Wecon Holdings Limited (1793.HK): Our new microcap position
A very asymmetric investment for the private investor
Today I have finished making an important position (10%) in a microcap in Hong Kong.
Name: Wecon Holdings Limited
Ticker: $HK.1793
Purchase price: 0.185 HKD
One of the greatest opportunities I have ever seen
⬇️Lets make a short thread of the company ⬇️
The company is pretty small, 150MHKD ($20M) Market Cap and free float limited to 25%. Perfect for the private investor ✅
The company operates in two segments:
- Construction Contracts (80% Revenues)
- Repair, Maintenance, Alteration and Addition (RMAA) Works Services (20% Rev)
But actually the company has a very clean balance. No Capex needed. They bid for different projects and when they get them awarded they outsource most of their services/assets. Easy business model.
They are getting new projects awarded this 2020.
The company operates in Hong Kong and I am very concerned about Hong Kong's future role in China is under high uncertainty
Although I am bullish in this aspect, the investment thesis does not go on that direction. The thesis can be tagged as a "special situation".
Lets see some data:
- Market Cap: 150M
- Cash + Deposits: 128M
- Receivables: 411M
- Equity: 281M
- Income 2019: 48M
- PER: x3.5
- Dividend Yield: 10.15%
- 2 Year contracts secured!
Holy Moly! Is this real life?
Downside limited, impressive ratios, lets check receivables:
The receivables (411M) are divided in:
+ Contract assets and trade receivables (337M), which are subdivided in:
- Other Contract assets (57M): Works finished not yet billed
- Retention Receivables (98M): Payments that the client retained until project gets finalized
- Trade receivables (181M): One month payment delayed
+ Prepayments, deposits and other receivables (32M)
+ Pledged deposits (42M)
The Working Capital Cycle in this companies is crucial. They could finance the WC with shorterm debt. This company made it few years ago and
now since they are collecting so much cash they have no need.
I have analyzed many other peers and this amount of receivables is normal. Other peers have higher discount but I feel Wecon combines better quality and upside.
Another important key point to highlight is the secured contracts.
They have 1,655 MHKD remaining obligations of the projects currently ongoing. This is 1.5 years of secured revenues for the company. It doesnt take into account project awarded that have not started yet!
How weak are the trade receivables? ⚠️
Since the projects are still ongoing,if customer does not pay, the company does not continue with the project. So better they pay
HK Locals told me that the Real Estate market is quite active and construction works are undergoing as usual
In fact, some of the projects are for the public sector. This gives a lot of security in the investment thesis.
Our correspondent in Hong Kong for @NewVilaResearch, @EXPATAROUND, has given very useful information about current situation in HK and we are pretty bullish.
In the video, you can see land gained from the seawith the main objective of building new apartments.
New Real Estate in HK gets sold before the building process starts. The Chinese are very interested in buying RE and sometimes the real estate makes a raffle to decide who will buy the asset.
But lets go to the historical results:
- 300% increase in Revenues in the last 6 years. Pretty impressive.
- ROE almost reaching 20%
- Operating margin of 4.5%
I believe it is not the best peer but it is the best one I could invest with my broker. And great asymmetry!
But why is this company so cheap?
Well, Wecon went public on February 2019 at a 0.65 HKD price. The founders sold 25% of the company which is the minimum required float in Hong Kong.
Since then, due to Hong Kong negative news the company has dropped to 25% of IPO price.
Skin in the game by founders and they cannot repurchase the share due to Hong Kong Exchange regulations that regulates the minimum free float to 25%.
The price is so low that it is reflecting the worst case scenario for the company IMHO.
They have given a 0.019HKD dividend this year (2020) which gives a dividend yield higher than 10%. And 0.014HKD in 2019.
Seems that the board does not see any problem?
When I invest in companies in Hong Kong I always want to see cashflow back to shareholders. This is the case.
The valuation of the company it is very easy to make:
Assuming no impairments (not many) in the trade receivables and the completion of the projects undergoing for the following 2 years we can easily end up with a company with a net cash x4 times current market cap
As you know, this is not a buy recommendation and you should make your own analysis.
Again, I have invested in a very asymmetric company where only private investors can enter.
Hope you like the thesis as much as I do.
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Thanks. May I ask what you have in mind when you say there may be better peers not available via your broker?