THREE DAYS AGO, on Nov 18, Hu An Cable announced that institutional investor SEAVI Advent has become a new shareholder in the company after it purchased a 4.22% stake, or 28 million shares.
The seller was Goka Limited which reaped S$11.8 million based on S$0.42 per share, which was a 10.5% premium over the closing trade price of S$0.38 on 15 Nov.
Goka’s stake in Singapore-listed Hu An Cable is now reduced to 19.56%. Goka is wholly-owned by Mr Yeung Wai Wing, a non-executive board member and substantial shareholder of Hu An.
SEAVI Advent is the Asian Affiliate of Advent International, a global private equity investment group that has raised more than US$26 billion in cumulative capital and invested in over 500 companies in 39 countries. Some of its prominent investments include Venture Corporation and Yangzijiang Shipbuilding.
In a Q&A with NextInsight, Teo Yi-Dar, the investment director of SEAVI, revealed that Hu An (recent stock price, 37.5 cents, market cap S$249 million) is one of only 3 companies that his fund has invested in this year.
Q. Why do you like Hu An Cable?
A: The economic growth in China has led to higher energy consumption. In particular, rapid industrialization in the past five years has accelerated growth in energy consumption and a CAGR of 11.0%.
The electrical power industry accounts for close to 40% of the electrical power cables used in the PRC. Electrical power cables are widely used in various fields in the PRC, and its demand, without a doubt, will be positively driven by the continual industrialization and urbanization of China economy.
Hu An is well poised to benefit from these macro trends of increasing demand.
Further, with the continual improvement in technology and skill sets, Hu An is now able to produce high voltage and ultra-high voltage cables. This positions them to pitch against their Japanese and European competitiors, whose products are higher priced. Hu An stands to benefit from this import substitution trend.
Q: Can you give your take on Hu An's management team?
Every year, we look at more than 300 companies, only to invest in 3 or at most 4 of them. We have seen companies from the same sector, operating in the same geographic vicinity, using the same suppliers and, many a times, selling to the same customers. However, their financial performance may vary quite a bit. Our anecdotal findings showed that the reason for such variation lies with the management.
We had opportunities to interact with Hu An's management. They impressed us as a relatively young and energetic team, who are able to harnass market opportunities and, at the same time, leverage on foreign technical knowhow and financial support from the capital markets to fuel the company's business growth.
Q: You mean so far this year, Hu An is only one of the 3 or 4 companies that your fund has invested in?
A:Yes, Hu An is the third company we have invested in this year. Our investments are concentrated, so my portfolio is always 10-15 companies.
Q: What is SEAVI Advent's take on Hu An's share price, which now hovers around 38 cents and is still below its Feb 2010 IPO price of 42 cents?
A: The company's short term stock performance doesn't really bother us. We fully understand the current overriding sentiments with regards to S-Chips; and like many other sentiments, it comes it goes. When we look at Hu An's forward multiples and PEG ratios, the numbers are in unison, alluding that Hu An's price is low based on its intrinsic worth. As Warren Buffet famously said: "In the short term the market is a popularity contest; in the long term it is a weighing machine."
Q: What do u mean by the 'numbers are in unison'? And would you reveal what you see as Hu An's forward multiples for this year and next year?
A: They are in 'unison' as in they are pointing to the fact that Hu An is under priced. I choose not to say what is the forward multiple we calculated, but you can quote from Phillips Securities' or CIMB's research.
Q: What is SEAVI Advent's investment philosophy with regards to Hu An?
A: Time is needed for management to develop and execute growth plans. We are fortunate to have supportive investors who have given us a longer term commitment; hence we have benefit of focusing on the fundamentals of a business and take a mid-to-longer term perspective.
Many people may not be aware that Venture Corporation Ltd was first invested by the SEAVI Advent funds back in 1984. When Venture was IPO-ed on 18 March 1992, it had a market capitalization of only S$27.2m; today, the company is worth more than S$2bil. We held that investment for more than a decade to realize its worth.
Of course I am very sure that we don't need to wait for another 10 years to see Hu An Cable roll out all its growth plans. Management has set a goal to be among the top five high voltage cable suppliers in China within the next five years. After much research and numerous discussions with industry players, I have concluded that the said objective is a foregone conclusion.
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