Meng Teck is an author, investor and entrepreneur.
Back to Blog
Hup Seng Industries Bhd (5024)
Hup Seng Industries Bhd is an investment holding company listed in Bursa Malaysia (Malaysian stock exchange) that is famous for it’s Hup Seng Cream Cracker. The group consists of three companies,namely,Hup Seng Perusahaan Makan Sdn Bhd,Hup Seng Hoon Yong Brothers sdn bhd and Incomix food industries sdn bhd.
I’m sure you have seen,if not eaten one of those yellow packet of hup seng cream cracker. I’m a fan of the cream cracker personally and have stacked up a supply of their cream crackers in my dorm.
In order to understand the business model,let us delve deeper into it’s business model
Hup Seng industries bhd in it’s nature is a food& beverages industry holdings. This is a pretty good industry to be in if you have a strong brand(refer Nestle). This is because this industry is recession proof. What this means is that during times of depression, the profits and revenues of the group will only be affected slightly. In fact, in some cases, it may even increase the revenue of the group as people are trying to cut living costs. What do you do when you try to cut living costs? Try to eat less outside right? Would Hup Seng cream cracker come to your mind as a cheap food to fill your stomach?
Secondly,this business does not require high maintenance cost. It does not have to compete to update to the latest technology by changing it’s equipment every few years against it’s peers as the only thing it has to do is to maintain it’s quality and expand it’s retail coverage. For example, Milo(from Nestle) has been around for so many year and yet,the same recipe is used till today.
Even though strictly speaking, branding is not categorized as a competitive advantage,however, I believe that it’s strong branding would be beneficial to the company in the long term as it doesn’t have to spend so much money retain it’s existing customers.
(I believe it is safe to say it is a market leader in the biscuit industry in Malaysia though I did not check it’s market share of the product)
Being in the food and beverages industy also means that it would be a little difficult for it to expand overseas (though it is trying to penetrate Indonesia by building a new plant there), this is because human’s taste preferences changes according to demographic).
Because it also lacks a strong competitive advantage, it would be easy for competitor to come in. Confectionary companies from china has already started to come in as it’s competitor, even with it’s strong market presence, no doubt some part of the revenue will be stolen.
Overall, I believe the business model is good and this particular group is doing pretty fine in Malaysia.
Now that we have got a rough picture of the business model, let us take a look at it’s management.
Upon due diligence,this is the type of management that I love. The directors have a large stake in the business (>55%). It is basically a family run business, I would call them the Kerk family. If you investigate further, you will find that some of the directors have been actively acquiring share of the company in year 2008-2009. This shows that the management has strong confidence on the business and believe that the shares are undervalued. However,please bear in mind that the acquisition is done during 2008-2009 when the PE is around 5-6.
The average annualized ROE for the past 5 years(from 2012 backwards) is 16.26% signifying good business model and good asset management.
Net profit margin has been inconsistent but a faint uptrend is observed.
Year 2008 - 7.3
Year 2009 - 12.6
Year 2010 - 10.7
Year 2011 - 7.7
Year 2012 - 13.1
It is explained in the annual report that the net profit margin is increased by cost cutting exercises which can be proved by the significant difference between the profit growth vs revenue growth. To be honest, the revenue growth has been slow. Having profit growth more than revenue growth is a very good sign of excellent management.
How about the group’s financial health? Is it in a lot of debt?
This group’s financial position is very beautiful. It is in a net cash position. It literally has NO DEBT. It has total cash of 80 Million versus a total liability of just 51.7 Million which consists of mainly deferred tax liability. This justifies why the group is so generous in it’s dividend giving exercises.
Dividend per share is also fluctuating but on an uptrend year on year
2009 - 12.75
2010 - 12
2011 - 25
2012 – 30
2013- ytd 25
Now that we known the business a whole. Now comes the price. Imagine the company as a product, you have seen what it can do,how wonderful it is, you got hyped up and you would love to own it. What’s the next question? Yes. What’s the price?
Let us discuss about the EPS…Eps has been fluactuating with a faint uptrend as well.
Kindly refer: http://klse.i3investor.com/servlets/stk/fin/5024.jsp
Therefore, it is difficult to predict what the earnings will look like in the future and difficult to calculate the growth rate. This makes it slightly undesirable as a precise evaluation is very difficult to be determined.
However, what we can measure is the Price over earning (PE ratio) as of now. It can be noticed that the PE ratio of the company has always been around 9 – 11. However,due to the recent surge of the share price, it has already become more than 20. In fact,it reached as high as 8.30/.30 = 27.67 before the share split and the bonus issue.
The catch = Share split and bonus issue:
Yes, the company recently exercised a share split of one ordinary share of 0.50 cents to 5 ordinary shares of 0.10 each and a bonus issue of 1 share of ordinary share of 0.10 for every 3 shares owned. Both having the same ex-date of 02.04.2014. This explains the sharp drop of the share price on the chart. I believe it will dilute the EPS by a factor of 5 * 1.3333 = 6.6667 if not mistaken? . Therefore, the adjusted EPS will be 30/6.6667 = 4.5 cents per share.
(I believe the recent surge in share price is also due to the rumors of this share split and bonus issue..those people are buying on rumors and selling on news)
At the share price of 1.22 as of 1:47 PM 4/18/2014. The adjusted Price over earning will be 1.22/0.045 = 27.11. The Price over earning is now at it’s historic high compared to the ratio of around 9-11 previously. Usually high PE is justified by predicted high growth rate. Will the growth rate be over 27.11%? if so,then the PEG will be less than 1 which will make this stock more attractive,however, I do not see any facts that can support this statement. Is it due to the construction of the new plant in Indonesia? Do you think this growth rate is sustainable given the record of fluctuation in EPS?
This share has come under my radar once, but was put aside due to the high valuation.
What we have found out so far that this company has an excellent business model with strong branding, management with a big stake in the company with wise asset management, it also has very strong financial position which will come in handy shall the China’s credit crunch issue aggravate( if you believe that bull market and bear market takes turn theory, we are actually nearing the end of the bull market (6 years since the sub-prime crisis),bulls usually run for around 6 years before the bear come again.). It is safe to say that this is a quality company. However,I find it difficult to justify the high evaluation of the company. In fact, I will only pay 0.72 per share for the company at most which is a PE of 16 after taking into account the strong cash position and the branding.
The ultimate question is this, Is Hup Seng Industries Bhd at the share price of 1.22 (adjusted PE= 27.11) and adjusted dividend of 23/6.6667 = 3.45 (which yield you 2.83%) or being more optimistic, 30/6.6667= 4.5 (which yield you 3.69% at most.) a good buy given it’s fluctuating nature? I leave this question to you. ( I did not calculate the Net Asset per share value,I believe it is around 0.25 per share (adjusted with share split and bonus issue))
Please read our disclaimer and copyright notice.
Savwee Enterprise. All rights reserved.