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8126.HK - GA Holdings


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Possibly the cheapest publicly-traded luxury auto dealer in the market right now.

 

The company sells BMW, Ferrari, Maserati, and Mini. They're small (probably <10 dealerships) and sell only in Fujian, China, which is mostly Tier 2 cities, but borderline Tier 1/2. Population of around 39M and GDP of over USD500B, so not too shabby at all. In addition, they are the sole licensee of Hertz rental cars in Hong Kong, which has been holding up remarkably well throughout the pandemic.

 

They've been in business since 1993, and listed on the GEM Board (OTC version of HK stock market) since 2002. They punch well above their weight, and would not be surprised if they were to up-list to the main board sometime in the future. The company is founded and run by experienced Singaporeans, and headquartered there as well - so not your typical Chinese operator (but there are murky related party transactions throughout the business operations which should be noted).

 

How's the business run? Cash flow is fully retained and reinvested to acquire additional luxury dealerships in Fujian.

 

Since 2007, revenues and adjusted EPS have compounded at 20% and 14% respectively. Book value per share has also surged more than 3-fold. This was in spite of very brutal competition since 2016 when China ushered in a far more competitive landscape for the entire auto supply chain.

 

Today, the company trades at <0.2x book (majority tangible with minimal goodwill) and ~3x earnings. This is despite carrying a pretty healthy balance sheet and producing an adjusted (for taxes) ROE of 10-12%.

 

The balance sheet is not so straightforward (requires some digging) and durability may be a concern due to limited number of dealerships. But I think it's pretty attractive here given the marquee brands and a long history of persistent growth/ profitability. 

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  • 1 month later...

2020 results out. Adjusted EPS up +34% (+96% reported), BV up +17%, and now trades at ~2x earnings.

 

The main concern with this is they only have a handful of dealerships (though all are super-luxury and productive). They also do business in Xiamen via an unlisted entity (Xiamen Zhong Bao) whose balance sheet is unknown. GA Holdings' guarantees to that entity are manageable (~$100M max), but they have a lot of receivables from them, which is a credit risk.

 

Offsetting this risk, their receivables are fully collateralized by the inventory of Zhong Bao, and management states they've had a long relationship with them with no issues thus far.

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@formthirteen - thanks for sharing the Yongda writeup, interesting read.

 

GA does have a services/ parts business that make up about 26% of rev (vs. ~14% at Yongda), which is very high for a dealership. Unfortunately they don't break out the gross profits by segment, so can't say for sure what the economics look like. Their Hertz rental business (which has a high D&A component) also makes comparisons tricky. But my guess (by looking at their consolidated gross margins) is that their aftermarket economics are similar to the larger dealers, but they don't enjoy the full benefit on the bottom line perhaps because of lack of scale (though I recall Buffett once saying he does not think there are scale advantages in the auto dealership business).

 

Why this thing remains low? My best guesses:

 

- It's a GEM stock (HK otc markets), so like way way off the beaten path

- Relationship with Xiamen ZhongBao could mask the actual capital structure of the company (similar to HK Chinese (655.HK) before they eventually disclosed it in the footnotes - https://www.valueinvestorsclub.com/idea/Hong_Kong_Chinese/3087202519)

- They don't pay any dividends, which makes most of the local investors completely ignore the stock

- It's small and the majority of the economics are concentrated in a handful of dealerships in one province

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This is interesting. Any idea why the head office is in Singapore?

 

Might seem irrelevant, but there were some Chinese businesses listed in Singapore with head offices in other jurisdictions that were frauds and used all the cross jurisdictional challenges to make prosecution harder. NOT saying this is a fraud, but wonder if anyone has come across a reason.

 

And yes, there are some legit business like Jardines who do something similar, but they do have a reason. 

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The co-founders and major shareholders are Singaporean and this has been their vehicle since 1993. Loh Nee Peng (who owns ~20% of the company) used to be an executive director, but is now pretty much an absentee owner. The CEO Choy Choong Yew is also Singaporean and probably wanted to remain based in his hometown. 

 

The company appears legit to me, but there is definitely some hair.

 

- The chairman (a co-founder) was bankrupt in 2004, but entirely personal and did not appear to involve fraud.

https://www1.hkexnews.hk/listedco/listconews/gem/2016/1025/gln20161025041.pdf

 

- They've run afoul of GEM listing requirements in the past for basically not disclosing properly connected transactions with Zhong Bao

https://www1.hkexnews.hk/listedco/listconews/gem/2018/0413/gln201804139993.pdf

 

So there are things to keep an eye on.

 

Offsetting these "concerns", I would note that an executive director has been buying in the open market, and they have interest in uplisting to the main board.

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The co-founders and major shareholders are Singaporean and this has been their vehicle since 1993. Loh Nee Peng (who owns ~20% of the company) used to be an executive director, but is now pretty much an absentee owner. The CEO Choy Choong Yew is also Singaporean and probably wanted to remain based in his hometown. 

 

The company appears legit to me, but there is definitely some hair.

 

- The chairman (a co-founder) was bankrupt in 2004, but entirely personal and did not appear to involve fraud.

https://www1.hkexnews.hk/listedco/listconews/gem/2016/1025/gln20161025041.pdf

 

- They've run afoul of GEM listing requirements in the past for basically not disclosing properly connected transactions with Zhong Bao

https://www1.hkexnews.hk/listedco/listconews/gem/2018/0413/gln201804139993.pdf

 

So there are things to keep an eye on.

 

Offsetting these "concerns", I would note that an executive director has been buying in the open market, and they have interest in uplisting to the main board.

 

  Thanks for digging into this a little more RVP. Do you have any info on management trying to uplist the company? Links etc.? Not having any luck finding anything.

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  • 2 months later...

Q1 earnings out a couple weeks ago, they really hit it out of the park. 

https://www1.hkexnews.hk/listedco/listconews/gem/2021/0513/2021051301112.pdf

Trailing earnings put them at ~1x earnings now.

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It definitely appears to have a long record of growth and profitability but a few things stood out to me that seem questionable. I don't know if the formatting will carry over but I'll give it a go: 

 

  2020 2019 2018 2017 2016 2015 2014
Receivables from Zhong Bao 137.6 99.4 59.7 35.6 121.1 93.7 108.2
Advances to Zhong Bao 559.0 405.6 500.5 354.9 312.8 244.4 219.1
Total Owed by Zhong Bao 696.6 504.9 560.2 390.5 434.0 338.1 327.3
Market Value of Collateral 413.3 568.1 596.4 390.6 421.6    
               
Zhong Bao debt guaranteed 109.3 102.7 158.6 166.2 156.5 143.3 215.6

 

So, while they have been profitable and that amount is growing, it seems like everything they generate and then some goes out to Zhong Bao in the form of interest free advances. Also, while they usually had enough collateral to cover the amounts owed to them, they are short by nearly $300m this year (they are owed ~$700m and have collateral of $413m) and that's not even counting the debt they are guaranteeing. The amount they are owed goes up and down year by year but is unquestionably trending up. Assuming the collateral is real and valued correctly, a default by Zhong Bao could wipe out all of their net current assets. If the collateral isn't real, it wipes out all of their equity. 

Further, when the company earlier failed to disclose the connected transactions with Zhang Bao and were censured by the HKEX, their directors failed to cooperate with the HKEX inquiry. From the censure press release: "In the course of the Department’s investigation, the Exchange sent an enquiry letter to each of the Directiors at their respective last known addresses. The Directors did not respond to the Exchange’s enquiry letter despite two reminders having been issued to each of them. The Committee found each of the Directors to have failed to respond to the Exchange’s enquiry without reasonable or valid reason and have therefore breached their Undertaking to Co-operate"

There could be a good explanation for it but the optics are terrible.

Their uplisting application in 2018 was denied because of the investigation. They reapplied in 2019 and announced in 2020 that the application lapsed after 6 months passed. Is anyone familiar with the process in Hong Kong? From what I understand, once an application is submitted there is back and forth between the legal departments of the exchange/regulator and the company. The fact that it lapsed makes me think there were questions being asked that the company couldn't or wouldn't answer and instead of getting another denial, they just let it lapse. But, I'm not familiar with the process in HK and would love to hear from someone that knows better. Perhaps I'm reading too much into it. 

The key to this whole story seems to be the relationship with Zhong Bao (and it's 100% owner Mr. Zhao Guiming). If everything is on the up and up, this is one of the cheapest stocks out there. If it isn't, the company seems like a mechanism to funnel money to Zhong Bao. Granted, so far there haven't been any issues with collecting from Zhong Bao but the balance owed is steadily growing so I'm not sure an effort to collect has ever been made. 

   

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Barminov, thank you for your perspectives. I completely agree with you 100% that the optics are horrible and that the key risk here is relationship with Zhong Bao. The fact of the matter is that this will remain somewhat of a black box (similar to banks), and so any potential investor would have to be comfortable with this and make their own judgment / assessment. So with that caveat, let me try to address some of the good points you bring up.

Regarding the failed uplistings to main board, it’s actually quite common. Especially since 2018, HK regulators have made it extremely difficult and high bar to uplist, and in fact last week made it even more difficult by further raising the minimum profit requirement. The rationale of this high bar was to tighten the screws on abusive back door listings. Here’s an article for further context:

https://www.google.com/amp/s/amp.ft.com/content/7e48e97c-06ea-11ea-a984-fbbacad9e7dd

If you go through the entire GEM board, you may be surprised how many tried to uplift and let the application lapse. Many were very straightforward and simple entities. My read here (take this with a grain of salt) is that many of these SMBs are focused on running their business, but are sorely lacking in regards to technical compliance with HKEX standards. While I appreciate regulators efforts to “protect” investors, I can tell you that there are A LOT of rules established by HKEX (whether for large or small stocks) that are completely irrational, archaic, and sometimes even protectionist towards certain investor classes. So it’s far from perfect by a long shot. 

Regarding the relationship with Zhong Bao, my take is that the business there has grown quite a bit, and so advances have correspondingly increased. Why are they using GA’s balance sheet as opposed to Zhong Bao’s? The optimist in me would say it’s because GA as a holding company can get better credit terms from banks, but the cynic in me would say Zhong Bao is levered to the hilt and relying on GA to survive and grow. This is the black box, and absent a voluntary disclosure of Zhong Bao’s balance sheet, I don’t think any amount of investigation would give me a definitive answer. Hence the market is probably shooting first and asking questions later.

While you are directionally correct on the sensitivity of the creditworthiness of Zhong Bao to GA’s solvency, I wanted to note that the majority of GA’s borrowings are actually guaranteed by Zhong Bao, Zhong Bao’s shareholder, and majority shareholder Loh Nee Peng.

So in the worst case scenario where all the Zhong Bao receivables and advances are wiped out + the $100m guarantee, equity would drop to roughly $300m, as shown below:

$1.8B (total assets) - $700m ZB receivables - $100m ZB guarantees - $1.05B (total liabilities) + $350m (non-recourse debt) = $300M.

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  • 2 weeks later...
Posted (edited)

Company just announced a new guarantee agreement with Zhong Bao in the amount of HK$62M.

 

https://www1.hkexnews.hk/listedco/listconews/gem/2021/0607/2021060700790.pdf

 

The announcement explains why they have this arrangement: "...since the company's listing in 2002, there has always been in place between the group and its distribution agents technical and cooperation agreements for the group's motor vehicle trading business as foreign companies were not allowed under PRC laws and regulations to engage in the business of trading motor vehicles directly in the PRC. (emphasis mine)"

 

Based on the general downward trend of the debt guarantees over the years, coupled with rising receivables and advances owed by Zhong Bao, my guess is that Zhong Bao's balance sheet has grown over the years (via business gains and working capital from GA), and their reliance on debt may have reduced. This is just a guess though, as there can be no way to confirm without actually seeing Zhong Bao's balance sheet. 

Edited by RVP
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