PC Partner Group Limited (HKEX ticker: 1263; Price: HK$ 3.90)
PC Partner (‘group’) is based in Hong Kong (HK) and is primarily engaged in the manufacture of video graphics cards [VGA] (88% of revenues).
It is a leading operator (with brands such as Zotac, Inno3d, Manli, etc.) and has long-established relationships with NVIDIA and AMD – two of the dominant graphics processing unit suppliers in the industry. It uses their technology to develop its own products.
The group also generates sales from electronic manufacturing services for other brands – primarily ATM and point-of-sale machines (5% of revenues); and other personal computer products (7%).
Geographical sales split is as follows: Asia Pacific (37%), Americas (21%), China (18%), Europe (24%).
The industry is currently impacted by recession fears, and inventory rationalization amid slowing PC sales. Further, recent US bans on semiconductor sales to China looms large - though this doesn’t extend yet to consumer technology sales to HK.
The group has also taken significant losses in recent years following the crypto mining ban in China amounting to HK$ 328m on a receivable, and HK$ 175m on a joint venture.
The group reported TTM revenues of HK$15.2b (FY20: $7.8b), ebitda of $2.9b (FY20: $286m), and net profits of $2.2b (FY20: $208m).
It enjoyed bumper profits in FY21 as a result of high selling prices of VGA cards due to demand outstripping supply (particularly for the RTX-3000 series).
Even pre-FY21, the company generated net profits of $250-300m. We are taking $300m as conservative earning power given the larger equity base now.
The financial position as at June 30th was strong with net cash exceeding $1.8b. The net current asset value (NCAV) was $2.7b, and net tangible equity was $3.3b.
The key risk is inventory obsolescence as VGA prices are particularly volatile – the group reported $2.2b of inventory (at lower of cost or net realizable value) as June 30th (on September 23rd). The auditors also seem correctly focused on this risk – and this figure appears conservative for now.
The equity is currently selling for HK$ 1.5b, which is at a 43% discount to NCAV, and approximately 5x normal demonstrated earnings.
The inventory valuation would have to fall to 45% of current value, before the NCAV is breached.
Furthermore, long-term fundamentals of gaming hardware remain strong and there’s potential upside with wider adoption of the Metaverse.
Though a dynamic industry, the current valuation appears to us to represent a worthwhile investment bargain in the present environment.
