Recent Share Price: HK$ 0.49
Accounting: HKAS
Fiscal Year: Dec. 31st
Market Cap: HK$359.8 million ($46.3 million)
Industry: Consumer Non-Cyclical / Personal Products

Founded in 1980, Ming Fai is primarily in the business of what are called amenity products for the travel and leisure industry. Ming Fai manufacturers and distributes small bottles of lotion, conditioner, and shampoo found complimentary in hotel rooms, among other various disposable products. On airlines, for example, they make the travel kits that are occasionally handed out to business or first class travelers on long-haul flights. The company has production facilities in Shenzhen, China, in addition to India and Cambodia.

Ming Fai is on my “David Webb Watchlist” and has finally been beaten down to levels where I take interest. For the past few years, small-caps have severely underperformed large-caps in the Hong Kong market–not to mention the widening gap between value vs growth. Needless to say, a small-cap value stock like Ming Fai has been taken out to the woodshed. To add insult to injury, the severe slowdown in the travel and leisure industry, due to COVID, has frankly left this company for dead.

The short-term outlook for Ming Fai does not look good. With a company leveraged to the travel and leisure industry, how could it not? They reported a loss in the first half of this year on severely reduced revenue and suspended their dividend.

However, I think the long-term outlook is much better than what is currently reflected in the stock price. My personal view is that COVID will not cause an indefinite structural change in the travel and leisure industry. The travel and leisure should return to its mean levels over time and Ming Fai appears to be a reasonable bet at these prices given my long-term bias. However, the longer long-term is another story. It is difficult to say what the metaverse will be and whether (almost) everything happens virtually in the future–and when that future will be. But until that “digital utopia” is realized, Ming Fai offers a lot of value for the price.

Ming Fai has excess working capital of around HK$200 million, give or take, depending on how you want to do the math. On an adjusted market cap of HK$160 million, you are buying a company with an average 5-year free cash flow of HK$30 million–nearly a 20% FCF yield.

In 2019, they did over HK$2 billion in revenue (and over HK$126 million in EBIT). The question is how long will it take Ming Fai to get back to HK$2 billion in revenue? And in the mean time, what will earnings look like? These are difficult questions to answer of course. In their half-year report, the company noted that the United Nations World Tourism Organization calculated that international tourism dropped by approximately 65% from January 2020 to May 2021. Since then, Ming Fai reported, in their 2021 interim report, that international travel is picking up but is “fragile and uneven”. But the trend has been positive, both in China and internationally, and Ming Fai expects more of the same over the next year. Further, they reported that, in China, domestic air seat capacity has already exceeded pre-crisis levels.

Hospitality Supplies

For the first 6 months, ending June 2021, revenue increased 14.5% (from the first 6 months of 2020) to HK$447 million, making this division one of the lone bright spots for this year. Gross profits increased as well, while margins compressed. Their global client base is well diversified and includes a stable of well-known brands: Four Seasons, Cathay Pacific, Mandarin Oriental, MGM Grand, and Sheraton, for example. By geography, 52% of revenue came from China, followed by Hong Kong (17%), Asia Pacific ex-China (13%), North America (10%), Europe (5%), and Australia (2%)

Operating Supplies and Equipment

For the first 6 months, the OS&E business generated HK$73 million with gross profit of HK$17 million (23%). In 2014, the company established this division to leverage their existing client relationships by broadening their product offerings–which is basically anything else found in a hotel and hotel room, e.g., linens, pillows, small appliances, hotel equipment, etc.

Health Care and Hygienic Products

For the first 6 months, revenue was HK$77 million, with gross profit of HK$9 million (12%). Recently, this segment branched out to produce disposable infection control products (hand sanitizers, sprays, wipes, masks, etc.), but also continues to market health care and hygienic products under their self-labeled brands “Pasion”, “everybody LABO” and “MING FAI”.

Summary

Ming Fai trades below liquidation value and one-third of tangible book (with 5-year and 10-year TBV CAGR of 3% and 4.5%, respectfully). The business is not great, but it’s not bad either and certainly is good enough for the price. Management has made some operational blunders over the past 10 years, but they act trustworthy. And you get David Webb’s endorsement. All in all, the company will do well if things revert towards a sense of normal and you get a well-capitalized balance sheet to wait it out.

Disclosure: We own shares in Ming Fai International Holdings Ltd (3828:HKG). Leaven Partners, LP may hold any securities mentioned on this blog and may buy or sell these securities at any time.