Originally published in Capital Employed Newsletter on 4th March 2025Dear Readers,
Welcome to another issue of ROE The Boat.
For this issue I am highlighting three cheap stocks listed in Hong Kong that all have solid balance sheets, decent returns on capital, and big chunky dividend yields.
Please note: this article should act as an introduction the companies featured and is not a complete deep dive. Make sure you do your own research before investing in any company mentioned in this newsletter.
Companies featured in this issue -
1) Best Pacific International Holdings
2) Dream International Ltd
3) Natural Food International HoldingFor your convenience please find the PDF version of this issue below -
Best Pacific International Holdings
The Hang Seng Index had a stellar 2024, rising 36%. Despite this surge, Hong Kong remains a market rich with value opportunities.
One standout is Best Pacific International, a leading global producer of elastic fabric, elastic webbing, and lace.
Their customer base includes major sportswear and apparel brands such as ANTA, FILA, Lululemon, Under Armour, and UNIQLO. Additionally, the company maintains long-term partnerships with top lingerie brands, including Aimer, Chantelle, Embry Form, Maniform, Marks & Spencer, Spanx, Triumph, Victoria’s Secret, and Wacoal.
Best Pacific provides a one-stop solution, allowing customers to streamline procurement, reduce inventory levels, shorten production lead times, and ensure color consistency across different lingerie materials.
With factories in China, Vietnam, and Sri Lanka, the company is well-positioned to navigate tariff challenges on Chinese exports to the U.S.
Chairman LU Yuguang, who has over 29 years of experience in the textile industry, owns 61% of the company. Other senior executives also hold significant stakes, and Fidelity is a major shareholder through both the Fidelity International Small Cap Fund and the Fidelity China Special Situations Investment Trust.
The company's net debt has been declining annually and now stands at 860 million HKD, while 2024 net profit reached 566 million HKD, marking a 61% increase.
Since 2018, operating margins have averaged 11%, with returns on capital employed (ROCE) averaging 12%.
Like many Hong Kong small caps, Best Pacific trades at an exceptionally low valuation, with a P/E ratio of 4.4 and an 11% dividend yield —a compelling opportunity for value investors.
Dream International Ltd
Dream International Ltd is engaged in the toy business, and is listed in Hong Kong with a market cap at writing of $3.82 billion HK dollars ($491 million USD).
The company designs and manufactures a range of products including plastic figures, plush stuffed toys, tarpaulin, and die-casting products. Some of the companies they manufacture for include Disneyland, Toys ‘R Us, Funko Pops, and Spin Master.
Dream International has 27 factories, seven in China and 20 in Vietnam. They’re also in the process of building a new plant in Indonesia which should be ready to go live soon.
Since 2018 revenue has grown from HK$3,466 million to HK$5,352 achieving a CAGR of 9%. In the same time period net profit has grown from HK$376 million to HK$830 million, achieving an impressive CAGR of 20%.
The latest interim report for the six months ended 30 June 2024, the group recorded revenue of HK$2,294.0 million (six months ended 30 June 2023: HK$2,489.1 million) and gross profit of HK$550.3 million (six months ended 30 June 2023: HK$576.6 million). This slight decline has been attributed to brand de-stocking, mainly in the US market.
North America remains the largest market, accounting for 42.6% of total revenue. Sales from Japan accounted for 23.5% of total revenue, followed by the Chinese mainland at 22.2%, and Europe at 2.7%.
The company seems well managed with consistent operating margins that since 2018 have averaged around 12%. Returns on capital employed over the same period averaged an impressive 20%.
The company has a healthy balance and carries no net debt. As at 30 June 2024, the group had cash and cash equivalents amounting to HK$1,327.7 million
Chairman Mr Choi owns 57.5% of the business. The MD also owns 3.47% of the company.
The share price rose by 40% last year as investors started to recognize the value. Despite this the company still seems cheap on a PE of 5 with a nice big 9.62% dividend yield.
The share price has recently broken into a new all time high.
Natural Food International Holding
Listed on the Hong Kong Stock Exchange, Natural Food International has a market cap of HKD 1.182 billion.
Unlike other Hong Kong-listed stocks we've covered, Natural Food generates 100% of its revenue in China.
As its name suggests, the company specialises in natural health products, primarily powdered supplements that are mixed with water before consumption, alongside a range of organic dietetic snacks.
Its product lineup includes Walnut Black Bean Sesame Powder, Black Nutrition Sesame Cake, Nutritional Gift Box, Nature-Nourishing Gift Box, and Evergreen Gift.
Key ingredients such as black sesame, walnuts, Chinese yam, goji berries, beans, chia seeds, oatmeal, and red dates are sourced globally—from fresh walnuts in the USA to high-altitude Bolivian chia seeds and premium Australian oatmeal.
The company has an extensive distribution network, selling through 3,900+ stores across 464 cities in China. However, e-commerce is the fastest-growing sales channel, with their products being sold on Tmall, JD.com, Vipshop.com, and via WeChat.
Natural Food was founded by husband-and-wife duo Mr. Zhang Zejun and Ms. Gui Changqing, who still own 42% of the company, ensuring strong insider alignment.
PepsiCo Inc., the second-largest shareholder with a 26% stake, sees significant potential in China’s growing demand for health-focused products—a market projected by management to expand at 9% annually through the remainder of the decade.
In the latest interim report (August 2024), revenue grew by 13.6% and net profit by 9%. The company maintains a strong balance sheet, with RMB 999.1 million in cash and bank deposits as of June 30, 2024, and zero interest-bearing debt.
Operating margins are steady at 10%, while returns on capital employed at 13%.
Despite its quality and growth potential, the stock remains deeply undervalued, trading at a P/E of 6 with a 5% dividend yield—making it an attractive opportunity.
Thanks for reading.
Please note the information in this report is for informational purposes only and should not be seen as investment advice. Please do your own due diligence before investing in any company mentioned in this article.