The hype of the “new economy” stocks started moving into Hong Kong this year with the IPO of Ping An Healthcare and Technology (1833:HK). However, retail investors have not been rather receptive towards the IPO of Xiao Mi. This was largely due to the company’s high valuation along with the dual-class share structure that was testing the limits of investors.
For investors that are looking to gain exposure to “new economy” stocks, they can look at these two Hong Kong-listed stocks that are trading at better much more attractive valuations.
Kin Yat Holdings
One of Asia’s top original equipment manufacturer (OEM) for electrical and electronic products, Kin Yat Holdings (638:HK) is well known for being the largest manufacturer of iRobot’s (IRBT:NASDAQ) robotics vacuum cleaner with over 60 percent of the global market share. iRobot is expected to continue its double-digit growth trajectory and will continue to bode well for Kin Yat.
Given the ongoing trend of automation across various industries, Kin Yat is expected to gain from the higher utilisation of robotics technology. In addition, the company have been actively diversifying its business and has since branched into resources development, real estate development and micro-motor development.
Other than robotics vacuum cleaners, the micro-motor segment is the second largest revenue driver which constituted to an approximate 30 percent of Kin Yat’s total revenue in 1H2018. Given the high barrier of entry and the company’s expertise in micro-motor, the segment is expected to continue being a strong growth driver.
Currently, Kin Yat has four manufacturing facilities located in Shenzhen, Shaoguan, Dushan and Malaysia. It is expected to add on two more factories in Shaoguan and Dushan by end of 2018, adding another 200 million micro-motors per annum into its production capacity.
Unlike other companies in the “new economy” category, Kin Yat has a strong balance sheet with an extremely low debt-to-equity ratio of 0.03 or just about three percent. The company is trading at an approximate dividend yield of four percent and at a low price-to-earnings (P/E) of just six times. Analysts from DBS benchmarked Kin Yat against other manufacturing assemblers which trade in the range of eight times to 10 times P/E, DBS quipped that Kin Yat’s fair value should be around HK$ 4.17 to HK$ 5.22. Against the current share price of HK$2.44, the target price represents a potential upside of 70.9 percent to 113.9 percent.
Shenzhen Neptunus Interlong
Shenzhen Neptunus Interlong Bio-Technique Co (Shenzhen Neptunus Interlong) (8329:HK) is the drug manufacturing arm of Shenzhen Neptunus Bio (000078:CH) that engages in drugs retailing and supply of medical devices. In FY17, Shenzhen Neptunus Interlong generated 54 percent of its revenue from drug manufacturing that targets hospitals while the remaining 46 percent comes from distribution of drugs manufactured by other companies to drug stores.
The company has a competitive edge over its peers due to the development capabilities of its parent company. Currently, the parent company has seven drugs that are in different stages of development. As the manufacturing arm of the parent company, the company has the right of first refusal to produce these drugs.
Distribution of drugs manufactured by other companies to drug stores will continue to be the key growth driver for the company. From 2013 to 2017, the company recorded a compounded annual growth rate (CAGR) of 40 percent as the coverage of drug stores grew to 130,000 stores which translates to approximately 30 percent of the national total. With demand continuing to grow with these drug stores, analysts from DBS expects the CAGR for 2017 to 2019 to be at 10 percent.
Currently listed on GEM, Shenzhen Neptunus Interlong has the potential to be transferred to the main board. The company has met the requirements for the transfer and will be a reputational gain should that occur. Valuation of the company is relatively low with a price-to-book (P/B) of 0.8 times and a forward FY18 P/E of 10 times which is 70 percent to 80 percent lower than the industry average. In addition, the company is in a net cash position in FY17, approximately at 59 percent of its market capitalisation.
Under the assumption that the stock should trade at one time P/B, analysts from DBS believe that the fair value of Shenzhen Neptunus Interlong should be at HK$0.46. Currently, the stock is trading at HK$0.36 per share and investors are looking at a potential upside of about 27.8 percent.