Another open letter to the Board of Allan (0684)
4 June 2024

To: The Board of Directors

Allan International Holdings Limited (Allan)

Dear Directors,

You will soon be convening a board meeting to approve and release results for the year ended 31-Mar-2024. It will be nice to learn how our business has been doing since 30-Sep-2023, over 8 months ago. The interim results for the 6 months to 30-Sep-2023 showed revenue growth of 12.2% year-on-year to HK$276.4m, with gross profit up 48.6% to $21.3m, albeit from low bases.

Loss before tax was reduced from $43.6m to $19.5m, and that was after a devaluation of investment properties of $15.7m, so apart from that, the business almost broke even, but it was partly assisted by interest on cash deposits up from $1.1m to $8.6m. You get no credit for keeping money in the bank on my behalf; I'd rather reinvest it in growing HK's economy.

As a reminder, I did urge you in my previous open letter and at numerous AGMs to sell the investment properties, but you have failed to announce any steps to do so. Allan is an electrical products manufacturer, not a property investment company. Rental income was also reduced from $10.3m to $8.6m during the period. The value of our property in Capital Centre, Gloucester Road, Wanchai was reduced from $280m to $265m, or about $0.80 per share. Don't try to time the market, just sell it. If the Cheung family likes that property so much, they can buy it from Allan at market valuation with their share of the dividends that you are about to declare and I will vote in favour of that connected transaction.

At 30-Sep-2023, net cash and investments stood at $506.5m, or $1.52 per share, the vast majority being bank deposits. From this amount, you declared an interim dividend of $0.02 and a "special" dividend of $0.13, a total distribution of $0.15 per share or $50.0m in total. That is less than 10% of the cash pile, leaving $1.37 per share in the group. It was a small step in the right direction, but you must do much more to reduce the excess equity in our company.

The other investment property, at "Hui Nam Hi-Tech Industrial Park" in Huizhou, Guangdong, was valued at $216.1m, or $0.65 per share. Net tangible assets were $966.9m or $2.90 per share before the dividends, $2.75 per share after the dividends. The market price at today's close is $0.83, a discount of 70% to net assets and 40% to net cash.

Public float

As you know, on 22-Apr-2024 I increased my holding through the 13% disclosure threshold to 13.01%. According to the circular dated 13-Jul-2023, the Cheung family and its associated parties hold 62.72%. That leaves the public holding 24.27%. Cheung-family directors may regard the stock price to be as cheap as I do, but now that I am over 13%, they cannot buy shares, and nor can the company repurchase shares, without reducing the public float further below the 25% minimum in the Listing Rules.

The last director purchase was on 30-Aug-2021 at $1.85. The only way to reopen that door is to persuade me to reduce my stake, rather than keep increasing it, and the only way I will do that is if you bring the stock much closer to fair value by returning surplus capital, which is in the interests of all shareholders, including the Cheung family. If you now distribute half of the net cash and investments ($0.69 per share), then sell the Wanchai property and distribute the proceeds (about $0.79 per share), we'll all receive $1.48 per share, almost 1.8x the current share price, and our company will still have over $200m in net cash, more than enough for its business.

Be patriotic

Our country's leadership, via the CSRC, has recently begun urging Chinese companies to pay more dividends. It's the patriotic thing to do, because greater capital discipline will boost return on equity, increase market valuations, lower the cost of capital and thereby make China's companies and the economy as a whole more competitive on the world stage. That has to be good for the world; a prosperous country is more likely to be a peaceful one. Conversely, continuing to hoard capital as if preparing for Armageddon will only increase its likelihood. Do you really want to be seen as unpatriotic, as you seek to sell your own-brand Warran products to our compatriots?

So I look forward to the results and to your decision to declare a much larger special dividend at the same time. It's our company's 60th anniversary. You know what you need to do.

David M. Webb

©, 2024

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