Kennox Comments On Welling

The Kennox Strategic Value Fund’s 4Q 2017 report included some commentary on HK-listed Welling Holdings (see the excerpt below). Kennox is an Edinburgh-based wholly independent asset manager. Their team runs the Kennox Strategic Value Fund, a long only global equities portfolio. We have previously covered them on this website, see here and here for more.

As per their latest quarterly report:

“Welling Holdings is a HK-listed manufacturer of small motors for air-conditioning units and white-goods. It has leading market shares (globally) in both air-conditioning motors and washing machine motors, due in part to its relationship with Chinese white-goods manufacturer Midea (who own 66% of the shares) to whom it makes over 50% of its sales. It has generated remarkably solid profits for the last 8 or 9 years (averaging about $600m) equating to about an 7x PE, and 8x our estimate of Sustainable Earnings at $500m (the low end of the range of results over that period). Adding to the appeal, it is very conservatively financed, with around 75% of the Market Cap represented by cash at the time of purchase. It is a robust business, and operates in a growth market. As affluence increases across Asia, demand for its products continues to increase. It is likely to face margin pressure as wage increases bite, but it can absorb these increases, and as a provider of low cost, but essential parts (each motor sells for just $5), Welling is likely to be able to pass these costs on over time.

Having first bought in September/October, Midea have since made an offer to take the company private, some 47% above our entry price. A rapid realisation of value wasn’t our expectation, but clearly Midea agree with us – the shares are markedly undervalued. We are holding on to the shares for now (even the recent share price represents a discount to where we feel it should be), in the expectation of an improved offer. While Welling is exactly the type of business that we would be happy to hold for the long term, it is likely that the shares will not be a feature of the portfolio for long.”