GDH Guangnan Holdings Ltd (1203:HKG)

Recent Share Price: HK$ 0.74
Accounting: HKAS
Fiscal Year: Dec. 31st
Market Cap: HK$671.6 million ($86.3 million)
Industry: Basic Materials / Steel

Incorporated in 1982 and based in Hong Kong, GDH Guangnan Holdings Ltd. (GDH) is primarily a manufacturer of steel-related products that are used for the packaging of consumer staple-related goods and is heavily invested in the pig business. Although based in Hong Kong, GDH is a PRC company–operationally speaking. I can see the red flags immediately going up: PRC, SOE, Pig Business… PASS! And I can’t say I really blame you. Who wants to get involved with that! On the other hand, those dividend checks keep rolling in and it’s hard to find evidence of shareholder abuse. Also, GDH has a solid long-term working arrangement with POSCO, a quite reputable Korean steel mill. And the company is cheap. Pretty darn cheap. However, remind you, this is based on a diversified approach, i.e., 30 to 60 stocks. There is a chance of being blindsided, so risks of this nature need to be handled with diversification.

We care about the country where the company is run. There is a disadvantage being outside of the US. A few years ago we were looking to invest in either PetroChina or Yukos in Russia. We ended up picking PetroChina because the political situation was more stable. It turned out to be a good decision. I care about the country and the geopolitical environment I am investing in. The whole company was selling for $35 billion. It was selling for one-fourth of the price of Exxon, but was making profits equal to 80% of Exxon. I was reading the annual report one day and in it I saw a message from the Chairman saying that the company would pay out 45% of its profits as dividends. This was much more than any company like this, and I liked the reserves. If it were a US company, it would sell for $85 billion; it’s a good, solid company. I don’t understand the Chinese culture like I understand the US culture. However it said right in their annual report that they will payout 45% of their earnings as dividends, basically they say if they make money they will pay it out. I invested $450 million and its now worth $3.5 billion. I decided I’d rather be in China than Russia. I liked the investment climate better in China. In July, the owner of Yukos, Mikhail Khodorkovsky (at that time, the richest man in Russia) had breakfast with me and was asking for my consultation if they should expand into New York and if this was too onerous considering the SEC regulations. Four months later, Mikhail Khodorkovsky was in prison. Putin put him in. He took on Putin and lost. His decision on geopolitical thinking was wrong and now the company is finished. PetroChina was the superior investment choice. 45% was a crazy amount of dividends to offer but China kept its word. I am never quite as happy as I am in the US, because the laws are more uncertain elsewhere, but the point is to buy things cheap. Russia is just a bad geopolitical environment. On the other hand, China has kept their word on paying the dividends. In fact, when the dividends check comes in, it is calculated out 10 or so decimals, these guys keep their word. I don’t know the tax laws in China, but you can buy a good business cheap.

Source: Student Visit 2007 URL:http://buffettspeaks.blogspot.com/2007/01/permanent-value-teachings-of-warren.html

Tinplating (2020 Revenue: HK$ 2,115.6 million, HK$ 8.7 profit; 2019 HK$ 2,022, HK$ 36.1 m profit)
This segment produces and sells tinplate and related products used as packaging materials for food processing manufactures. GDH Zhongyue, 100% subsidiary, (located in PRC) has an annual output capacity of 290,000 tons tinplate, 80,000 tons of tin-free steel (TFS), and 140,000 tons of blackplate (cold-rolled steel plate).

In 2006, the group formed an alliance with POSCO Co. to establish a joint-venture: GDH Zhongyue Posco. GDH has a 66% interest in the JV and POSCO has a 34% interest. The JV has an annual output capacity of 200,000 tons. The products are used for the packaging of beverages, food, medicine, and chemicals. In the first half of this year, GDH reported 72% of revenue from this division with 159,640 tons of tinplate products produced–a 15% increase y/y. Year over year revenue was up 44% with profit up 140%. On the negative, ex-PRC revenue declined due to increased competition, supply chain constraints and the cancellation of the export rebate policy on chrome-plated iron.

Fresh & Live Foodstuffs (2020 Revenue: HK$ 321.0 million + HK$ 81.9 million distribution = HK$ 403.0 m, HK$113.3 profit; 2019 HK$ 326.4 rev / HK$ 49.2 profit)
This segment distributes, purchases, and sells fresh and live foodstuffs. The name of the game here is pig farming. GDH has a wholly-owned subsidiary, GDH Food, a 65% interest in GDH Food Foshan, a 51% interest GDH Trading, a 13% interest in Hubei Jinxu and a 34% interest in Guangdong Baojin.
In the first half of 2021, this division contributed about 28% to total company revenue. The company reports that the pig market is seeing increased demand as China emerges from Covid but experienced some headwinds in rising costs and pricing pressure in some instances. The company highlighted the new slaughter business and the chilled meat wholesale and retail business in the PRC as growth centers. GDH claims an overall market share of live pigs in Hong Kong at 47%. Also, the company reported that GDH Food Foshan has begun construction of a meat processing plant in Nanhai District, Foshan City which they expect to be operational by early next year–with a capacity of processing (slaughtering) 2.18 million pigs, 73,000 cattle, and 90,000 sheep per year.

The company focuses on the Guangdong-Hong Kong-Macao greater bay area and has increased capital injections on vertically integrating their business from breeding to processing to cold storage and distribution. The company has expressed interest in expanding into retail with plans to set up a number of retail chain stores in the greater bay area for meat and non-staple food businesses.

Property Leasing (2020 Revenue: HK$ 19.4 million, HK$ 12.8 profit; 2019 HK$21.3 rev, HK$15.3 profit)
This segment leases office and industrial premises. For 2020, the properties were listed on the books at an appraised value of HK$ 450 million. The properties leased are plant and dormitories at the GDH Zhongyue production facilities and office units in Hong Kong

  1. 29/F, Shui On Centre, 6–8 Harbour Road, Wan Chai, Hong Kong
  2. Land, buildings and structure of GDH Zhongyue (Zhongshan) Tinplate Industry Co., Ltd., 25 Yanjiangdongyi Road, Torch Development Zone, Zhongshan, Guangdong Province, the PRC.

Risks. Guandong Holdings, a private state-owned enterprise, has a 59% interest in the company. Guandong Holdings also has interests in Guangdong Investment (270) and Gurandong Tannery (1058), among other interests.

 5 YEARS10 YEARS
Change in Working Capital HK$      (138,806,000) HK$        760,933,000 
Net Income HK$        416,770,000  HK$     1,129,906,000 
D&A HK$        373,313,000  HK$        824,695,000 
Other non cash charges HK$      (155,109,000) HK$      (385,440,000)
Capex HK$      (151,140,000) HK$      (462,952,000)
Owner Earnings HK$       345,028,000  HK$    1,867,142,000 
Dividends HK$      (163,368,000) HK$      (349,348,000)

Disclosure: We own shares in GDH Guangnan Holdings Ltd (1203:HKG). Leaven Partners, LP may hold any securities mentioned on this blog and may buy or sell these securities at any time.

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