Trio Industrial Electronic Group is a Hong Kong listed company engaged in the manufacture of industrial electronics. Its main products are electro-mechanical products, smart chargers, switch-mode power supplies, and smart vending systems – used in the medical, renewable energy industry, and vending industries. 72.5% of its shares are held by insiders.
The company generates 79% of its sales in Europe, and 15% from the US. Management focus appears to be on increasing its presence in Europe with higher-margin products (such as smart vending systems).
It has suffered as a result of Covid-19 and US-China trade tensions with a 30% drop in revenues over the last year. This was due to reduced customer demand, and delayed production due to disruption in manufacturing facilities.
Sales peaked in 2018 at $886m before falling to $689m currently. EBITDA margins peaked in 2017 at 16% (the year it listed) and fell to 5% currently (with minor net losses). Applying a five-year average margin of 10% to recent sales, and deducting TTM depreciation results, results in demonstrated pre-tax earning power of $56m (which equates to 2019 ebitda, and appears conservative considering it includes the impact of US-China trade tensions).
Cash position is strong at $132m net of borrowings - primarily representing unused listing proceeds, which will be used to grow its European business. Net working capital is at $253m and net tangible assets are at $343m.
The equity sells currently for $165m, which is less than 2/3rds of net working capital value (a proxy for liquidation value) and 3x pre-tax profits.
Working capital primarily consists of inventories, receivables, and cash. Inventories were largely comprised of raw materials and subject to $2.5m in impairment charges recently. $30m of receivables were past due and not provided for as they were considered good. Even discounting this, there appears to be sufficient value to cover the market price.
This net working capital value doesn’t count the $24m in market value of land held under long-term leases, and $9m in market value of financial assets (the investment value of a key man insurance contract).
Further, there was a transaction between the holding company and the departing executive director in February 2020 for $0.1662/share, which is above the current price of $0.165.
Overall, the equity appears to be selling for less than the debt that could be safely issued against it, constituting the ideal investment form of safety and profit potential.