Excerpts from DCG Asia Value Fund's annual report for the year ended June 2016 are republished with permission. Since inception in September 2011, the Fund has returned 57.5% net of all fees, more than double the MSCI Asia ex-Japan Index’s 25.8% gain. DCG Capital holds a Capital Markets Services licence for fund management activities under the Securities and Futures Act of Singapore and is regulated by the Monetary Authority of Singapore.
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Our HWA position was built at an average cost of S$0.76. |
Around S$0.25, HWA came to our attention as a classic net-net that was slowly repurchasing stock (one of Charlie Munger’s ‘cannibal’ companies). Corporate governance appears to be good and it was easy to ascertain a robust and real balance sheet.
| ♦ Story of HTL |
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HWA is a high-end sofa manufacturer and distributor, selling under the HTL brand. Europe accounts for over-50% of sales, North America 15-25%, with Asia Pacific making up the rest. Production facilities are in the PRC with a corporate HQ in Singapore. HWA was founded in 1976 by the Phua brothers in Singapore and has been exporting to Germany since 1981. HWA has been listed since 1993. |
The problem with Asian net-nets is that they tend to stay that way unless a catalyst exists.
Once it became clear that the Phua family were exiting the business and had found a credible buyer in the furniture industry, Guangdong Yi Hua Timber, now known as Yi Hua Lifestyle (“Yi Hua”), it was easier to commit time analyzing this idea.
The Phua family has given Yi Hua a 3-year post-acquisition profit guarantee (totalling US$82.75 million over 2016-19) that an uninformed outsider may view as aggressive, given the past 5 years of poor operating results.
Indeed, the Shanghai bourse queried Yi Hua (listed on Shanghai Stock Exchange 600978:CH) on the valuation of the HWA deal.
A careful review of Yi Hua’s filings finds a realistic profit guarantee, given stabilization of Brazil leather hide prices to 2009-10 levels. Regulatory approvals have been obtained so we expect HWA’s EGM to be called imminently.
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