Curious Case of Million Stars Holdings (HK:8093)

Hey everyone,

I was busy growing my team to nurture a community of GIM investors. Our membership site is finally up!

Lately, my GIM community highlighted a company that may have some issues.

While low P/E or low EV/EBIT is desirable, it may also signal the company is an inferior company. These companies often get pushed around by their customers, lack of pricing power, can’t collect their receivables, or lack of access to a growing market. In fact, you should be more wary of such companies to find out whether there are problems.

Coming back to Million Stars Holdings, it has 3 biz segments. They are an internet advertising agency, mobile payment/technical support and leather business.

The company was formerly known as Odella Leather Holdings. The leather business was their old business.

Million Stars Holdings

According to Morningstar, Million Stars Holdings have a PE of 1.7x. By any metric, it is a screaming value to you. The ROE is >100%, gross margins >40%, and operating profit >30%.

In FY2017, the group reported 847% increase in revenue from HK$62mil to HK$587mil. It counts Tencent, Jinri Toutiou and Dianping.com as part of its customer base.

What is the market missing when the valuation is P/E of 1.7x? Should we buy it immediately?

Here is my humble opinion:

All of us know the foundation of a balance sheet is…

Shareholders’ Equity (Net Assets) = Total Assets minus Total Liabilities.

On the cash side, I see no issue. The company does not have any significant debt.

I will dig on its trade receivables of $226.434m. Why is this so important? I checked this figure against its net asset of $261.117mil.

Should the entire trade receivables go bad, it wipes off $226.434mil off its net asset of $261.117mil. Immediately, the equity would’ve shrunk to $34.74m.

Next, I need to understand the quality of their customers.

You can see that their top customer accounts for 31.1% of total trade receivables and the top 5 accounts for 70.3%. I am uncomfortable over the fact that 5 customers account for the bulk of their revenue. What if the business is one-off? The group mentioned that Tencent, Jinri Toutiou and Dianping.com are its customers. I guess, they will pay up eventually.

Next, out of the existing $226.434m of trade receivables, $151.206m has past its credit days but not impaired. That’s 67% of the trade receivables!

If Millions Star is unable to collect back the trade receivables in time, the co may have to start borrowing money or tap on existing cash balances to fund its future operations. I see that as a potential strain.

A timely collection of trade receivable is very critical for any company to recycle the capital for its day-to-day expenses and its growth projects. I see it a top priority.

After FY2018 is concluded, here comes Q1 FY2019…

Revenue growth: 50.7%

Cost of Sales growth: 104%

How can the cost of sales increase so much?

The gross profit was unable to support their selling, distribution and admin expenses. Hence, the company reported a loss in Q1 FY2019.

Conclusion

• High risk in having high customer concentration.
• While they have strong companies as their customers, the schedule of collecting trade receivables could be improved to demonstrate authority and fair bargaining powers.
• The lack of profitability may indicate the business is not well-managed.