Tianyun International - it was amazing
"From HK with love"
Tianyun International (6836) is a Hong Kong small cap that produces fruit snacks, fruit cans, trading of tropical fruits and now energy drinks.
The company ipoed in 2015. Here are the characteristics of Tianyun;
Defensive products
Dividend paying until 2020 and good margins.
Large growth runway with capacity increase
Normalised PE under 10
With a big catch.
“Tianyun international” or “Shandong Tiantong” was established in the production and sales of processed fruit products in 2003. Many of the fruits are rarer fruits, and not just apple and bananas.
A large part of the sales were OEM, where the fruits are sold overseas for companies without branding, who will then resell the fruits to end customers under their own label in cans.
Gradually the company was trying to grow into higher margin and more reliable income sources, by developing processed branded foods, mostly in the form of fruit snacks. By having a brand, the company can sell differentiated products at a commercial price set by supply and demand for this product category (snacks or drinks), rather than selling a commoditized product at a price set by supply and demand for a commodity.
Tianyun is also expanding capacity with Capex and M&A and due to its small size has a large runway in China.
Slowly, with each passing year, the proportion of the branded products increased in the mix, enabling better margins.
Lastly, in 2020, the company developed and launched its energy drink, called “Shiok Party”
According to the latest interim report, the shift to own brands, including drinks, was a success:
This compares to 2014-2015 where most of the sales and profits were commodity sales.
Economical returns:
The returns have been excellent. The company has also paid decent dividends.
The current valuation is absurdly cheap, at under 10 PE ratio using latest figures or exactly 10 PE using 2020 annual results, negatively impacted by covid. Why not 2021, well, they are not yet published, more on that later.
To get full analysis on this company:
I wrote it before; I’m not looking to beat the analysts. Thats a full time profession. The analysts are focused on analyzing and not on finding, and are experts in one sector and one geography. I’m attempting to uncover and to select value opportunities.
Here are two full analysis of the company that go into greater detail.
Shareholding:
The company has a standard Owner operator shareholding base, with each operator owning 20% of the shares, so it is 40% owned by the two owners. They are Chinese, and there is no specific information about them I can find with my zero language skills in Chinese. On webb-site.com there is no red flag about the owners.
in 2017, a state owned entity took control of 27% of Tianyun. It is Sichuan Development Holding Co., Ltd. The founders sold a stake at this time.
Both parties signed a cooperation agreement with the following terms:
..to develop a base for source of supply of raw materials and supply chain for processed agricultural and food products in Sichuan Province in China; to invest in talents, technology, expertise, business network and provide capital; to invest in agriculture industry projects, including introducing overseas advanced agricultural technology, mature corporate management system; to provide capital for acquisition of high-quality agriculture projects in China and abroad; and to contribute an aggregate sum of RMB1 billion in the next three years to agricultural food projects.
Following this, in 2019, a JV with 200 million RMB of capital was implemented to create a fruit and vegetable processing centre, grading centre and trading centre in Sichuan.
and then…2021, the state owned entity sells all to an unknown shareholder in Hong Kong, and the JV had no real assets or revenues and was dismanted.
http://www.tianyuninternational.com/en/uploadfiles/news/2021030614412213.pdf
The catch and the conclusion.
So far the pitch sounds good. But, you cannot buy this stock. I cannot sell it either.
That is right, the stock is suspended since April 1st 2022 for financial irregularities..
So am I going to lose it all? I don’t know. I still want to be positive because that’s the best attitude I can have.
We have a real business (when the state organisation took a stake in the company and developped a JV with it).
But the JV did not do anything material in 2 years, in terms of revenues or assets, so there could have been some hidden issues and disagreements or some big red flags. (http://www.tianyuninternational.com/en/uploadfiles/download/2021071219124597.pdf)
Positive and good margins
With net cash.
So if the loss is partial in terms of funds, it will recover because the business is strong. If the owners are in it to milk the IPO proceeds after 8 years, it’s a zero.
When I started investing in HK small caps, I knew there was some risk due to the reputation of some HK frauds, and due to me not being on the ground and familiar with HK and China in terms of companies and products, and not being able to real newspapers to vet companies.
For Tianyun, honestly I always wondered if the products were true. The pictures looked low key, the CEO looks dodgy with his bald hair. But it is also often the rough appearance of Chinese small caps. I couldn’t find the product online, but I have zero local skills and Alibaba Tabao requires a login to search. I relied on analysts support.
As a precaution I split my HK smalls in very small amounts of diversified bets. And luckily, one of these was an exited 5+ bagger (Modern Dental group), and a few were 50% returns or more exited. But Tianyun was a 2 bagger that is now suspended so the impact is bigger for 2022 performance if it is a loss. And I just got another HK stock suspended (Ecogreen), this one with 15 years of dividend history, so I am not too concerned but a delisting can still happen. Overall the strategy worked and results were secured but it is risky and definitively not for the faint hearted!
The two HK stocks are Mainland China stocks.
As a result, I reduced my other Mainland China exposure and will Pause Hong Kong before I get the outcomes for Tianyun and Ecogreen. It could last a year or more. I keep all the HK stocks I wrote articles about because they are old HK/SE Asia money that can be trusted to at worse rob you partially with unfair deals but not rob you of your ownership, or state entities affiliated like Shanghai Pharma.
2022 was a punch in the face in terms of non democratic countries stock returns and a set back compensating good returns on other value stocks. Russia was a once in a decade type war of aggression event. Diversification saved me twice and I will keep advocating it for emerging markets and small caps. I will send new funds away from fully authoritarian states.
I have to dig more towards places with the risk of total loss are lower, namely Singapore, Japan, Latam, Europe (ex the infamous London AIM market), North America.
Chinese small caps are tricky... I'm always afraid investing them. Hoping that you'll recover your investment.
By the way, I'm surprised that the name of the energy drink is "Shiok", I thought that was Malay Singaporean slang - not a word that's commonly used in the Shandong province.
Sold. I still like the business but I prepare my portfolio a bit more for the worst (Taiwan crisis, oil crisis)