Company profile:
Xinghe Holdings is a Malaysian black scrap metal trading company. The company has established a national scrap yard supplier base in Malaysia to purchase recyclable black scrap metal and resell it to steelmaking customers. The company operates three scrap yards with a total area of about 35000 square meters. According to Frost Sullivan, the company ranked first in terms of trade volume with local Malaysian steel mills in 2017, with a market share of about 20.8%.
Sino-Thai point of view:
Under the influence of the Malaysian government's trade protection policy, the domestic steel industry is growing rapidly: according to Frost Sullivan, five of the seven steel mills in Malaysia have crude steel production facilities for electric arc furnaces. Arc furnaces can use black scrap metal as the main raw material to produce steel. Malaysia's black scrap metal has been in short supply, and the supply gap is met by importing black scrap metal. Due to the scattered sources of black scrap metal, steel mills in Malaysia usually designate three to four large suppliers to purchase. Most of the company's revenue comes from Lion Companies, Malaysia's largest steelmaker, which has accounted for about 80 per cent of its total revenue in the past three years. From 2018 to 2022, Malaysian crude steel production is expected to grow at a compound annual growth rate of 10.2%, and demand for black scrap metal will grow at a compound annual growth rate of 9.7%. The price of black scrap metal has also risen since 2016, helping the company to widen interest spreads and profit margins.
In terms of operating results: as of August 31, 2015, 2016, 2017 and 2018, Xinghe Holdings realized operating income of HK $859 million, HK $757 million, HK $1.4 billion and HK $1.137 billion respectively, with profits of HK $27.3 million, HK $24.1 million, HK $46.2 million and HK $28.5 million respectively, with net profit margins of about 3.2%, 3.2%, 3.1% and 3.4%, respectively. Revenue fell slightly in 2016, down 11.9 per cent from a year earlier, due to strong resistance to the Malaysian steel industry caused by the dumping of steel products by Chinese exporters. Subsequently, China's supply-side reforms to reduce steel excess capacity in 2016, coupled with the Malaysian government's implementation of protective measures for the local steel industry since April 2017, increased the company's revenue by 95.3% in 2017. The company continued its growth momentum by the end of August 2018, with revenue up nearly 35% compared with the same period in 2017.
Valuation: based on 1 billion shares after the global public offering, the market capitalization of the corresponding company is HK $5.0-620 million, which is lower than that of its Hong Kong counterparts; the corresponding price-to-earnings ratio is about 10.8-13.4 times, which is higher than the industry average; and the price-to-book ratio is about 1.56-1.82 times, which is higher than the industry average. In terms of profitability, the ROE and ROA of 17 years were 39.29% and 16.09% respectively, higher than the industry average. Considering the company's industry status, performance and valuation, we give it a score of 64, with a rating of "neutral".
Risk hints: (1) market policy risk (2) market competition risk (3) over-reliance on head customers