Ming Fai International (03828.HK): A Deep Value & High-Yield Opportunity in Global Travel Recovery

Executive Summary

Ming Fai International Holdings Limited presents a compelling deep value and high-yield investment opportunity. The investment thesis is anchored in the robust post-pandemic recovery of its core global hospitality market, a pristine net-cash balance sheet that provides a significant margin of safety, and a market valuation that appears profoundly disconnected from its fundamental earnings power and asset base. The Company’s strategic foresight in diversifying its supply chain further enhances its long-term competitive position and earnings durability.

For the fiscal year ended 31 December 2024, Ming Fai delivered a strong performance, with revenue growing 11.8% to HK$ 2.31 billion and profit attributable to owners surging 37.48% to HK$ 143.2 million. This robust bottom-line growth translated into a substantial 42.9% increase in the total dividend to HK$0.10 per share, underscoring management’s confidence and commitment to shareholder returns.

Valuation analysis suggests a significant undervaluation at the current share price of HK$ 0.89. A conservative Dividend Discount Model indicates an intrinsic value of HK$ 1.88 per share, while a valuation based on Warren Buffett’s Owner’s Earnings concept suggests a value of HK$ 1.39 per share. Both metrics point to a substantial upside of 54% to 109% from the current market price.

The stock is particularly well-suited for long-term, value-oriented investors seeking a sustainable and high dividend yield, with the current dividend representing an attractive yield of 11.2%. Key risks to this thesis, including dependence on global travel trends and raw material cost inflation, are present but appear adequately compensated for by the deep discount to intrinsic value and the Company’s exceptional financial strength.

Corporate Profile and Business Segment Analysis

Company Background and Strategic Position

Ming Fai International Holdings Limited, incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange, is an investment holding company that has established itself as a leading international supplier to the hospitality industry. The Group’s principal activities involve the manufacturing and trading of a comprehensive range of hospitality supplies, operating supplies and equipment (OS&E), and health care and hygienic products.

The Company operates a vertically integrated business model, combining in-house manufacturing with strategic trading operations to serve as a “one-stop shop” for its global client base of hotels, airlines, and hospitality groups. This integration provides a key competitive advantage in terms of quality control, supply chain reliability, and cost management. Ming Fai’s operational headquarters is located in Hong Kong, with its primary manufacturing base in Shenzhen, PRC, and a strategically vital new production facility in Cambodia, which is central to its future strategy.

Deep Dive into Business Segments (FY2024)

Ming Fai’s revenue is diversified across three distinct but complementary business segments.

Hospitality Supplies (83.5% of Revenue)

This segment is the core engine of the business, generating revenue of HK$ 1,930.1 million in FY2024, a strong increase of 13.7% year-over-year. It encompasses the design, manufacturing, and sale of a wide array of guest room amenities, including branded and private-label shampoos, conditioners, body washes, soaps, and other personal care items. The performance of this division is directly correlated with the health of the global tourism and travel industry. Management’s discussion explicitly links this segment’s strong growth to the global tourism recovery, citing data from the UN World Tourism Organization that showed international tourist arrivals in 2024 had recovered to 99% of pre-pandemic levels.

Operating Supplies & Equipment (OS&E) (9.1% of Revenue)

The OS&E segment generated HK$ 210.4 million in revenue, an 8.8% increase from the prior year. This complementary business line deepens client relationships by offering a broader range of hotel necessities beyond in-room amenities. Its growth is closely tied to new hotel construction and refurbishment cycles. The positive performance in 2024 was supported by a strong hotel development pipeline, particularly in the PRC, which saw 871 new hotels with over 120,000 rooms open during the year.

Health Care & Hygienic Products (7.4% of Revenue)

This segment, which focuses on products like disposable infection control items, saw its revenue decline modestly to HK$ 170.8 million from HK$ 176.8 million in the prior year. Management attributes this normalization to the waning demand for anti-epidemic products as the world moves further beyond the COVID-19 pandemic. While revenue dipped, the segment’s gross profit margin expanded significantly by 5.1 percentage points to 30.0%, indicating effective cost management and product mix optimization.

Geographical Footprint and Strategic Shifts

Ming Fai possesses a well-diversified global sales network, which reduces its dependence on any single market. An analysis of the core Hospitality Supplies segment reveals a significant and strategic shift in its revenue mix between 2023 and 2024.

While the PRC remains the largest single market, its contribution to hospitality revenue decreased from 32.3% in 2023 to 27.3% in 2024. This was not merely a relative change; absolute revenue from the PRC market saw a slight decline from HK$ 547.8 million to HK$ 528.0 million. In stark contrast, other regions experienced powerful growth. Revenue from Hong Kong surged by 61% from HK$ 182.6 million to HK$ 294.4 million, increasing its share of the segment from 10.8% to 15.2%. Similarly, North America grew by a robust 29%, from HK$ 250.9 million to HK$ 323.0 million, expanding its share from 14.8% to 16.7%.

This geographical rebalancing is highly significant. It demonstrates that the Company is not solely reliant on the potentially volatile PRC economy. The explosive growth in Hong Kong captures the direct benefit of the city’s strong post-COVID travel rebound. Furthermore, the sustained growth in North America validates the company’s strategic initiatives to compete effectively in developed Western markets. This diversification enhances the overall quality and resilience of Ming Fai’s earnings base, making it a more stable and de-risked investment proposition.

Management Strategy and Industry Outlook

Management’s Cautiously Optimistic Stance

The management team presents a “cautiously optimistic” outlook for the business. They acknowledge the powerful tailwind from the sustained recovery in global tourism while remaining prudently aware of significant external risks, including geopolitical tensions, global trade frictions, and economic policy uncertainty. This balanced perspective suggests a responsible and experienced leadership team focused on navigating a complex global environment. The core strategy is to capitalize on the industry’s recovery while proactively mitigating external threats through operational agility and strategic investments.

The Cambodia Plant

A cornerstone of Ming Fai’s strategy is the diversification of its supply chain through its production facility in Cambodia. In the Chairman’s Statement, this initiative is explicitly framed as a direct response to global challenges, designed to “mitigate the challenges posed by trade tariffs,” “alleviate cost pressures,” and tap into high-growth Southeast Asian markets.

This move is far more than a simple cost-saving exercise; it is a sophisticated geopolitical and trade de-risking strategy. The United States is a key market for both the Hospitality and Health Care segments. Historically, goods manufactured in China have been subject to significant tariffs amid US-China trade disputes. By establishing a production base in Cambodia, Ming Fai can potentially ship products to North America and Europe while bypassing these tariffs, creating a durable cost advantage over competitors who remain solely dependent on PRC manufacturing. This proactive investment demonstrates exceptional foresight, building a strategic hedge against geopolitical risk that enhances the long-term durability of the company’s earnings and strengthens its competitive moat.

Future Prospects and Growth Levers

Looking ahead, management has outlined several key initiatives to drive growth:

• Expansion in Southeast Asia: The Company plans to leverage its Cambodian base to seize opportunities in the rapidly expanding hotel construction pipeline across Southeast Asia.
• Focus on Sustainability: A stated commitment to Environmental, Social, and Governance (ESG) principles and the development of “environmental-friendly products” aligns with the evolving demands of major international hotel chains and could unlock new customer segments.
• Deepening Customer Relationships: The strategy emphasizes fostering long-term, stable partnerships through superior product quality and service, a classic approach to building a resilient and valuable enterprise.

Comprehensive Financial Health Assessment

Income Statement Analysis (FY2024 vs. FY2023)

Ming Fai’s FY2024 income statement reflects strong top-line growth translating into even stronger bottom-line profitability.

• Revenue: Total revenue grew by 11.8% to HK$ 2,311.3 million, primarily driven by the 13.7% surge in the core Hospitality Supplies segment as global travel recovered.
• Gross Profit and Margin: Gross profit outpaced revenue growth, increasing by 15.6% to HK$ 579.9 million. This led to an 80-basis-point expansion in the gross profit margin to 25.1%. Management attributes this margin improvement to disciplined cost controls and a successful shift in product mix towards higher-margin items.
• Operating Expenses: Distribution costs rose by a modest 5.5% to HK$ 246.4 million, indicating good cost discipline. Administrative expenses increased by 14.0% to HK$ 155.7 million, slightly ahead of revenue growth, which can be attributed to higher employee benefit expenses (up 15% overall) reflecting wage inflation and investments to support growth.
• Profitability: Operating profit grew by a robust 20.5% to HK$ 173.7 million . A significant reduction in finance costs from HK$ 6.3 million to HK$ 2.9 million , a result of lower debt levels, further boosted pre−taxprofit. Ultimately, profit attributable to owners of the Companysurged by an impressive 37.48% to HK$ 143.2 million, resulting in Basic Earnings Per Share (EPS) of HK$0.198.

Balance Sheet and Capital Structure Review

Ming Fai’s balance sheet is exceptionally strong, characterized by high liquidity and a substantial net cash position.

As of 31 December 2024, the Company held HK$ 328.6 million in cash and cash equivalents. This cash balance dwarfs its total borrowings (both current and non-current), which stood at a mere HK$26.1 million. This results in a net cash position of HK$302.5 million. Relative to the Company’s market capitalization of HK$ 660.8 million, this net cash hoard represents an extraordinary HK$ 0.412 per share. At the current share price of HK$ 0.89, an investor is only paying HK$ 0.478 for the entire operating business, with the remaining HK$0.412 per share backed by cash on the balance sheet. This provides an enormous margin of safety and gives the company significant financial flexibility to fund future growth, pursue acquisitions, or enhance shareholder returns without needing to access capital markets.

The following table summarizes the key financial health ratios, all of which indicate a position of exceptional strength:

Dividend Analysis: Sustainability and Forecast

Historical Performance and Payout Ratios

Ming Fai has a strong track record of returning capital to shareholders, with a clear rising trend in its dividend payout. The dividend per share has grown from HK$ 0.025 in 2020 to HK$ 0.10 in 2024, representing a five-year compound annual growth rate (CAGR) of an impressive 41.4%.

For FY2024, the total dividend of HK$ 0.10 per share against an EPS of HK$ 0.198 results in an earnings payout ratio of 50.5%. This is a prudent and sustainable level that balances rewarding shareholders with retaining capital for future growth.

Free Cash Flow Coverage

To assess the true cash-based sustainability of the dividend, an analysis of free cash flow (FCF) is necessary.

• Cash from Operations (CFO): HK$161.6 million
• Capital Expenditures (CapEx): HK$77.8 million (Purchase of PPE)
• Free Cash Flow (FCF): CFO – CapEx = HK161.6M−HK77.8M = HK$83.8 million
• Total Dividends Paid: HK0.10/share∗734.26Mshares=HK73.4 million
• FCF Payout Ratio: HK73.4M/HK83.8M = 87.6%
• FCF to Dividend Coverage Ratio: HK83.8M/HK73.4M = 1.14x

The FCF payout ratio is higher than the earnings-based ratio because the company’s capital expenditures currently exceed its non-cash depreciation charges, indicating investment in growth beyond simple asset maintenance. While the dividend is fully covered by the cash generated from operations, the 1.14x coverage ratio offers adequate but not extensive headroom. However, this is more than sufficiently mitigated by the company’s massive net cash position of HK$302.5 million, which could fund the current dividend for over four years even in a zero-FCF scenario. This cash buffer makes the dividend highly secure in the short to medium term. The long-term sustainability will depend on the returns generated from the current growth-oriented CapEx.

Dividend Forecast (FY2025)

Assuming a conservative 10% growth in net profit for FY2025, in line with recent trends, would yield an EPS of approximately HK$ 0.218. Again, assuming that the company decides to maintain a 50% payout ratio, the dividends will be 0.11 per share. For valuation purposes, a slightly more conservative estimate of HK$0.105 per share (D₁) is used.

Intrinsic Value Estimation

Valuation I: Dividend Discount Model (Gordon Growth)

The Dividend Discount Model (DDM) values a company based on the present value of its future dividend payments.

• Formula: Intrinsic Value (V0​) = D1​/(r–g)
• Inputs:
  • D1​ (Expected Dividend): HK$0.105
  • r (Required Rate of Return): Calculated as the 10-year Hong Kong Government Bond Yield (~3.1%) plus the Equity Risk Premium for Hong Kong (6.0%), resulting in r=9.1%.
  • g (Sustainable Dividend Growth Rate): A rate of 3.5% is selected. This is a conservative estimate, positioned above Hong Kong’s nominal GDP growth rate (~3.0%) but well below the growth implied by the company’s ROE and retention ratio (5.6%) to ensure a margin of safety.
• Calculation: V0​=0.105/(0.091–0.035)=0.105/0.056=HK$1.88

This valuation suggests the stock is trading at a 52% discount to its intrinsic value.

Valuation II: Owner’s Earnings Method (Warren Buffett)

This method, favored by Warren Buffett, aims to calculate the true cash flow available to shareholders.

• Formula Proxy: Owner’s Earnings (OE) ≈ Cash from Operations – Maintenance CapEx.5
• Calculation of OE (FY2024):
  • Cash from Operations: HK$161.6 million.1
  • Maintenance CapEx Estimate: Depreciation of Property, Plant, and Equipment is used as a conservative proxy for the capital required to maintain the business’s current productive capacity. Depreciation (PPE) = HK$59.2 million.1
  • Owner’s Earnings = HK161.6M−HK59.2M = HK$102.4 million.
• Valuation: Applying a conservative 10x multiple to these stable owner earnings implies a total business value of HK$1,024 million.
• Intrinsic Value per Share: HK1,024M/734.26Mshares=∗∗HK1.39**

This method suggests the stock is trading at a 35% discount to its intrinsic value. Both valuation approaches indicate significant undervaluation at the current price.

Applying The Traditional Value Investing Yardsticks

Benjamin Graham’s Checklist

Ming Fai International screens exceptionally well against the quantitative criteria espoused by Benjamin Graham, the father of value investing, qualifying it as a classic “bargain” stock.

Warren Buffett’s Framework

Assessing Ming Fai through Warren Buffett’s qualitative lens reveals a high-quality business purchased at a deep discount.

• Business Quality (Economic Moat): The company possesses a moderate but durable moat. While it lacks a global consumer brand, its long-standing relationships with major hotel groups, its integrated supply chain, and its strategic manufacturing footprint (including the tariff-hedging Cambodia plant) provide significant cost and reliability advantages over smaller competitors.8
• Financial Strength: The financial position is exceptional. The substantial net cash position and negligible debt are hallmarks of the financially conservative, resilient businesses Buffett favors.9
• Profitability (ROE): The Return on Equity for FY2024 was 11.3%. While solid and profitable, this is below the 15%+ level that Buffett typically seeks for truly outstanding businesses.8
• Management Rationality: Management has demonstrated rational capital allocation. The proactive investment in Cambodia shows foresight in navigating geopolitical risks. The balanced dividend policy of a ~50% payout demonstrates a commitment to both rewarding shareholders and reinvesting for future growth.1

Conclusion and Key Risks

Investment Thesis

The company offers a rare and compelling combination of deep undervaluation, a strong balance sheet, a robust and growing dividend, and a clear growth catalyst tied to the secular recovery in global travel. The stock passes the rigorous quantitative tests of Benjamin Graham with ease and aligns well with the qualitative principles of Warren Buffett. The current market price offers a profound margin of safety, with nearly half of the company’s value backed by net cash. This presents an attractive opportunity for patient, long-term investors seeking high, sustainable income and significant capital appreciation potential.

Key Risks to Thesis

Investors should consider the following risks:

• Macroeconomic Risk: A global recession or a significant slowdown in major economies could halt or reverse the recovery in business and leisure travel, which would directly and negatively impact Ming Fai’s revenue and profitability.
• Input Cost Inflation: The company’s profitability is sensitive to the price of its raw materials, such as plastics and chemicals. A sharp and sustained increase in these costs could compress gross margins if they cannot be fully passed on to customers.
• Geopolitical Risk: While the Cambodia facility mitigates direct tariff risk, the company retains significant manufacturing and sales operations in the PRC. It remains exposed to broader geopolitical tensions and potential regulatory shifts within China.
• Customer Concentration: Although the top five customers account for less than 30% of total revenue, the hospitality supply industry is characterized by relationships with large, multinational hotel chains. The loss of a key hotel group as a client could still have a material impact on the business.

Disclaimer:

This article is a record of the thinking behind a personal investment decision. It does not represent any recommendation to purchase any stock mentioned in the article. As always, readers are strongly advised to do their own due diligence before making any investment decisions.