From the 2018/2019 Annual report
Hong Kong Economic Times Holdings Limited (“HKET Holdings” / “the Group”) is a diversified multi-media company. Its core business – publication of the Hong Kong Economic Times (“HKET”) – was established in 1988. It is the leading financial newspaper in Hong Kong, also ranked number one on Media Credibility*. Besides, the Group launched its free publication, Sky Post, in July 2011. Apart from newspaper publishing, the Group also operates other businesses such as magazines and book publishing, recruitment advertising & executive training, and lifestyle platforms. In addition, the Group runs a financial news agency, information and solutions business. ET Net, the leading financial news agency in Hong Kong serving the professional market, has expanded to the Greater China market.HKET Holdings was listed on the Main Board of The Stock Exchange of Hong Kong Limited on 3 August 2005 (Stock code: 00423).
Media in Hong Kong is a tough business. There has been a transition from print to online/mobile and from paid to free. HKET has been the only media group that has been able to grow revenues, albeit quite modestly. (up 34% since 2010) There are a number of reasons that can explain the relative success of HKET. First of all, financial newspapers are probably more resilient than general newspapers. Secondly, most of the growth is coming from the ET Net division. This seems to be a niche product. I suspect ET Net provides a cost-effective way for small brokers and other financial players to have news, quotes and a trading terminal geared towards the local market. More global solutions would cost a lot more, so it is quite sticky. Thirdly, they introduced Sky Post in 2011, which is the second largest free daily newspaper. And last but not least, they have transitioned quite well into the online segment. Most of the advertising dollar growth is due to the online segment (which still need to translate in profits due to the high investments.) (see Graph 1)
Real estate?
HKET owns a lot of real estate. It already owned quite a few things when it IPO’ed and throughout the years, it has acquired more. Most of these are on the balance sheet at historical cost minus depreciation (PP&E). The accounting is massively undervaluing these properties because real estate prices have boomed in HK. Eg. in the prospectus, HKET mentions it owns quite a number of workshops in Kodak House II, North Point. At that time they valued these at roughly 2,000 HKD per sqft. In the last two years, a few properties in Kodak house II changed hands at 8,000 to 9,000 HKD per sqft. I have identified three locations where it holds or held real estate. I have emailed and called the company multiple times in order to get a list of their properties. So far they have ignored me. With the help of land searches I have identified properties in two different locations with a minimum value of 892M HKD. (I didn’t want to do a landsearch on all potential properties)
Risks
- Advertising income will drop during recessions. This will drop straight to the bottom line. Staff costs are around half of the expenses and are not easy to cut costs without affecting the quality.
- HKET has excess cash and does not seem very willing to return it to the shareholders. They might keep on accumulating real estate or hoarding the cash. Worse still, they could do some bad acquisition.
- The liquidation value is not guaranteed. If they were to become structurally loss making they might keep going until they spent all the value (sell assets and use the cash to pay for the expenses). Some of the founders are still major shareholders, these people are probably too emotionally attached to the business to liquidate it.
- As you can see in graph 2, printed media is only marginally profitable and they might never be able to monetize the online platforms. The only segment structurally making money is the Financial news, agency, information and solutions segment.
- Consolidation between small local brokers, might make ET Net less competitive. Bigger brokers might go for more global solutions.
Valuation
I found it very hard to come with a meaningful valuation for HKET. I will not describe any bullish case because I have a hard time figuring out why there would be a bullish case for it. The downside scenario will be a liquidation value. There is a case to be made that this company is worth more dead than alive.
- Base Case
In our base case, I will assume that HKET can keep its revenues steady and realizes a Profit Margin of 5% (5.7% last year). I believe depreciation overstates maintenance capex by at least 10M so I am adding this back to arrive at a perpetual cash flow of 74M. After discounting back the cash flow (12.5%), I arrive at a value of 1.37 HKD per share for the operating assets. HKET also has a cash balance of 0.73 HKD per share, which adds to 2.1 HKD per share in total.
- Liquidation value
To calculate the liquidation value, I only considered the cash, receivables and the real estate. After paying back all balance sheet liabilities, I get a liquidation value of 2.57 HKD per share (See Table 1). Discounting the real estate by 50% would still result in 1.54 HKD per share.
Conclusion
HKET is not a great business and does not have much scope to grow. However it is cheap, has hidden assets and has a few call options on growth of ET Net and monetizing the online platforms. Furthermore, David Webb, the HK activist investor and Fung Siu Por, the chairman and CEO, have been buying shares previously around these levels and higher. I have bought shares at 1.33 HKD. This represents a yield of 13% or 29% ex-cash. (By Ex cash means if they would distribute all cash, lowering my buying price by 0.73 HKD per share)
