I bought China Electronics
Huada Technology (0085.HK) within the price range of $1.50 to $1.75 from 2 Nov to
7 Nov 2017 as I believed it would be a multi-bagger going forward. I thought I
would have the time to recommend it to my followers at about the average price
that I bought it but it was not to be. It closed at $1.70 today, 7 Nov 2017, up
16.44 percent within three trading days. However, at current price, it is still
grossly undervalued and I will not be surprised if it becomes a 5-bagger within
a year or so. I will load more of this gem if there is a substantial pullback.
(1)
About China Electronics Huada
Technology Limited
China Electronics Huada
Technology Company Limited (abbreviated to CE Huada Tech), formerly China
Electronics Corporation Holdings Company Limited (before 21 Sep 2017), is a
Hong Kong-based investment holding company principally engaged in the design of
chips. The main businesses of the Company include the design, manufacturing,
and sales of integrated circuits chips. Its main products include second
generation identification (ID) cards, social security cards, fuel cards,
telecommunication cards, electric cards, transportation cards, RFID and
wireless networks equipment, among others.
(2)
Seemingly Poor 1H2017 result belying the
actually very stellar performance
CE Huada Tech
reported very poor 1H2017 performance with its net profit declined by 86.1% to
$143 million compared to 1H2016’s figures.
However, its revenue had increased by 2.5% to $688 million and EPS was
7.04 cents.
I knew this could present an opportunity for me if I could go deeper to find out more about the details. This “poor result” has caused its share price to keep falling after the announcement of its 1H2017 result. However, the decline of the net profit was due to the one-off profit of $621 million derived in June 2016 through disposal of 100% equity interest in China Electronics Technology Development Co. Ltd (中電科技) to China Electronics Optics Valley Union Holding Company Limited “CEOVU” (中電光谷, 798.HK), for a consideration of 1,058,530,083 new ordinary shares of CEOVU and subscription in cash of HK$1,193,175,934 for 1,491,469,917 new ordinary shares of CEOVU which CE Huada Tech has now a 31.88% interest in. CEOVU has its shares listed on HKEx and is principally engaged in the business of development and operation of large-scale business parks in the PRC.
I knew this could present an opportunity for me if I could go deeper to find out more about the details. This “poor result” has caused its share price to keep falling after the announcement of its 1H2017 result. However, the decline of the net profit was due to the one-off profit of $621 million derived in June 2016 through disposal of 100% equity interest in China Electronics Technology Development Co. Ltd (中電科技) to China Electronics Optics Valley Union Holding Company Limited “CEOVU” (中電光谷, 798.HK), for a consideration of 1,058,530,083 new ordinary shares of CEOVU and subscription in cash of HK$1,193,175,934 for 1,491,469,917 new ordinary shares of CEOVU which CE Huada Tech has now a 31.88% interest in. CEOVU has its shares listed on HKEx and is principally engaged in the business of development and operation of large-scale business parks in the PRC.
The
value of 31.88% of CEOVU (798.HK) that CE Huada Tech owns is close to HK$1.87
billion, and market cap of CE Huada Tech is only HK$3.45 billion, which means
the IC business of CE Huada Tech is worth only HK$1.58 billion, which is already
worth twice the price of a shell company. “Cheap” is the only word that I can
use to describe this stock.
(3)
Over-punished Depressed Prices Making
the Stock Grossly Undervalued
Weekly Chart of CE Huada Tech
(a) Price and volume were both up
recently, signifying the uptrend has started.
(b) The price hit the peak of $4.83 on
19 May 2015 when the net profit was only $177 million. The estimated net
profit for FY2017 is about $360m and the forward net profit in 2018 will
be $650m, and there is no logic for the price to remain at this current depressed
level.
(c) With the 7 Nov 2017 closing price of
$1.70, the forward
p/e for 2018 is a very attractive 5.31x and this depressed
valuation among its peers makes it a good candidate for it to be a multi-bagger
hands down.
(d) Its dividend yield at current price
is 1.765%, which is very attractive for a growth and turnaround stock.
(4)
The support from the government
The single commodity that China
imports the most currently is neither food nor oil, but IC chips and the value
involved is about US$230 billion in 2016.
China Electronics Corporation
(中国电子信息产业集团有限公司, short name CEC which is the grandparent company of CE
Huada Tech), Integrated Circuit Fund (国家集成电路产业投资基金股份有限公司 which is funded by China Ministry of
Finance), and Sino-IC Ltd (华芯投资管理有限责任公司
) signed an MOU in Beijing on 18 July 2017 with the understanding that
Integrated Circuit Fund will pump 20 billion RMB into CEC to support its development
of IC-related business. It is highly speculated that most of this fund will go
into CE Huada Tech.
CEC owns 100% of Huada Semiconductor which in turn owns 59.42% of CE Huada Tech. CE Huada Tech changed its name from China Electronics Corporation Holdings Company Limited in Sep 2017 to avoid being confused with its grandparent’s.
CEC owns 100% of Huada Semiconductor which in turn owns 59.42% of CE Huada Tech. CE Huada Tech changed its name from China Electronics Corporation Holdings Company Limited in Sep 2017 to avoid being confused with its grandparent’s.
The China government gives
CE Huada Tech the exclusive rights to produce IC chips for passports and
identification cards, which involve the highest security level. What is
noteworthy is the next three years will be the peak period for producing the IC
chips for passports and identification cards and the profit margins for them
and the stability of this exclusive business are both high.
Compared to other high
tech stocks the China government supports that have an average p/e of above
30x, the price of CE Huada Tech can easily go up by 5 fold if 30x p/e is
anything to go by.
(5)
The positive strategies of the
grandparent company
The grandparent company,
CEC, set a target in 2015 that they would securitise more of their IC design
and manufacturing business in the following three years. These two years will
be the critical period for CEC to consolidate and issue new shares for their IC
business. It is very clear that CEC will pump more capital into CE Huada Tech
soon and the price should rocket up following the move.
(6) Possibility to be included into the
Shenzhen-HK Stock Connect
One
of the rules for A+H stocks or stocks listed in HK stock exchange to be
included in the Shenzhen-HK Stock Connect for both Shenzhen and HK investors to
trade is that the market value has to be at least HK$5 billion. It is easy for CE
Huada Tech to reach the threshold to be included in the Stock Connect as it has
only about HK1 billion free float in the market. To achieve that, either the price has to be pushed
up by market players to about $2.50 or the grandparent company has to inject new fund into it.
(7)
Conclusion
With the explosive
growth rate in the coming three years, strong governmental support, the likelihood
that its grandparent company CEC will pump in new capital, its current low p/e
and its historically powerful surge at opportune moments in 2007 and 2015, I do
not think my target price for CE Huada Tech at $3.00 within half a year is too
ambitious. My target price a year from now is $5.00.
No comments:
Post a Comment