Huisen (‘company’) is engaged in the manufacture of panel-type furniture (cabinets, shelves, coffee tables, etc.) as well as upholstered furniture and outdoor furniture.
It is China’s largest exporter of panel-type furniture and 2/3rd of sales was generated in the US. Most of its revenues are concentrated among five customers including Walmart, which has been a customer since 2012.
Rising interest rates and the inflationary environment is expected to dampen property purchases and therefore, furniture buys.
The company raised equity financing of over HK$ 1.2b (~1b rmb) via an IPO in December 2020 at a price of HK$ 1.77/share.
Revenues and net profits have grown steadily, culminating in FY21 figures of 5.1b rmb (FY20: 3.9b) and 888m rmb (FY20: 541m) respectively. (FY21 was a year when Trump-era tariffs on China were in full effect.)
The balance sheet is overloaded with net cash (net of all liabilities) of 2.2b rmb.
The equity is currently selling for 1.4b rmb i.e., at a 36% discount to net cash, and <2x 2021 earnings.
These figures are extraordinary, and unless the accounting figures are materially fabricated, this represents quite a bargain.
Management declared a dividend of 216m rmb for FY20 (in the year of the IPO) but cut it completely in FY21. To be fair to management, they warned against using the initial dividend as a reference for future payouts in the IPO prospectus.
The IPO proceeds are expected to be utilized by 2023 for expanding production capacity (by at least 50%) including manufacturing facilities for particleboards.
Even after this, there appears to be substantial cash left over for buybacks of stock at these subnormal prices. This lack of shareholder orientation is, therefore, a significant negative in our view.
Management has issued stock options for under 10% of the outstanding shares to a few key employees but these have an exercise price of $1.878/share, which is over 3x the current market price.
The business is exposed to risk of additional tariffs, and it may not be worth too much above tangible book value due to these uncertainties (the IPO valuation was at ~1.3x book).
We haven’t seen evidence suggesting fraud at this company, and the business appears to be worth a lot more than the current market price.
