CE Huada Tech (HK.85) --- Cannot let it run away

I have mentioned China Electronics Huada Technology --- an undervalued gem --- a few times already, and I believe it is high time astute investors gave serious thought to adding some shares to their portfolio.

As a target with the dual concepts of "State-owned special undervalued stocks " and "IC chip", China Electronics Huada Technology (HK.85) has a P/E (TTM) of only 3 times, who wouldn't love this bargain price?

It's understood that CE Huada Tech is a leading domestic smart card and security chip vendor under China Electronics, mainly selling integrated circuit products. Over the past three years, its performance has maintained a compound growth rate in the mid-to-high double digits, and its market value has also increased with performance growth, rising by 169% since the beginning of 2022. Despite the significant increase in market value, its performance is even more impressive, leading to a valuation remaining at a low level.

The company is a high-quality stock with low valuation, and recently there have been quiet buying activities from some funds. The stock price has continued to rise for four consecutive weeks, likely preparing for the release of stupendous annual performance. The main reason is that the first-half-year report profits have increased by 1.7 times, and the annual performance is expected to be even more impressive. However, despite being undervalued, this stock has yet to attract the attention of most astute investors, as evidenced by its persistently low trading volume.

So, let's delve deeper into the company, whether it will remain undervalued for a long time, and whether its fundamentals can support the market value to continue rising.

Excellent performance, generous dividends

It is understood that the IC products of CE Huada Tech are mainly used in smart cards, radio frequency identification, and wireless communication fields. Specific products include the second-generation resident ID cards used by Chinese citizens, social security cards, fuel cards, telecom cards, electricity meter cards, transportation cards, and wireless network equipment, etc. The company has excellent performance, with a compound growth rate of revenue of 36.9% from 2020 to 2022, and a growth rate of 55.9% in the first half of 2023, with a high probability of maintaining a high growth trend for the whole year.

In addition to strong growth, the company's profitability is also continuously improving. The gross profit margin has increased from 33.96% in 2020 to 44.78% in the first half of 2023, an increase of 10.82 percentage points. Moreover, the company has adjusted its debt structure and carried out refined management, with the expense ratio decreasing year by year. During the period, expenses (administrative, sales, and financial) have decreased from 37.28% to 14.15%, a decrease of as much as 23.13 percentage points.

Excluding the impact of special items (primarily affecting 2020), the company's net profit margins for the first half-years of 2020-2023 were 5.13%, 7.43%, 21.39%, and 30.6%, respectively. Notably, in the first half of 2023, the net profit already exceeded that of the entire year 2022. Although the full-year profit announcement for 2023 has not been released, the outlook for the second half of the year is optimistic, with growth rates and profit margins likely to remain at the level of the first half. With significant profit increases, the company's annualized ROE for 2023 reached a whopping 48.4%.

What's more crucial is that CE Huada Tech performance growth is very healthy, primarily relying on business capacity and internal drive, rather than following the path of debt expansion like most companies. In the first half of 2023, the company's liability- asset ratio was 57%, compared to 56.6% in 2020, showing minimal change. Additionally, its interest-bearing debt mainly consists of short-term bank loans, which decreased by 12.98% in the first half of 2023 compared to 2020, representing a reduction of 14.81%.

It's worth noting that CE Huada Tech is also very generous with its dividends, distributing dividends every year at a stable payout rate of over 30%. Based on its current market value, this translates to a dividend yield of 5%. Despite such strong performance and generous dividend payouts, it has been somewhat overlooked by the market. Some value investors may have already taken notice and are patiently waiting for the valuation to be realised. The expected increase in valuation for the company lies in its business prospects and industry potential.

A dark horse in the making, with promising prospects

CE Huada Tech IC products are used in the smart card industry, which has maintained a stable global market size. According to Eurosmart statistics, global smart card shipments have remained steady at 9-10 billion units in recent years, with China being one of the world's largest smart card application markets, experiencing a mid-to-high single-digit growth rate. According to forecasts by relevant research institutions, the market size of China's smart card industry is expected to reach 34.47 billion yuan within 2023.

Looking at the market landscape, according to data from China Business Intelligence Network, the concentration of the smart card chip industry in China is relatively dispersed. CE Huada Tech ranks second with a market share of 10.69%, second only to Unigroup Guoxin Microelectronics (紫光国微). From its official website, it can be seen that the company provides secure SE chips and secure MCU chips, with solution scenarios mainly applied in areas such as the Internet of Vehicles, the Internet of Things, and financial payments.

The company has a well-established supply system that can reliably provide products to meet market demands. For example, despite disruptions caused by the pandemic affecting the supply chain and resulting in chip shortages, the company managed to maintain growth in shipments from 2021 to 2022. As the capacity shortage gradually eased in 2023, the company seized the opportunity to dynamically adjust its production and sales strategies to address new demand opportunities. Actively adjusting its product strategy, the company has increased promotion efforts in the Internet of Things (IoT) and smart connected vehicle security chip application markets. Shipments of eSIM chips, smart connected vehicle security chips, and high-end SIM chips have performed remarkably well.

It's worth noting that CE Huada Tech places a strong emphasis on R&D, actively promoting the commercialisation of R&D achievements. In the first half of 2023, R&D expenses accounted for 9%, representing a decrease compared to the previous year, primarily driven by significant performance growth resulting from R&D achievements. During this period, the company added 18 new patents and registered 1 new software copyright. Leveraging its scale advantage, product superiority, and supply chain advantage, CE Huada Tech stock prices experienced both volume and price increases, defying the general trend in 2023. In comparison with peers, both Unigroup Guoxin Microelectronics and CE Huada Tech are industry leaders, but the latter is growing faster, with higher profitability levels and significantly increased market share.

The smart card industry is experiencing increased demand this year, with CE Huada Tech maintaining its strong competitiveness and sustainable high-performance track record. Additionally, major brokerage firms are optimistic about the global semiconductor environment, with Huatai Securities' research report suggesting a gradual recovery in the global semiconductor market. The Chinese region is expected to maintain high-intensity capacity expansion this year, with promising prospects for industry development driven by AI. As a leading player in the niche sector, the company is likely to attract significant attention from large funds and institutions.

CE Huada Tech is undervalued, with a P/E (TTM) of only 3.73 times with its closing price of HK$1.62 on 8 Mar 2024. The average P/E for the semiconductor sector is 16.3 times, indicating a potential premium valuation of up to 543.3%. Comparatively, taking Unigroup Guoxin Microelectronics as an example, despite being listed on the A-share market, even with a 50% AH premium, CE Huada Tech's P/E (TTM) and P/B valuations are only 20% and 45% of Unigroup Guoxin Microelectronics, respectively. Moreover, CE Huada Tech is known for its generous dividend policy, further enhancing its attractiveness compared to peers.

In summary, while CE Huada Tech currently has low trading volume, its excellent financials, generous dividend payout, and very low valuation suggest it is an overlooked gem awaiting discovery by investors, potentially positioning it as a dark horse stock with promising prospects.

Superphang
http://superphang.blogspot.sg

Investing in T-bills

Upcoming T-bill auctions are scheduled for 4 Jan 2024 (the first tranche 6-month T-bill) and 25 Jan 2024 (1-year T-bill). The 1-year T-bill matures on 28 Jan 2025. This tight schedule poses a challenge for CPFIA investors seeking to transfer funds from CPFIA to their CPF OA so as to carry on enjoying the CPF OA rate of 2.5% pa. Cash investments, however, remain unaffected.

For the January 2024 auctions, market bond dealers will factor in the three anticipated 25 basis points hikes in 2024, as announced by the Fed Chairman. Consequently, the cut-off yield for the 1-year T-bill is expected to be approximately 50 basis points lower than that of the 6-month T-bill. 

Opting to utilise my CPF OA funds, I plan to have a competitive bid for the 6-month T-bill, proposing a lower rate of 3.3% this time, lower than my previous bid. This adjustment is necessary in light of the potential interest rate reduction by the Fed in March, with an anticipated 25 basis points decrease. 

Additionally, I intend to reinvest the upfront interest received from the discounted 6-month T-bill into the 1-year T-bill, maximising the yield and making my CPF OA fund more productive. 

Wishing everyone a joyous and prosperous 2024!

Superphang
http://superphang.blogspot.sg

Li Ning (HK.2331)

I purchased Li-Ning (2331, current market cap of HK$67.9 billion) on 31 Oct at an average price of HK$24.40 and it closed at HK$27.55 on 3 Nov.  Spot on!

This year, the share price of Li-Ning has experienced a 59.9% decrease, making it the worst-performing constituent stock in the Hang Seng Index. In the same period, the Hang Seng Index decreased by 12.3%, while Anta Sports (2020, market cap of HK$249.7 billion) only saw a 12% decline.

Entering the market at the beginning of the year at a high price for Li-Ning meant a significant cost, equivalent to a P/E of 50 times and a P/B of 6 times. Li-Ning's current valuation has approached actuality, with this year's projected P/E about 30% lower than that of Anta Sports and a 60% lower P/B.

After the market close on 25 Oct, Li-Ning released its Q3 operational update, indicating a single-digit increase in retail year-on-year, but a single-digit decline in same-store sales. The market reacted strongly but negatively. On 26 Oct, the company spent HK$28.92 million to repurchase 1.19 million shares at an average price of HK$24.3. Then, on 27 Oct, they further spent HK$205 million to repurchase 8.32 million shares at an average price of HK$24.7.

According to the latest equity disclosure data from the Hong Kong Stock Exchange, also on 27 Oct, GIC Private Limited purchased an additional 8,095,500 shares of Li-Ning, amounting to approximately HK$198 million. Following this increase, GIC Private Limited's latest holding of Li-Ning now stands at 134,819,422 shares, increasing their ownership stake from 4.81% to 5.11%.

With ample resources at their disposal, Li-Ning is poised to continue increasing their holdings should the stock price deteriorate further. As of the end of June this year, the company held a substantial cash reserve of 19.22 billion yuan (HK$20.5 billion), equivalent to 30.2% of the company's market value.

In the first half of the 2023 fiscal year (ending in December), Li-Ning reported a revenue of 14.02 billion yuan, a 13% year-on-year increase, while the net profit was 2.121 billion yuan, down by 3% year-on-year. Prior to the interim results announced on 10 August, the stock price was HK$43.35. The following day, it briefly reached HK$46.35. The market response was not particularly positive, and the current price is almost halved from that time.

The second half of this year for Li-Ning is expected to yield lower profits than the first half, but a comparison with the lower base of the same period last year should not be too unfavourable. The full-year profit is forecast at 4 billion yuan (EPS of 1.52 yuan), a marginal 2% decline. The valuation has become more realistic compared to before. Over the past 6 years, the average P/E was 40.6 times, and the average P/B was 7.3 times.

Li-Ning, oversold and undergoing company buybacks, with increased holdings by Northbound funds (inflow of HK$923 million last week) and GIC Pte Ltd, should be able to reach my target price of HK$40.

Superphang
http://superphang.blogspot.sg

Weakness in Creative Technology is my strength

I recently executed a successful short sale on Creative Technology, which resulted in a significant profit when I bought back the shares.

The price surged very quickly with exceptionally high trading volume after the announcement made following the market closed on 21 Sep 2023, regarding its strategic partnership with Skyworth Group. However, the share price of Skyworth Group has remained muted since the announcement.

From a technical perspective, it appeared then that a significant correction for Creative Technology was imminent. It seemed inevitable then that Creative Technology was due for a considerable correction and my estimation was prescient and timely.

Creative daily chart at the end of 3 Nov market close.

As the market grows increasingly uncertain, it is becoming apparent that there will be more profitable opportunities in shorting stocks rather than longing them. 

Superphang
http://superphang.blogspot.sg

Outlook for Singpore Property Market

To cater to strong private housing demand, the Singapore Government has decided to increase the supply of private housing on the Confirmed List further to 5,160 units, from 4,090 units in the 1H2023 GLS Programme. This brings the total Confirmed List supply to 9,250 units in 2023, the highest level since 2013. This is also nearly 50% higher than the supply in 2022, and around 2.5 times the supply in 2021. The Government has also made available sites on the Reserve List that can yield an additional 3,430 units, for developers to initiate for development if they assess that there is demand.

The increased Confirmed List supply for 2H2023 will add to the existing pipeline supply to meet the housing needs of the population. Specifically, it will bring the total pipeline supply of private housing (including ECs) to about 63,500 units, comprising 50,200 units with planning approval and 13,300 units from GLS sites and awarded en-bloc sites that have yet to be granted planning approval. Of these, about 40,400 units will be completed between 2023 and 2025, which is more than double the 20,000 units completed from 2020 to 2022. This forms part of the total supply of about 100,000 public and private housing units to be completed between 2023 and 2025, which will help to cater to housing needs in the immediate few years ahead.

Based on my estimation, Singapore's private property index has exceeded the fundamentals of the economy by at least 25% due to pent-up demand resulting from construction delays during the Covid-19 pandemic.

However, now that the pandemic is behind us and housing construction is ramping up, the pent-up demand for housing will soon be satisfied. It is important to note that what rises quickly often falls quickly as well. If this coincides with a weak economy or a recession, the Singapore property market could crash or be severely affected.

Superphang
http://superphang.blogspot.sg

CE Huada Tech (85.HK) Returns With A Vengeance

I have been holding onto CE Huada Technology (85.HK) for more than five years. In 2022, its earnings became remarkably solid, and the first half of 2023 saw even more impressive growth in its earnings.

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CE Huada Tech announced that it expected the comprehensive net profit attributable to shareholders to be approximately HKD 610 million to HKD 650 million for the six-month period ending on June 30, 2023. Take the mid-point of the estimation at HKD 630 million, this is an increase of 210.3 per cent compared to the profit of HKD 203 million for the same period last year.

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The main reasons for this expected increase in profit are:
(i) the group has seized industry opportunities and dynamically adjusted its production and sales strategies, coupled with strong performance in the eSIM chip and high-end SIM chip business; and
(ii) the impact of the continued shortage of integrated circuit production capacity in 2022, resulting in an imbalance between supply and demand for smart card chip products, with the selling prices of some key products remaining high in the first quarter of 2023.

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The price experienced a remarkable surge of 49 HK cents on the first day following the profit alert, 19 Jun 2023, reaching HKD 1.60, which represents a staggering increase of 44.14% within a single day when HSI dropped 0.64% on the same day.

Take a look at the EPS of CE Huada Tech in HKD:
1H2023 0.31066

2H2022 0.1617
1H2022 0.1001

2H2021 0.0326
1H2021 0.0292

If its 1H2023 EPS can be sustained in 2H2023, the P/E for 2023 would only be 2.58x. Based on a conservative multiple of six times earnings, the target price would be $3.72.

Superphang
http://superphang.blogspot.sg   

US Dollar ang Gold Prices

I will attempt to share my analysis on the US economy, direction of the US dollar and gold prices.

From the 1970s to the 1980s, the US experienced high inflation, with Federal funds rates soaring to 14% during that decade and the price of gold increased 25 times.

Is gold a good bet now? While high interest rates can lower the price of gold, high inflation can push it up.

If interest rates do not exceed the inflation rate by a large margin, the inflation push on gold prices can exceed the interest rates.

There are more conflicting signals from the market: The US had a strong employment market, but GDP declined, and this can be attributed to the transformation of the US economy and how US changed the computation of unemployment rates. The high interest rates environment saw a decline in high-profit industries such as finance and technology, leading to significant layoffs, and a rise in low-profit manufacturing and service industries, leading to increased hiring of lower-pay and part-time jobs.

As a result, GDP and unemployment rates diverged. The excessive rise in labour costs caused the cost of returning businesses to the US to skyrocket, making it difficult to short the US dollar as borrowing costs are too high. The US dollar needs to increase significantly in value for shorting the currency to be profitable. If the US Fed funds rate has already reached 5 to 5.25%, and the US dollar has not appreciated, when will it be possible for the US dollar to appreciate?

The global trend towards de-dollarisation is heating up, with BRIC countries preparing to expand, and it is clear that they are competing with the US dollar. Once a new trading currency or settlement mechanism appears, the demand for the US dollar will rapidly decline. The US dollar's smile curve does increase during economic downturns, but it has never faced the challenges of the past de-dollarisation trend before a recession. Therefore, being too optimistic about the US dollar is not a good thing.

Since there is currently no currency eligible to challenge the US dollar, gold may continue to rise under the de-dollarisation trend. The US dollar strengthened throughout the high inflation period in the 1980s but this time it has shown a different pattern. Michael Hartnett, the Chief Investment Strategist at Bank of America, predicts that the US dollar has entered a bear market and is expected to fall 20% in the long term. The US dollar has been weaponised too much, causing the world to want to abandon it. In the past six months, the US dollar has fallen, and the price of gold has risen, indicating that these views are not wrong.

Investors can continue to go long on the US dollar, but the US debt problem will only continue to grow as the US dollar's hegemony is challenged. The creditworthiness of US bonds will continue to weaken, and the US will expand its debt ceiling before June, meaning that it will continue to print money and raise debt, diluting the US dollar further.

The collapse of Silicon Valley Bank can be considered a Lehman Brothers’ moment, and there are more black swans waiting to happen. However, the Fed knows very well that the US dollar can only maintain its value by increasing interest rates and the Fed has to be more hawkish than European Central Bank's Governing Council in raising the Fed funds rates.  However, the current bearish trend on the US dollar is not just various investment institutions borrowing to short it; it is a coordinated effort by central banks around the world to short the US dollar, leading to a significant amount of selling of US bonds and dollars, which must have resulted in losses for countries that have them. Some could be on the verge of collapsing in the next few months. 

It is increasingly likely that the US inverted yield curves will begin to have a greater impact, potentially leading to more black swan events for countries and companies struggling with high levels of debt.

Superphang
http://superphang.blogspot.sg