Undervalued and net net investments in the Chinese market: Part 2

More high quality companies trading at Graham esque net net valuations unlike any other market in the world

Welcome to the second part of me covering undervalued and net net investments in the Chinese stock market. As of Feb 3 2025, when I’m writing this, if you open any form of media other there whether alt, social, or mainstream media I’m willing to “bet the farm” as Nadella and Masa did on Scam Altman that your entire feed is probably filled with headlines about Trump’s tariffs and delusions of grandeur about how its going to destroy Canada and Mexico and how manufacturing is going to suddenly come back in droves to the U.S., whether you believe all of this or not there’s no gainsaying the fact that the markets and media have found their new sensationalism for the next few months.

Keeping all of this in mind what is Mr. Dragon’s completely rational reaction to all of this, covering more net net stocks in China of course. The amount of irrationality in both the U.S. and Chinese markets is wild but for different reasons; in the U.S. you have stocks like Nvidia and Microsoft pumped up by prospects of endless AI capex and massive vaporware investments of crazy figures, when Scam Altman’s OpenAI trades at a higher valuation than companies with tangible products which consumers have loved for years like Xiaomi then you know that there’s a problem in the system. But today, our area of focus is not on the U.S. or Xiaomi but instead a further exploration of stocks trading at valuations that would even make Ben Graham salivate.

Let’s firstly address the elephant in the room that most people complained about in the first part; there’s no denying the fact that corporate governance in some Asian companies can be questionable in the sense that if they’re family owned then the families tend to treat them as a personal piggy bank and disregard shareholders at all so whenever I have covered net nets I’ve paid attention to either completely exclude family owned enterprises and/or include only the ones where there’s a long history of competent corporate governance and returning capital to shareholders.

Secondly, a lot of people especially on Reddit, the most propagandized social media out there, were quick to bring up the frankly primate esque agreement of “Muh Chinese numbers fake, Chinese accounting fraud, Asians are scammers” and my answer to that is all of the scams covered by Hindenburg so yes clearly there are scams everywhere and they’re actually more likely to occur in the U.S. also some of the companies that I cover here are state owned companies which pay out physical dividends to the government so the chances of fraud there are lower than almost any enterprise out there. Now let’s finally get to the analysis of these egregiously undervalued companies.

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Dickson Concepts (113.HK)

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Dickson Concepts operates in perhaps the most difficult market in the world-Hong Kong and China luxury retail. The market for luxury retail in Hong Kong and China has struggled the most out of all of the sectors that I track globally. For most of the 00s and 10s, Hong Kong was a hub for luxury retail because it had no import duties and VAT on luxury items as compared to China which taxed these items heavily. Chinese tourists arrived en masse to Hong Kong to shop their heart out at luxury retailers at cheaper prices as compared to back home. This has now completely faded because Hainan has also been established as a duty free destination and is significantly more touristy and scenic than the concrete jungle of Hong Kong and also because luxury brands are now basically in every Chinese city now. Hong Kong’s status as a luxury retail hub is for all practical purposes, over. Furthermore these are some issues:-

• Outbound travel from Hong Kong to Shenzhen in the last five years or so has decimated almost retail in Hong Kong except for maybe consumer staples, hawkers, and neighborhood malls. Everything from massages to hotpot to clothes is at least 40-50% cheaper in Shenzhen as compared to Hong Kong and with both the Hong Kong and Chinese governments seeking to integrate the Pearl River Bay Area into a giant metropolis, I think this trend is bound to continue into the foreseeable future.

• Hong Kong’s status is also being heavily challenged by Japan because of the weak Japanese yen as compared to the HKD which is pegged to the U.S. Dollar. Travel to Japan and luxury consumption because of it has grown exponentially.

All of this to say that I’m very bearish on Hong Kong luxury retail. This is also reflected in Dickson Concepts’ numbers. Revenues and profits have been struggling and declining and I don’t expect things to get any better. In China where they also have significant exposure, things are also not that rosy which is evident from the large declines in Chinese revenue reported by basically all luxury brands operating there. Chinese consumption patterns are currently and I think for the future going to reflect two things- migration towards value and migration towards local brands.

Thus I’m pricing and valuing Dickson Concepts as a company which is going to shut down in the next few years. The core business is still profitable so the company isn’t burning its cash reserves. It has 2.873 billion HKD of net cash while it trades at a market capitalization of 1.9 billion HKD and you get a 10% dividend yield which you wait for the company to go bankrupt. This isn’t the best company here but its not completely bad either because of the high dividend yield but there are better companies to be found on this list.

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China Mobile (941.HK)

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China Mobile is the highest quality company on this list. They operate in a oligopoly with their only competitors being China Unicom and China Telecom. All three of these companies are state owned and thus the management of all of these companies is very high quality and ensures that there’s no price war hammering margins as is common in the telecom industry elsewhere in the world. China Mobile has a billion telecom users. it’s the largest out of all the three telecom players and like the other two has a high growing cloud business which is giving proprietary cloud players like Alibaba and Tencent a good run for their money. They are perhaps the best consumer defensive stock in the world that I can think of because they have both stable businesses like telecom and broadband along with a high growth vertical in the form of the cloud business.

But what makes China Mobile undervalued? it won’t show up on stock screeners and you’ll have to dig down deep to find out how its so undervalued. The three large telecom players collaborated in 2014 to form a new entity- China Tower- to spin off their tower assets which have to be heavily depreciated into a new separate entity. The reason why China Mobile is a net net but doesn’t appear on the surface as such is because even though China Mobile’s EBITDA doesn’t account for their 28% stake in China tower, this is still accounted for in their enterprise value thus inflating it. So to find out China Mobile’s real enterprise value you have to deduct their China Mobile stake. Hence China Mobile’s actual enterprise value is 830 billion HKD while their EBITDA in 2023 was 341.4 billion HKD so they’re trading at an EV/EBITDA of just 2.43 times.

At this price you get a very high quality state sponsored oligopoly business growing profits at around 5% a year and paying an almost 7% dividend yield. If you believe that their EBITDA can grow at just 3% ,which is very low if you account for how much cloud capex they’re planning to do, and if they trade at a more rational 5 EV/EBITDA in 2035 then your compounded stock plus dividend returns will be 17.24% per year.

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Automated Systems (771.HK)

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This is the most irrationally priced of the bunch. This is the sort of company that Ben Graham would lose sleep for; in my entire life I’ve never come across any thing even excluding stocks that is priced this irrationally cheap. Automated Systems is a boring IT consultant business at the face of it but if you compare it to other IT consultants, especially Indian ones, which hardly grow revenues and profits by 1-3% a year, that are still priced at 25-30x earnings then its quite cheap at just 6x earnings.

They hold about 2 billion HKD dollars of Grid Dynamics (GDYN) stock while having 800-900 million HKD further in net cash but it trades at an egregiously low 558 million dollars in market cap. So when you buy Automated Systems you get about 300 million dollars of net cash and a 2 billion dollar stake in Grid Dynamics for completely free. For context, I hate Grid Dynamics and think that its completely overvalued but still this irrationality cannot be explained.

I don’t think there’s a better example of the contrast in lunacy prevalent in both markets than Automated Systems. How in the world can something that has a significant stake in a US company plus net cash trade at a discount to both whilst also being profitable and paying a near 5% dividend yield. I won’t even run a valuation on this because any way you slice it, this stock is very very very cheap and the irrationality has to stop someday. Even if they were to sell their entire GDYN holdings and redistribute the amount to shareholders they would still be very cheap. If someone ever tries to tell you about the wonders of financialisation and the wonders it can achieve then explain Automated Systems to them and they’ll understand. How in the world does the market price crappy IT consultancies in India at 30x while completely neglecting this is beyond me.

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Natural Food International Holding Limited (1837.HK)

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You thought Automated Systems was it? Nah I have more. Natural Food International Holding Limited (1837.HK), listed on the Hong Kong Stock Exchange, is a leading Chinese health-focused food company. Established in 2012 and listed in 2019, the company specializes in plant-based, organic, and natural food products, catering to growing consumer demand for healthier lifestyles. Its product portfolio includes plant-based meat substitutes, whole-grain foods, organic snacks, and dietary supplements sold under brands such as SUO ZHI MAO (索之味) and Farm2Beauty. The company targets China’s middle-to-high-income urban consumers through both offline retail partnerships and e-commerce platforms like Tmall and JD.com.

Headquartered in Hangzhou, Natural Food operates in a rapidly expanding niche within China’s food industry, driven by rising health consciousness, environmental concerns, and government support for sustainable agriculture. China’s health food market is projected to grow at a CAGR of 9%+ (2023–2030), fueled by urbanization, rising disposable incomes, and government initiatives promoting food safety and sustainability. Over 30% of sales come from online channels, leveraging China’s booming digital commerce ecosystem.

They’re growing revenue rapidly at 13.53% in H1 24 and profits at about 9%. They also have a high ROIC of over 20% and PepsiCo owns a 20% stake in them. Coming to valuations, they are also egregiously cheap with a PE of only 6x and net cash of 1 billion dollars while their market cap is also 1 billion. While not having negative enterprise value they are still very cheap relative to growth and deserve to be at least priced 2x from here relative to their fundamentals.

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That’s it for today folks. I’m looking for feedback for my upcoming deep dive series’. If you have any ideas or feedback then I’m all ears. Thank you for supporting me.