Bamboos Health Care Holdings

I spent a couple of hours yesterday reading about Bamboos Health Care Holdings (2293.HK). Hong Kong is a place where I’m still finding lots of interesting stocks to look at and Bamboos caught my eye because it looks quite cheap at first glance.

This company illustrates nicely why I find Hong Kong such a challenging place to invest. There a lot of seemingly screaming bargains to be found, but often I’m left wondering what is really going on there behind the scenes. Unfortunately, there are hardly any people digging deep into these micro-caps in Hong Kong, so I’m left with questions and there appears to be no real way to get answers.

In the end I thought, why not just write a post about it? I’ll just list the most important questions and issues that I see. Perhaps one of my you has something to say about the company. You can do this by leaving a comment, but you can also contact me here if you prefer e-mail.

Summary financial data

Bamboos is a provider of healthcare staffing solutions in Hong Kong to individuals and institutional customers, like hospitals and clinics. The company went public in 2014 on the GEM (Growth Enterprise Market) market in Hong Kong. In March of 2017, they delisted from the GEM market and transferred to the Main Board of the Hong Kong stock market.

Some summary financial data about Bamboos:

Share price: $0.80 HKD
Outstanding shares: 400.0m
Market cap: $320m HKD (~$41.3m USD)
Book value (June 30, 2020): $153.3m
Cash: $101.6m
Financial assets: $28.4m
Total liabilities: $28.6m
Net income fisc. 2020 (ended June 30, 2020): $30.7m
Net income fisc. 2019: $38.9m

This looks pretty attractive: the company has $100m+ in cash, there’s an extra $28m in other financial assets and you’re currently paying around 10x earnings. As a staffing provider, capital expenditures for the company have been minimal. For fiscal 2020, capex was only $2.6m and the year before just $0.2m. If you look back further, you’ll see the same picture.

Why is the company buying this stuff?

After this snapshot, I looked at some filings on HKEXnews. The very first one was about a disclosable transaction about the acquisition of non-physical gold (.pdf). In late November, the company spent $20m to buy 11,870 mace troy of non-physical gold from Hang Seng Bank (0011.HK). And in another filing a few weeks earlier, the company announced a further $18.3m gold purchase.

The disclosed reasons and benefits for this transaction:

[…] for the purpose of enhancing efficiency of use of idle cash enhancing efficiency of use of idle cash […] The Directors consider that the Acquisitions provide the Group with the opportunity to balance and diversify its investment portfolio. Having considered, among others, the low interest rate environment, the instability of global economic environment and the price performance of gold, the Directors consider that the Acquisitions are stable investments which could secure the Group from currency debasements and inflation in times of uncertainty. The financial products are selected prudently with an aim to improve the Group’s efficiency on capital utilization without affecting the Group’s daily cash flow.

I’ve looked at plenty of companies that have a lot of excess cash, but very rarely have I seen a company do something like this. I’m not a big fan of companies making these types of investing decisions with excess cash. The principle should be to invest in your core business and return excess cash to shareholders. After I saw this filing, I looked at other things they’ve done with their cash.

It turns out there’s some more exotic stuff:

On April 6, 2020 the company disclosed that they spent $13.3m to buy two senior notes (.pdf) issued by Jiayuan International Group (2768.HK). The coupon rate on these notes is 13.75%. Jiayuan International is a Chinese property developer with what looks te be quite a large debt load. The stated purpose of the purchase was once again “enhancing efficiency of use of idle cash”.

FinTech?

What’s also a bit strange is that these investments were made by a wholly-owned subsidiary called Bamboos FinTech Limited. In the latest annual report the principal activities of this subsidiary are described as “investment holding”. I went back and looked at earlier reports and Bamboos FinTech first appeared in fisc. 2018 as a dormant subsidiary. I couldn’t find any separate disclosures about the establishment of this subsidiary. The first investments by Bamboos FinTech were only made during fisc. 2020 when the subsidiary became active.

Buying non-physical gold from a bank and senior notes from a Chinese property developer don’t have anything to do with “FinTech”, as investors understand that term. Why would you establish a subsidiary with that name, keep it in a dormant state for a few years and then start making these types of investments?

Why is the company public?

Bamboos went public in 2015. The company did a placing of 100m shares (.pdf) at a price of $0.50 per share. The net proceeds after fees and expenses were $39.8m. So the costs incurred were $11.2m – or 22.4% – of the $50m the company sought to raise. That seems like a huge percentage to me. As an insider you have to have a very good reason to pay such a relatively large cost to do a placing.

Page 12 of the prospectus (.pdf) shows how the company planned to use the proceeds from the placing:

The amounts needed for any of the next three fiscal years seemed very modest. About $7m for fisc. 2015, another ~$16m for 2016 and ~$11m for 2017. The company was already nicely profitable and cash generative by then: in 2012 and 2013 net income was $13m per year (page 249). What’s even more notable is that the company had $33.7m in cash as of Dec. 31, 2013 (page 246) and only $9m of debt (page 247).

It seems that there was no real need for this business to raise cash at that point. They could have easily done the investments they mentioned by using future internally generated funds and/or the cash on the balance sheet.

Insider Ms. Hai Hiu Chu owned 300m shares and Mr. Kwan Chi Hong owned 30m. Why would they dilute themselves by placing 100m new shares? One reason could be that the placing was done at a very high price, but it doesn’t really look that way to me. At the final placing price of $0.50, the market cap of the company was $200m. Take out the excess cash and looking at the earnings at that time, the earnings multiple looks very reasonable. Net of cash the company traded at around 13.5x earnings. If they expected earnings growth over the next few years, then the decision to place shares looks like a bad one from their personal standpoint, even ignoring the costs associated with the placing, the costs of being public, etc. That earnings growth has actually materialized, the company has shown earnings of $30m+ a year since fisc. 2017.

All in all, the share placing doesn’t make much sense to me. I’m unable to really answer the question why this company went public.

HRnetGroup Limited buys Kwan’s stake

In May, 2019 a Singapore listed company HRnetGroup Limited (CHZ.SI) disclosed the purchase of 30m shares at a price of $1.40 per share. In a filing on the same date, Mr. Kwan Chi Hong reported the sale of 30m shares at the same price.

I think that raises some questions for HRnetGroup shareholders. Are they comfortable with their company investing in this Hong Kong company and buying this stake from an insider?

Dividends

A positive fact is that Bamboos has consistently paid dividends since its IPO. For fisc. 2020 this amounted to $30m, which is a very substantial amount for this micro-cap. In previous years they paid out $10m-$20m. To date, the company has paid out more cash to shareholders than they raised, but they did already have $30m+ on the balance sheet at the time of the listing. Regardless, it’s a good sign to see a Hong Kong listed company paying out large dividends. It is an indication that the company does generate cash.

Conclusion

Bamboos Health Care Holdings is just an example of a Hong Kong company that looked very promising to me initially, but where the share price also reflects some skepticism from investors.

I think that skepticism is warranted in this case. The investments in gold and the notes, the “FinTech” subsidiary that has nothing to do with Fintech, no convincing reasons for the share placing – these things all leave me with questions that I’m unable to answer. It should still be interesting to follow the company and see what other investments they make in the future.

Disclosure: no position in Bamboos Health Care Holdings or HRnetGroup Limited