I am very happy to start writing about my favorite holdings, starting with this Article, and your feedback is appreciated.
This company has a very simple business. It sells some flours and edible oils, as well as cleaning products.
Business:
The cooking oils and Flour. brands are marketing as brands for the high end market, and are quality brands, for example:
"Soon is a popular edible oil brand in the food and beverage catering market. It has been well received for its high quality by various food outlets as well as chefs from different hotels and restaurants for decades."
"Awarded “Hong Kong Q-mark Quality Product” and “Hong Kong Top Brand”, Knife oil prides itself in the provision of the best products to satisfy today’s consumers’ pursuit of taste and health."
"Golden Statue is the bakers’ choice for top-quality flour. For over six decades, Golden Statue has been leading the Hong Kong bread flour market and is a significant supplier to many households, hotels, bakeries and food manufacturers."
"Royal Sakura Japanese Style Bread Flour is made from selected imported wheat with superior Japanese flour milling technology."
The cleaning products are more focused on Hong Kong but have also strong brand value:
"AXE was first launched in 1969 and has served consumers for almost 50 years with its comprehensive product line, ranging from dishwashing soap to fabric care, kitchen and floor cleaning products."
History and strategy
It has a very long history, starting in 1930 in Singapore and 1961 in Hong Kong. Contrary to many stocks listed in Hong Kong, it has its roots in Hong Kong, and has a long track record.
The long term chart in google starts at HKD 1.45$ in 2000 and is now at HKD 16$, with regular growth, and dividends.
On the history section of their website, we have an idea of how they did it:
2002.Acquisition of Jiangsu Jingyuan Flour Mills and the setting up of Jiangsu Lam Soon Flour Mills Company Limited
2003.Expansion of the daily wheat processing capacity of Shekou Flour Mills to 1,200MT, thereby becoming the largest foreign-owned world-class flourmill in the PRC
2007.Acquisition of land in Qingzhou, PRC and the establishment of Lam Soon (Shandong) Food Company Limited
2009.Acquisition of assets for flour mill operations in Jiangsu, PRC and the setting up of Jiangsu Lam Soon Food Company Limited
2013.Opening Ceremony of Lam Soon (Sichuan) Food Company Limited
2015.HK Catering Oil Production Line Opening + China Oil Production Line Opening
2019.Yixing plant relocated(?)
Without going in all the details, we can conclude several things:
They expand in volume
They expand in geographic provinces in China
They expand in product lines
China has many provinces, and they have much space to grow.
Earnings and valuation
They got hit hard in the first half of 2020, with the strict lockdowns in China, earning HKD 0,55$ per share, compared to HKD 0,8$ in the past halfs. But as a good defensive stock, it remained profitable.
It earned HKD 1$ in H2 2020 (up 28% yoy with a 7% revenue growth), so we have HKD 2$ of normalised earnings based on the last performance. for a 16$ stock or a PE ratio of 8. The yield is about 3%, so they keep most of their profit to reinvest while growing a dividend reasonably.
The earnings benefited from tailwinds like RMB Currency, bran prices as well as headwinds from covid effects on baking market, hotels and restaurants, and oil costs. So it's fair to say that they are not over or under earning.
The homecare segment, 15% of profit as of H2, benefitted from covid, because it has cleaning products.
They clearly are not saying that they over earn when we read the last line of their outlook:
"We had adapted and continued to strengthen our fundamentals. As such while we remain cautious, we are also optimistic and well positioned to ride on any recovery momentum swiftly and decisively."
On top of that, the company has $1.6B HKD net cash on the balance sheet, 41% of the Market Cap.
I am not a fan of net cash, I do not discount it in valuations, but this company is still distributing a growing dividend, and expands constantly, so the net cash is a bonus.
Cash flow generation is good when we look at the annual reports, they do not invest all their operating cash flow for the growth. EPS is pretty close to Free cash flow, which includes growth projects. For H1, it was lower, we do not have the detail, so it must be working capital
Pre covid, the previous three years EPS grew at a CAGR of 18.5%, but revenue only grew at 4% CAGR. Revenue for H1 2021 is already 6% higher than H1 2019 precovid.
Future developments (from Dec 2020 results release).
During this period, we launched the premium Golden Statue Japanese and Golden Statue French Flours
The Group also began distribution of Manuka Health honey products in China
The Group remains committed to strengthen its growth fundamentals. Our specialty fats facility in Jintan, China commenced construction work in September 2020. However, due to the COVID-19 pandemic and weather disruptions, the project encountered a slight delay and is currently expected to be operational by the end of FY2020/21.
With a strong cash position, the Group is well positioned to make capital investments, acquisitions and/or enter into joint ventures to strengthen its supply chain and to support geographic and business expansions, should good opportunities arise.
Conclusion: Its a buy, even with no growth, with a PE of 8 in a defensive industry. Earning growth should continue with expansion and catering recovery in 2021, making it a strong buy with either a PE of 20 objective or a long term hold as the growth strategy continues.
EDIT 26 MARCH;
I received some great feedback:
1-If we look at Net Margin, it looks like LAM SOON over earned in H2, possibly with restocking after H1 hit by the pandemic, and its normalised PE ratio is more like 11. My view is that makes sense, but it is not mentioned in the earning release by the management, therefore I do follow this view as high probable. I view it as a possibility.
2-A big reason for the discount is the illiquidity of the shares. I did not think of that and I agree.
3.The cash, they might use it for a bad acquisition, or not use it at all. I agree, but a bad acquisition should still increase the earnings. If not used, the cash will pay some interest. I do not count the cash in my valuation because I do not know what they will do with it, but it is a bonus catalyst.
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