477.HK A value play

477.HK is a firm in Zhe Jiang, specialized in manufacturing bathroom warming appliance. Its brand Aupu is well recognized within Chinese consumers with a market share of 49.33% in 2008, as well as a number 1 market share for the last 7 years ever since this number started to be published back in 2002 by Chinese Industrial/ Company Information Group. Moreover, its market share is at or more than 4 times as much as the number 2 player for the last 7 years, too. Stock was listed back in Dec 2006, but the company has been running for 16 years, one of the Start firms in that province.

Good and conservative management team, very low debt (Currently at 2.53% of the asset), good product turnover speed, too. Good cash level since listed, for instance last year’s market cap was around 709m HKD (using an average price of 1) while the cash was 359.2m; From the latest report, we saw they invested 288.7m HKD cash into securities which needs to be clarified as to what type of the investment was made. For now, with 498m HKD market cap, 326.6m HKD is in current asset. Unlike other electronic appliance producer in China, according to the latest public conference, they are running the firm on a cash for delivery basis, which of course also need to be clarified with channel checks.

Valuation wise, the stock is trading around 6.85 after a spike of 6% today; Plus, the firm has a good record, albeit short, for dividend payout given its good cash level as well as a management team having a sense of shareholder value. Payout ratio is 139.25% as a result of a special cash dividend, but if we excluded that, still a steady 10%+ yield annually.

Earning is down last year though, with 1Q and 3Q doing ok but 4Q dropped, given it is somewhat related to the new home sales number. Attention needed. The company is well under researched with only one firm covering it, which is its underwriter and the analyst has not updated it for a while, reasonable for a small cap.

Overall, channel checks as well as the usage of that cash investment needs to be checked further; Company earning outlook also needs attention but personally speaking given its dominating position in this kind of the product and it should not be hard for the firm to come back to a steady earning track, if not increasing. Worth buying around 0.6HKD, if those checks have been done and the result is promising. Will follow up on that. And of course, its liquidity is another issue for such a small cap name.