The Kennox Strategic Value Fund’s 4Q 2016 report included some commentary on Texwinca Holdings (Texwinca). As of the end of February 2017, Texwinca was the fourth largest holding of the fund (~4.1% of the portfolio). Highlights / excerpts are included below.

Company overview:

• Hong Kong listed textile company; core business provides high-end fabrics to global branded clothing companies (e.g. Uniqlo, Nike, Gap etc.)
• Margins have increased in recent years as a result of a focus on high-tech fabrics (e.g. anti-UV materials) and rush orders (which helps retailers reduce their inventory burden)
• The company benefits from operating in a small market – “very few companies can live up to the environmental and sustainability standards expected by a demanding western client-base”
• Texwinca also operates retail stores in mainland China under the Baleno brand
  • This segment currently faces headwinds as consumer demand in China remains sluggish

Valuation:

• Recent downturn in the non-core, retailing business has negatively impacted market sentiment and shares are down from ~HKD 9 to ~HKD 5.30 per share (as of last close)
• Company has a strong balance sheet with ~50% of the market cap (~HKD 2.50 per share) covered by cash or near-cash investments
• At the same time, Texwinca’s core fabric business produces ~HKD 0.50 per share in post-tax profit per year
  • Implies an ex-cash multiple of ~5x with no value ascribed to the retail business
• Expected payout ratio of ~70% (~HKD 0.35) translates to a ~7% current dividend yield

Kennox is a wholly independent asset manager. They run the Kennox Strategic Value Fund, a long only global equities portfolio. You can learn more about them from their website.