It’s generally unprofitable to join a multi-level marketing company - far better to own one. Natural Health Trends Corp is a US-listed direct seller of personal care products. The vast majority of its sales (81%) are generated in Hong Kong, who sell to members in China via e-commerce through various importers.
The company applied for a direct selling license in China in January 2019 but was advised by a “Chinese governmental authority” later in the year to withdraw its application, which the company did so.
The company suffered a double whammy in 2019 as the Chinese authorities began an intensive review of general direct selling practices in China – and the company received a lot of negative social media coverage. The pro-democracy protests in Hong Kong also curtailed activities that added to its woes.
As a result, 2019 saw a decline in its sales from $192m to $78m and its net profit of $31m turned into losses of $6m. And now, Covid-19 has further postponed meeting events.
The company is also facing lawsuits from shareholders and SEC investigations on the inadequacy of disclosures on the legality of its business in China.
Management indicate deteriorating sales and cash for the foreseeable future. The stock has cratered to $41m, well below its net current asset value (a proxy for liquidation value) of $65m. Most of the current assets comprise cash and liquid securities amounting to $96m. Present value of lease liabilities amount to only $3.2m.
The company has a history of generous dividend payouts. 2019 losses didn’t prevent it from paying $7.3m in dividends and buying back stock for $10.1m. This was offset by the issuing of $8.3m of treasury stock to employees under long-term incentive programs (LTIP). There’s a further 1.22m share eligible for issue, which indicates 11% dilution.
The company has used up only $22m of its $70m authorization for repurchasing stock. The remaining $48m of firepower is enough to buy out the entire equity valued at $41m, leaving behind over $34m in net assets, mostly cash. Dilution shouldn’t affect this equation materially.
This appears to be a clear case of a business being left for dead and selling for much less than dead. Investors have a sufficient margin of safety against future losses - at current valuations - with the continued prospect of dividends and repurchases at attractive yields.