HK 第25部分; Growth stocks

Since the start of the HK 第部分 series on 2024/01/12, I have mostly focused on finding Dollars trading for Pennies. More recently, I have warmed up to growth stocks. Today, I introduce three of them.

From absurd-cheap, high divi stocks…

Initially, my focus on the HK exchange was on profitable, absurd-cheap stocks with high dividend yields, and decent governance. I believed this combo would reduce risks and provide the highest likelihood to generate positive investment returns. I have mostly been been happy with the results of that strategy thusfar. There have not been any blow-ups, although Natural Food did give up most of its earlier gains😬, and three stocks are already up c30% or more, including dividends.

…to growth stocks

More recently, I have been warming up to certain higher-growth and/or higher-quality stocks. There are a couple of reasons for this. First of all, my experience from recovering from previous declines in the stock market (2002, 2008, 2020), is that I usually under-estimated the potential for growth & quality stocks. I’ll try not to be too much of an ass 😳, and learn from those prior mistakes… hitting the same stone three times is bad enough already.

Obviously I cannot be sure whether HK stocks have already started their structural recovery… but at the very least we must be closer to the bottom than the peak, given the absurd-cheap valuations I have writing about this year, and given that the Hang Seng Index chart has almost halved. … and of course, a bit of government stimulus would not hurt either.

Hang Seng Index (HSI)

Secondly, while growth stocks may not (all) look screamingly cheap on their teens earnings multiples and low dividend yields, I believe stocks with comparable characteristics would often be worth at least twice as much in Western countries… and YES, YES, I understand that there needs to be a higher risk premium for investing in China. Finally, the companies themselves are indicating that their shares are undervalued.

For a long time, growth companies were shying away from any type of capital returns to shareholders. By contrast, recently, even companies that only just have turned profitable are already starting to buy back shares. What a change!

What growth stocks do I like?

In this post, I introduce three high-growth stocks I like and recently bought. Mind you, I have been going throughs tons and tons of HK stocks trying to find the ones that fit with my preferences; solid business model which I can understand, decent governance, not too much competition, (potential) for solid/strong returns on invested capital and free cash flow generation, capital returns to shareholders, et cetera. After having spent a lot of time on screening and learning about the basics, I likely still have (a lot) more to learn about these businesses. Moving more towards higher growth stocks also usually means that the companies are in a relatively less-mature stage of their economic life cycle. Business prospects can change much more quickly than for established companies such as China Tower and the (toll roads, utilities, food) companies in the First Pacific portfolio. That all means, I perceive the risks to be higher, and size positions at lower weights, and may be quicker to close positions.

Ingredients

Definitions:

• FAV/s: financial assets value (cash + securities + investments in associates & joint ventures + investment property, minus borrowings) per share

• FAV/P: FAV divided by share price to indicate what portion of the share price is covered by financial assets value

• P/E: price-earnings multiple

• DY: dividend yield

• MC: Market cap in million x share price currency, HKD in this case

Some of the ingredients of the three high-growth stocks include;

• Busted IPO’s; Share prices have declined by roughly two-thirds to up to 90% from their respective peaks from a few years ago.

• High revenue growth; One company doubled its revenue since 2021, and another grew it almost four-fold until the 12 months ending 2024/06/30. Revenue growth is expected to continue at a high pace in the next few years driven by supportive demographic trends, scheduled product introductions, and international expansion. Notably, these companies have been beneficiaries of the US-China trade war and have been substituting products of American players who dominated the Chinese market.

  The third company grew revenues about 50% since 2021, and I am less sure on the revenue growth path going forward, but I believe the (lower) valuation (multiple) makes up for that.

• Attractive economic models; All three companies have already reached profitability, and have (or seem on their way to have) attractive economic models with strong returns on invested capital and free cash flow generation.

• Strong balance sheets with net cash covering a considerable portion of the market caps.

• Capital returns; All companies have started capital returns to shareholders, and two of them are now regularly buying back roughly 20% (or even more) of daily trading volume.

• Attractive valuation; I believe they are trading at a high-single digit to high-teens earnings multiples for 2025. I mostly used broker estimates to calculate the P/E figures below, but I believe those estimates are too low. Profit trends are tracking ahead of the broker estimates.

• Stocks characteristics; Two companies » Market cap: USD 300-700m range, Average daily value traded (ADV): USD 0.5-1.4m. The third company is a large-cap.