China’s Travel Sector Recovery – 30%+ Upside
A recent VIC write-up on Ming Fai International has piqued my interest. I want to note straight away that this is an illiquid Chinese company listed in Hong Kong with limited shareholder communication. However, the underlying investment thesis is fairly interesting and some members might find a place for it in their portfolios. I’m sharing a quick overview of the situation below.
The appeal of this investment idea boils down to these 6 points:
- Prominent Asia-focused activist David Webb holds a 15% stake in Ming Fai, making it his seventh largest disclosed position. A few years ago he successfully pressured the company to make the right capital allocation decisions (here and here).
- The founder/chairman has a 30% stake in the company and another director 3%. Management appears to be relatively shareholder-friendly, as evidenced by sizable dividends (around a 30% payout ratio) and sporadic share buybacks, albeit in small amounts.
- Ming Fai currently trades at HK$450m market capitalization, which is fully covered by HK$206m of net cash (46% of market cap) and HK$241m book value of the properties owned by the company. Essentially, investors are getting the operating business at no cost.
- The company is cheap based on its operating earnings. Ming Fai currently trades at PE=6.4x on 2022 net income. That’s around the middle of the historical 5x-8.4x range. However, the earnings in 2022 were still depressed due to China’s COVID lockdowns with revenue and margins substantially below the normalized levels. On 2019 earnings the company trades at only 4.9x PE.
- It is a stable business exposed to China travel recovery. The recovery might already start showing up with Q2 or Q3 2023 earnings.
- Ming Fai distributes a seemingly safe 6.6% dividend. Unlike most of the Hong Kong-listed securities, the company pays out a significant part of earnings via dividends. Any recovery in earnings is likely to result in dividend increase and in turn further share price re-rating.
Ming Fai manufactures and supplies amenities and accessories to luxury hotels and airlines. It operates mostly in China but also in North America and Europe. The range of offerings is fairly, but the key products are bathroom consumables and other in-room accessories Its clients include hotel chains such as Marriott, Shangri La, Accor Hotels, Wyndham etc. It’s not a spectacular business by any means as Ming Fai is essentially selling commodity products. However, the business is very stable and benefits from strong customer loyalty as clients have low incentives to switch away from the existing reliable supplier of a low-cost product. For the last 19 years, Ming Fai was unprofitable only once and that was in 2021 due to COVID.
Ming Fai’s financial performance is substantially exposed to the Chinese travel and hospitality sector. The international travel recovery in China has been relatively slow compared to Western countries as China reopened almost a year later. International flight traffic in China was only at 38% of pre-pandemic levels in May, while full recovery is expected to be reached only by the end of next year. This is reflected both in Ming Fai’s financials and the stock price, which is still down 26% compared to pre-pandemic levels. However, as the travel recovers, the performance should pick up and is expected to catalyze the stock price re-rate to pre-2020 levels. While the full recovery will likely take some time, the improvements in financial performance might already be visible in the coming quarters. Domestic travel in China saw a much faster rebound than international with the travel during May 2023 holidays coming on top of the 2019 levels.
See the historical financials and valuation multiples in the table below (note: the company paid a one-time HK$0.20/share special dividend in 2016, excluding it, the yield and payout ratios would’ve been 5.9% and 32% respectively):