New Century Group HK: My Worst Performer

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
Liabilities
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

The company usually has had a lot of very liquid assets and I always wished the company would distribute it to shareholders, either with stock buybacks or dividends. Unfortunately, the company used the available cash to buy a company from its owners. The company paid HK$480 mil for the money lending business. That's $0.08 per share.

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.

Hong Kong and Greek Portfolio Update

I haven't posted the results from my holdings for a while. And there has been a slew of them. Almost all of them have not disappointed. But their stock performance has been disappointing. I guess that is the hard reality of investing in out of favour markets.

The Greek crisis that has resurfaced this year has stained my nerves. But my two Greek holdings have held up very well. European Reliance (EUPIC) reported H1 revenues up 7% yoy. Such revenue numbers are very encouraging considering how the Greeks are strapped for cash. On the other hand, I am not surprised that a consumer insurer does well in Greece because it fills a void left by the very cash strapped government. The H1 earnings are down slightly from $0.15 to $0.125. The difference was mainly due to higher operating expenses, in part because the company hired more staff. The company currently trades at 1.9x book and 4.2x TTM earnings. This company is one of the cheapest stocks I own. And I am very pleased that the company recently has begun to publish all their investor information in English.

Karelia Tobacco (KARE), also based in Greece, also did very well in H1. This one is less surprising considering that the company gets most of its revenue from exports. In addition, smoking is a mostly recession-proof industry. The company report H1 revenue up 15% yoy. Net revenue (without excise tax) was up an incredible 28%. Earnings went up only 3% mostly because of an adverse court decision regarding duties. The company said that they will appeal the decision even though they have already expensed the loss. Without this decision the H1 profit would have been around $12 per share instead of the $8.52.

In following Greek news through the crisis I also learned that Greece is a society with an all powerful elite. The Karelia family sure counts as part of that group and that is wonderful. They will defend their business interest from all the nonsense happening in the country. So that if the country somehow implodes, the company will find a way to do fine and protect its wealth, and by extension my shares also.

The Hong Kong stockmarket is down in sympathy with the turmoil in China's markets. I feel Hong Kong has some of the most undervalued stocks anywhere today. My two Hong Kong stocks are currently trading at very depressed values. Soundwill Holdings (HK:878), which owns some of the best retail properties in Hong Kong, reported H1 earnings that were similar to last year. Considering the China turmoil I am very happy it wasn't worse. Soundwill typically depends on the mainland China shoppers to to buy the luxury products and dine sumptuously at their prime rental locations. So, there will be downward pressure on rents now that the Chinese government has clamped down on illicit income and China's economy is slowing down. Anecdotal evidence says that some rents in prime locations are down 10-15%. That said Soundwill's rental income has actually increased yoy, albeit slightly. So, I don't see why the stock is trading at a ridiculous HK$9.50 today! Below I show how much the balance sheet is worth per share. Compare that with Hk$9.50 per share!

Soundwill		HK $ per share
Assets	Property under development	12.00
	Other current Assets	3.39
	Investment property	56.00
	Other non-current assets	1.00
Liabilities	All Debt	8.08
	Other liabilities	4.88
	Equity to shareholders	58.34
	Minority Interest	1.09
6 Month EPS		1.02

Someone who is still turned off by the stock can point to the overpriced real estate market. An overpriced real estate market means Soundwill's assets are overstated. Still the margin of safety is so big I believe Soundwill is a steal. And the company is regularly turning over its real estate. In the H1 report, the company said it will convert HK$0.75 per share of this investment properties into cash through a sale that is expected to close in the latter part of 2015.

My other Hong Kong stock is New Century Group (HK:234). The company is profitable and also has a tremendous balance sheet. It trades at 14.1 ¢! Below shows the balance sheet and note that the vast majority of the debt is an interest free loan from the majority owners.

New Century Group		HK ¢ per share
Assets	Equity investment	6.6
	Other current Assets	1.3
	Investment properties	10.9
	Other non-current assets	1.5
	Cash	8.9
Liabilities	All Debt	2.7
	Other liabilities	1.1
	Equity to shareholders	25.5

The company announced recently that it will acquire a cruise liner in addition to the two it already owns for about HK$170 M. That is approximately 1/3 of the company's available cash. But the purchased cruise liner has generated charter income of about HK$20 M in each of the last two years. So that is a greater than 10% return on investment if it continues. I think it is a very reasonable way for the company to deploy its cash.

Earnings from IEHC, New Century and Hanover Foods

IEHC reported 2015 earnings of $0.79 versus $0.63 a year earlier. Revenue increased to $16.4 M from $15.4 M a year earlier. Gross margin was was slightly better; 37% versus 36% M a year earlier.

Today, IEHC is a growing company trading at 7.7x earnings. It has no long-term debt. And it trades at book! If it trades 25% higher at 10x earnings it would still be undervalued.

A new blogger NoName Stocks has written a tremendously detailed post on the earnings results. So, I feel no need to repeat what he wrote. But I'll summarize and emphasize some important points. The company increased book value by $1.8 M as a result of the increased retained earnings. This amount is not reflected in cash however. It is instead reflected mostly in inventory and, to a lesser extent, accounts receivable and PP&E. The report stated that order backlog is up to $8.7M from $5.9M a year earlier. All this indicates that the company is experiencing a secular increase in demand for its products. The company needs to increase production capacity and it is in the midst of doing that. The company purchased several new machines. While it is doing that however, margin may temporarily compress. So, it is good news that margins have been flat at 37%.

New Century Group Hong Kong (HK:234) reported earnings of 1.71 HK¢ versus 0.52 ¢ a year earlier. The stock spiked to 25.5 ¢ on the news. See the chart below. The stock has twice spiked in the last year, each time on earnings results — in November 2014 and May 2015.

The stock carries 25.5 ¢ of equity per share. And the balance sheet is liquid. 43.2% of the balance sheet is investment properties, 35.2% is cash, and 26.3% is in stocks. So the market value should be close to the book value. Anyone looking at the chart must be puzzled as to why the stock can drop to the 13 ¢ range. The last time it happened was just a few weeks after the earnings announcement. And maybe the following picture of a typical brokerage firm shows why. While in US markets retail investors make up around 40% of stock ownership, in China it is 80%. Many of the retail investors buy stocks in those types of operations. They are basically people who want to do online trading but who do not have home computers setup for it.

	HNFSA
Price	102.500
Market Cap	76.49 M
P/E TTM	12.1 x
Div yield	1.1 %
P/BV	0.34
ROE	2.8 %

From what I can gather, these investors are not really investors, but speculators. And that is why the Chinese stockmarket has gone through record highs followed by a 35% crash. I guess that this effect has also infected Hong Kong, either through the Shanghai and Hong Kong interconnect or some other means.

Hanover Foods reported another underperforming quarter. So far in Q3 the company is on track to earn around $8M for the year. The company's operating margin was 3.3% versus 2.9% a year ago. But this is such a drop from 5% just a few years ago. I have no idea why this company has such low margins. The company also had almost no cash flow because it spent all the year's profits on inventory buildup. Again, I have no idea why. On the plus side the stock trades very low relative to book and at least is still profitable. Sooner or later it will turn around and improve its margins — or at least I hope. But in hindsight, I wish I never got involved with this stock.

What Just Happened in Hong Kong?

On Monday morning Nov 24th Hong Kong time, the market opened with New Century Group Kong Kong (HK:234) opening up slightly at around HK$ 0.16. But 15 minutes into the trading session, all hell broke loose. The stock jumped to HK$ 0.40! That is a 160% rise! But it was too good to last. After two hours it fell back to around HK$ 0.25, which was still up 66%. There it stayed for the rest of the day.

The spike was ostensibly because of an early announcement that H1 earnings are up 390% yoy which, on the face of it, sounds great, until you realize that still means only 0.65 HK ¢. But I guess some investors didn't bother to download last years H1 to see what the announcement really meant, and bid up the stock to HK$ 0.40. For the next three weeks the stock slowly drifted slower to just HK$ 0.166! The falling chart shows the painful descent.

HK:234 Daily Closing Stock Price

And no, I didn't sell it all at the top! I was napping when it happened! Now that the stock is back to just 10% above the level before all this happened, I wonder how could a stock spike up 150% and then drop 60%. Who could have made such a colossal mistake by buying at such high levels? In hindsight, I am sure I didn't miss some behind-the-scenes event. My theory is it happened partially because some buyers did not understand initially that earnings was just up to 0.65 HK ¢, and partially because of an influx of new buyers from Shanghai through the Shanghai-Hong Kong Stock Connect.

The Shanghai-Hong Kong Stock Connect is a pilot program to help China open up its capital markets. Up until Nov 17, Chinese citizens cannot normally invest outside China, nor can outsiders invest in exchanges in China. When I say China I am referring to mainland China excluding Hong Kong. So many chinese companies list on foreign exchanges to get access foreign capital. Alibaba is probably the most well-known example.

The Connect allows any investor in the Hong Kong Exchange to buy certain securities in the Shanghai Exchange. It also allows qualified investors in China to invest in Hong Kong Stocks through the Shanghai exchange. This is the path for China to be a free capital market. However, there is a caveat. On each day there is a limit of how much Shanghai stocks and Hong Kong stocks can be bought by the other market. And there is also an aggregate limit. The aggregate limit is RMB 300 bil for Shanghai to purchase on the Hong Kong Exchange and RMB 250 bil for Hong Kong to purchase on the Shanghai Exchange. The aggregate limit is like the seating limit in a restaurant. Once the limit is reached, waiting customers have to wait for seated customers to leave before getting service. So, once the RMB 250 bll limit is reached, investors in China can no longer purchase Hong Kong stocks until investors in China sell some Hong Kong shares. This means the maximum outflow of capital from China is RMB 250 bil, which is a just 1% of the total RMB 24 bil market capitalization of the Hong Kong exchange. But this may just be enough to tip stocks significantly higher, like what happened to New Century Group. After all, Chinese retail investors are probably less savvy than Hong Kong investors and are much more prone to speculation. And what happened is clearly a case of speculators gone wild.

The current aggregate quote for purchasing Shanghai stocks is RMB 241 bil out of RMB 250 bil. So, it is at the limit meaning there is still pent up demand for Hong Kong stocks.

The current aggregate quote for purchasing Hong Kong stocks is RMB 235 bil out of RMB 300 bil.

	HK:0234
Price	HK$ 0.166
Market Cap	HK$ 957.82 M ($ 123 M USD)
P/E TTM	16.1 x
Div yield	3.9 %
P/BV	0.65
ROE	4.0 %
LT Debt/Equity	0.11

New Century Group has three main lines of business. One is cruise lines; they own two cruise ships. But that business is low margin and often not profitable. The other is real estate, mostly hotels in Hong Kong and Singapore. One contributor to the increased earnings was the disposal of a hotel in Indonesia. The company properties are valued at HK$629M. The third line of business is securities trading. The biggest contributor of the increased earnings was fair value gains in this line of business. The value of the cash and securities on the books is HK$993 M. The company's equity is HK$1.5 bil, the market cap is HK$ 957M. Note that the market cap is less than the cash and investments on the books! So a shareholder can pay for his shares with the liquid assets on the books and get the profitable real estate minus a small amount of debt for free!

In hinhsight, I should have sold the shares at HK$ 0.25 when it was trading about book, but no point in crying over split milk. I think the shares now are undervalued because of the price to book ratio. In addition I feel Hong Kong stocks can be a play on a more open China capital market as the events of the last three weeks showed. And finally, I feel the Hong Kong stock market is undervalued in general, so investing in this company is like buying a undervalued close-ended equity fund.

Why I Bought New Century Holdings HK

HK:0234
Price	HK$ 0.154
Market Cap	HK$ 888.58 M ($ 114 M USD)
P/E TTM	5.7 x
Div yield	5.8 %
P/BV	0.63
Price/Netnet	1.13
ROE	11.0 %

I am currently armchair travelling through Hong Kong. My first words are: WOW! It is bargains galore!

Hong Kong gets a bad rap from me because of its proximity to China. I would not invest in China because I have heard of too many cases of fraud. In addition China's economy depends too much on government-driven construction. I feel China has to be in a real estate bubble now.

I first looked at Hong Kong after hearing about the Third Avenue Funds' investments in Hong Kong real estate companies. Some Hong Kong real estate companies are incredibly cheap; for example, Wheelock is selling for half of book. However, I backed off after looking at the Third Avenue holdings. The companies often have too much real estate in China, and they almost always are family majority owned.

Recently, I looked closely at small caps and they are much better, in part because they are too small for the smart money. The small caps have even better balance sheets and are less exposed to the real estate market. My first find is New Century Holdings Hong Kong (HK:0234).

New Century's ticker goes back at least 18 years. That is the extent of the online information at HKNews. However, 13 years ago it was called Multi-Asia International Holdings. And it was a money-loser basket case. It tried to do a number of ventures, from film processing to manufacturing to real estate. But that doesn't matter now. What matters is the net operating losses (NOL) that it had in the books in 2001. I believe the potential tax savings from the NOL is the reason that the current management, the family of Mr. Huang Cheow Leng, took over the company as New Century Holdings. Initially, in 2001, the Huang family owned 52% of the company. Today the family owns 65%.

In the last 12 years the family has built quite a company. The family has turned the company into a hotel and cruise ship and gaming enterprise. The family owns not only New Century but a number of other businesses, one of which sold New Century two cruise ships. These two cruise ships were the primary business of the company early on. In 2013, the company operates four segments and their operating incomes were in millions HK$:

• cruise ship - 50.2
• hotel operations - (0.1)
• property investments - 53.3
• securities trading - 116.5.

The following table shows the company's growth. The equity growth has been more than 20% CAGR! And though the drawback to equity growth is dilution, the growth makes up for the dilution, as the table shows. The significant share growth came in 2003, 2004 and 2008. In 2003, it was a rights issue, so the company got equity capital. In 2004 it was related to a convertible loan from the Huang family for the cruise ships. And in 2008, it was for a further share issue to third parties. So the company has been busy raising and putting capital to work. Today, the company has plenty of excess capital. This is despite a generous 6% dividend.

	Basic Shares	Diluted Shares	Dividends HK$	Equity HK$	Huang Family Interest
2002	1896.8	1896.8	0	97	0.52
2003	3325.6	3325.6	0	175
2004	3326	3378	0	232
2005	3355.2	3864.4	25.4	397	0.56
2006	3841.1	4571.9	39.3	610
2007	4655.6	4881.8	48.2	741
2008	5595.6	5645	0	1095
2009	5765.2	5765.2	20.2	985
2010	5765.2	5765.2	34.6	1143
2011	5765.6	5765.6	52	1323
2012	5767	5767	52	1316
2013	5767	5767	52	1406	0.65

The company's only long term debt is a loan equal to about 10% of the equity to the Huang family. But this loan is interest free and has no due date. On the asset side of the balance sheet, about a third is in investment properties, a third is in securities on the Hong Kong stock exchange, and a little less than a third is in cash. So the balance sheet is highly liquid. And what isn't liquid is mostly properties in Hong Kong, Singapore and Indonesia. They do not own properties in China as far as I can see.

I feel like buying this stock is like buying a Hong Kong stockmarket ETF, with a decent debt-free moneymaking cruise ship and property investment business thrown in for free.

Overall, the New Century seems to be relatively transparent. The company regularly file notices regarding operations and ownership. And the company values its assets and its depreciation reasonably. So, the family ownership does not appear detrimental to the minority shareholders. Still, as a minority shareholder, I will be vigilant. Mr. Huang has three children and one niece as executives directors of the company. They are compensated from $100k to $250k USD. They all also have a generous options package, which currently is underwater.

As a final note, I must remind the reader that New Century is a little-known smallcap stock with very concentrated control in an emerging market. I have done my best to decipher their filings, but I am sure my data has some errors here and there. So, if anyone wants to invest in this company, he should do his own research! And he should also read the disclaimer on the right.