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1260.HK - Wonderful Sky Financial Group


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#1 financial PR firm in HK trading at a discount to its net cash and marketable securities (mostly corporate bonds). In addition to getting the business for free, you also get the 9th floor of The Center - a Grade A HK office building they're currently using valued at HKD $594M (~85% of current market cap, but definitely overvalued). There's a good 2017 write-up on VIC, but if you want the abridged version read on.

 

The business is simple - they manage the entire PR life cycle for businesses that want to go public/ have gone public on the HK stock exchange. This includes things like investor roadshows, corporate filings, financial printing, translations, etc. The relationship usually begins before a company goes IPO, and continues in the (hopefully successful) many years that follow as a public-listed company. Barriers to entry are low, but reputation is everything in this business. Because their services are a fraction of total IPO cost, potential customers usually go with the best of the best, since this is usually a once in a lifetime affair (like how marriages used to be). This was reflected in their 88% dominance of the HK IPO market in 2016, and engagement in all top 10 deals.       

 

Today, they've built up a large base of recurring customers over the years, which now likely makes up 2/3 of revenue, so they've become less dependent on the IPO market. They're also growing their presence in the China and Singapore exchanges, though it remains minuscule and lack of evident traction. While costs are relatively fixed (mostly in-house and outsourced labor), margins are incredibly high (GP 50%+, NI 20% - 30%+), which is likely indicative of the pricing power they command.

 

By all accounts this looks like a good business that's not going anywhere, but the market has appraised them as if they're going extinct. In a nutshell, I view this as a free play on the HK IPO/ listed market without having to pay high HKEX (388.HK) prices, with the embedded defensiveness of recurring maintenance income from past clients.                 

 

 

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Given how strong the HK ipo market has been, it's disappointing that revenues and core profits still experienced severe contraction.

 

From the announced projects they've worked on vs the HK ipo slate YTD, it doesn't appear like they lost much market share. It think the absence of real life roadshows and other tangible PR related services (i.e. lucrative cross sell services) may have hurt them. I'm guessing here, because disclosures are minimal. The impact on their business was larger than I expected. If my assumptions are correct, I think it means you're going to see very volatile (but profitable) results in any give period. That's something the market isn't going to be able to discount well.

 

On the other hand, their high yield bond operation has been quite fruitful, and the balance sheet has swelled. I think the market is correct to punish the underlying business, but I think the market is incorrectly ignoring their balance sheet. The result is a wider discount to liquidation value.

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