[A financially strong cigar-butt thrown out with Chinese property distress]
Sundart (‘company’) is one of the leading integrated fitting-out contractors in Hong Kong (HK). It provides these services to residential and commercial buildings, and hotels; in HK (28% of latest six-month revenues), Macau (23%), and mainland China (49%).
The business was impacted by covid-related lockdowns in all three markets. The gross value of construction work decreased in HK, tourism/gambling revenues were down in Macau, and normal economic growth slowed in mainland China. All of this directly affected demand for interior fitting-out services.
The company reported TTM revenues of HK$ 5.3b (FY20: $5.9b), ebitda of $388.5m (FY20: $546.5m), and net profits of $311.7m (FY20: $406.5m).
Latest six-month revenues ($2b) were down 17%, and net profits ($96m) were down 38% over the prior period. This included a $21.5m impairment charge on receivables (Prior period: $3.4m).
The balance sheet (as at June 30th) was strong with net cash of nearly $1.3b and a net current asset value of $2.5b. This largely comprised receivables of $2.8b and contract assets of $1.2b. Receivables over 60 days (credit period) amounted to only $422m.
The equity is currently selling for $820m, which is one-third of net current asset value and 2.6x depressed ttm earnings.
The key question is the collectability of receivables and contract assets. While cash balances were down $527m since December 31st, receivables and contract assets were actually lower – which doesn’t indicate a significant problem with revenue collections. The cash decline appears to be a result of payable reductions and dividend payments ($151m).
Moreover, the company appears to partner with a diverse group of reputable HK developers on relatively high-value contracts (>$50m). There doesn’t appear to be significant credit risk.
As for prospects, the company currently has 65 projects in hand with $6b in outstanding work. The HK government appears committed to increase the housing supply, and the Macau government is intent on developing its tourism/leisure industry via events/festivals. All of this should bode well for fitting-out services.
Furthermore, the company intends to partner with well-known HK developers in high-end projects for malls, commercial buildings, and hotels in mainland China.
Management paid dividends exceeding $150m in the last two years, which yields 18% at market.
Considering the above track record, financial position, and prospects - the current price appears very cheap for the equity – and the investor is paid handsomely while invested.
