1127:HK - Lion Rock Group

[kab60]

Their discussion about importance of scale and the onshoring momentum (particularly to Europe) is interesting. How do they stack up on both? I like how they've been proactive in diversifying their production bases and vertically integrating the publishing and manufacturing sides. But is it enough/ is it translating to better pricing power?

 

On a more granular level, net income attributable to owners in 2020 and 2019 is 104m and 139m respectively. Of this year's figure, ~70m (~55m after-tax) of that was from pandemic subsidies and FX gains. So their underlying profit for the year is closer to like 40m - 50m. Their working capital management for the year was strong, which allowed for higher cash conversion to the balance sheet. But working capital management is only a temporary balm and eventually the business needs to pickup.

 

Anyways I don't want to nitpick and miss the forest for the trees. But considering the tough industry and challenging business momentum, I think a higher level of precision becomes important.

Those are very fair points, appreciate the pushback.

 

I don't think they'll ever get anything resembling pricing power, and I expect they'll have to keep slugging it out every day to be more efficient and convenient than their competitors. It is definately a tough business, but when you look at the economics it does spit off a lot of cash and doesn't require a ton of capex, so despite the tough environment and lack of growth I quiet like it below (growing) NCAV, as management are very generous in returning cash versus a lot of other cheap and arguably better businesses in HK.

 

I actually don't think a lot of precision is needed considering how cheap it is, but if management didn't return a lot of cash I'd park my money elsewhere. My base case is that management keeps slugging it out and it's basically status quo. Bull case is the new plant in Malaysia and Quarto working out and getting them back to growth. Bear case is more headwinds and management being unable to compensate through diversification in vertical integration - or CK Lau stepping down as CEO.

[RVP]

That makes sense, and I agree that management payout to minority shareholders has been more generous than most.

 

I just wonder if their current footprint is good enough/ well-positioned going forward. For example, they mention the re-shoring trend accelerating and the increased competitiveness of European print manufacturers. Can their manufacturing presence in China, Singapore, Australia, and Malaysia compete well, or will they be forced to eventually bulk up their European exposure?

 

I think their current footprint enables them to serve their major customers in Australia cost-effectively, but what about their US customers (40% of rev)? Can the labor cost advantages in low-cost centers like Malaysia overcome the lower shipping costs (by virtue of geography) of a European printer shipping to the US market? Can they capture enough demand in their core markets (US, Australia, UK) to effectively spread out their costs?

 

If the answer to any of those is no, then they may have to spend more money down the road to remain "competitive", which could erode the NCAV. Hence my thoughts on precision as every dollar becomes increasingly precious. Currently I'm also leaning towards them being able to maintain status quo (they're smart and have multiple pieces on the chessboard), but I also can't entirely brush aside how quickly things could get ugly if (and this is still a medium if) they lose critical mass. 

[kab60]

I've been pondering since the results were published and decided to sell my position and deploy it all in Analogue Holdings instead, another HK Company, which also recently published results. Really appreciate the feedback, RVP.

Both Lion Rock and Analogue trade around or below NCAV, but Analogue just seems to have the wind at its back whereas Lion Rock is fighting to keep status quo.

I'd never hold cash when I could park it in one of these two and clip more than 10 pct. in dividends a year, but Analogue just seems like an easier bet to make. With Lion Rock it's pretty obvious that it's optically cheap, and I thought a reinstitution of the dividend might change the narrative. That hasn't really happened, so perhaps the market isn't missing anything here.

Whereas with Analogue, I can better articulate why it might be severly mispriced. Opportunity cost is real, and despite a decent absolute return since the writeup, it has been an expensive place to tie up capital considering the opportunity set out there at the time.

[RVP]

I think that's a pretty smart decision. Analogue definitely looks easier.