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Elite Client Idea #16

Updated: May 1

Sitoy Group Holdings Limited (HKEX ticker: 1023; Price: HK$ 0.49)

Sitoy (‘group’) is a manufacturer and retailer of leather handbags, small leather goods, travel goods, and footwear products.

It manufactures for various high-end American and European brands (75% of sales); and retails its own brands (25%) - owns two brands; and exclusive China distribution rights for another.

Geographic sales split is as follows: China (39% of sales), America (23%), Europe (22%), Rest of Asia (12%), Others (4%).

23% of FY22 sales, however, were from a single customer (manufacturing segment).
It also operates three commercial properties in HK (90% leased out) valued at $700m (as at year-end June 30th 2022).

The group has been adversely impacted by Covid lockdowns, high labour costs, and stronger competition.

The group recorded large losses in FY20 and FY21 aggregating HK$ 304m. These included impairment charges of ~$70m. Cash from operations were, however, stable during these two years aggregating $311m.

Performance picked up in FY22 with cost control measures, large growth in manufacturing orders, and China re-opening after Covid in the first half of FY22. As a result, it reported FY22 revenues of $1.846b, ebitda of $193m, and net profits of $112m.

Moreover, management disposed of a loss-making Italian brand – removing this, net profits were $150m. This doesn’t appear to us to be abnormally high considering the operating conditions in FY22, and past performance.

The financial position is strong with net cash of nearly $300m. Net current asset value stood at $663m – adding in the market value of investment properties, minimum realizable asset value is estimated at $1.363b. Tangible equity stood at $1.763b.

The equity is currently trading at $472m, which is 35% of minimum realizable asset value, and 3x FY22 earnings.

In addition, management appears to be shareholder oriented with generous dividend payouts aggregating $77m in FY22, which yielded 16% at market. Past dividends have exceeded this amount.

There are share options and awards outstanding amounting to under 8% of outstanding shares – but the weighted average exercise price of these options is above $3.80.

Long-term prospects are good with the steady growth in manufacturing orders, and renewed focus on the rapidly growing retail market in China. The group also appears fairly well-established in its field manufacturing for reputed international luxury brands.

Overall, this stock appears to be substantially undervalued on the basis of asset values and earning power.

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