Quicky #16 on Tradelink (536 HK)

This part #16 is about Tradelink Electronic Commerce Limited, which I found using a screen for ‘cheap’ Hong Kong stocks with a net cash position …

This is not investment advice. Please read the disclaimer.
I might currently or at a later point in time own shares (economic interest) in mentioned or related companies.

Everyone who was in Hong Kong, knows that it’s not all office towers and bars. HK has long served as the gateway to China and many goods traditionally passed HK and moved through its vast ports further into the world. Mainland terminals in the PRC have overtaken HK though.

The company (Tradelink Electronic Commerce Limited, Tradelink) provides trade-related electronic services for both Hong Kong and international business. Tradelink’s electronic platform facilitates trade among corporate subscribers and logistics service providers based in Hong Kong or overseas. (factsheet)

Its stock (536 HK) rebounded from its Septmeber low of HK$ 0.80 and currently trades at HK$ 0.95 for a market value of HK$ 755m. It traded as high as HK$ 1.40 in 2019, and as high as HK$ 1.70 in 2016. It shows a low 11x P/E (and much lower when adjusted for net cash) and a high 9% dividend yield. Interim dividend was recently lowered in (HK$ .0195 vs .033).

Typically for a services company, Tradelink does not carry many hard assets on its strong balance sheet. Its net assets value of HK$ 340m should result in continued high dividend payouts and mostly consists of

  • Cash and cash equivalents: HK$ 200m
  • Bank deposits: 60m
  • Other financial assets: 183m
    • incl. three bonds with nominal value of US$ 3m (HK$ 23m) each
  • Receivables …

This is another part of my series of Quickies on new companies.

Operational results took a hit due to the pandemic, decreased business activity in Hong Kong (HK) and the Peoples Republic of China (PRC) and global trade. For the first six months of FY 2020, total revenues declined -4% yoy and profit from operations shrank -18.5% (presentation). The company reports three operating segments

extract from presentation

E-commerce is the biggest and most important segment. It includes the two subsegments Government Electronic Trading Services (GETS) and supply chain solutions. The GETS sub-segment includes the company’s activities related to its appointed by the local HK government — toghether with two other companies — to provide GETS services for the trading community. The business is very much dependend on the econonomic activity as becomes clear in Tradelink’s H1 2020 report:

All other services, including the supply chain sub-segment within e-commerce, is most of all project-based business. This does not make for a defensive business, especially when expenses (excluding depreciation) seem to be rather fixed: these expenses decreased by only -0.8% to HK$ 88.9m in H1, thereof HK$ 58m personnel with -2.2%).

The GETS business is responsible for the majority of the company’s business and it is a profitable one. Trade should rebound and the company can clearly be seen as a reopening trade (so is Koshidaka) and I believe when Chinese and global trade rebounds the chances are quite good for better results and a higher share price, but

  • If trade volumes and GETS services rebound, profits will rise but not necessarily margins, since
    • it seems to be labor intensive business and
    • two other companies are appointed.
  • GETS licenses have to be renewed and (theoretically) further companies could be appointed by the government resulting in political/regulatory risk. So does
    • the introduction of a new system called Trade Single Window or TSW

Other issues I don’t like are many outstanding employee options at rather low prices which could result in dilution if and when the stock re-reates (somewhat mititgated by high dividend payouts though). It appears to be an interesting company but,

comparing Tradelink to other potential investments, I do not believe it to be the investment I am searching for:

  • China Mobile has a strong balance sheet and high dividends as well, both have political risks involved, but it has a much more defensive business and siruption risk seems lower (TSW)
  • Silverlake Axis Ltd‘s dividends are currently lower but its balance sheet is also strong. It has project based business but mostly sticky revenues, so has Tradelink (as 1/3 appointed GETS service providers). Silverlake’s business appears much more sticky to me due to its banking clients.

For the above reasons I pass.

I hope you enjoyed this post. What’s your take on Tradelink or its competitor below?

Update Jan 18th: Freight costs for shipping containers from Chinese ports are rocketing, as are Chinese exports. Hong Kong trade volumes in H2 2019 seem to have recovered strongly from H1, as several measures indicate. I believe a trade volume and thus a revenue/profit rebound for Tradelink’s GETS business is even more likely than initially thought.


Further reads

Computer And Technologies Holdings Limited is another listed (0046 HK) company that providing GETS services (link). Quickly flipping through its interim 2020 report, it appears to me, that

  • its business activity seems comparable
  • it seems cheap as well, high net cash, usually high dividends
  • I stumbled over David Webb being a shareholder
    • I knew that name, probabaly from his webb-site.com
    • There are no new reports on C&T it seems, but the main issues bloated balance sheet, idle cash from his 2014 letter seem to be valid still.

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