Conglomerates have long been considered as the megafauna of the corporate world. Although some observers, especially those in the West, believe conglomerates lack focus, in Asia conglomerates tend to be revered as the hallmark of successful entrepreneurship. Since conglomerates are often large, multinational and are made up of independent entities that operate in multiple industries, they tend to be highly adaptive and are usually able to withstand various shocks due to their diversified nature.
Nevertheless, to many investors, public companies with different business units are often regarded as “boring” stocks, as they lack a singular story that drives investors’ interest like what many tech companies have been able to achieve. With multiple business segments in different industries, some might deliver great returns but some would be far from ideal.
However, this perception of yours is going to change as China Brilliant Global Limited (8026:HK) (hereinafter referred to as “CBG” or “the Group”) offers a fresh insight into how a company with various business segments should be run, in which the Group disposed loss-making investments and assets while focusing on expanding their profitable businesses.
Why now is the time to watch China Brilliant Global Limited (8026:HK)?
The Group’s businesses are grouped under 3 operating segments focusing on Trading & Retailing of Jewellery, Money Lending and Trading and Distributing Pharmaceutical and Healthcare products. These 3 operating units are among the hottest ‘booming’ sectors in the world’s second largest economy.
Trading & Retailing of Jewellery– Guangdong is the country’s main location for jewellery production, while Shenzhen city is famous for jewellery processing. The Group’s retail and wholesale business located in Shenzhen gave them a competitive edge as Shenzhen accounts for 70% of China’s total jewellery sales. The strategic location of their business not only gives them greater access to more potential buyers, but also help them lower the logistical costs of transporting the jewellery around.
Money Lending– Tighter bank credits in China means more opportunities for money lenders. With strict internal risk control, providing credits to reliable borrowers could bring in great source of income to the group. In addition, the markets are forecasting interest rate cuts by central banks, which will increase the appetite for borrowers to take out loans.
Pharmaceutical & Healthcare Products– There are a few reasons driving the growth of pharmaceuticals and healthcare products in China. As a superpower, China wants to be an important innovator of pharmaceutical products. In addition, a burgeoning middle-class, rapidly aging society, and an increasing health awareness to obtain higher quality treatment present vast opportunities for the industry.
This ‘Conglomerate’ Stock is Poised for Major Growth!
The Group’s Jewellery business under the Luk Fook brand has enjoyed an increase in revenue of approximately 101% year on year. The increase in revenue from the Jewellery Business for the period under review was mainly because of the increase in wholesale of golden jewellery products in PRC. Other jewellery products sold by the group includes gold, karat gold, platinum, diamond and gemstones. There are few factors that are going to increase the profit margin of this business segments.
- The Gold factor: Gold price hits 6 years-high as investors await US interest rate cut amid growing concerns over the US trade war with China, tensions between Tehran & Washington and Brexit. In recent years, resistance above $1,350 an ounce was too much for bullion to overcome, but that changed in June. Spot prices touched $1,453.09 on 19 July 2019.
- The strategic location of the in retail and wholesale businesses are carried out in South China, region which economic activities are most active.
- The Group intends to identify more jewellery wholesaler customers in South China, thereby expanding it’s secondary gold sales agency business. The Group has secondary membership of Shanghai Gold Exchange, which allows them to place orders for bullion via the online trading platform of Shanghai Gold Exchange and wholesale gold jewelleries to jewellery wholesalers.
Recent Increase in Gold Prices Signal A New Opportunity
The Fed looks likely to cut interest rates by 25 basis points, with some observers expecting a higher reduction of 50 basis points. This would be the first potential reduction since the financial crisis. Such a cut would depress bond yields, the prospect of which has added to the lustre of gold for investors. The metal serves as a hedge against potential weakness in the global macroeconomic environment. Investors see no end in sight to the trade war between the US and China despite multiple talks between both sides. The meeting between President Trump and President Xi at the G20 summit in June has also failed to produce conclusive results. Gold could be one of the biggest winners and this will greatly benefits gold miners and traders. This could be real opportunities for investors as uphill trend of gold prices means higher profit margin for the group.
New Market Reach Could Be Unparalleled
Gold buying spree behaviour from the People’s Bank of China tells us one thing or two, which is to collect as much of the safe haven asset as possible to prepare for tougher economic conditions. As long as the secondary gold sales agency business in the group continues to expand as planned, the group may commission external factories to process more bullions into finished gold jewellery, thereby increasing sales to jewellery wholesalers.
As CBG (8026:HK) increases its footprint in the Guangdong province through leveraging its existing network, based on the success the jewellery business brings to the Group, the revenues are expected to increase in a much faster pace compared to last year.
Consideration of further expansion in the Money Lending unit
The Group commenced its Money Lending business in 2016 by acquiring a group of companies with a valid money lending license in Hong Kong to achieve additional income source. The Money Lending segment continued to grow and currently bring positive results to the company.
Amidst a weak global macroeconomic environment, central banks around the world have been widely expected to cut interest rates, starting with the Federal Reserve in the US. As Hong Kong’s monetary policy is essentially pegged to the United States, any rate cut in the US would bring about a similar rate cut in Hong Kong. With lower rates on the horizon, more borrowers would be encouraged to take on loans, benefitting lenders like CBG.
Similarly, weak bank lending data from mainland China this year are prompting fresh calls for further monetary easing by the People’s Bank of China. This could be an opportune time for CBG to expand its money lending business in the mainland, as reduced bank lending calls for more alternative sources of financing which is exactly what CBG is offering. Even though money lending is the newest business of the Group and only contributes a small amount to the Group’s total revenue, expansion plans in this segment could potentially make this one of the most important business units of the Group.
Some investors may recall losing money in the stock market during the US subprime mortgage crisis in 2008 where financial institutions were brought to their knees in the process. Rest assured, investors need not worry about CBG as the Group has conducted internal risk assessment on its loan arrangements and noted that its borrowers have substantial investments and assets which support their respective financial capability to repay the loans, thus no securities or collaterals was sought. The purpose of the loans is merely to enhance the short-term cash flow of borrowers. This stands in contrast to the risky lending behaviours engaged by US banks in the build-up to the crisis, where even borrowers with no credit history, no assets, and no income were able to obtain loans.
More Partnerships Signal Additional Market Opportunities
The Pharmaceutical business recorded an approximately 142% increase in revenue year on year to ~HK$24.2 million for the 9 months ended December 2018. The stellar performance was due to strong business relationships with target pharmaceutical companies, chain pharmacies and target hospitals from West Guangdong.
It’s true that new markets are difficult to enter, especially when Beijing’s attempts to open up to private foreign investors remain slow. National problems require local solutions as policies are different across states and provinces in Mainland China. Fret not, as we are about to show you how CBG could solve the chronic imbalances of medical equipment problem in China’s healthcare system.
- CBG holds the essential license to engage in sales of pharmaceuticals, healthcare products and pharmaceutical consumables in targeted pharmaceutical companies, chain pharmacies and targeted hospitals.
- CBG has a strong network with hospital in Guangdong province, covering at least ten cities in the province.
- CBG operates a comprehensive medical distribution channel.
CBG’s strategy is clear, that is expansion. Their focus resides on scaling their business into a higher level by leveraging the existing relationships and trusts they have been building for the past few years to keep scaling their medical distribution channel, capturing more sales for the group.
What is important for investors to note is that even though CBG’s businesses are in fast growing industries, its businesses are actually pretty defensive. The Jewellery business benefits from increased interest from buyers and investors at a time of economic uncertainty. Conventional wisdom also suggests that the super rich usually stays super rich regardless of how the economy is doing. Not being affected by economic downturns suggest that they will continue buying jewellery as they please.
Similarly, Money Lending business is also stable during times of weakness as fewer borrowers obtain conventional bank lending. The prospects of interest rate cuts are hugely beneficial to any money lending business, especially one like CBG’s which is in the position of rapid expansion.
Last but not least, success in the Pharmaceutical and Healthcare business are primarily driven by demographic trends. Regardless of how the markets are doing or what additional tariffs come next, pharmaceutical and healthcare are industries that will be in demand.
It is perhaps surprising that a conglomerate like CBG can combine all 3 seemingly unrelated businesses under one roof. It is even more surprising that these 3 businesses are in high growth yet defensive sectors. CBG (8026:HK) will be a safe bet regardless of when the next recession is going to hit.
According to the agreement between Ram Marketing and Consulting and China Brilliant, Ram has received $15,000 from China Brilliant for a period beginning July 30, 2019 and ending August, 30 2019 to promote and market China Brilliant. We may at any time trade additional shares of China Brilliant on the open market, including dissemination of beneficial information about China Brilliant to the public before, during or after the website and information, provide public dissemination of favorable information. Click here for full disclaimer.