot size: 1,000.



The group was initially founded in 1956 as a construction company. It listed under the name of Tai Cheung Properties Limited in 1972. Its managing director and executive chairman of the board, David Pun Chan, joined the company in 1973. Tai Cheung Holdings has a long company history and a lot of experience and stability in its management.

The substantial decline in profit is mainly attributable to significant decrease in property sales recently. However, the local property market has shown improvement with an increase in overall transaction volume and a rebound in prices.

The group operates both in Hong Kong and the U.S. There are a lot of expectations that Repulse Bay project will achieve high return for shareholders. Otherwise the high class residential market in Hong Kong is well supported by limited new supply, particularly in prime locations and traditional luxury districts. As the government has increased its land sales program, the company can continue to pursue opportunities to replenish its land bank with development potential. There's a good opportunity for the group to increase its land bank over the next 12 months.

As a bonus Sheraton-Hong Kong Hotel, in which the Ggoup has 35% interest, enjoys a reputation as one of the most well-respected 5-star hotel in Hong Kong. It managed to achieve satisfactory performance during the period amid the challenges including slowdown in tourist arrivals and a relatively strong local currency.

Tai Cheung Holdings is a big net-net (which is not necessarily an advantage), but it is stable and safe. The balance sheet is strong with ample cash on hand. The group's borrowings are payable within one year. The company has a strong family ownership. David Pun Chan owns 29%, his mother Chan Poon Wai Kuen owns 16% and his sister Ivy Sau Ching Chan 3%.

Sing Tao News Corp. (HKSE:01105)

Sing Tao News is an investment holding company principally engaged in media-related business. The company operates through three business segments. The Media segment is engaged in the publishing and distribution of newspapers, magazines and books. The Trading segment is engaged in the trading of consumer products and the licensing of distribution rights. The Others segment is involved in the provision of internet and information consultancy services.

  • Market cap: 865.36 million Hong Kong dollars.
  • Price: 1.00 Hong Kong dollar (net cash 0.59, net-net working capital 0.98, net current asset 1.19).
  • Price/NCAV: 84%.
  • F-Score: 6.
  • Z-Score: 3.47.
  • Debt to equity: 0.0.
  • Dividend yield: 6.0%.
  • EV/EBIT: neg. EV.
  • Lot size: 2,000.



The Sing Tao brand dates back to 1938 when the daily newspaper of the same title was launched in Hong Kong. The company is incorporated 1996 and employs around 2,000 staff worldwide. Based in Hong Kong and with a business network covering major cities of the PRC, U.S., Canada, Europe and Australia. The flagship publication is the renowned Chinese international newspaper Sing Tao Daily, which is one of the world's most widely read Chinese newspapers.

Former international investment banker Charles Tsu Kwok Ho acquired the Sing Tao Group in 2001 with an aim of developing it into a leading media corporation. Ho has successfully built up an extensive business and political network in the People's Republic of China. Ho owns 49% of shares and his son Ho Kent Ching Tak has already joined the company.

Although the group is divided into three business segments its newspaper operations are the most important - Headline Daily, Sing Tao Daily, The Standard and the overseas business of Sing Tao Daily. Together, these account for the largest percentage of the Media operations' revenue and profit.

As a publishing company Sing Tao News suffers from the same problems as the whole industry. The trend toward digital media becomes stronger year by year. The group continues to develop its new media business and allocate more resources to develop and enhance its digital products and services.

Also the Hong Kong economy has increased the challenges. The overall local advertising market dropped by 13% last year. The group must continue to focus on optimizing its operating efficiency and offering innovative solutions and multiple platforms to meet the changing needs of its advertising customers.

Anyway, Sing Tao News maintained a strong financial position with a lot of cash. Even in difficult times it has been profitable and paid a steady dividend. In addition to current assets its PP&E property is large and valued at fair value at the end of each reporting period. The group's businesses will benefit when economic conditions improve.

G-Resources Group (HKSE:01051)

G-Resources Group is an investment holding company principally engaged in the exploration, mining and sales of gold and silver products. The company operates through these business segments: principal investment business, money lending business, real property business.

  • Market cap: 3.75 billion Hong Kong dollars.
  • Price: HK$0.14 (net cash 0.24, net-net working capital 0.24, net current Aasset 0.28).
  • Price/NCAV: 50%.
  • F-Score: 5.
  • Z-Score: 3.00.
  • Debt to equity: 0.0.
  • Dividend yield: 3.1%.
  • EV/EBIT: neg. EV.
  • Lot size: 3,000.



G-Resources is quite a different company than the previous two. Until last year it was more or less a mining company. The company has sold its Martabe mine in Indonesia and now continues as a financial services company. Many shareholders - among others giant fund BlackRock - were against selling its crown-jewel gold mine at near book value to a consortium led by a fund partly owned by G-Resources Vice Chairman Owen Hegarty. Unfortunately, they lost the vote 41.18% against 58.82%. G-Resources has also diluted its shares in the past, and many investors have complained about it.

G-Resources is headed by Chiu Tao who was appointed as the chairman and an executive director during 2009 and then appointed as acting CEO of G-Resources on June 30, 2015. Chiu Tao is also the chairman and an executive director of NetMind Financial Holdings, which owns 16.9% of G-Resources' shares. By the way Hui Richard Rui, who was strongly involved in the sale of Martabe mine, tendered his resignation as an executive director on Feb. 3.

The strong performance in 2016 was mainly due to the profit from the disposal of the Martabe Mine. The company is now focusing on its remaining businesses, namely principal investment business, financial services business and real property business. It is still too early to say how the change will succeed. Interest rates will rise slowly, and all investors are chasing for yield, pushing up the price of certain asset classes. The global financial market remains volatile, and there will be both shocks and opportunities.

The balance sheet of G-Recources is excellent. Most of the current assets are cash and among the noncurrent assets there are for about 100 million Hong Kong dollars of listed debt securities. What is particularly interesting, its current assets ratio (current assets to total liabilities) is a very high 21.3. It means good downside protection. A 10% to 20% decline in current assets would still leave big upside for investors.

Without doubt, there are still a lot of open questions about the company's future direction. But then again it looks like all the bad things are priced yet and any good news may push the share price up quickly.

Fujikon Industrial Holdings (HKSE:00927)

Fujikon Industrial Holdings is a Hong Kong-based investment holding company principally engaged in the design, manufacturing and sale of electro-acoustic products, including headsets and headphones products.

  • Market cap: 453.81 million Hong Kong dollars.
  • Price: 1.08 Hong Kong dollars (net cash 0.17, net-net working capital 0.80, net current asset 1.18).
  • Price/NCAV: 91%.
  • F-Score: 6.
  • Z-Score: 3.64.
  • Debt to equity: 0.0.
  • Dividend yield: 5.5%.
  • EV/EBIT: 4.3.
  • Lot size: 2,000.



Fujikon Industrial Holdings was founded in 1982 and has been listed on the Stock Exchange of Hong Kong since 2000, which means it is well established in its industry. The company's founders are also the major shareholders. Johnny Yeung Chi Hung (chairman and CEO) owns 20.18% of shares, Simon Yuen Yee Sai owns 16.35%, and Michael Chow Man Yan owns 19.50%. This means they have long experience in the business, and their interest are more aligned with other shareholders.

The headsets and headphones business is the main production and generated 72.5% of Fujikon's total revenue. The other segment, accessories and components, account for 27.5% of revenue.

The past financial period has remained challenging for the group as it continued to be affected by a lackluster global economy and intense competition within the electro-acoustic industry.

Fujikon announced profit warning on Jan. 17. The company anticipates that it may record a net loss for the year ending March 31,mainly due to a drop in the overall gross profit margin, which was a result of increase in the provision for obsolete stock. Also change in the combination of the products sold, significant drop in handling income and increase in cost of sales will affect the result.

In this situation Fujikon is aware of the importance of controlling costs, and the company will be dedicated to product development, which also enables it to utilize its innovation and engineering prowess to draw market interest.

Although revenue, profit and as a result also dividends are under pressure, Fujikon's current assets position is strong and the company is debt free. Fujikon has as well significant PP&E value which is carried on the balance sheet probably for less than they are worth. For me it's difficult to evaluate how well it is going to succeed in its product development, but it has enough money to do it. Discount to net current asset value does not give large margin of safety, but otherwise if the company is able to be profitable in the future its market price will be much higher than NCAV.

Selecting the right net-nets

Right now there are little over 100 net-nets in Hong Kong to choose from, but the quality is very variable. When investing in Hong Kong, China is the big issue. I tried to avoid companies that are based in China or have major operations in China. There are surely good Chinese net-net stocks, but the risk of fraud and gimmick accounting is just too high.

I tried to pick net-nets with long enough company histories, stable management and reliable owners. It's very important to try to find net-nets that are less likely to go to zero. Concentrating to pick up the safest and strongest net-nets out there is the way to do it. To look at F-Score and Z-Score provide useful basic information before examining balance sheet more deeply. You should always focus first on the downside protection - upside will take care of itself.

Disclosure: The author owns no share mentioned. I owned Luen Thai Holdings earlier, but it's not net-net anymore.

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This article first appeared on GuruFocus.