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.

Photo by KaLisa Veer on Unsplash

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.