This is my second note on this forum (please see my note on PW Medtech which I feel it is great time to accumulate post initial rally)
Changshouhua Food Company Limited, an investment holding company, produces and sells branded and non-branded corn oil primarily in the People’s Republic of China. It is currently the largest corn oil manufacturer in China. Company is a revenue compounder with 12 year revenue and GP growing 45% and 25% respectively but since 5 years ago, rev and GP and OP only grew 3% and 6% CAGR, respectively. GPM expanded from 20% in 2013 to 23% in FY18 due to better product mix as mix shifted towards own brands. ROE averaged 18% historically since 2007 albeit only 12% in FY18. ROIC on the other hand, scored an impressive 23% since 2006.
Why interesting?
1. Super cheap: Company has net cash levels of HKD$2B which is higher than the market cap of HKD$1.9B. Despite alot of cash, company also has an attractive business that generates around HKD400M of operating earnings every year which translates to HKD4B in market value. Adding net cash and HKD$4B of operating company, market valuation is HKD$6B which is more than 3x the market cap. This is dismissing the fact that the company has very attractive growth opportunities going forward but market is totally ignoring this let alone assuming that the operating company has 0 value!! P/B is at historical low and should not be this cheap considering the company's ROIC hovers more than 30% and company
2. The company has very strong moat in the corn oil business and the company was able to maintain high GPM even when raw materials increase. This is likely due to the high pricing power company has due to it's brand. The company also has lower cost of production given it can convert 94% of gross corn into refined corn oil vs. industry standard of less than 90%. Less than 4% of total sales volume of edible oil comes from corn oil - expected to rise as residents get higher purchasing power and become more health-conscious
3. New growth driver: The Group has been continuing to prioritize own brand development and gradually introducing other different types of edible oil products and the series of Changshouhua Kitchen food products under the brand of (Longevity Flower). The Company started the designation for the production in high-end condiment products, which were launched to the market officially under the brand of (Longevity Flower) since 2018. New condiments are produced through traditional Taiwanese fermentation process, which include Aromatic Soy Sauce, Premium Soy Sauce, Superior Soy Sauce, Original Soy Sauce, Deluxe Dark Soy Sauce and soybean paste. The soy sauce series offers different capacity specifications for consumers: 160 ml, 500 ml, 855 ml, 1 liter, 1.3 liters, 1.6 liters, 1.9 liters and 4.3 liters, while soybean paste is sold in 680 grams. While not sure, how much contribution was made from this product, we notice that the "non- corn branded products" has grown rapidly in last 3 years.
4. Dividends expected to increase due to high interest / debt issues at Parentco level.
Risk is that there may more inter-group transactions driven by the new products as company sources soy sauce raw material from parentco.
Changshouhua Food Company Limited, an investment holding company, produces and sells branded and non-branded corn oil primarily in the People’s Republic of China. It is currently the largest corn oil manufacturer in China. Company is a revenue compounder with 12 year revenue and GP growing 45% and 25% respectively but since 5 years ago, rev and GP and OP only grew 3% and 6% CAGR, respectively. GPM expanded from 20% in 2013 to 23% in FY18 due to better product mix as mix shifted towards own brands. ROE averaged 18% historically since 2007 albeit only 12% in FY18. ROIC on the other hand, scored an impressive 23% since 2006.
Why interesting?
1. Super cheap: Company has net cash levels of HKD$2B which is higher than the market cap of HKD$1.9B. Despite alot of cash, company also has an attractive business that generates around HKD400M of operating earnings every year which translates to HKD4B in market value. Adding net cash and HKD$4B of operating company, market valuation is HKD$6B which is more than 3x the market cap. This is dismissing the fact that the company has very attractive growth opportunities going forward but market is totally ignoring this let alone assuming that the operating company has 0 value!! P/B is at historical low and should not be this cheap considering the company's ROIC hovers more than 30% and company
2. The company has very strong moat in the corn oil business and the company was able to maintain high GPM even when raw materials increase. This is likely due to the high pricing power company has due to it's brand. The company also has lower cost of production given it can convert 94% of gross corn into refined corn oil vs. industry standard of less than 90%. Less than 4% of total sales volume of edible oil comes from corn oil - expected to rise as residents get higher purchasing power and become more health-conscious
3. New growth driver: The Group has been continuing to prioritize own brand development and gradually introducing other different types of edible oil products and the series of Changshouhua Kitchen food products under the brand of (Longevity Flower). The Company started the designation for the production in high-end condiment products, which were launched to the market officially under the brand of (Longevity Flower) since 2018. New condiments are produced through traditional Taiwanese fermentation process, which include Aromatic Soy Sauce, Premium Soy Sauce, Superior Soy Sauce, Original Soy Sauce, Deluxe Dark Soy Sauce and soybean paste. The soy sauce series offers different capacity specifications for consumers: 160 ml, 500 ml, 855 ml, 1 liter, 1.3 liters, 1.6 liters, 1.9 liters and 4.3 liters, while soybean paste is sold in 680 grams. While not sure, how much contribution was made from this product, we notice that the "non- corn branded products" has grown rapidly in last 3 years.
4. Dividends expected to increase due to high interest / debt issues at Parentco level.
Risk is that there may more inter-group transactions driven by the new products as company sources soy sauce raw material from parentco.