Dream International has acquired the Tarpaulin business from C & H. Mr Kyoo Yoon Choi, the controlling shareholder of Dream International holds 61.95% of C & H. So it is a connected transaction. The total consideration is around 125 million HKD. The revenue acquired totals 322 million HKD and 389 million HKD in 2017 and 2018 respectively. Total profit was 18M and 14M HKD.
I am not very enthusiastic towards this deal at first sight. The tarpaulin business sounds very much like a commodity business. I also don’t like the fact that it was a connected transaction. There is always a chance that this deal did not happen at arm’s length. Because this acquisition is relatively small, it does not need to be approved by minority shareholders and relatively little information is provided. All in all, based on the figures they provided, the deal is not excessively priced. But we will have to see how this new business will contribute towards the profitability of the company.
HKET published their semi-annual earnings. The reorganised the reportable segments. Revenues and Profit are now split between Media and Financial news agency. I believe this will make analysis clearer going forward. Revenues for the six months ended 30 September are down by 7%. Especially the advertising income got hit by the global economic uncertainty and the unrest in HK. Gross profit margin is around 39%, only down 1 percentage point. But as we have indicated in the risk section of our initial writeup on the company. A drop in revenue goes straight to the bottom line. Operating costs even increased a little due to increase in headcount and a general salary increase. Net profit to owners for the six months dropped from 42M HKD to 11M HKD.
I do not expect a quick turn around in profitability however the premise of this investment was more based on the hidden assets and cash on the balance sheet with a call on their operating business. The share price has not really moved much on the earnings release so I would say this was more or less priced in already. I would consider to add a small amount at a roughly 20% lower price. This is not my best idea so it will never grow into a big position.
