$CE HUADA TECH(85.HK)

CE Huada Tech 中电华大 (85.HK) – A Growth and Turnaround Stock

I bought China Electronics Huada Technology (0085.HK) within the price range of $1.50 to $1.75 from 2 Nov to 7 Nov 2017 as I believed it would be a multi-bagger going forward. I thought I would have the time to recommend it to my followers at about the average price that I bought it but it was not to be. It closed at $1.70 today, 7 Nov 2017, up 16.44 percent within three trading days. However, at current price, it is still grossly undervalued and I will not be surprised if it becomes a 5-bagger within a year or so. I will load more of this gem if there is a substantial pullback.

(1) About China Electronics Huada Technology Limited

China Electronics Huada Technology Company Limited (abbreviated to CE Huada Tech), formerly China Electronics Corporation Holdings Company Limited (before 21 Sep 2017), is a Hong Kong-based investment holding company principally engaged in the design of chips. The main businesses of the Company include the design, manufacturing, and sales of integrated circuits chips. Its main products include second generation identification (ID) cards, social security cards, fuel cards, telecommunication cards, electric cards, transportation cards, RFID and wireless networks equipment, among others.

(2) Seemingly Poor 1H2017 result belying the actually very stellar performance

CE Huada Tech reported very poor 1H2017 performance with its net profit declined by 86.1% to $143 million compared to 1H2016’s figures. However, its revenue had increased by 2.5% to $688 million and EPS was 7.04 cents.

I knew this could present an opportunity for me if I could go deeper to find out more about the details. This “poor result” has caused its share price to keep falling after the announcement of its 1H2017 result. However, the decline of the net profit was due to the one-off profit of $621 million derived in June 2016 through disposal of 100% equity interest in China Electronics Technology Development Co. Ltd (中電科技) to China Electronics Optics Valley Union Holding Company Limited “CEOVU” (中電光谷, 798.HK), for a consideration of 1,058,530,083 new ordinary shares of CEOVU and subscription in cash of HK$1,193,175,934 for 1,491,469,917 new ordinary shares of CEOVU which CE Huada Tech has now a 31.88% interest in. CEOVU has its shares listed on HKEx and is principally engaged in the business of development and operation of large-scale business parks in the PRC.

The value of 31.88% of CEOVU (798.HK) that CE Huada Tech owns is close to HK$1.87 billion, and market cap of CE Huada Tech is only HK$3.45 billion, which means the IC business of CE Huada Tech is worth only HK$1.58 billion, which is already worth twice the price of a shell company. “Cheap” is the only word that I can use to describe this stock.

(3) Over-punished Depressed Prices Making the Stock Grossly Undervalued

Please see the weekly chart attached and pay attention to the net profits from 2014 to 2018

(A) Price and volume were both up recently, signifying the uptrend has started.
(B) The price hit the peak of $4.83 on 19 May 2015 when the net profit was only $177 million. The estimated net profit for FY2017 is about $360m and the forward net profit in 2018 will be $650m, and there is no logic for the price to remain at this current depressed level.
(C) With the 7 Nov 2017 closing price of $1.70, the forward p/e for 2018 is a very attractive 5.31x and this depressed valuation among its peers makes it a good candidate for it to be a multi-bagger hands down.
(D) Its dividend yield at current price is 1.765%, which is very attractive for a growth and turnaround stock.

(4) The support from the government

The single commodity that China imports the most currently is neither food nor oil, but IC chips and the value involved is about US$230 billion in 2016.

China Electronics Corporation (中国电子信息产业集团有限公司, short name CEC which is the grandparent company of CE Huada Tech), Integrated Circuit Fund (国家集成电路产业投资基金股份有限公司 which is funded by China Ministry of Finance), and Sino-IC Ltd (华芯投资管理有限责任公司 ) signed an MOU in Beijing on 18 July 2017 with the understanding that Integrated Circuit Fund will pump 20 billion RMB into CEC to support its development of IC-related business. It is highly speculated that most of this fund will go into CE Huada Tech.

CEC owns 100% of Huada Semiconductor which in turn owns 59.42% of CE Huada Tech. CE Huada Tech changed its name from China Electronics Corporation Holdings Company Limited in Sep 2017 to avoid being confused with its grandparent’s.

The China government gives CE Huada Tech the exclusive rights to produce IC chips for passports and identification cards, which involve the highest security level. What is noteworthy is the next three years will be the peak period for producing the IC chips for passports and identification cards and the profit margins for them and the stability of this exclusive business are both high.

Compared to other high tech stocks the China government supports that have an average p/e of above 30x, the price of CE Huada Tech can easily go up by 5 fold if 30x p/e is anything to go by.

(5) The positive strategies of the grandparent company

The grandparent company, CEC, set a target in 2015 that they would securitise more of their IC design and manufacturing business in the following three years. These two years will be the critical period for CEC to consolidate and issue new shares for their IC business. It is very clear that CEC will pump more capital into CE Huada Tech soon and the price should rocket up following the move.
  
(6) Possibility to be included into the Shenzhen-HK Stock Connect

One of the rules for A+H stocks or stocks listed in HK stock exchange to be included in the Shenzhen-HK Stock Connect for both Shenzhen and HK investors to trade is that the market value has to be at least HK$5 billion. It is easy for CE Huada Tech to reach the threshold to be included in the Stock Connect as it has only about HK1 billion free float in the market. To achieve that, either the price has to be pushed up by market players to about $2.50 or the grandparent company has to inject new fund into it.

(7) Conclusion

With the explosive growth rate in the coming three years, strong governmental support, the likelihood that its grandparent company CEC will pump in new capital, its current low p/e and its historically powerful surge at opportune moments in 2007 and 2015, I do not think my target price for CE Huada Tech at $3.00 within half a year is too ambitious. My target price a year from now is $5.00.

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47 likes 58 comments
OngEric

China Invites Foreign Cash to Build a World-Class Chip Industryhttps://www.bloomberg.com/news/articles/20...

Positive for CE Huada

stockwizard

Semicon bellwethers 华虹半导体 (1347.HK) p/e is 15.3x and 中芯国际 (981.HK) p/e is 37.3x

prescientsuper

中电华大科技(00085.HK)公布,截至2017年12月31日止年度,实现来自持续经营业务收入14.53亿港元,同比增加6.9%;毛利5.00亿港元,同比减少1.1%;公司权益持有者应占溢利2.20亿港元,同比减少79.3%;每股基本盈利10.84港仙;每股派息3.0港仙。
于期内,利润下滑主要是由于2016年度,集团确认出售中电科技及认购新中电光谷(00798.HK)股份产生的一次性收益6.21亿港元;及2016年度,集团确认收购中电光谷31.88%股权产生的一次性账面收益(为负商誉)4.09亿港元所致。
P/e = 116/10.84 = 10.7x. Not really bad but market just punished it due to the comparison of the one-off solid HK$409m accounting profit in FY2016 derived from the purchase of 31.88% 中电光谷.
Dividend Yield based on the closing price of 3 April 2018 = 3/116 = 2.586%.

clim

Reply to @prescientsuper : i have seen a lot of HK stocks get punished evem their core earnings up but overall down due to one off gain of previous results... doesnt make sense, is it this is the way games play over there?

power_ranger

Hi Prescientsuper, thanks for the KT.
Can I ask the risk of the business service agreement? I read the 26 June 2015 agreement. The amount payable to CEC group for the processing and purchase of raw material is 460m in 2014. The amount to receive by the group is 167m.

They entered into lost making agreement?? Isn't it very negative for the company?

prescientsuper

Reply to @power_ranger : China has no choice but to be seriously preparing capital for home-grown semiconductors in order to catch up with giants in the US and Taiwan.
CE Huada Tech will benefit from this initiative sooner or later.

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Aragon

Market sentiment is weak. Probably not that good to add at this moment.

prescientsuper

It looks more and more like the major shareholder, which is the parent company of CE Huada Tech, is determined to privatise it and for that the game plan will have to be that the 30-day average price before they make the announcement is low so that they need not pay too much to take the company out of the HK stock exchange. The prices seemed to be artificially suppressed for the past few days near to the close of each trading day. To privatise 85.HK, the major shareholder who owns about 60% of the company now, need to pay for the remaining 40% of the outstanding shares they do not own, which is about 0.8 billion shares. If we take $1.50 as the price that they are interested in maintaining for the purpose of privatisation, we may have another 3 weeks or so to go before it can move up 40 percent --- a premium paid to minor shareholders generally for many a privatisation. This will mean the price can move up to $2.10 in 3 weeks' time.
Do your own due dilgence as my deduction may not be right.

ohyuanyuan

Reply to @prescientsuper : I am confident that it will chiong when the company makes the earnings announcement at end March 2018.

I would rather the parent company injects new fund than they take 85.HK private because the former will achieve @prescientsuper target price of $3. And the latter will only achieve $2.10.

Aragon

The fall is quite sharp. Any company specific news?

stockwizard

Reply to @Aragon : The stock is consolidating at the price range of 1.40-1.50. There should be movement closer to the date of results announcement and/or asset injection by its parent company. Hang in there bro.

NoeticInvestor

20% drop from top. Should jeep more.

Charles

Reply to @NoeticInvestor : can buy? target is $5!

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