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2788:HK - Yorkey Optical


sginvestor
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Yorkey Optical (HK$2788)

 

The main business of Yorkey is in the manufacturing and sales of plastic and metallic parts and components of Digital Still Cameras (DSCs), action cameras, copier-based multifunction peripherals, surveillance cameras, projectors and advanced TVs, etc.

 

The DSC market is a slowly dying business as mobile phones cameras become more advanced but Yorkey has managed to remain barely profitable with interest income mainly from property they own. The company derives a bulk of their revenues from Japan and the PRC.

 

Yorkey’s latest interim report gives us reason to look at this stock.

 

Interim Report - Balance Sheet 30/6/20 (All figures in USD$)

 

Non-current Assets

 

Investment Properties: Acquired in 31 December 2016, Workshops 01-09. 26th Floor CRE Centre, bought for $6.3M. Unable to find any disclosed transactions at Cre centre and hence couldn’t get a gauge on whether they overpaid for this. However, let’s assume they overpaid and value this at = $2.75M (50%)

 

Property, Plant & Equipment: This is currently valued at US$5.1M on their balance sheet. As the DSC market is a slowly dying industry, let’s assume a worst case scenario and value their equipment at $750K (15%).

 

Deposits valued at balance sheet figures = $390K

 

Total Non-current Assets = $4M

 

Current Assets

 

Inventories ($2.7M) = Let’s assume their inventories are worthless and value it at $270K (10%).

 

Trade and other Receivables ($7.76M) = $6M(valued at 80%)

 

Bank balances and cash = $82M

 

Total Current Assets = $88M

 

Total Assets = $4M + $88M = $92M

 

Yorkey has no debt and total liabilities amount to = $20M

 

Thus, anyone can come along and pay $56M for a company with a book value of about $72M in a worst case scenario and get $16M for free.

 

Let’s say in the past 3 months since the interim report was released, the company has suffered more losses in their business. I believe the difference between book value and market price provides a sufficient margin of safety as I have been fairly pessimistic in the valuation of the assets.

 

Short Case:

1. Market might know something I don’t, resulting in the low share price.

2. The numbers could have been fudged and the business is in worse condition. Management might be not be disclosing all information to shareholders. (This has happened before in 2013 but the old CEO and financial controller have been removed)

 

Catalysts:

1. Yorkey Optical is a dying business, but the DSC market has slightly recovered and Yorkey’s business will recover over the coming years. I believe Yorkey will not go bankrupt anytime soon and will still be definitely be worth more than $56M. (http://www.cipa.jp/stats/documents/e/dw-202011_e.pdf) (http://www.cipa.jp/stats/documents/e/d-202011_e.pdf)

2. Management has also been buying back shares.

 

Additional points:

David Webb, HK corp governance guru has also recently added US$35K to his current holdings. He is a 5% shareholder of the company since 2013 and has fought against the board for them to be more shareholder-friendly.

The past 3 times he has invested a similar amount to his positions, the stock has always revalued upwards in the following months.

David Webb Acquisition Dates:

Jan 28 2014 (Went up in Feb)

Jul 22 2014 (Went up in Aug)

Jan 19 2016 (Went up in Feb and March)

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Thus, anyone can come along and pay $56M for a company with a book value of about $72M in a worst case scenario and get $16M for free.

Are we talking about the same country? This is clearly not the case. Even in the USA mgmt can fight back. The HK courts are now captured and I do not see a foreigner buying such a company whole.

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Without digging much deeper than the numbers you presented, why not go with some of Webbs' other holdings? I wrote up Analogue Holdings and Lion Rock Group, which both trade below and at NCAV despite them being fine businesses with good management and a high payout. I like Webb, but a lot of his picks seems like pretty bad businesses. That can be a perfectly fine way to make money, but when decent to good businesses trade around net net as well - and management doesn't suck - I know where I park my money. (Lion Rock and Analogue also has some warts, obviously, among other things it's not clear how much of their free cash is actually free, nor how much one should haircut receivables).

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I own a small position. Yes, the business is slowly declining, but they've still been able to eke out profits in most years.

 

The main reason I like it though, is that management has been under pressure from Webb since 2013 and he's been successful. The company had connected transactions with its major shareholder, Asia Optical, and Webb campaigned against these transactions. To read more about this, check out: https://webb-site.com/articles/yorkey.asp and https://webb-site.com/articles/yorkey2.asp. One of his arguments was that Yorkey was extending credit on generous terms to Asia Optical and by doing that, Yorkey's cash basically became a piggy bank for Asia Optical. Ultimately shareholders vetoed the connected transaction with Asia Optical in June 2015: http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0618/LTN20150618376.pdf

 

In the subsequent annual reports I don't see that particular connected transaction anymore, so I assume this is still the status quo.

 

I don't think it's a coincidence that the company decided to pay $10m+ special dividends in the years 2016-2019 after losing this vote. The special dividends were on top of their regular dividends, which also remained high in those years. Management lost the vote and Asia Optical lost control of their piggy bank. Paying out more of that cash to all shareholders became the rational thing to do.

 

So I think that makes it a pretty attractive situation. Yes, the business is not great, but management is probably going to continue to return a substantial amount of cash to shareholders, probably if earnings recover a bit. It's pretty rare to see an activist prevail at a HK-listed company, but I think Webb has forced their hand here. Webb has a serious disease though, so it remains to be seen if he is able to continue to stand up to management if this is needed in the future. But it should be possible to have a representative do this for him. The fact that Webb bought a bit more recently seems positive in that regard, he's not going anywhere.

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Thanks for the additional flavour, that makes sense. So basically a cash box trading at a discount and returning money with the added kicker - and risk - that business may/may not turn around. So what are the odds that things turn around? :)

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