Hopefluent (137% Profit in 9 months)

Hopefluent Group Holdings Limited (‘company’) is a Hong Kong listed company that is one of the largest property agents in China. It operates in over 200 cities, with 39% of its revenues from Guangzhou province, and is involved in over 2,000 projects.

The company services both property developers as well as secondary real estate servicers. It also generates 3% of revenues from financial services (mortgage referral and loan financing).

The property market in China was depressed due to Covid-19. Despite this, property prices seemed firm due to strong demand for housing, and the industry appeared less hurt than others.

The company generated growing revenues and EBITDA (12-14% margins) over the last few years – recording $6bn in sales and $775m in ebitda in 2019. This fell to $5.4bn and $771m in the last twelve months. The earnings were backed by strong cash flows.

The company’s subsidiary, Hopefluent China, acquired Poly Consultancy Group (‘Poly’) with a share swap that resulted in 56.1% of the combined entity. Poly, however, held de-facto (voting) control over subsidiaries with limited share ownership. This resulted in the non-controlling interest being entitled to 55% of the profits of the company – with shareholders entitled to 45%.

Therefore, only $238m in net profits (ttm) were attributable to the company’s shareholders.

The financial position was strong with a net cash position of $1.96bn. The current asset ratio stood strong at 3.19:1, and the net tangible equity on June 30th was $3.1bn – consisting primarily of cash and receivables.

The equity was selling at $1bn or 4x ttm earnings and less than one-third of tangible asset value.

Dividend payouts have ranged between 20 and 30% of profits and paid consistently.

Management, however, attempted to buy out public shareholders with a repulsive low-ball offer of $1.50 (near the current price) in April 2020. This was accepted by 3.53% of public shareholders reducing the free float to 29%. If the float fell below 25%, the HK exchange may have de-listed the company thereby penalizing remaining public shareholders.

The ‘independent’ directors’ and financial adviser reports are examples of comical analysis. The ever-increasing discounts to net asset value, and thin liquidity were reasons offered to public shareholders to sell out at the paltry price. This was not the best example of shareholder-oriented management.

At the current market price, however, this stock appears to us to be very cheap for a leading agency in a relatively stable industry.

TTM: Trailing twelve months

$ represents Hong Kong $