Hyfusin: profitable Vietnamese net-net and nanocap with good earnings quality (HK:8512)
Hyfusin Group Holdings manufactures candles in Vietnam and sells them mainly in the US (more than 80% of the revenue) and also some in the UK. Almost all non-current assets are in Vietnam. Headquarters are in Hong Kong. The company is incorporated in the Cayman Islands. The stock trades as 8512 in Hong Kong. Trading volume is very low.
Here are some statistics:
Current price (2023-09-12): 0.168 HKD. Market cap: 23.6 million USD. Enterprise Value: 14.9 million USD. NCAV/Market cap: 1.7. Gross Profit/Total Assets: 0.38. EV/EBIT: 0.96. P/E: 1.9. EV/Revenue: 0.60. P/FCF: 1.9.
Filings are here. See in particular the annual report over 2022 and the recent interim report over the first half of 2022. The company went public in July 2018.
A search on the company name and keyword “fraud” did not reveal any issues. The only key audit matter was trade receivables. I do not think there is any reason for concern.
Substantial shareholders: Two brothers in their late fifties own 58%. The younger brother is executive chairman and the older brother (Wong, Andrew Man Chit 黃聞捷) is CEO. Two women own together 16.5%.
I found several governance issues. The main issue is that the two brothers give themselves excessive bonuses. According to the annual report these bonuses are a certain percentage of the profit before income tax. I estimate they each get about 15%, which I find completely outrageous.
Furthermore, the board is weak. One of the independent directors, Chu Peleus Kin Wang 朱健宏, is also independent director for 2 companies in the so-called Huarong CMB network, according to David Webb. According to Webb, another independent director, Ho Chi Wai HKID:K316XXX 何志威, is also an independent director of another company that has been criticized by the stock exchange for a disclosure issue. But in this case independent directors have not been informed by the also criticized executive director.
The balance sheet is strong with low leverage, a high current ratio and enough cash. The combination of cash and substantial current debts is a red flag. While the company has ample cash I do not think it is a cash hoarder.
Pay out: The company does not pay a dividend. I have not found any repurchases or dilutions.
My take: rare combination of a net-net and low EV/EBIT + quality stock. Over the years there has been good revenue and earnings growth. Growth seems to have stalled since 2022 but might return. The two controlling shareholders give themselves about a third of the pre-tax profit, which is outrageous. Assuming they do not take anything else from the company cheapness should outweigh this major governance issue. Therefore I think this is a good stock for a small position.
Disclosure: long Hyfusin Group Holdings.
I did upload the latest quarterly report to Claude ai. it gives the following summary:
"Here is my analysis of the financial report:
1. business model
- Hyfusin Group Holdings Ltd is principally engaged in the manufacture and sale of candle products.
- It has its head office in Hong Kong and manufacturing facilities in Vietnam.
- It mainly manufactures everyday candles, scented candles, decorative candles and other products such as diffusers.
- Its main customers are department stores and buying agencies in the US and UK.
- Hyfusin produces the candles based on customers' requirements and offers a wide range of services such as product design, raw material selection, trial samples before mass production, etc.
- The focus is on mid- to high-end candles for the US and UK markets.
2. strengths
- Established long-term customer relationships with major retailers
- Experienced management with industry knowledge
- Wide product range and customised production
- Modern production facilities in Vietnam
- Multiple awards for product and service quality from customers
3. financial ratios
- Solid liquidity with a current ratio of 3.2
- Healthy equity ratio of 71.6%
- Gross profit margin increased to 36.8%
- Solid gearing ratio of 14.4%
- Continuously increasing net profit
4. profit and loss account
- Turnover increased by 9.4% due to growth in scented candles and everyday candles
- Gross profit margin increased due to lower raw material prices
- Other income increased due to higher interest income
- Administrative costs increased due to higher personnel costs
- Net profit increased by 58.7% due to higher gross profit margin
5. balance sheet
- Debt moderate and increased due to further borrowing to finance operations
- Inventories strongly increased compared to previous year due to increased production
- Trade receivables increased in proportion to turnover
- Solid equity base
6. cash flow statement
- Operating cash flow negative in H1 2023, which is typical in this industry
- Cash flow from investing activities positive due to low investments
- Cash flow from financing activities positive due to new loans
- Overall decrease in cash and cash equivalents, but sufficient reserves available
7. company status and market outlook
- Candle market shows increasing demand for scented and coloured candles
- Positive management outlook based on customer relationships and competitive advantages
- Planning of a new plant to increase capacity
- Expected sales growth due to trends in the candle market
8. product analysis
- Scented candles with highest sales and growth of 8%
- Also growth in everyday candles, while decorative candles decline
- Confirms trend towards scented and coloured candles
9. regional sales
- USA accounts for 95% of sales - company's focus market
- Great Britain contributes 5%
- Asia and rest of the world of minor importance
SWOT analysis
Strengths: Established customer relationships, product expertise, modern production
Weaknesses: High dependence on a few major customers, strong competition
Opportunities: Growth of the candle market, new customers through distribution
Risks: Fluctuating raw material prices, rising production costs, exchange rate risks
11. competitive comparison
- Competitor Yankee Candle is much bigger with broader distribution
- Advantages of Hyfusin are customised production and production presence in Asia
- Competitor Bolsius has similar size but less export focus
- Hyfusin can offer added value through product differentiation and service
- Recommendation: continue to focus on core trends and strengthen key account relationships"
According to the 2019-2022 financial data, the company has accumulated cash and equivalents from 30 million in 2019 to 171 million in 2022. This is quite substantial. Moreover, the company does not seem to have paid any dividends or bought back any shares during this period. Another red flag is the different countries involved (CA, HK, Vietnam). The company is very cheaply valued.