If you ask Warren Buffet about his dream business. One of his answer will be See’s Candies. For Buffet, a wonderful company should own a superior business and be managed by a skilled management.

That’s not the case for HEVEA because the business itself is cyclical. However, HEVEA shared some of the characteristic of Buffet’s wonderful company.

Competitive Advantage

The reason why See’s candies can sustain a high return for many years is because of the quality of their product(Chocolate) is superior than its competitors. Personally, I haven’t check the product’s quality of Hevea, but if the crowd is right, then it ticks buffet’s checklist of a wonderful company.

Also, cost advantage is crucial for Hevea to maintain a profitable business. Because one of their business segment is particle wood, they have no bargain power as a supplier if there is an oversupply of particle wood. Fortunately, one their segment is RTA(Ready-To-Assemble). But the barrier of entry is still weak. Despite these concerns, HEVEA managed to keep their cost low and steadily increasing their sales (sign of a good management).

Comparison of HEVEA and EVERGREEN

HEVEA’s earnings before interest after tax (EBIAT) margin is twice bigger than EVERGREEN. Although EVERGREEN profit margin might have an edge, but this might be due to size of EVERGREEN. Can HEVEA takeover EVERGREEN as an incumbent? The answer is not obvious, but in term of value, HEVEA gets the cake.

Valuation (Based on 2016 report)

We are uncertain about HEVEA’s future, so using valuation model gives us a clearer picture of HEVEA’s value. The no-growth valuation using normalized earnings give me a value of 2.2 Per share or 1.2Billion. With a bit of extrapolation, HEVEA is undervalued.

Conclusion

If you think HEVEA’s earnings are sustainable, then HEVEA is undervalued at this moment. If you think HEVEA’s earnings can still grow, it’s a bargain. But, if you think earnings are not sustainable, HEVEA is perfectly priced.

Note: not a buy/sell/hold advice

https://twentybaggers.wordpress.com/2017/06/07/hevea5095-good-management-bad-business/