Usually cigarette butt is not a good idea in HK exchange market cause many stocks are trading at below 0.5X net asset value with situations that you may never achieve your full value when management cheat on you.
Maybe compounders are really popular star nowadays,but what i will introduce is a net-net stock.You can decide whether it's a value trap or not.
Overview
This is an idea which is small cap,lack of liquidity and mostly suitable for individual investors.Anyway,there is a significant discount of the intrinsic value which i measure by the free cash flow in this case.The core hypothesis is there is an asset which is is a piece of land was hided by the accounting .Actually that is not important cause the asset is known by everyone who pay attention to this name .However,things are getting more and more clear in a durable long term negotiation. Rather than high leverage or value trap, this kind of cigar-butt provide a pretty attractive irr.
Brief history
DYNAMIC HOLDINGS LIMITED(“DHL”) was incorporated in Bermuda with limited liability and was listed on the HongKong Stock Exchange in 1992.DHL used to be a leading property group dedicated to the top cities of mainland China(e.g. Beijing,Shanghai,Shenzhen). In fact, DHL is not a typical real estate developer with many land reservations.And now its assets are consist of three parts which include a shopping mall in Beijing，an office building in Shanghai, and a piece of land in Shenzhen.
The land in Shenzhen is of vital importance to the investment thesis,so I will introduce the main history of the land from the start in 1980s.Information can be obtained from 10K.
1. The land locating at Dongjiaotou were owned by Zhenhua a corporation incorporated by DHL and Shenhangyun in the early 1980s, and originally for the using of terminal operation this land were.
2. In 1990s,Zhenhua submitted an application requesting to change the land use of Dongjiaotou plot from single port development to multi-functional port,which included residential and commercial development. And the government approved.
3. Around the year 2000,DHL tried to increase the capital to change the shareholding from 49% to 80% thereby negotiating the acquisition of the remaining 20% of the shares.However,as we all know now,DHL failed, the equity ratio is 49/51 for DHL to others now.Management of DHL is asking for the benefit of DHL in Zhenhua that is to say the 80% portion of Zhenhua.And I dont think they will win nothing except their diligence of grasp value and patience of persistence.
4. The 51% stakes owned by Shenhangyun transferred to Jiazhaoye(a Chinese real estate developer) firstly and then to Zhongxin Group in a series of weak industrial operating circumstance.So,the Dongjiaotou land plot belong to DHL and Zhongxin at present.
5. The original land was replaced with equivalent plot nearby due to land occupation in the new urban planning especially the Shenzhen Opera House would locate in the land they owned ever.
6. In December 20th 2023,DHL declared the obtainment of the new land piece.That is to say the new land belongs to DHL 100 percentage without any risk.
Current situation
The dust settles as for the controversial land,and the biggest variable of the future cash flow is settled down.So,we can analysis the value of the land in a more certain way.
DHL has zero interest-bearing debt revealed in recent quarter report,and there is no risk to go to bankruptcy like some high leveraged real estate developer.
(All in HKD)
Shares out 237.7 mln
Market cap 2075 mln
Debt 0
Cash 0
Valuation
In recent announcement he value of the land has been appraised at the current market price to be 12.63 billion Hong Kong dollars. Deducting the withholding tax for land value increment, the profit this year will be 5.4 billion.
The other two plots of property are positive value as both of them can operate in a net cash infow. conservatively，I consider this two asset being zero.
The value 5.4 billion will inflow in the next 4 years while the Shenzhen Opera House complete in 2028. As the result,the irr will be approximately 29% to the equity only while there is no debt.
Why cheap
I think the lost patience of shareholders is the primary reason of cheap price.Additionally, the weak HongKong stock market as well as the upsetting real estate industry of China do make sense in such situation.
There are many investors already know the information of the land as well as the corporation, so they withdrawal in recent years, and most of them lost the patience to wait the full value achieved.
Risk
The biggest risk is the special dividend that the board which direct by Chenyongzai is willing to payout, if Chenyongzai or his inheritor do not give the excess cash to shareholders or they play with the shareholder,everything above will make no sense.