|Shares Out. (in M):||28||P/E||n/a||n/a|
|Market Cap (in $M):||15||P/FCF||18||10|
|Net Debt (in $M):||0||EBIT||-2||-1|
You may either hate or love these classic Graham and Dodd net nets. I will not change your mind, but to find one in this environment with a good probability of success is fairly enticing to us. Nova LifeStyle, Inc. (NVFY) manufactures and distributes residential furniture worldwide. It has a good history of success and profitability, but the last few years , with the tariffs and competition in the low margin sector, the Company has been severely challenged and profitability has vanished. The stock is down in the vicinity of 75%. But, the Company is attempting to restructure and focus on high end furniture. The Company initiated the transition to the high-end customer at the beginning of 2019.
in 2017, the Company sold products in 14 countries worldwide, with North America and Australia their principal markets, accounting for 47% and 24%, respectively. Sales to Europe have dropped off as the Company has gradually stopped selling their low margin products. The Company supplies its products under its own brands and does also sell to OEM's.
During the first six months of 2019 sales have been 52% in North America and 45% in China. The Company is diversifying manufacturing away from China to deal with the tariffs to import into the US.
I know your reaction: "Another dying furniture Company!" But, management owns almost 40% of the Company and pays themselves very little. They are heavily invested in this new high margin strategy. They have been successful repositioning themselves in the past. They are also buying back their shares. They tend to be very opportunistic in their buying of both their shares and inventory.
Why should we be interested? This is your classic "Cigar Butt"! there are a few good puffs left here even if the turnaround does not go as planned. The company has about $2.50 of net current assets and sells for $0.55! (Oh, and by the way, they are free class flow positive!) It's basically a free call on it's inventory (which makes up over $60 million of its assets and $55 million is fresh and has not even been delivered yet from the manufacturer.). The Company recently placed and advance order of $49.6 million to suppliers who manufacture physiotherapeutic jade mats in China (mats for yoga and physical therapy). Our due diligence indicates that the demand for these mats is good and the Company should do well with them, but even if it breaks-even, we are still sitting with a Company 75% below liquidation value!
The balance sheet is stellar with $3 million in cash, no debt and a current ratio of over 60!
We love situations like this. There is no complexity. There is no need to understand the intricacies of the entertainment or technology market! The bet is very simple. If the Company can sell these mats at a reasonable margin, the stock is at least a double! If the purchase of these mats was complete lunacy, we lose, but that assumes these mats are just about worthless. There is no technology here! These are mats! I like my chances as management has put its "skin in the game" with us. It's simply too cheap not to put a few cents into the game.
Yes, there are concerns, as always. Management has control. They are incorporated in Nevada, not the most shareholder friendly state.There are shareholder lawsuits, but they are derivative cases in which any proceeds would benefit the Company. The shares are not very liquid. And of course, there is always the risk of fraud, which we must live with.
The catayst is very straight forward. Will the large order of mats sell? If it does, shareholders are huge winners. Even if they do not, the margin of safety is huge and we may do well any way.