New Century Group Hong Kong (HK:234) has been a sad performer for a long time in my portfolio. I bought it initially around HK$0.13 and today it is at $0.06!
New Century operates in several segments in primarily Hong Kong. Formerly, they were cruise lines, hotels, rental properties, and securities (i.e., stocks) trading. Besides the rental properties business, all the other segments are becoming less prominent on the company's bottom line. In fact, the company sold it's last hotel and exited that business several years ago.
The company's cruise lines wasn't doing all that great before covid came along, and understandably its revenue dropped considerably during this time.
The company has a security trading business because of an unique feature of Hong Kong tax laws. In most other countries a company must pay capital gains taxes on realized securities gains. But Hong Kong does not. So effectively Hong Kong encourages companies like New Century that have ample cash to engage in securities trading.
In the place of the under-performing segments, the company added a money lending business two years ago, called ETC. This business was completely owned by the same family trust that owns the majority of New Century. And New Century acquired 60% of the lending business in exchange for the cash equivalent of the equity acquired.
| Assets (HK ¢ ) | 2020 | 2021 H1 |
|---|---|---|
| Cash | 7.59 | 7.13 |
| Stocks | 0.24 | 1.12 |
| Receivable | 2.14 | 1.15 |
| PPE | 5.85 | 4.98 |
| Rental Property | 9.54 | 9.28 |
| Private co. | 0.03 | 0.04 |
| ETC loans | 11.88 | 12.47 |
| Repossions | 0.24 | 0.63 |
| | ||
| Payables+Dep | 0.35 | 0.73 |
| Misc liabilities | 0.35 | 0.42 |
| Debt | 1.93 | 1.93 |
| Minority Interest | 6.91 | 6.57 |
| Shareholder Equity | 27.98 | 27.15 |
New Century's investment property business consists of high-end retail and office real-estate. Their rental occupancy has consistently been 100%. And the real-estate value on their books is not an illiquid asset that is held indefinitely. In 2011, for example, the company sold a large chunk of their property for HK$485 mil. On the right is the company's balance sheet with values divided by the number of share and expressed in HK ¢. As the table shows, their real estate value is only about a third of the companies equity, so it is not overly exposed to a housing bubble.
I liked New Century because of the company's huge and liquid balance sheet. I feel showing the value per share can really put a perspective on the attractiveness of this stock.
Note that the minority interest ownership is almost entirely a claim on the money lending business.
Note also that the company debt are monies owed to related parties paying little or no interest.
Other than these two items, pretty much the rest of the company belongs to the shareholders. The following chart shows the company grew its equity consistently throughout the last 16 years. The chart also shows the company paid out more than HK$0.07 per share in dividends over that period. That's pretty good considering the current price of $0.06 ! Please ignore the spike in book value in 2019, that is only due to an accounting quirk that requires the company to recognize the money lending business one year before the money is paid to acquire it.
On the face of things there isn't much justification for the stock to trade at $0.06. But the narrative on such an obscure Hong Kong stock can deter the market. Namely, Hong Kong is experiencing a slowdown due to the political turmoil of the last few years. There may be a long term exodus from the island which will make it less of a financial hub of southeast Asia. In addition, the stock is of the foreign and small cap value variety, which has suffered terribly in the last 10 years.
The company's owners also haven't done much to help the stock price. It hasn't been paying regular dividends last few years. And it siphoned off a huge chuck of the company's cash to buy the money lending business. Initially, I was extremely worried when New Century acquired the lending business. Are the owners enriching themselves at the expense of us minority shareholders? Recently, I am less worried because I see the lending business become a big contributor to income.
So all-in-all New Century has become the worst holding in my current portfolio, but I still use the logic of analysis and I feel the stock is still good enough to hold.
