Shenguan Holdings (Group) Limited (‘Group’) manufactures edible collagen sausage casing products. This comprises over 90% of its sales. It also manufactures collagen-based pharmaceutical, food, skin care, health care, and bioactive products – and conducts research and files patents to expand its product portfolio.
It occupies a leading position in the industry supplying major manufacturers of processed meat products and sausages. It serves the higher-end of the nutritional market where collagen casings are preferred over pig casings. Over 90% of its sales are in China though it generates sales in South America, South-east Asia, and the USA as well.
It is currently enduring an oversupply situation and greater competition in its industry after pork production declined in China. It is also subject to variations in the price of its major raw material – cattle hide – though this has been stable in the current period. Furthermore, Covid-19 has delayed resumption of activity at its customers, and reduced sales by 6% over the year.
Sales have been fairly stable over the last five years and printed at $1.1b in the last twelve months. Ebitda and net earnings were $185m and $79m respectively. Applying average margins and removing amortization charges – as they related to technology knowhow for bioactive collagens, which doesn’t appear to be recurring in nature – we arrive at current earning power of $130m/year.
Net cash is strong at $697m and the net current asset value is $1.2b. We add to this non-current cash deposits of $232m and fair value of investment properties of $8m to arrive at a liquid asset value of $1.5b.
The stock is selling for $824m or 57% of liquid asset value and just over 6x earnings.
A major bonus is the regular payment of substantial dividends that have averaged over 80% of earnings. Therefore, the recent dividend yield is over 14%.
Apart from the oversupply situation, which is likely to get ironed out with demand growth, we suspect that the depressed price is due to the initiation of an employee stock option plan (in May) that authorizes issuance of options up to 30% of issued shares. Management haven’t granted any options to date.
This appears to be a well-situated company with good prospects selling below liquidation value and likely to continue to earn and pay out attractive dividends over the foreseeable future.