COSCO International Holdings Limited (SEHK: 517) is the subsidiary of COSCO (Hong Kong) Group (COSCO Hong Kong's parent company is COSCO Group). It is headquartered in Hong Kong and it was listed in the Hong Kong Stock Exchange in 1992. It is 66% owned by the COSCO SHIPPING Group.
The value thesis for this company is in its balance sheet. 6.09bil hkd of net cash which equates to HK$3.97 of net cash per share vis a vis a market cap of 3.34bil hkd(2.18 per share). This will likely allow the company to make a series of small acquisitions to complement its existing businesses and/or enable it to make a transformational acquisition to substantially expand its earnings.
This company is trading at 45% discount to its net cash and has been profitable every year since the GFC. It has also been paying out more than 50% of its earnings consistently.
2009: 0.56 EPS 0.2454 FCF 0.094 DIV(4.33%)
2010: 0.83 EPS -0.0891 FCF 0.400 DIV(18.4%)
2011: 0.25 EPS 0.0028 FCF 0.090 DIV(4.15%)
2012: 0.24 EPS 0.2532 FCF 0.080 DIV(3.69%)
2013: 0.16 EPS 0.2698 FCF 0.055 DIV(2.53%)
2014: 0.23 EPS -0.1008 FCF 0.130 DIV(6.00%)
2015: 0.22 EPS 0.2759 FCF 0.160 DIV(7.40%)
2016: 0.16 EPS 0.4363 FCF 0.145 DIV(6.68%)
2017: 0.23 EPS 0.0739 FCF 0.180 DIV(8.29%)
2018: 0.19 EPS 0.1285 FCF 0.140 DIV(6.45%)
2019: 0.17 EPS 0.1451 FCF 0.160 DIV(7.37%)
512 is able to churn out cash consistently almost every year due to its low capex services orientated operations. A simple calculation of its total FCF per share since 2009 till now equates to HK$1.64 against its total div paid per share since 2009 till now of HK$1.634. This shows that in this 10 years period, its div payout is sustainable from its FCF generation.
Assuming they dont touch their cash horde and just churns out the same fcf for the next 10 years with the same, close to 100% payout of fcf, it would theoretically give back 75% of its current market cap to opmi in the next 10 years. Here is the breakdown of their net cash over the years:
2009: 1.26bil
2010: 6.26bil
2011: 5.69bil
2012: 5.80bil
2013: 6.27bil
2014: 6.11bil
2015: 6.21bil
2016: 6.68bil
2017: 6.53bil
2018: 6.33bil
2019: 6.09bil
Their net cash has min fluctuations over the years. In Aug 2018 they acquire a 33% stake in Nasurfar for 99.7mil hkd which contributed a monthly avg profit of 460k(18x pe) in 1H 2019 compared to 400k in 2018. Cash is being used slowly on acquisitions that have growing bottom line.
Another thing to note is that its 6.09bil hkd worth of cash, consist of 91% usd which is actually strengthening amongst the other major currencies like yuan, hkd and sgd etc. The cash is also getting a return of 3.42% representing a 110 basis points above 3 month US dollar London Interbank Offered Rate as at the end of June 2019. So there is a fix D mechanism inbuild to the company if it continues to sit there. To add to the stability, its finance income from its interest is 50% more than its operating income.
A simple break down of its "free" core businesses:
1) Ship Trading Agency Services. Earnings are from commission for being the middle man in a transaction of a ship. Very cyclical business and dependent on over/under supply of ships. Average OPMs are in the 60% range.
2) Marine Insurance. A stable but low-growth business as companies need to renew their insurance on their vessels frequently. The OPMs have averaged about 70% in the last 5 years. Very parent based business as majority of this business is to insure its parent's vessels. Which brings consistency and stability.
3) Marine Equipment and Spare Parts. They have been growing this business as they try to target customers outside of the COSCO shipping group. The economics here are not great with OPMs at 5% and demand is tied to vessel demand.
4) Coatings. Here they manufacture and sell marine coating paint with anti-corrosive characteristics. Here the profitability fluctuates with raw material prices but demand itself is stable as most of it is for maintenance and repairs. They also sell similar products for industrial use and for containers. OPMs are in the low single digit range. Recent cost restructuring and acquisition increased its PBT by 3000%.
5) Trading business. This is trading mostly for marine fuel and the profits varies with oil price but it accounts for only 4-5% of the profits.
Their businesses have a moat due to the fact that there are servicing its parent predominantly(which is a captive stable customer) followed by outside customers. So even though its not exciting, the bottom line should be consistent.
512 in my view represent a very interesting case where not only is the share price trading at 45% disc to its net cash, Its share price is also at near 10 years low. A neg 2.46bil hkd coy that has been always profitable and also paying out more than 50% of its earnings. Owned by cosco group which is the world largest shipping company in terms of comprehensive strength. Its fleet of more than 1,100 ships, with a combined capacity of over 85 million DWT, ranks the first in the world.
Risks:
1) Lack of execution on acquisition front. The share price could continue to trade at a depressed valuation if the group fails to execute on its plans for acquisition(s).
2) Overpaying for an acquisition or buying a non-complementary business. The risk exists that the group may overpay for an acquisition or buy a business that does not complement its current businesses, thus leading to shareholder value destruction.
Catalyst:
1) A big earning accretive acquisition using its cash hoard(cosco logistic would be a good idea)
2) Coy pays out all its cash of $3.97 per share and immediately multibags
3) Parent privatize 512 at an acceptable price and slowly strip the cash and IPs for themselves
Do note, at this price, you are buying their core businesses and investment properties(115mil hkd worth) for free. You are also using 2.17 hkd to buy 3.97 of net cash(predominantly in usd) while getting a 6.42% thereabout return via div yield which is net sustainable by its own fcf.
Disclosure: At the time of this posting, I own shares in this company.
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