Elite Client Idea #12

Trio Industrial Electronics Group Limited (HKEX ticker: 1710; Price: HK$ 0.14)

Trio Industrial (‘company’) operates in the power electronics industry and generates revenues from Electro-mechanical products (39% of sales), Smart chargers (27%), Switch-mode power supplies (23%), Smart vending systems (9%), and others (2%).

Geographical split of revenues is as follows: Europe (81%), North America (12%), China (3%), South East Asia (1%), and others (3%).

Sales are fairly concentrated with 40% of its sales generated from its top two customers.

In the last six months to June 2022, the company incurred unsatisfactory increases in material, labor, energy, and logistics costs – which couldn’t be passed in full to customers.

Due to raw material shortages, the company stocked up on inventory resulting in cash outflows from operations that necessitated the use of some bank financing.

The company reported TTM revenues of HK$ 836m (FY20: $702m), ebitda of $12.5m (FY20: $53m), and net profits of $0.16m (FY20: $29m).

Operating profit margins have compressed over the last five years. Due to the dynamic nature of the industry, we have conservatively taken recent FY20 earnings as ‘normal’ – it also excludes the effects of covid lockdowns in China, and cost inflation resulting from the Russia-Ukraine conflict.

The balance sheet is strong with net cash of $29m (largely as a result of leftover IPO proceeds from 2017 offset by bank borrowings of $48m). Net current asset value stood at $168m, and net tangible assets were $345m.

Receivables of $19m were past due, and the company has non-current liquid assets of $11m (including the investment element of a key-man insurance contract of $9.2m). Adjusting these factors, liquid asset value is about $160m.

The equity last traded for $140m, which is below assessed liquidation value, and under 5x FY20 earnings.

As a secondary check of investment value, the equity sells for less than the company’s access to undrawn banking facilities of $158m.

Though management expects a turbulent business environment over the next one or two years, the company has added capacity (of $90m) by leasing two factories in China, which should be operational by end of 2022. There’s an additional $44m from IPO proceeds that will be used to add capacity by 2023. These actions indicate management confidence in prospects over the long future.

This stock appears to have minimal downside risk at the current price, and seems to possess reasonable normal earning power (with upside in additional capacity), which should manifest when operating conditions return to normal.