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.