1008.HK - Brilliant Circle Holdings

[RVP]

I'll preface this by saying that this could be a value trap. But at 0.2x book and ~3x earnings, it might still work out.

 

The company manufactures packaging for cigarettes in China, with a particular focus on high-end product lines. This has been the direction consumers gravitated towards over the past decade, and they've made meaningful investments in production equipment (imported from Germany, Switzerland, Denmark, and Japan) to support their operations.

 

In 2015 (the latest presentation I could find), they had about 8% market share. In China, tobacco companies are a monopoly (China Tobacco), and account for 95%+ of all smokers in the country and over 40% of the world's total consumption. This means companies like Brilliant Circle have no bargaining power, and must compete via a tender system which typically lasts 1-2 years. As a result, pricing pressure has been intense, and only the fittest survive.

 

Price of Brilliant Circle has collapsed since they announced they lost a tender bid from one of its major customers.

 

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1204/2020120401364.pdf

 

Disclosures in their annual reports don't give a granular customer breakdown, but it won't be more than 28% of revenues (their largest customer). The company is very focused on profitability, so they may have walked away due to uneconomic terms.

 

The dividend is ~60% at current prices - yes that's not a typo. For the past 3 years, they basically ran a dividend recap strategy, leveraging up the balance sheet to pay more than the underlying earnings can support. Just based on core earnings, the dividend would probably be 25% at most.

 

The company's balance sheet is basically net cash neutral - which is something I know many folks here like. So the balance sheet is "optimized", for better or for worse.

 

This payout / capital structure policy was probably influenced by Swiss PE firm Partners Group, who own 6.6% of the company.