Kimi/Moonshot AI Overview:

On May 7th 2026, Moonshot AI — developer of China’s leading agentic AI model Kimi — closed a $2 billion Series D at a $20 billion valuation1, led by Meituan’s venture arm. Total cumulative funding now exceeds $4 billion, surpassing MiniMax and Zhipu AI to make Moonshot the best-funded LLM startup in China (for now).

Public reports suggest Kimi’s annualized recurring revenue hit $200 million in April, doubling from $100 million just one month prior. On OpenRouter — a reasonable, if imperfect, proxy for developer adoption — Kimi’s K2.6 model has surpassed 1 trillion tokens in weekly call volume, ranking second globally across all models.

Token rankings on a routing platform don't pay the bills, so the quality and composition of Kimi's client base matter. Beyond a growing roster of Chinese enterprise customers, one of Kimi's most prominent Silicon Valley supporters is Cursor AI. Cursor's most powerful "Composer 2" model was built on top of Kimi K2.5 as its base, allowing the company to reach “frontier-level performance at a fraction of the cost of other models.”2 More recently, SpaceX reportedly acquired an option to buy Cursor for $60bn while Cursor trains its latest models on xAI’s infrastructure.3

The fact that leading American AI labs are publicly selecting a Chinese base model over every Western alternative available to them is, in our view, a meaningful commercial validation.

As a result of Kimi’s recent success, Kimi’s valuation has increased by nearly 10x over the last 2 years. But what if one could turn back time? What if one could turn back time 2 years and invest in Kimi at a $2.5 bn valuation instead?

Welcome to 2024, Marty!

The Setup: A Valuation Frozen in Time

While institutional investors competed to fund Moonshot at $20bn, one of its earliest backers quietly sits on the Hong Kong Stock Exchange: China Merchants China Direct Investments (CMCDI): 133.HK.

As of 31 March 2026, CMCDI’s balance sheet carries a $16.76 million book value in Moonshot AI.

Although a ~2% of NAV stake in Moonshot AI may seem insignificant, Pg 29 of CMCDI’s 2025 annual report provides more detail on exactly how this stake is valued: it is not marked to market.

As of December 31st, 2025 (and hence reported as of 31st March 2026), CMCDI’s reported $16.76m investment in Moonshot is based on a $2.5bn valuation ($16.76/0.066%) and does not reflect its more recent valuation uplift.

A mark-to-market assessment at the latest $20bn valuation would suggest that Moonshot currently accounts for over 10% of CMCDI’s NAV.

The Discount on the Discount

CMCDI currently trades at a significant discount to NAV, at roughly 0.6x NAV, implying that the market values CMCDI’s Moonshot EV at only $1.5bn. A 93% discount to its most recent mark.

This is heavy, Marty!

The historical bear case on CMCDI centered on governance: a captive external manager, an opaque fee structure, and limited accountability to minority shareholders. That picture has changed materially.

Following activist engagement (background here), the prior external management agreement expired. A transitional arrangement is now in place (January 2026 announcement) that explicitly ties manager economics to exit outcomes — a structure that meaningfully aligns incentives with shareholders for the first time.

As a further sign of that alignment, CMCDI recently declared a US$0.25 per share dividend, payable in July 2026, equating to a near 8% current yield at today’s price while long-term investors wait for the discount to close.

Financials:

The table below provides indicative NAV estimates under different scenarios (making reasonable assumptions about dilution and taxes), and including a blue-sky “Moonshot” scenario that could see CMCDI’s current stake in Kimi valued at over 30% of CMCDI’s NAV.

For additional context on the activist history and where the discount stands relative to peers, the prior campaign materials remain the best public reference:

Investors need not speculate about how markets value minority holdings in frontier AI models. SK Telecom — which holds a stake in Anthropic valued at $3–4 billion — has seen its market capitalization expand by over $6 billion year-to-date, as markets have begun pricing its AI exposure into the parent company. CMCDI offers a structurally similar dynamic: a listed vehicle with an understated, illiquid AI asset, trading at a discount that implies the market has not yet done the same math.

Are you ready to go back to the future, Marty? Your future is whatever you make it. So make it a good one.

For years, AXT was a sleepy compound semiconductor name. Today, investors increasingly view its Beijing Tongmei subsidiary as a scarce upstream asset in the indium phosphide value chain, with leverage to AI optics, transceivers, and eventually co-packaged optics, with the share price having increased over 3000% over the past 12 months. At the same time, short interest in the stock is near record levels. What explains this vast divergence of opinions?

A great deal of the recent enthusiasm around AXT appears to treat Tongmei as a pure strategic winner from optical demand growth. In our view, that is too simplistic. The business is not just a story about AI optics. It is also a story about transfer pricing, export permissions, capital intensity and technology diffusion.

This note provides a deep dive into Tongmei’s business model and explains why we believe the risk/reward in investing in AXTI today is heavily skewed to the downside over the medium term.

Why Tongmei Matters

Beijing Tongmei is the crown jewel inside AXT. AXT owns 85.5% of the business, and Tongmei is the group’s key exposure to indium phosphide and other compound semiconductor substrates. At the same time, minority investors retain a put right over 7.06% of Tongmei for roughly $49 million — a detail that matters more than the market seems to appreciate if liquidity tightens or the long-delayed China IPO never reactivates.

As of March 31, 2026, the Shanghai Stock Exchange still shows Tongmei’s listing as paused, pending updated financial materials as shown below. There appears to have been no meaningful progress since 2022, with the last major filing activity dating back to July of that year. More importantly, the exchange’s earlier feedback focused on exactly the issues investors should care about today: dependence on the parent, the relatively limited size of the addressable substrate markets, and the depth of Tongmei’s underlying R&D capabilities. Each of these topics we will explore in greater detail, having analyzed thousands of pages of public Chinese regulatory documents.

Tongmei and it’s relationship with AXT

Tongmei’s 408 page prospectus1 states that the improvement in gross margin between 2020 and 2021 was materially helped by a “change in business operations,” which added 17.67 percentage points to gross margin.

In 2020, AXT created a Delaware entity called AXT-Tongmei, which was later transferred to Tongmei. From mid-2021 onward, international sales were routed through that entity. Before that, Tongmei sold products to AXT on a cost-plus basis, and AXT captured the offshore resale spread.

The prospectus makes clear how meaningful that spread was. Between 2019 and 2021, the gap between Tongmei’s transfer price and AXT’s external selling price was extremely large. In the first half of 2021 alone, AXT bought substrates from Tongmei at roughly RMB 662 per unit and resold them at about RMB 1,375.

The 2021 earnings improvement was not just the result of stronger industry conditions. It was also the result of moving the profit pool closer to Tongmei.

That distinction is fundamental because it leads to the central question of the entire valuation:

Can Tongmei continue to access offshore customers and offshore pricing at scale?

If yes, the economics may be attractive. If not, much of the current excitement becomes far harder to justify.

Tongmei’s Real Business Model: Not Just Making InP, but Monetizing Geography

At a high level, Tongmei manufactures indium phosphide substrates through a three-stage process:

1. polycrystalline synthesis

2. single-crystal growth

3. processing and finishing.

Step 1: Polycrystalline synthesis - raw materials are geopolitically sensitive

Polycrystalline synthesis involves combining liquid metal Indium with Phosphorus vapor to create a solid, high-purity polycrystalline ingot. While some players rely on third parties (including IQE), Tongmei is vertically integrated and can produce its own InP polycrystals.

In 2026, the acquisition of these two primary raw materials is subject to significant supply chain and geopolitical friction.

Tongmei’s upstream position benefits from China’s role in critical inputs, especially indium. China accounts for the majority of global refined indium production, giving domestic players a clear sourcing advantage over foreign competitors. We do not believe there are any significant bottlenecks in Chinese Indium refining capacity to support significantly higher levels of growing opto demand. According to USGS data2, China accounts for nearly 70% of the world’s production capacity. With the US being 100% reliant on imports.

Since February 2025, China has imposed export licensing requirements on several critical minerals, including indium. AXT itself has disclosed that Tongmei’s substrate product lines now require approval from the Ministry of Commerce before export, with recent delays affecting the business. Management has suggested approvals should be obtainable because indium phosphide is not typically viewed as a military end-market material.

In practice, export controls reflect a blend of security, industrial policy, and geopolitics. Most recently, China has imposed numerous export restrictions on refined chemicals, despite their having no military applications and an oversupplied domestic market.

That matters enormously because, as we highlighted in the previous section, Tongmei appears able to earn supernormal economics only when it can export.

Step 2: Crystal growth is important — but probably not impregnable

Polycrystals are grown into single crystals using one of several methods: The mainstream Chinese production route is Vertical Gradient Freeze, or VGF. Tongmei is currently the largest domestic operator, in part because of its yield and process know-how. But the market should be cautious about confusing current operating advantage with durable structural scarcity.

Capex for VGF expansion does not appear prohibitive. Not only has AXT highlighted a doubling of capacity this year, but domestic peers, including Yunnan Germanium (002428), are also rapidly expanding. If demand remains strong, capacity can come in faster than many investors expect, as we see no meaningful capacity constraints for domestic equipment.

That can be a dangerous setup in industrial markets. Once the industry sees high margins, incremental capital follows. The question is rarely whether capacity can expand. It is how long the margin umbrella survives after it does.

Tongmei’s know-how may still keep it ahead of local peers for some time. But history suggests that process advantages in Chinese manufacturing ecosystems do not remain exclusive forever.

1. In 2022, the Chinese securities regulator questioned3 why the company did not disclose that one of Tongmei’s ex-employees was being investigated in a trade secret dispute in its prospectus. This ex-employee was subsequently convicted and sentenced in June 2025.4

2. Concurrently, the Shanghai Stock Exchange5 questioned Tongmei’s R&D and “Know-how” capabilities, including examining the “Cross License and Payment Agreement (交叉许可和互不起诉协议)” AXT signed with a third-party “Company M,” which ends in 2029. The licensing arrangement stipulates that AXT must pay royalties to M, while M is exempt from royalties. The scope of the license covers the manufacturing, use, import, and sale of gallium arsenide and indium phosphide crystals and substrate products. Industry speculation suggests “Company M” is Sumitomo. As the current cross-license agreement is a fixed-cost cross-license and not a variable-cost cross-license that is based on revenue or units, this structure could change materially in the future, given the significant expected increase in industry size.

Step 3: Processing & Finishing:

The grown crystals undergo cutting, edge grinding, lapping, polishing, and cleaning before being vacuum-packaged as finished substrates and sold to end customers. We don’t believe there are any major bottlenecks in this process. However, due to Japanese players’ current inability to source Chinese Indium under current export controls, the price of Indium and by extension InP substrates has increased significantly, with international price increases outpacing domestic price rises.

The real bottleneck is downstream, not necessarily at Tongmei

Tongmei’s substrate business sits upstream. But channel checks suggest that one of the real bottlenecks in the broader InP ecosystem is epitaxy — particularly MOCVD deposition at larger wafer sizes. That is a very different part of the value chain, and one where Aixtron remains the dominant equipment supplier with over 70% market share. Unlike VGF, there are few Chinese-equivalent tools for InP readily available; channel checks suggest Aixtron is now beginning to shift its supply chain from SiC/GaN tools to InP due to current backlog lead-time constraints.

That has two implications.

First, the industry’s ultimate growth rate may be constrained by downstream bottlenecks rather than substrate availability alone.

Second, investors may be overcapitalizing upstream substrate players while underappreciating where the hardest technical bottlenecks still sit.

Valuing Tongmei, and Why the Market May Already Be Paying for the Best-Case Outcome

The current enthusiasm around AXT increasingly resembles a capitalization of possibility rather than probability.

To justify a more optimistic valuation above its current share price, investors must implicitly assume more aggressive set of assumptions than below:

• The InP substrate market is expected to expand beyond $2 billion by 2030,

• Tongmei takes more market share than the current 35%

• Long-run operating margins are higher than 20%

• Investors are willing to ascribe a higher multiple than 20x earnings

Using this set of assumptions, one can arrive at an implied 2030 value equivalent to $45 per share (roughly the current share price)

1. The market becomes very large, very quickly

The Tongmei prospectus framed the global InP substrate market as roughly $96 million in 2020, growing towards around $200 million by 2026. Even allowing for stronger recent demand, this remains a small market today.

Sumitomo, the largest industry player with ~45% market share, provided a strategy deck in November 20256. The deck provides a good reference point for the company’s plan to increase InP substrate production capacity by 2.4x over 2023 levels by 2028.

We will make an even bolder assumption: the InP substrate market grows 10x to a $2 billion TAM by 2030. We think a $2bn InP industry TAM is more than justified, given that the entire Co-packaged optics industry (which has been the primary driver of the recent increase in share price of the sector) is only expected to reach around ~$10bn by 2030, according to the most recent analyst forecasts. As highlighted above, the InP substrate production is only the first of many stages in the production of optical solutions.

2. Tongmei keeps its current share in a much larger market

That is also not a trivial assumption, given Tongmei’s current ~35% market share.

Nvidia’s recent multi-billion-dollar investment in the optical supply chain is focused on diversifying risks away from China, not on supporting its further expansion. Recent industry actions already point in that direction, with Lumentum announcing it has expanded manufacturing of indium phosphide (InP)-based optical devices in America. The political economy of the supply chain is moving toward redundancy and regionalization.

That does not mean Tongmei loses relevance. It does mean the market should hesitate before underwriting a stable share in a 10x-larger market, as though geography were irrelevant.

3. Margins remain attractive despite expanding domestic competition

We assume Tongmei will be able to support 20% long-term operating margins. This may be the most underestimated risk. As explained in the previous section, we do not believe there are significant bottlenecks to Chinese domestic capacity expansion in single-crystal growth using the VB method, beyond industry know-how to improve yields.

When a Chinese industrial segment shows high returns and modest incremental capital requirements, new supply tends to appear quickly. Tongmei may still earn good returns. But the burden of proof should be on anyone assuming that today’s economics remain intact after multiple years of capacity growth, especially at a margin level the company has never achieved.

The financial statement below depicts a Chinese lab-grown diamond manufacturer and illustrates how a typical Chinese industrial company perform through the cycle: During the post-COVID boom, the rapid rise in popularity of lab-grown diamonds drove a significant increase in demand and wholesale prices, resulting in significant margin expansion for manufacturers. The industry expanded capacity very quickly, with very few barriers to expansion and slowing US demand, supply quickly exceeded demand, and the entire industry became unprofitable very quickly.

For Tongmei to achieve a 20% steady-state operating margin, it would likely require a scenario in which the company secures a disproportionate share of export licenses at the expense of other domestic competitors. As we highlighted previously, the current geopolitical environment for export licensing remains highly volatile and uncertain.

4. The licensing and IP environment stays supportive

Tongmei’s prospectus itself raises questions about R&D independence and references a cross-licensing arrangement with a third party, reportedly set to expire in 2029. Whether or not that becomes a direct problem, it is another reminder that Tongmei’s current position may be less self-contained than the equity story often suggests.

5. The capital structure stays clean

This is not a trivial footnote. AXT has already raised capital, Tongmei has minority put obligations, and the stalled IPO removes a potential source of balance-sheet flexibility. If capex continues to rise into 2028 and beyond, investors may discover that the path to scale is far more dilutive than the current narrative assumes.

The Right Way to Think About Tongmei

Tongmei should not be dismissed. It is clearly a real asset.

It has scale. It has customer relevance. It has a strong domestic position in a strategically important area of the semiconductor stack.

But investors should also be precise about what kind of asset this is.

Tongmei is not best understood as a pure scarcity asset where each new dollar of demand drops cleanly to the bottom line. It is better understood as a strategic industrial asset whose earnings power is highly sensitive to market structure:

• whether exports remain feasible,

• whether offshore pricing remains accessible,

• whether domestic competition compresses returns,

• whether capital requirements rise faster than expected,

• and whether today’s process edge remains durable.

That makes it investable. It also makes it fragile, and at current share price levels, we do not believe investors are being fairly compensated to take on the risks.

The following content represents the opinions of the authors and is provided solely for informational and educational purposes. It does not constitute an offer, solicitation, recommendation, or advice with respect to any securities, investment strategies, or investment products in any jurisdiction. This content is not investment advice.

At the time of publication, we hold no short positions in any of the securities discussed; however, we may establish, modify, or close positions at any time without notice.

Our analysis is based on publicly available information, statutory filings, and forensic research. The framework applied does not assert, imply, or allege equivalence of conduct, intent, culpability, or outcome between the case studies discussed. The inclusion of multiple issuers is solely to illustrate recurring risk indicators that have historically preceded permanent capital impairment across industries in different geographies.

We do not represent or warrant that the information presented is accurate, complete, or current, and it should not be relied upon as such. Readers are solely responsible for conducting their own independent analysis and due diligence and should consult qualified legal, financial, or other professional advisors before making any investment or related decisions.

The Asymmetry of Returns

There are two distinct disciplines in the pursuit of alpha:

Value: Buying assets below intrinsic value. We have already detailed a number of these opportunities in our previous research, including our first 2026 highlight (link).

Capital Preservation: Avoiding the “zeros”—the permanent impairment of capital. A less discussed topic in general by industry practitioners.

As Warren Buffett famously observed:

This note focuses exclusively on Rule No. 1, and on our process for identifying risks that can lead to permanent capital loss.

The Origin of Our Framework

Regular readers of this newsletter will recall our recent profile of Intellego Technologies (INT.ST) (link), a company whose CEO was subsequently arrested on suspicion of gross fraud.

What may be less well known is that the forensic framework applied in that analysis was developed over many years. Its origins trace back more than eight years to our research on Corporate Travel Management (CTM), where we independently identified a series of structural risk indicators that were examined in detail in VGI Partners’ 176-page public short report (link).

Fast forward to today: CTM is in a trading halt, unable to file its FY25 full-year accounts, with KPMG engaged to resolve a dispute with its auditor, Deloitte. Subsequent regulatory and audit processes have publicly reported that CTM overcharged UK clients, including government entities, by £77.6 million over a number of years—effectively recognising unearned revenue as profit.

Amid severe liquidity constraints, some institutional investors have reportedly begun marking down the value of their CTM investments, in certain cases to zero.

While operating in different sectors—industrials versus corporate services—CTM and Intellego exhibit a striking convergence of warning signs. The framework below reflects the questions we used to identify risk in both cases.

The Forensic Checklist

When analyzing a potential outlier, we ask three core questions:

1. Governance Gatekeepers

   Is the valuation premium driven by a charismatic or “messianic” founder? If so, what checks and balances are in place? Are the board and senior management empowered to challenge decisions, or do key oversight roles function as revolving doors? Persistent turnover—particularly within the finance function—can signal discomfort among those closest to the ledger, even when external approvals remain intact.

2. Unit Economics

   Does the company claim software-like margins in a fundamentally commoditised industry? If margins are “super-normal,” do cash flows corroborate those claims—or is the divergence widening?

3. The Physical Verification

   Do statutory accounts reconcile with physical reality? When the digital narrative presented in investor materials conflicts with the observable footprint—offices, factories, staff, products—we default to the physical evidence.

Attentive readers may note that these are the same categories of questions posed to management in our prior report—questions that, to date, have not been substantively addressed.

Author’s note: Mr. Rosenqvist has ceased to be a Director of Intellego’s Chinese subsidiary, according to the latest Chinese regulatory filings. Separately, Swedish media have reported that Mr. Rosenqvist denies recent involvement with Intellego’s Chinese operations, having left the parent board in 2023.

Intellego has since engaged KPMG to conduct a forensic review of its accounting practices and capital-market communications. We hope this process will provide clear, verifiable answers for the company’s shareholders.

Case Study 1: Corporate Travel Management

ASX: CTD | USD $1.7bn Market Cap

1. The Charismatic Leader & The Revolving Door

Founder Jamie Pherous publicly positioned Corporate Travel Management (CTM) as a challenger to traditional corporate travel models, frequently emphasising the company’s technology capabilities alongside its service offering. This positioning coincided with a period during which the company traded at a valuation premium and was widely supported by Australian small-cap institutional investors.

Following the release of a short-seller report by VGI Partners in October 2018, CTM rejected the report’s conclusions, characterising the analysis as flawed and indicating that it would consider legal options. In response to market scrutiny, CTM disclosed that it had engaged Ernst & Young to conduct an independent review of certain issues related to its FY2018 financial statements. While the company publicly stated that the review did not identify material misstatements, the full EY report itself was never released, with only selected conclusions summarised in a November 2018 ASX market update.

Under our governance framework, we assess where critical judgment resides within an organisation. Risk can arise when highly subjective revenue and cost items are determined centrally rather than at the regional level. While such centralisation is not inherently improper, it can weaken the linkage between reported profitability and underlying local commercial activity, introducing opacity at the head-office level. In our experience, this dynamic often places sustained pressure on senior finance leadership to reconcile external guidance with operational realities. Across markets, this form of structural tension is frequently associated with elevated turnover in senior finance roles.

At CTM, these characteristics coincided with notable instability in the finance function:

• Steve Fleming (Global CFO): The long-time global CFO moved to a regional role in 2019 amidst scrutiny, leaving the firm altogether shortly thereafter.

• Neale O’Connell (Global CFO): Resigned after less than two years in the role.

• Cale Bennett (Global CFO): Resigned after two years in the role, with James Patterson holding an interim position for one year before current CFO James Spence joined in late 2024.

2. The “Tech” Moat vs. Cash Flow Reality

CTM consistently reported EBITDA margins of approximately 30%, nearly double those of peers such as Amex GBT, attributing this efficiency to technology and automation.

• The Tech Reality:

  VGI’s IP searches in 2018 found zero granted patents, and physical checks revealed regional offices using standard, white-labeled third-party software rather than a proprietary stack.

  Our quantitative linguistic analysis of CTM’s earnings call transcripts shows that management’s emphasis on “technology” and “automation” was materially higher than that of industry peers and intensified during periods of margin scrutiny. By contrast, peer companies more frequently refer to “platforms,” reflecting sustained investment in multi-product technology architectures. This divergence in language is consistent with differences in business models rather than communication style alone.

  

  

• The Margin Mirage:

  While VGI’s analysis primarily examined CTM’s super-normal margin profile from a European and consolidated perspective, our research at the time focused more closely on the company’s Asian operations.

  In 2018 and 2019, CTM reported EBITDA margins in Asia exceeding 30%—a highly competitive market where the largest local peers were earning roughly half that level of profitability. At the same time, many second-tier players were loss-making amid the disruption caused by China’s first tariff war and Hong Kong protests. Subsequent disclosures in FY19 indicated that more than 30% of reported Asia revenues were derived from volume-based incentives.

• Cash Flow Divergence:

  While a detailed technical discussion of principal-versus-agent considerations and IFRS 15 (Revenue from Contracts with Customers) accounting is beyond the scope of this report, these accounting frameworks are, by design, highly judgment-dependent and can materially influence the timing of revenue and earnings recognition.

  In this context, VGI observed that despite reporting substantial cash balances at each reporting date, CTM consistently earned an implausibly low return on cash on hand. This pattern suggests that a material portion of reported cash may not have been freely available at the group level, even if the year-end cash balances are “consistent with the average monthly balance across the preceding 12 months”, as reported in EY’s conclusion.

  In parallel, our analysis indicates that CTM’s Asian operations were structurally working-capital-intensive, requiring significantly more cash to support day-to-day business activity than their reported earnings contribution would imply.

  Taken together, these factors complicate the interpretation of reported earnings and cash conversion and warrant careful consideration when assessing the sustainability of reported profitability.

  Notably, CTM’s FY24 disclosures include expanded discussion of contract liabilities and revenue recognition judgments under IFRS 15, highlighting the continued sensitivity of reported results to accounting assumptions.

3. Irreconcilable Accounts & Ghost Offices

Among the most concerning findings documented by VGI was the disconnect between the digital narrative and physical presence.

• Ghost Offices: Site visits to listed offices in Stockholm, Glasgow, and Paris revealed they were either non-existent or occupied by unrelated tenants. A “Dutch Harbor, Alaska” address traced back to a Safeway supermarket.

• Statutory Mismatches: An analysis of statutory accounts showed significant changes to revenue recognition policies over the years.

Case Study 2: Intellego Technologies

Nasdaq First North: INT | USD $700m Peak Market Cap

1. The Charismatic Leader & The Revolving Door

Claes Lindahl founded Intellego in 2011, promoting a vision of transforming a Swedish nano-cap into a global leader. Following the publication of our forensic report on Intellego’s purported Chinese operations on October 10, 2025, the company did not engage with the underlying concerns. Instead, it publicly attacked the analysis as “factually incorrect” and alleged market manipulation on October 13, 2025.

According to Swedish financial media reporting, the board subsequently approved a multi-million-SEK bonus payment to Lindahl, which was paid around November 11–12, 2025, ahead of Lindahl’s planned trip to China. The company stated that the payment was authorised under its remuneration framework following what it described as strong performance and revenue growth during 2025.

The narrative unraveled on November 18, 2025, when Lindahl was arrested on suspicion of gross fraud (grovt svindleri). Institutional fallout followed swiftly. On November 26, 2025, EKN and SEK—agencies that had previously provided critical credit assurance—jointly filed a police report regarding suspected fraud, according to Dagens Industri. Public reporting has referenced invoices involving a Chinese counterparty among the matters under review.

On November 27, 2025, Deloitte informed the market that, during its audit of the FY25 accounts, it had identified grounds for suspicion of accounting fraud and was legally required to report the matter to prosecutors. Intellego subsequently engaged KPMG to conduct a forensic investigation of its accounting and capital-market communications. (CTM Déjà vu?). On January 15, 2026 Intellego highlighted that: “Based on what we have seen so far, we believe it is fair to say that most and perhaps all our revenue transactions and cash flow in 2025 are suspect.”

In the period preceding the arrest, the finance function experienced rapid senior turnover:

• Petra Olofsson (CFO): Exited after less than 1 year.

• Hans Denovan (CFO): Lasted approximately 2 months.

2. The “Tech” Moat vs. Cash Flow Reality

Intellego reported gross margins exceeding 80%—levels more typical of high-margin software businesses than industrial manufacturers. Management attributed these economics to a purportedly world-leading patented photochromic ink and to arbitrage opportunities, claiming the ability to source disinfection devices in one region and resell them in another at 4–5× markups.

• The Commercial Reality: The company announced a $360 million+ contract with Chinese giant Yuwell. However, Yuwell explicitly denied the existence of a “minimum purchase” commitment, stating the deal was subject to actual business volumes.

• At the same time, China’s regulatory trajectory under the Minamata Convention is accelerating the transition away from mercury-based products. Domestic regulations prohibit the manufacture of mercury thermometers from 1 January 2026, reinforcing the broader phase-out of mercury in healthcare applications. In UV disinfection and lighting, low-pressure mercury lamps are expected to be progressively displaced through the mid-to-late 2020s, as procurement standards and regulatory guidance increasingly favor mercury-free technologies. The replacement pathway is converging on UVC LEDs, pulsed xenon, and excimer (far-UVC) systems, with UVC LEDs currently the most commercially mature and scalable alternative.

• Cash Flow Divergence: Receivables increased sharply, a pattern that warrants scrutiny under common revenue-recognition risk frameworks. The company also relied heavily on factoring to generate the appearance of positive operating cash flow.

3. Irreconcilable Accounts & Ghost Offices

Forensic diligence in China dismantled the operational narrative.

• The Phantom Workforce: Chinese filings showed zero social-security contributions by Intellego’s subsidiary between 2021 and 2024. Under Chinese law, this indicates the absence of legally registered employees.

• Physical Verification: The purported “operational headquarters” in Shanghai was found locked during business hours.

Conclusion: The Oxygen of Truth

Corporate failures are rarely sudden. They emerge through the accumulation of discrepancies.

For investors seeking long-term outperformance, verification must take precedence over trust. A “ghost office” may simply be the physical manifestation of “ghost revenue” on the financial statements.

When a charismatic management team asks investors to believe in a platform generating margins far above industry norms—while CFOs keeps quitting and reported cash earns no return—the prudent response is to follow the cash.

Earnings are opinion.
Cash is fact.
Everything else is narrative.

Trust the ledger, not the legend.

The Rarity of Validation

Each year, the financial industry produces vast volumes of research. Truly differentiated fundamental analysis—particularly work grounded in forensic analysis rather than narrative extrapolation—remains rare.

Our approach is informed by decades of institutional investment experience across multiple markets and geographies, with a particular focus on bridging Eastern and Western capital market insights. This perspective allows us to identify both structural opportunities and risks that are often obscured by jurisdictional complexity, accounting opacity, or market-specific norms.

In a limited number of cases, our publicly released research has been followed by material regulatory or legal developments involving the issuers examined. Outcomes of this nature are uncommon and serve to reinforce the central principle of our work: verification must take precedence over narrative.

We are open to confidential dialogue with qualified professional investors and allocators interested in our research process, forensic discipline, and its application to identifying asymmetric risk-reward opportunities.

To connect, please contact: admin@maiuspartners.com

The story of China Yuchai International Limited is among the most compelling—and persistently misunderstood—sagas in the universe of U.S.-listed Chinese equities. For more than three decades, the company has reigned “King” of China’s internal combustion engine (ICE) market, commanding a leading share across heavy-duty trucks, buses, and off-road machinery through its core operating subsidiary, Guangxi Yuchai Machinery Company Limited (GYMCL).

Yet for most of its public life, CYD has traded at valuations implying terminal decline. This discount was not driven by operating irrelevance, but by a toxic mix of corporate governance complexity, the infamous “Golden Share” structure held by Hong Leong Asia, and a persistent conglomerate discount that trapped investor perception in the early 2000s.

As investors look toward 2026, however, the foundations underpinning this narrative are shifting. The “King” is attempting a return—not by defending legacy diesel franchises alone, but by executing a strategic pivot under its “1235 Strategy,” repositioning Yuchai from a domestic engine manufacturer into a globalized powertrain and green-energy solutions provider.

The convergence of governance normalization, AI data center power demand, global expansion, and the commercialization of new energy technologies has created the most credible re-rating setup CYD has seen over the past two decades.

This report traces Yuchai’s evolution, dissects the governance battles that suppressed historical earnings and valuations, contrasts its conservative trajectory with Weichai Power’s aggressive capital strategy, and frames the operational roadmap that underpins our constructive 2026 outlook.

Part I: The Genesis of the King (1951–2002)

To understand the magnitude of Yuchai’s current transformation, one must first appreciate the depth of its roots. The company’s history is a microcosm of China’s own industrial evolution—from a provincial factory to a global powerhouse navigating the complexities of international capital markets.

From the Rice Fields of Guangxi

Yuchai’s origins date back to 1951 in Yulin, Guangxi, where it was established with a 20,000-yuan grant as a labor-reform workshop producing agricultural tools. Known then as the Yulin Qiantang Industrial Society, the facility reflected China’s early post-war industrial priorities rather than any grand commercial ambition.

By the late 1950s, the factory had pivoted toward internal combustion engines, trial-producing early diesel models with minimal external technical support. The 1970s marked a structural inflection: labor-reform inmates were removed, and the enterprise was renamed Yulin Diesel Engine Plant—signaling its transition into a professionalized industrial manufacturer.

The Wang Jianming Era: The Rise and Fall of the “Power King”

In 1985, Wang Jianming—a graduate of Shanghai Jiao Tong University—was appointed director. Under his leadership, Yuchai experienced a meteoric ascent:

• 1992 Shareholding Reform: Yuchai became an early adopter of China’s corporatization reforms, transitioning to a shareholding structure.

• 1994 NYSE Listing: Yuchai became only the second mainland Chinese company to list on the New York Stock Exchange. Remarkably, it remains the longest-continuously listed Chinese company in the U.S., surviving the Asian Financial Crisis, Sarbanes-Oxley, and recent U.S.–China audit disputes.

• Scale Leadership: By the mid-1990s, Yuchai had become China’s largest internal combustion engine production base.

  

The IPO was not merely financial—it was geopolitical. Capital raised in New York was reinvested directly into modernizing Yulin’s production base. The structure established China Yuchai International (CYD) as the majority owner (76.4%) of GYMCL.

Part II: The Battle of Golden Share (2002–2005)

To facilitate the IPO, a latent control mechanism was embedded into the corporate structure: the “Golden Share.” This arrangement decoupled economic ownership from voting control by giving the holder powers, including:

• Appoint 6 of 11 CYD directors

• Appoint 5 of 13 GYMCL directors

• Veto power over all shareholder actions

Public shareholders and the Yulin government bore the economic risk, while strategic control rested with Hong Leong. For nearly a decade, this tension was masked by growth and Wang Jianming’s ability to bridge foreign shareholders and local interests. As growth slowed and political priorities shifted, the fault lines widened.

The 2003 Dividend Blockade

The crisis was triggered on August 23, 2002, with the liquidation of Diesel Machinery (BVI) Limited (DML). For years, DML had served as a neutral buffer, holding the “Special Share” (which carried board-control rights) in a joint venture between Hong Leong Asia and China Everbright. As Everbright pivoted away from industrial assets to build a domestic financial powerhouse, the liquidation of DML consolidated unilateral control of the Special Share directly into Hong Leong’s hands.

Sensing a loss of local influence, the Yulin City Government moved swiftly. In September 2002, acting through its offshore intermediary Goldman Industrial, it acquired Coomber Investments Limited from China Everbright. This gave the Yulin government a strategic 24.3% “stealth” stake in the NYSE-listed parent company.

The tension broke when Yulin sought confirmation that it would inherit Everbright’s historical rights, including the power to nominate two directors to the boards of both CYD and its operating subsidiary, Guangxi Yuchai Machinery (GYMCL). When Hong Leong declined to recognize an automatic transfer of these rights and refused to guarantee that factory dividends would be passed through to the NYSE listed parent, the dispute escalated into a full-scale regulatory blockade.

Claiming the “Special Share” mechanism allowed for unauthorized foreign control in violation of original 1994 approvals, GYMCL distributed dividends to its domestic shareholders while withholding and escrowing the RMB 245.7 million attributable to the NYSE parent. For CYD’s public shareholders, the message was stark: profits were being generated, but the cash was trapped onshore—leaving the listed entity an “economically hollow” shell despite its industrial dominance.

MOFCOM Intervention and the July Truce

In March 2003, the conflict reached Beijing. GYMCL petitioned the Ministry of Commerce (MOFCOM), which issued a correspondence in April advising that the ownership structure required “rectification.” This effectively validated the local government’s blockade and institutionalized the “governance discount” that would plague the stock for years.

A fragile truce was finally reached in July 2003. Under the resulting Reorganization Agreement:

• The RMB 245.7 million in withheld dividends were released to the parent.

• Two senior financial managers appointed by CYD, who had been locked out of the factory, were reinstated.

• Governance reforms were promised to bring the subsidiary in line with international standards.

Yet, while the cash flowed again, the Golden Share survived, and with it, a persistent market distrust. For the next two decades, investors viewed CYD as a company where economic rights could always be subordinated to local political outcomes—cementing a perpetual significant valuation discount relative to its peer, Weichai Power (2338.HK) - until now.

The Removal of Wang Jianming

Caught between Hong Leong and local government interests, Wang’s reformist ambitions—relocating core business functions, attracting external capital, and reducing Yulin dependency—were increasingly viewed as threats. In October 2005, he was removed as Chairman and replaced by Yan Ping, marking the end of Yuchai’s most entrepreneurial era.

Part III: The Two Titans – Yuchai vs. Weichai (2005–2020)

The opportunity cost of Yuchai’s governance paralysis becomes stark when contrasted with Weichai Power (2338 HK).

While Yuchai navigated internal conflict, Weichai—under the leadership of Tan Xuguang—embraced capital markets, vertical integration, and aggressive M&A, markets have rewarded its bold move, returning more than 20% p.a. since its 2004 Hong Kong IPO (vs. 4% p.a. for CYD).

In 2005, Weichai overtook Yuchai in annual sales, and the acquisition of Torch Group secured control of Shaanxi Heavy Duty Truck and Fast Gear, creating a self-reinforcing industrial ecosystem. Subsequent international M&A (Baudouin, KION, Linde Hydraulics, Ballard, Ceres, PSIX, among others) transformed Weichai into a global industrial platform. By 2024, Weichai generated over RMB 200bn in revenue, versus ~RMB 20bn at the CYD listco level (or ~RMB 50bn at the broader group level).

Yuchai, constrained by governance, pursued a different strategy: neutrality. Without captive OEMs, it became the supplier of choice to Dongfeng, LiuGong, and China’s bus market—preserving relevance, but sacrificing scale. Yuchai also proactively forged alliances with international partners, including Rolls-Royce in 2017, to manufacture its Series 4000 power generation engines, with a phase II expanded partnership announced in August 2024 to also incorporate Series 2000 engines.

However, with Mr. Tan’s retirement from Weichai in 2024, this has important implications for the sector and Weichai’s strategy going forward, which we will discuss in further detail in a subsequent note.

Part IV: The Return of the King

In March 2021, a new era began as Li Hanyang assumed the role of Chairman. Unlike the purely administrative transitions often seen in State-Owned Enterprises (SOEs), Li’s background is that of a “grassroots engineer” with a sophisticated technical pedigree.

A 1993 graduate of Tsinghua University in Mechanical Design and Manufacturing, Li was a rarity for his time: a top-tier graduate who chose to leave the coastal hubs for the rugged industrial frontier of Guangxi. His rise within Yuchai is the stuff of company legend:

• The Proactive Technician: Starting as a workshop technician, he earned the respect of veteran masters by working alongside them on the shop floor, reportedly even volunteering for menial cleaning tasks to prove his dedication to the “Yuchai spirit”.

• The Technical Visionary: After studying CNC programming in the United States in 1994, he returned to modernize Yuchai’s production lines. As head of the Cold Working Plant, he slashed production costs by 15% and improved quality by 60% through performance-based pay reforms.

• The Intrepreneur: In 2003, Li led a small project team to found Guangxi Yuchai Power with a modest initial capital of only RMB 2 million. Driven by the vision of creating a "Power Supermarket for Farmers," he identified a massive gap in the rural market for high-tech yet affordable small-bore multi-cylinder engines.

The modern era of China Yuchai began in December 2021 with the formal launch of the “1235” Strategy. This was not merely a slogan; it was a recognition that the old model of relying solely on domestic diesel sales was a dead end in a decarbonizing world.

At the core of Li Hanyang’s leadership is the “1235 Strategy,” a disciplined roadmap designed to transition Yuchai from a legacy manufacturer into a modern power systems leader:

• “1” Singular Goal: To achieve the milestone of 1 million power units in annual sales by 2025, establishing a new baseline for global scale.

• “2” Parallel Tracks: A commitment to a dual-track strategy where New Energy Power and Traditional Power advance in tandem, ensuring Yuchai remains relevant across all stages of the energy transition.

• “3” Strategic Pillars:

  • Comprehensive: Achieving full coverage across products, markets, and customer segments. This includes expanding beyond legacy high-speed engines to capture the medium- and low-speed engine markets.

  • Innovative: Focusing on the New Energy frontier, specifically prioritizing hydrogen fuel cells and hydrogen-combustion engines.

  • Robust: Transforming traditional weaknesses into strengths. For example, Yuchai is aggressively optimizing its presence in the tractor unit (semi-truck) market—a segment where it has historically been underrepresented.

• “5” Core Enablers: The strategy is anchored by five fundamental capabilities that ensure execution: R&D Excellence, Manufacturing Precision, Marketing Reach, Service Reliability, and Brand Equity.

Crucially, this strategic reset has been accompanied by tangible governance signals:

• The announcement of a new share equity incentive plan at the subsidiary level in June 2024

• A annoucement and completion of a $40 million share buyback in August 2024

• The announcement of a new share equity incentive plan at the listco level in May 2025

• Several high-profile changes in former leadership, beginning with the investigation of former Chairman in July 2025

• The announcement of the potential IPO of one of Yuchai’s key subsidiaries, which we have previously written in detail about in August 2025 (link), and the significant growth opportunities this division has given its exposure to the AI data center growth

2025 Records and the 2026 Outlook

In his December 31, 2025 New Year address—“Ride the Momentum, Pursue Long-Term Success” (乘势而上 笃行致远) (link), Chairman Li declared all-time record highs across volumes, revenues, and profits at the group level. Mr. Li’s commentary is consistent with third-party industry data, showing that Yuchai is one of the largest market-share gainers YTD.

While the CYD listco represents ~40% of the group’s assets, the read-through is unmistakably positive. Consensus FY25 EPS of US$2.18 remains well below historical levels of US$3.00—and far below the US$4.55 achieved in 2010—suggesting earnings normalization alone could drive further upside as its full year results are released in late February.

With the stock having re-rated from ~0.3x to ~1.0x book value since we first profiled the company, we believe 2026 remains catalyst-rich, offering both multiple expansion alongside asymmetric earnings upside opportunities, and we look forward to riding the momentum while pursuing long-term investment excellence.

Author’s note: This report should be read as background information for a better understanding of our research process and the level of on-the-ground insights we are capable of generating, while providing a glimpse into Intellego’s China business. It is not intended as a detailed investment thesis on the parent company, Intellego Technologies AB.

This Research note is divided into four parts. Firstly, we will give an overview of Yuwell, Intellego’s largest Chinese partner, followed by a detailed forensic analysis and site visit of Intellego’s China business. We will then test Intellego’s products against the competition. Lastly, based on our research, we have compiled a list of key questions that we believe long-term investors and other vested interests should ask Intellego’s management to gain a deeper understanding of the business.

Overview of Yuwell and Zhongyou Medical (Likang)

Yuwell (officially Jiangsu Yuyue Medical Equipment & Supply Co., Ltd., SZ:002223) is a leading Chinese medical device manufacturer, generating over US$1 billion in revenue in 2024. The company’s core business spans the research, development, manufacturing, and sales of medical devices and related solutions, with a broad portfolio encompassing respiratory treatment, diabetes management, and other healthcare products.

To broaden its portfolio, Yuwell expanded into infection control and disinfection by acquiring Shanghai Zhongyou Medical High-Tech Co., Ltd. (commonly referred to as Zhongyou by Yuwell, or Likang by Intellego) in 2017. Yuwell initially bought a 61.6% stake in Zhongyou for ¥863 million in November 2016 and completed a full 100% acquisition by May 2018 (purchasing the remaining 38.4% for ¥537 million). Zhongyou’s business became Yuwell’s “Infection Control Solutions (感染控制解决方案)” segment, which from 2020 to 2023 contributed between ¥7.56–11.84 billion in annual revenues (peaking at ~17% of Yuwell’s sales during the height of pandemic-related demand in 2022). However, this segment saw a sharp decline of 36% in 2023 (down to ¥7.56 billion, ~9.5% of revenue) as pandemic demand waned. In the 2024 annual report1, Yuwell changed its segment reporting, rolling the infection control business into a broader “Clinical Equipment and Rehabilitation Solutions (临床器械及康复解决方案)” category — highlighting the non-core nature of Zhongyou’s business.

With China’s domestic market growth slowing and fierce competition arising from the government’s volume-based procurement strategy for medical equipment, Yuwell has increasingly focused on international expansion, particularly in the respiratory care space. For example, in January 2025, Yuwell announced2 a strategic partnership with U.S.-based Inogen (Nasdaq: INGN), including a 9.9% equity investment3, and in June 2025, highlighted a German partnership expansion4. This reflects Yuwell’s practice of openly disclosing significant partnerships and global initiatives.

According to China’s Measures for the Administration of Information Disclosure by Listed Companies (上市公司信息披露管理办法), any information or major event likely to significantly impact a listed company’s stock price must be disclosed promptly. Intellego’s March 2025 press announcement5 of a contract valued at up to USD $1.4 billion would be monumentally significant even for Yuwell, which generated about USD $1 billion in total revenue in 2024. Such a deal would represent over 130% of Yuwell’s entire annual revenue, making it unequivocally material and subject to immediate disclosure by Yuwell if true.

To investigate this, we posed a direct question to Yuwell’s management via the Shenzhen Stock Exchange’s investor Q&A platform6: “Has Likang, a subsidiary of Yuwell, signed a 5-year US$360 million minimum purchase agreement with Intellego?”

Author’s note: This Q&A exchange is also accessible directly through Yuwell’s investor relations page7 by navigating to the “投资者交流” section and then the “深交所互动易” (Interactive Q&A) portal.

Yuwell’s official response was:

“In 2024, Yuwell’s subsidiary Shanghai Zhongyou Medical High‑Tech Co. had signed a cooperation agreement with Intellego Technologies AB, as a collaboration around UV disinfection‑efficacy monitoring products. The deal aims to expand Yuwell’s range and diversity of disinfection-related products. The specific cooperation amount is subject to actual business volumes rather than a predetermined figure.”

This reply provides significant insight into the Yuwell–Intellego relationship from Yuwell’s perspective:

• Yuwell confirms the partnership: A cooperation agreement does exist between Yuwell’s subsidiary (Zhongyou/Likang) and Intellego, focusing on UV disinfection efficacy monitoring products.

• No mention of a “minimum purchase” commitment: Yuwell’s answer pointedly omits any reference to Intellego’s touted USD $360 million minimum contract figure. Instead, it emphasizes that the scale of cooperation depends on actual sales volumes.

• Only the 2024 deal is acknowledged: Yuwell references an agreement signed in 2024, with no indication of any expanded or new agreement in 2025. This stands in direct contrast to Intellego’s March 21, 2025, press release, which described a broadened partnership.

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As a mainland-listed company, Yuwell is subject to rigorous disclosure obligations. In addition to publishing full statutory filings8, the company provides summaries of investor Q&A interactions and publishes all investor questions and answers online 9. Broker research summaries are also available10. In reviewing Yuwell’s public disclosures, we found multiple references to the Inogen partnership (despite its relatively small current financial impact), yet not a single mention of Intellego — despite Intellego’s reported Q1 2025 Asia revenues suggesting a major contribution to Yuwell’s infection control business.

On Zhongyou’s official website11, the subsidiary outlines its strategic plan for 2023–2027; tellingly, there is no mention of Intellego or ultraviolet disinfection technology. This omission is striking given that Intellego’s purported $360 million deal would imply adding billions of RMB in revenue to that division each year — a highly material addition to its current trajectory.

We did find Intellego’s products referenced in one context: they appear briefly in Likang’s 40-page product brochure (Intellego’s UV devices are shown on page 27). In fact, Likang markets two Intellego products in China, each serving a different purpose: Likang UV Intensity Indicator strips and Likang 254 nm UVC Dosimeter cards.

Both products respond to ultraviolet light but measure different things:

• The UV intensity indicator shows the instantaneous power of a UV light source at a given moment, expressed in microwatts per square centimeter (µW/cm²). It provides a quick visual confirmation that a UV lamp is emitting at the expected intensity.

• The UVC dosimeter, by contrast, measures the cumulative UV exposure (total UV energy over time), expressed in microjoules per square centimeter (µJ/cm²). It records the total dose of UV delivered over a disinfection cycle.

  

In simple terms, intensity tells one how bright the UV is right now, while dose tells one how much total UV energy has been delivered over a period. If the UV intensity is held constant, the total dose can be approximated by the formula: Dose (µJ/cm²) = Intensity (µW/cm²) × Time (seconds). A dosimeter provides a more precise record of total exposure, whereas an intensity indicator is a one-time check of lamp output.

Intellego Technologies China Statutory Filings Analysis

In Intellego’s annual report, the company identifies its primary Chinese subsidiary as Intellego Technologies Co., Ltd. (Shanghai) (上海易得量生物科技有限公司, business registration number 91310000MA7B0GEJ85). We verified this entity through Chinese corporate filings12. However, our analysis of Intellego’s China filings revealed several anomalies:

Board Composition

Mr. Per-Ola Helmer Rosenqvist – a name familiar to the Swedish investment community – is listed as a Director of Intellego Technologies (Shanghai). He also serves as Chairman of ARC Aroma Pure (Shanghai) Co., Ltd., an indirect subsidiary of OptiCept Technologies AB (formerly ArcAroma AB). Notably, Mr. Rosenqvist was a member of Intellego’s Swedish board from 2020 until mid-2023, when he abruptly resigned citing personal reasons13. This departure coincided with his exit from the board of another company (Plexian AB) amid Swedish media reports of an insider trading investigation involving his previous role at SensoDetect AB14. Specifically, Mr. Rosenqvist was accused of purchasing SensoDetect shares just before a major announcement in December 2020 about a distribution deal in China – the kind of price-sensitive information a chairman would likely know ahead of time. Most recently, Mr. Rosenqvist has sold shares in Intellego while appealing charges for gross insider trading (grovt insiderbrott)15. While that case did not involve Intellego directly, we note that Mr. Rosenqvist has also executed trades in Intellego’s stock that were subsequently unwound16. Given this history, we question whether his continued involvement on Intellego’s China board is in the best interest of shareholders from a governance perspective.

Mrs. Louisa “Lou”17 (娄荣青) is listed as a Supervisor (监事) of Intellego (Shanghai) and was, until July 22, 2025, the Legal Representative of the subsidiary. Publicly, Mrs. Lou presents herself as Intellego’s Director of Operations (运营总监), according to a 2023 media interview18. Chinese filings show that Mrs. Lou wears many hats: besides her Intellego role, she is a Director of ARC Aroma Pure (Shanghai) Co., Ltd.19 – again linking her to Mr. Rosenqvist’s business network – and she is the controlling shareholder of Shanghai EAG-METAL Industrial Co., Ltd.20 , a company we will discuss later. Putting aside the ArcAroma connection, one might ask how the COO of a supposedly high-growth Swedish company (with claimed multi-hundred-million-dollar deals in China) has the capacity to concurrently hold two other significant positions outside of Intellego.

It’s worth noting how powerful the “Legal Representative” position is in China. Unlike a Western chairman, the legal representative’s signature can bind the entire company, open and control bank accounts, and represent the firm in legal matters. This authority comes with personal risk: if the company violates laws or defaults, the legal representative can face penalties or travel bans. Thus, changes in this role are often telling. In Intellego’s case, it’s notable that the legal representative role was recently transferred from Mrs. Lou to Mr. David Chen (陈文化). Mr. Chen is publicly identified as Intellego’s Managing Director for APAC21 and is now listed as the Chairman of Intellego (Shanghai). According to his LinkedIn profile22, David Chen is a Chinese national who has been based in Shanghai since 2003. The shift of legal representative duties to Mr. Chen suggests a potential change in internal responsibilities or risk management approach within the China business.

Social Security Contributions

Despite Intellego’s much-publicized partnership with Likang, the statutory filings show that Intellego (Shanghai) paid zero social security contributions for any employees from 2021 through 2024. This is highly unusual.

Under China’s Social Insurance Law, every registered company — including wholly foreign-owned enterprises (WFOEs) like Intellego (Shanghai) — is legally required to contribute to social insurance for all its employees. This obligation isn’t optional and cannot be waived by any private agreement. Both David Chen and Louisa Lou have represented themselves as Intellego executives and appear in the subsidiary’s records. As Chinese nationals drawing income from Intellego’s China entity, their compensation (including, for instance, gains from Mr. Chen exercising stock warrants23 ) should be subject to mandatory social insurance and income tax withholding.

Intellego’s complete lack of social insurance payments for any China-based staff contradicts statements made by its CEO in a recent investor presentations24. Around the 4:40 mark of that presentation:

If Intellego indeed has “its own staff” in China, it is puzzling that none of them appear on the social insurance rolls. (For context, we checked companies associated with Intellego’s China leadership: both EAG-METAL and ARC Aroma Pure have each made social insurance contributions for at least one employee every year since 2017, according to their filings.)

Business Contact Analysis

Intellego (Shanghai) lists two addresses in its corporate filings. One is the original registered address in Shanghai’s Fengxian District (肖南路368号, Building 1, 3rd Floor). The other is a communication address in Songjiang District (泗砖公路255弄111号4楼, which we’ll call the “111 address”). We found that the Fengxian “368” location is essentially a mass-registration site — over 10,000 companies are registered at that address. In contrast, Intellego appears to be the only company using the specific “111” address in Songjiang. This suggests that the “111” location is the actual operating office for Intellego’s Shanghai subsidiary.

Moreover, Intellego (Shanghai) shares the same contact phone number and email address with two other companies: ARC Aroma Pure (Shanghai) Co., Ltd., and Shanghai EAG-METAL Industrial Co., Ltd. All three list louisa@eag-metal.com as their contact email and have the same phone number on record. Historical records indicate that this email belongs to Mrs. Lou’s company (EAG-METAL) and started appearing in Intellego’s filings around the time the subsidiary was founded in 2021.

Although the eag-metal.com website is currently offline, an archived version25 identified Mrs. Lou as the Sales Director for a Finnish air purification startup called Air0. Regulatory filings for Air0 show it generated roughly €282,700 in revenue in 202426 and has been consistently loss-making. Air0’s official site still lists Louisa as a distributor in Shanghai27.

Our team visited the “111” Songjiang address during a normal workday. The office was locked, and through the glass we observed boxes of Air0 products (shipped from Helsinki) on the premises. This on-site observation underscores that Intellego’s key individuals in China are closely involved with other ventures (like Air0 and EAG-METAL), raising questions about their focus and potential conflicts of interest.

Registered Capital Base

Chinese company law distinguishes between Registered Capital (注册资本) and Paid-in Capital (实缴资本). Registered capital is the amount shareholders commit to contributing to the company (recorded with regulators), while paid-in capital is what has actually been contributed to date. If paid-in capital lags far behind registered capital, Chinese law typically requires the shortfall to be paid in within a certain period (often within 5 years of establishment), or the company and its owners can face penalties.

Intellego Technologies (Shanghai) was established on October 18, 2021, with a registered capital of ¥1 million (around SEK 1.3 million). As of the latest filings, only ¥0.51 million of that capital had actually been paid in, despite the subsidiary being nearly four years old and Intellego claiming substantial sales into China starting in 2023. In other words, almost half of the pledged capital remains unpaid, even as Intellego touts major business growth in China.

This minimal capitalization – and the failure to fully fund even that small amount – raises a red flag. It prompts a fundamental question: Why would any reputable partner (let alone a large, publicly listed Chinese company like Yuwell) commit to hundreds of millions of dollars in purchases from a local entity that has so little capital invested? The stark contrast between Intellego’s grand announcements (of massive China deals) and the modest reality of its China subsidiary (in terms of capital, staffing, and operations) is difficult to reconcile. For investors and stakeholders, this discrepancy warrants close scrutiny and healthy skepticism.

Reception of Intellego’s Products in China

Intellego has made appearances at major trade shows in China, including:

• June 2023 (WIETEC, Shanghai): Intellego’s subsidiary Daro presented at the WIETEC environmental technology conference28.

• November 2023 (China International Import Expo, Shanghai): Intellego participated in the CIIE trade fair29.

• April 2025 (China International Medical Equipment Fair, Shanghai): Intellego’s products were showcased at CMEF, occupying a small part of Likang’s booth space30. Intellego’s CEO, Claes Lindahl, highlighted this event on social media; however, we view Intellego’s CMEF presence as a routine marketing effort, in contrast to the high-profile partnership signing ceremonies that Yuwell typically holds for significant deals3132. (This is despite Intellego’s arrangement with Likang likely being more financially material than some of Yuwell’s heavily publicized collaborations.)

  

  

Despite these trade show appearances, Intellego maintains a very low profile in Chinese media and online platforms. Intellego China’s official social media presence is limited to a WeChat account (“Intellego 易得量”) linked to its Shanghai subsidiary (易得量生物科技（上海）有限公司). Notably, none of Intellego China’s 11 WeChat posts have garnered more than 100 views. For example, a seven-minute interview with Intellego’s Asia Managing Director, David Chen, has only about two dozen views since its 2023 release.

We also searched for Intellego on RedNote (小红书, Xiaohongshu), one of China’s most popular social media and e-commerce platforms for user reviews and product discovery. We did not find a single mention of Intellego’s products on RedNote, even though we found numerous reviews for competing UV indicator products.

In terms of e-commerce presence, China’s market is highly digital — nearly 30% of retail sales occur online. While distribution of healthcare equipment into hospitals typically happens offline, Chinese regulation means hospitals are subject to a highly competitive tender process known as “volume-based procurement (VoBP)”, depressing margins and profits for product manufacturers and distributors.

If a product has any traction, it is usually available through online marketplaces. However, among the many UV disinfection indicator products listed on major Chinese e-commerce sites, we found only one online store offering Likang’s UV intensity indicator strips, with a total of just nine recorded sales 33. Furthermore, we found no online listings for Likang-branded 254 nm UVC dosimeter cards.

This lone online store listing provided some revealing details. The manufacturing address for the Likang UV intensity indicator is given as “Gustav III:s Boulevard 34” in Sweden — an address we recognize as a shared office space, not a manufacturing facility. (Intellego’s Nasdaq First North listing prospectus 34 notes that Stema Specialtryck AB in Borås produces Intellego’s dosimeters and indicators, while Bio-Hospital AB in Kopparberg produces the chemical indicator ink.) Crucially, the retail price listed for Intellego’s UV intensity indicator in China is about ¥1.1 per strip (approximately US$0.15).

To put Intellego’s reported sales into perspective: the company reported SEK 54.3 million in Asia revenues for Q1 2025. If those revenues came primarily from selling UV indicator strips, it would require an enormous volume of strips to be sold and used. By our estimates, hundreds of indicator strips would have to be consumed per day at each of Likang’s ~3,000 hospital clients to reach that revenue figure. Such usage would make Intellego’s indicators one of the most widely used daily consumables in those hospitals. Yet, tellingly, as of our research, Likang’s own official product webpage35 does not list Intellego’s UV indicators or dosimeters for sale at all.

Product Review and Comparison

Our investigators obtained multiple single-use UV intensity indicator samples available in the Chinese market and compared them to Intellego’s China-sold UV intensity indicator. The competing products we tested included brands such as LOSH (露水牌), Four Rings (四环牌), and SHINVA (新华牌). Below is a summary of how Intellego’s indicator stacks up:

Our investigators observed that Intellego’s UV indicator (the Likang version we obtained was manufactured in April 2025) lacked a hygiene license number on its packaging. Under China’s disinfection product regulations, a dual-track system exists for product approval36. Historically, all disinfection products needed a Product Hygiene License to be sold. Recent regulations allow that only “new” disinfection products — those using novel materials, technologies, or sterilization methods — must go through the stringent national registration to obtain a license. “Existing” or well-established product types can instead undergo a safety and efficacy evaluation and then simply file the product with provincial authorities.

Further, the sample we obtained was printed in English, with a Chinese Likang sticker overlay on top, contrasting with a publicly rendered image of a fully Chinese product.

Upon our inquiry, Yuwell’s management confirmed that Intellego’s product has a safety and efficacy evaluation on file, instead of a hygiene license 37. In other words, Intellego’s UV intensity indicator is being sold via the filing pathway as an “existing” product, not as a “new” product that requires special approval. This implies that Chinese health regulators do not view Intellego’s UV intensity indicator as a novel technology.

As highlighted earlier, the primary benefit of a dosimeter (which measures accumulated dose) over a simple intensity indicator is greater accuracy in gauging total exposure. We obtained Intellego’s 254 nm UVC dosimeter card (through a non-Likang channel) and tested it against two professional-grade Lishang UVC radiometers38 that are specifically calibrated to Chinese national standards.

In contrast to the UV intensity indicators, the UVC dosimeters do not list a manufacturing address at all, only stating that the product is manufactured by Intellego Technologies AB. The markings on the back of the dosimeter would suggest one of its key use cases is surrounding disinfection related to COVID.

To evaluate the performance of Intellego’s UVC dosimeter, we conducted controlled exposure tests using a calibrated 254 nm UV-C light source. The dosimeters were subjected to two intensity settings — 500 µW/cm² and 1,000 µW/cm² — for 200 and 100 seconds, respectively, corresponding to a total UV dose of approximately 100 mJ/cm². According to Intellego’s own specifications, this dose should trigger a distinct bright pink color change, indicating full saturation.

However, in our trials, the dosimeter turned only orange, not pink, suggesting that it responded as if exposed to less than half the intended dose (~50 mJ/cm²). We repeated the experiment under identical conditions using two independent, calibrated radiometers to verify accuracy, as shown in the videos below. The results were consistent across both devices. Based on this controlled setup and repeated validation, we conclude that the Intellego UVC dosimeters we acquired (packaged June 2025) exhibit significantly lower sensitivity than the company’s stated performance standards.

In a separate observation, we continued exposing the dosimeter until it reached its pink end-point, which according to Intellego’s specifications corresponds to 100 mJ/cm² of UV-C exposure. We recorded the exposure duration and verified the cumulative energy using our radiometer. The radiometer measured a total dose exceeding 600,000 µJ/cm² (≈600 mJ/cm²) — more than five times higher than the level indicated by the dosimeter.

This lack of sensitivity is more than a technical flaw — it carries significant real-world safety implications. In medical environments, overexposure to UV light can be hazardous: many instruments contain plastic or polymer components that degrade (photodegrade) when exposed to excessive UV radiation. If Intellego’s indicators and dosimeters under-report actual UV exposure, users may unknowingly extend sterilization times or increase intensity, risking equipment damage and compromising safety protocols.

The fundamental advantage of using a dosimeter over a cheaper intensity sticker lies in its supposed accuracy — its ability to measure cumulative exposure precisely. But if that accuracy is unreliable, the rationale collapses. In such cases, practitioners would be better served either by using a calibrated radiometer for precision or by approximating exposure through a simple intensity indicator, rendering the dosimeter’s added cost and complexity effectively obsolete.

Questions for Intellego Management

• Board and Governance: How does the Intellego China Board assess potential business risks while operating in a high-risk jurisdiction like China? How does having Mr. Per-Ola Helmer Rosenqvist and his close associate, Louisa Lou, on the Intellego China board benefit minority shareholders, given Mr. Rosenqvist’s historical track record and Louisa Lou’s multiple roles?

• Partnership Discrepancies: Why is the language publicly used by Yuwell substantially different from the language in Intellego’s press releases? Specifically, why does Yuwell not acknowledge the $360 million minimum commitment or the March 2025 expanded partnership in its public statements about Intellego?

• Local Operations: Where is the actual office location of Intellego’s China operations, and how many employees does Intellego actually have on the ground? How does Intellego ensure appropriate compliance with all relevant Chinese law (including social security contributions and all relevant tax withholdings) is being correctly accounted for in these operations?

• Product Manufacturing and Quality: Where are Intellego’s UVC dosimeters and UV intensity indicators manufactured, and what quality control processes are in place to ensure these products are correctly calibrated and meet Chinese regulatory standards?

Conclusion: Lessons from the Intellego Case

Our investigation into Intellego’s China operations illustrates a broader truth about investing in cross-border narratives: stories travel faster than facts. What begins as a bold headline — “a billion-dollar China partnership” — can, upon closer inspection, unravel into a web of partial truths, mismatched disclosures, and governance inconsistencies.

We view such discrepancies not as anomalies, but as data points — evidence of how information asymmetry and narrative friction can create both risk and opportunity. This case reinforces the importance of first-hand research, especially for companies that have substantial exposure to opaque markets, where disclosure standards, cultural norms, and regulations vary widely.

Three lessons stand out:

1. Trust must be earned twice — once through transparent disclosure and again through consistent execution. When partners’ public statements diverge, investors should pause and ask why.

2. Governance is a leading indicator of durability. The strength of a company’s oversight, incentives, and compliance infrastructure often determines whether its growth is sustainable or fleeting.

3. Forensic curiosity creates an edge. Sustainable long-term investment edge rarely comes from faster data; it comes from deep insights — from walking factory floors, reading local filings, and asking uncomfortable questions.

In this sense, the Intellego story is less about one company and more about a principle: that sound investing requires alignment between narrative and reality. For long-term investors, the task is not simply to find growth, but to verify it — to seek not the most optimistic story, but the truest one.

At Maius Partners, our mission is to bridge global capital with local insight — to uncover what’s real beneath what’s told.

Like what you read or have a tip? You can contact us at admin@maiuspartners.com

1. Yonex (link) delivered +40% MTD and +70% total return since we first featured it in February. A textbook case of how strong governance and pricing power can unlock outsized performance. While our thesis flagged pricing power as the key driver, the sheer magnitude of earnings upgrades—and market recognition—caught even the bulls off guard.

   

2. CQME (link) surged +28% MTD, +50% since June, validating our call to double down back in June (link). The company guided for double-digit earnings growth, delivered +50%, and beat across every major segment—including joint ventures. Importantly, CQME reinstated an interim dividend for the first time since listing—a signal of governance reform with teeth.

   We also note a pending share incentive scheme, awaiting State approval, that would further align management with minorities. For political watchers: Chongqing Party boss’s self-assessment scorecard in Study Times mapped almost point-for-point to CQME’s business fortunes. Yet most domestic investors remain fixated on minutiae (e.g. Cummins JV engine mix) instead of the bigger picture while international investors struggle with basic concepts like whats a Chongqing.

3. Impro Precision (link) +25% MTD despite volatility around Mexican tariff risk. The reality: Impro is positioned to pass through tariffs given supply tightness, evidenced by a 50% hike in 2025 capex at its Mexican facility (~HKD600m). Execution risk remains the key debate.

   

4. Thakral Corporation (link) added +13% MTD in line with expectations. What mattered: the company immediately resumed buybacks post-results. YTD, buybacks equal 0.8% of SO (0.2% in July, 0.6% in August). For the first time, management explicitly flagged buybacks as a top capital allocation priority.

   

5. CYD/H22 (link) +46% MTD, a testament to its core turnaround, data center growth optionality, and IPO prep—all significantly ahead of our February projections.

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Portfolio Updates:

We have added to CQME and CYD, funded by a full exit from Impro Precision.

• CQME & CYD both trade below book with multiple catalysts for earnings acceleration.

• Impro now sits at 1.3x book, with slower growth and tariff execution risk. Congratulations to those who rode Impro—bragging rights: you’ve officially outperformed Buffett in castparts.

Why CQME Still Gets Better 📈

A key overlooked driver: Hitachi/ABB Chongqing JV. Historically CQME’s largest earnings contributor, it received ￥850m in 2020 govt. support to build a new plant (completed 2023). With Hitachi’s 2023 acquisition of ABB’s energy division, expansion accelerated again in 2024, positioning the JV for >￥5bn revenue capacity.

• CQME owns 37.8% of this business.

• We forecast ￥100m NPAT attributable to CQME in 2025, inflecting higher as capacity ramps.

• Over 50% of products are exported—a rarity for a Chinese industrial, underscoring demand strength.

Historically, Hitachi/ABB Chongqing was the biggest joint venture earnings driver for CQME, with CQME owning 37.8% of the business. The business was so succesful that in 2020, the Chongqing government provided ￥850mn in funding (link) for the company to establish a larger factory that was complete in 2023. With the acquisition of ABB’s energy division by Hitachi in 2023, Hitachi choose to further expand the capacity in 2024 (link) which we understand will be able to support a revenue base of over ￥5bn once complete. However as the company is in expansion phase, this has temporarily depressed earnings and dividend payments (the the JV appears to have paid out the ￥850mn funding as a special dividend in 2020 and then used construction debt to fund the expansion), which is why we failed to incorporate this business in our initial assessment.

The table below depicts the historical financial performance of the business and what conservative forecasts may look like: With over ￥100m NPAT attributable to CQME alone in 2025, before earnings further inflect as capacity ramps (we understand over 50% of its current products are exported, an extremely high proportion for any Chinese business highlighting the strong demand), its not hard to envision why this businesses valuation starts with a billion. Further, we believe the business could be a significant beneficiary to China’s recently annouced $170bn Moutou Hydropower project (link) over the longer term given its historical track record in Three Groges Project. While the market currently values this business at near 0, it’s not hard to envision a scenario where this businesses valuation alone supports the current entire market cap of CQME. (￥5bn revenues, 17.5% net margins, 20x PE equates to ~HKD7bn valuation attributable to CQME vs. similar current market cap).

Closing

This earnings season reinforced one theme: corporate governance reform is no longer abstract—it’s translating into hard cash and multi-bagger potential.

Yonex, CQME, CYD, Thakral: four case studies of how Asia’s legacy companies can be re-rated when governance catches up with fundamentals.

Back in February, we first profiled (link) a forgotten China microcap stock: China Yuchai Limited, which was trading well below its intrinsic value. Since then, the stock has doubled, and at its recent highs, tripled. Yet, despite this strong run, we believe the real story is only just beginning.

Successful industrial turnarounds—think Rolls-Royce, which has gone from market pariah to market darling—tend to deliver generational wealth creation. Conveniently, Yuchai is deepening its collaboration with Rolls-Royce via the recently announced mtu Series 2000 engine partnership (link). But the real game-changer emerged yesterday.

The Setup Today:

Yesterday, released a seemingly cryptic announcement regarding a potential subsidiary listing. While the market has shrugged, we believe this disclosure fundamentally reshapes the investment case. On the back of this, we have re-established a position in CYD.

Our analysis suggests the announcement most likely refers to the potential IPO of MGP (Guangxi Yuchai Marine and Genset Power Co., Ltd)—CYD’s fast-growing data centre and genset arm. To recap: CYD owns a 76.41% stake in GYMCL, which historically owned 100% of MGP.

In mid-2024, CYD quietly completed a share incentive scheme for MGP. A 6.54% stake was transferred to employees for ￥82.88m. While absent from U.S. SEC disclosures, the crucial detail is buried in Hong Leong Asia’s SGX filings (link): unlocking of the scheme is contingent on a public listing.

The agreement highlights six key employees, whom our analysis of PRC regulatory filings suggests include both senior management and technical leadership across MGP and GYMCL. Strikingly, these six individuals contributed ~43% of the ￥82.88m capital —an unusually high personal commitment for Chinese SOE employees that signals extreme conviction and alignment.

Assessing the Value of MGP

• No standalone financials are currently available for MGP. However, using the same first-principles industry framework that led us to call CYD’s earnings inflection back in February, we can begin to outline the potential economics of the business.

• At a minimum, investors would ascribe a 15x earnings to a pure-play MGP listing. This is still a steep discount to Weichai’s China onshore marine & genset exposure (000880.SZ) or Weichai’s offshore exposure —despite MGP’s superior minority-investor alignment and higher optionality.

Peer Comparison between Yuchai MGP and Weichai PSIX

Source links

(1) CHINA YUCHAI INTERNATIONAL LIMITED 2025 EQUITY INCENTIVE PLAN

(2) Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

(3) Entry into a Material Definitive Agreement

Why This Matters

This announcement provides a new valuation anchor for CYD. Instead of being viewed as a commoditized diesel engine business, the market must now grapple with a high-growth subsidiary that could re-rate meaningfully upon IPO.

In short:

• MGP carve-out/IPO is real (employee incentive structure confirms it).

• Key insiders are aligned (significant personal financial commitment).

• Valuation reframe is underway (15x earnings baseline, with upside).

Given this new setup, we view the risk/reward as highly attractive. The market has yet to price in the potential of MGP’s standalone valuation. We are positioned accordingly.

Introduction: The Setup

The journey of Smart Share Global / Energy Monster (Nasdaq: ) from a celebrated market debutant to a contentious buyout target encapsulates the volatile narrative of China's sharing economy champions. In April 2021, the company, backed by heavyweights like Alibaba and SoftBank, listed on Nasdaq at $8.50 per American Depositary Share (ADS), commanding a valuation of $2.2 billion amidst investor enthusiasm. Less than four years later, with its stock languishing below $1.00, the stage was set for an opportunistic management-led buyout. This, however, is not merely another story of a fallen growth stock. It has become the arena for a proxy war over fair value, pitting insiders against a formidable, well-capitalized shareholder.

The core conflict is a study in contrasts. On one side stands an insider consortium, led by CEO Mars Cai and private equity firm Trustar Capital, with an initial offer of $1.25 per ADS—a price that appears to be a classic "take-under" designed to capitalize on a cyclical low point. On the other side is Hillhouse Capital, a sophisticated investment firm and a major shareholder, which has crashed the party with a publicly disclosed, fully funded, and 42% higher offer of $1.77 per ADS.

The central thesis of this analysis is that Hillhouse's intervention has shattered the illusion of a smooth, management-friendly privatization. It has injected genuine competition, acute legal pressure, and intense public scrutiny into what was shaping up to be an insular process. The market, while having priced in some of the potential upside, appears to underestimate still the probability of a final transaction price near or even above Hillhouse's competing bid. The investment opportunity here is not just a bet on a higher price; it is an investment in the likely breakdown of a flawed governance process under the weight of superior economics and legal force.

We believe this has created an incredibly compelling, highly asymmetric risk/reward opportunity for minority shareholders that can expect to generate ~20% returns over a 3 - 6 month period with relatively modest levels of risk.

The Engine Room: Understanding Energy Monster's Business

The Business Model at a Glance

At its core, Energy Monster, known in China as 怪兽充电, operates a ubiquitous yet straightforward service. It is one of China’s largest mobile device charging providers, with a vast network of 9.6 million rental power banks distributed across 1.28 million locations, including cafes, malls, bars, and public venues. The user proposition is straightforward: scan a QR code on one of the company's bright green cabinets to release a portable battery, use it to charge a device, and return it to any station in the network. The cost is typically around ¥3 (approximately $0.50) per half-hour.

The Great Pivot: From Blitzscaling to Survival

Energy Monster's corporate history can be divided into two distinct strategic eras, each with profound financial implications.

Initially, the company pursued a landgrab strategy built on an "asset-heavy" model. Energy Monster purchased its charging cabinets and power banks, deploying them directly into venues and sharing a portion of the rental income with the host location. This approach required significant upfront capital expenditure and high ongoing operating costs related to hardware depreciation and maintenance. However, it allowed the company to capture the largest possible share of each rental fee. This was the growth story that powered its early success and its IPO, leading to rapid revenue expansion to ¥2.8 billion by 2020 and notable profitability, including a net profit of ¥166.6 million in 2019.

Beginning in 2021-2022, the operating environment changed dramatically. The lingering effects of the pandemic reduced foot traffic, and a broader slowdown in the Chinese economy created significant headwinds and competition increased from competitors including Meituan. In response, management executed a crucial strategic pivot to an "asset-light" model. Under this new framework, third-party partners—such as vending machine operators or the venues themselves—own and deploy the charging hardware. Energy Monster's role has shifted to providing the technology platform, branding, and maintenance support in exchange for a smaller percentage of the revenue.

We believe the current business model is capable of generating around ¥ 200m EBITDA per annum with limited capex requirements; however, due to high legacy D&A costs, continues to be unprofitable on a statutory basis. Hillhouse highlights that “under our estimate, the Company will resume growth in 2026 and its Non-GAAP operating income will turn positive in 2027 as a result of steady operation growth”.

The Architect and The Agitator: Management, Mr. Gan, and Shareholder Alignment

The Incumbent Bidders: CEO Mars Cai and Trustar Capital

The group that initiated the go-private transaction consists of the company's founder and CEO, Mars Cai, backed by the private equity firm Trustar Capital (an affiliate of CITIC PE). Their primary incentive is clear: to acquire full control of the company at the lowest possible price. By leveraging their deep insider knowledge of the business's trough performance and their structural control over the company's voting shares, they are positioned to execute this strategy effectively. Their offer of $1.25 per ADS was likely calculated as the minimum price necessary to appear as a significant premium to a deeply depressed stock price, while remaining comfortably below their internal assessment of the company's long-term intrinsic value.

Jiawei Gan: The "Iron Man" in a Conflict

At the center of this takeover drama is Jiawei "A-Gan" Gan, a legendary figure in China's technology sector whose presence adds layers of complexity and credibility to the situation.

Mr. Gan's operational pedigree is impeccable. He was employee #67 at Alibaba, eventually rising to become the company's Sales VP. He is perhaps best known for his tenure as the Chief Operating Officer of Meituan, where, after being recruited by founder Wang Xing, he built the firm's formidable offline "iron army" of sales agents. This organization was instrumental in Meituan's victory in the "Thousand Groupons War," a brutal period of hyper-competition that saw thousands of competitors fall by the wayside. His involvement with Energy Monster—as an angel investor, advisor, and board member—lent immense credibility to the company during its IPO and signaled a focus on disciplined, ground-level execution.

The Web of Connections

Mr. Gan's alignment in the current conflict is complicated by his multiple, overlapping roles:

1. Angel Investor: He was an early, personal investor in Energy Monster through his investment vehicle, LIGAN Legend Ltd., holding roughly 1.9% of shares at the time of the IPO. This position aligns his interests with long-term value creation for all shareholders.

   

2. Independent Director: He joined the Energy Monster board in 2021 and chairs both the compensation and nominating committees. In this capacity, his fiduciary duty is explicitly to protect the interests of all shareholders, particularly the minority investors who lack the voting power of the founders.

3. Hillhouse Operating Partner: His current professional affiliation is with Hillhouse Capital, the very firm that has now launched a competing, superior bid to acquire the company.

We believe, Mr. Gan's profound conflict of interest is not merely a corporate governance headache; it is the central pivot point of the entire investment thesis. His presence simultaneously validates the underlying value of the asset and exposes the flawed process that allowed the lowball bid to emerge in the first place. When the initial Trustar proposal was received, the Board formed a Special Committee of three independent directors—including Mr. Gan—to evaluate it; however, the Special Committee chose not to entertain Hillhouse when it expressed its dissatisfaction with the initial offer in a February letter addressed to the board, this suggests Mr. Gan may have been sidelined throughout the initial Special Committee review process.

However, after Hillhouse's competing bid emerged, the company announcements indicated this same committee would continue its evaluation. Placing Mr. Gan in the extraordinary and deeply conflicted position of being a committee member tasked with impartially evaluating a superior bid from his own firm. Rather than being sidelined, he is likely now at the very center of the decision-making process, creating a significant governance paradox. His fiduciary duty to all shareholders is now in direct conflict with his professional affiliation. This dynamic puts immense pressure on the other two committee members and the committee's independent advisors to ensure a fair process, as any decision they make will be scrutinized in light of Gan's presence.

The Battle Unfolds: A Timeline of the Takeover

August 1, 2025: The Opening Salvo

The takeover battle commenced when the Trustar-led consortium signed a definitive merger agreement to acquire Energy Monster for $1.25 per ADS. A critical component of their strategy was securing the support of founders and key management figures, who together controlled approximately 64% of the company's voting power through their ownership of high-vote Class B shares. This voting bloc brought them tantalizingly close to the two-thirds majority (66.7%) required for merger approval under Cayman Islands law, making the deal appear almost unstoppable from the outset.

August 13-20, 2025: Hillhouse Drops the Gauntlet

The dynamic of the deal was irrevocably altered in mid-August.

• On August 13, Hillhouse Capital submitted its preliminary non-binding proposal to acquire the company for $1.77 per ADS directly to the board. The timing of this proposal is critical: Before a definitive agreement, Hillhouse is reluctant to table an offer as management could stonewall; however, by waiting until a definitive agreement is signed, the board was formally obliged to consider alternatives.

• After likely receiving a tepid or non-committal response during the last few days, Hillhouse escalated its campaign. On August 20, it went public by filing a Schedule 13D. This filing disclosed its 14.4% ownership stake and, crucially, attached the full letter sent to the board (link), making the superior offer and Hillhouse's grievances known to all shareholders and the market at large. This was a deliberately aggressive and strategic move designed to force the board's hand and prevent the offer from being quietly dismissed behind closed doors.

The Governance Paradox: Gan's Enduring Role

The emergence of Hillhouse as a competing bidder created an immediate and profound conflict of interest for Jiawei Gan. However, contrary to standard governance expectations, public announcements indicate that the Special Committee—which includes Mr. Gan and was formed in January 2025—will continue to evaluate all proposals. This leaves the committee in a precarious position. The director most aligned with the superior offer from Hillhouse is not an outside agitator but an inside participant, whose every action and vote will be viewed through the lens of his dual loyalties. This unusual situation intensifies the scrutiny on the committee's process and its eventual recommendation.

The timeline of these events reveals a potential strategic miscalculation by the Trustar consortium and the Special Committee. They appear to have underestimated Hillhouse's resolve and its willingness to engage in a public fight. The Trustar group likely viewed Gan's presence on the board as a manageable issue, perhaps assuming he would object internally but would ultimately be powerless against their near-majority voting bloc. They did not seem to anticipate that his affiliation with Hillhouse would be leveraged to launch a full-fledged, public competing bid.

The Special Committee's failure to run a market check or engage with a known major shareholder like Hillhouse—which was also an early investor in the company—looks, in hindsight, either negligent or deliberately biased toward the management bid. Hillhouse's decision to go public via the 13D filing was a direct and forceful response to this insular process. They understood that a private letter could be ignored. Still, a public filing creates a legal and reputational crisis for a board of directors if they fail to engage seriously with a manifestly superior offer. The timeline shows a reactive board being forced into a corner by a proactive and legally sophisticated shareholder.

Legal Hardball: Hillhouse's Strategy and the Board's Dilemma

Hillhouse's approach extends far beyond simply offering a higher price; it is a masterclass in applying legal and procedural pressure to force a fair outcome.

The "Superior Proposal" Gambit

The letter from Hillhouse to the Energy Monster board is a piece of precise legal craftsmanship. By explicitly labeling its $1.77/ADS offer a "Superior Proposal," Hillhouse is invoking a specific legal term of art defined within the existing merger agreement with Trustar. This language triggers specific clauses that compel the Special Committee to formally evaluate the offer in good faith to determine if it meets the agreement's definition—typically an offer on terms more favorable to shareholders. A failure by the committee to conduct this evaluation properly would constitute a breach of the merger agreement itself, in addition to a violation of their broader fiduciary duties.

Weaponizing Fiduciary Duty

The letter further states that Hillhouse is "gravely concerned" that the board may disregard shareholder interests in favor of the inferior insider deal. This is a thinly veiled warning shot, laying the groundwork for future shareholder litigation. Energy Monster is incorporated in the Cayman Islands, and under Cayman law, directors have a fiduciary duty to act bona fide (in good faith) in what they believe to be the best interests of the company, which in a sale context translates to securing the best value reasonably available for shareholders. Ignoring a 42% higher, fully-funded, all-cash offer would be an almost textbook violation of this duty, exposing the directors to personal liability

The Nuclear Option: Cayman Appraisal Rights (Section 238)

This is Hillhouse's ultimate point of leverage. Should the board and the insider consortium somehow manage to force through the $1.25 deal, Hillhouse has a powerful legal remedy. With its 14.4% stake, it can formally dissent from the merger vote and then petition the Grand Court of the Cayman Islands to conduct a judicial proceeding to determine the "fair value" of its shares under Section 238 of the Cayman Islands Companies Act.

This represents a nightmare scenario for the buyer group. Cayman appraisal cases can be lengthy, expensive, and unpredictable. Crucially, in recent years, the court has shown a willingness to award fair values significantly above the merger price, especially in cases where the sale process is shown to have been flawed, non-competitive, or tainted by conflicts of interest. The mere threat of such a proceeding is a powerful deterrent. It forces the Special Committee and the Trustar group to weigh the cost of increasing their bid against the certainty of incurring massive legal fees, significant delays, and the substantial risk of a court forcing them to pay a higher price anyway.

Hillhouse is not just making a higher offer; it is systematically dismantling the legal and procedural defenses of the incumbent buyout group. The Trustar deal was built on three pillars: 1) a signed definitive agreement, 2) a nearly locked-up voting majority, 3) a compliant board. Hillhouse's "Superior Proposal" language attacks the signed agreement, using its own terms as a weapon against it. The public nature of the bid and the explicit invocation of fiduciary duties attack the notion of a compliant board, placing the directors under an intense legal and reputational microscope where simply rubber-stamping the lower deal becomes toxic. Finally, the potent threat of appraisal rights attacks the economic calculus of the voting majority, demonstrating that even if they "win" the shareholder vote, they could still lose in court. This multi-pronged legal strategy transforms the situation from a simple vote into a complex negotiation where both the board's process and the deal's ultimate price are effectively on trial.

The Arbitrageur's Calculus: Scenario Analysis and Valuation

The following table synthesizes our perspective on potential outcomes, assigning subjective probabilities to each based on our qualitative and quantitative understanding of the situation.

The Bear Case: Key Risks to the Thesis

While the risk/reward profile appears highly favorable, several significant risks could derail the investment thesis.

Management Entrenchment: The most significant risk to a superior outcome is the potential for management entrenchment. CEO Mars Cai and the founding team may prefer to partner with Trustar for non-economic reasons, such as retaining greater operational control or a more favorable management equity package in the privatized entity. They could refuse to cooperate with Hillhouse—whose offer is conditional on management rollover—thus making the competing bid non-viable. They could then pressure the Special Committee to find a pretext to reject the Hillhouse offer and proceed with the original deal, leveraging their 64% voting bloc as a formidable weapon.

Deal Collapse / Stalemate: A bidding war could turn hostile, leading to a stalemate where neither party is willing to proceed. If Trustar were to terminate its agreement in frustration and Hillhouse could not secure the necessary cooperation from management to sign a new one, both deals could collapse, leaving shareholders with no M&A catalyst at all.

In his 2020 letter to shareholders, Warren Buffett made a rare and candid admission: he had made a "big mistake". The mistake was overpaying Precision Castparts (PCC) in 2016, a world-class manufacturer of aerospace components headquartered in Portland that Berkshire Hathaway acquired for a staggering $37 billion at 12x EBITDA. Buffett was clear: PCC was a "fine company — the best in its business," but he had been "too optimistic about PCC's normalized profit potential" and, consequently, was "wrong in my calculation of the proper price to pay".

The episode is a masterclass in one of investing's core tenets: even the best business can be a poor investment if you pay too much. The table below depicts the difference between the 2015 management internal forecasts and PCC’s actual P&L over the past decade:

But what if you could get a second chance? What if you could invest in a similar high-quality, mission-critical industrial powerhouse, but at a price that doesn't require Buffett-like optimism? What if that company was not only navigating the cyclical downturns that plagued PCC but was also pivoting to become a key supplier to the two most powerful secular growth stories of our time: the AI revolution and the aerospace supercycle?

That opportunity exists today in a little-known, Hong Kong-listed company: Impro Precision Industries (1286.HK). The market is valuing Impro like a run-of-the-mill cyclical, completely missing its transformation. While Buffett paid for 12x EBITDA on peak earnings / ROIC for PCC, we believe one can currently buy Impro Precision Industries on less than 5x EBITDA on trough earnings / ROIC.

And the one person with the most information on the planet—the founder and CEO who owns ~72% of the company—is screaming that it's undervalued, deploying over HK$420 million of his cash to buy up shares on the open market (link) over the past 2 years.

The Big Picture: A Business in a Two-Speed World

At first glance, Impro looks like many other global industrial manufacturers. It's a top-10 global player in high-precision, high-complexity cast and machined components, with a diversified business spanning automotive, construction, agriculture, and more. This diversification has been a source of strength, allowing it to weather downturns in any single industry.

But look under the hood, and you'll see a company operating in a two-speed world. While its legacy markets like construction and agriculture are facing predictable cyclical headwinds—corroborated by commentary from key customers like Caterpillar —two of its segments are hitting escape velocity, powered by secular, multi-year tailwinds.

1. The AI Data Center Revolution (High Horsepower Engine Segment)

2. The Aerospace Supercycle (Aerospace Segment)

These two engines of growth are fundamentally reshaping Impro's earnings profile, making it higher quality, more predictable, and deserving of a much higher valuation multiple.

Company Overview: A Vertically Integrated, One-Stop Solution

Impro Precision is a global top-10 manufacturer of high-precision, high-complexity, and mission-critical casting and machined components. Founded in 1998, the company has evolved into a sophisticated and globally diversified industrial technology leader with an A-tier list of clients and award wins, including Caterpillar, Cummins, Honeywell Aerospace, Boeing, and Airbus (link).

The core of Impro's competitive advantage lies in its "one-stop solution" business model. Unlike smaller competitors that may specialize in a single process, Impro offers a fully integrated suite of capabilities that spans the entire production lifecycle. This includes initial research and development, tooling design and manufacturing, casting (both investment and sand), secondary precision machining, heat treatment, and surface treatment. This comprehensive offering allows Impro to deliver fully finished, ready-to-use products directly to its customers' assembly lines. This integration simplifies the supply chain for its clients, reduces logistical complexity, ensures quality control across the entire process, and ultimately creates a much stickier, long-term partnership that is difficult for competitors to displace.

The foundation of Impro's global competitive advantage lies in its extensive and highly advanced operations in China. The company is a dominant force in the industry, recognized as the world's fifth-largest independent investment casting manufacturer and the largest in China. We believe this offers a unique set of cost advantages versus many of Impro’s key international competitors, which historically are German-based. Faced with declining demand for European automobiles, combined with high labour and energy costs (typically 30-40% COGS), key competitors including Gienanth, have gone bankrupt, directly resulting in increasing orders to Impro.

Further, progressively expanding Impro's global footprint is a key tenet of its strategy. The company operates 21 production facilities and nine sales offices strategically located in China, Turkey, Germany, the Czech Republic, and Mexico. The most significant of which is Impro's massive investment in its San Luis Potosi (SLP) campus in Mexico. Situated on a sprawling 68-acre site, the SLP campus was conceived from the ground up as a fully integrated, "one-stop solution" for the North American market. The campus is a comprehensive manufacturing hub, featuring five distinct plants: a Precision Machining Plant, a Sand Casting Plant, an Investment Casting Plant, an Aerospace Components Plant, and a Surface Treatment Plant.

Dual Pillar Strategy

The true power of Impro's strategy lies in the deep operational synergy between its Chinese and Mexican pillars. The SLP campus was explicitly designed to be a beneficiary of the company's global expertise. The company notes that the campus is "built upon the cumulative operational wisdom of Impro employees and best practices of Impro plants worldwide". This is not merely a statement of philosophy; it is a documented operational reality. Impro has executed a deliberate program of talent transfer, relocating experienced personnel in critical disciplines such as plant management, process engineering, quality assurance, and logistics from its established foundries in China to its new operations in Mexico. These individuals serve as "cultivators of Impro culture and operating genes," ensuring that the company's decades of operational excellence and stringent quality standards are replicated faithfully within its North American hub. This demonstrates a long-term vision to create a seamless global production system where institutional knowledge and best practices flow freely across continents.

This dual-pillar structure creates a formidable competitive moat. A purely Chinese-based competitor remains fully exposed to US tariffs and the geopolitical risks of the US-China relationship. A purely North American competitor, on the other hand, faces significant disadvantages. While President Trump continues to push his MAGA directive, the reality is: The U.S. domestic casting and forging industry has been contracting for years, leading to capacity constraints, a critical shortage of skilled trade professionals, and a general hesitancy among suppliers to invest in new capacity after recent boom-and-bust cycles. According to the National Defence Industrial Association,” Over the past two decades, more than 241 forging plants have closed or consolidated, and more than 21,000 jobs have been lost, mostly due to foreign competition. ”

By integrating its operations, Impro circumvents these challenges. It leverages the unparalleled scale and technical expertise of its Chinese foundries for the most challenging upstream processes while utilizing its Mexican hub for tariff-advantaged, logistically superior final production. This "best of both worlds" model allows Impro to offer a value proposition of quality, cost, and reliability that is exceedingly difficult for rivals rooted in a single region to match.

2.2. Analysis of Top Three Key Revenue Growth Drivers (Fast Growers represent ~40% of Group Revenues in FY25)

While Impro's diversification has historically provided stability, the company's future growth is now being disproportionately driven by three powerful, secular, and interconnected trends. These drivers are fundamentally reshaping the company's earnings profile from cyclical to structural growth.

Fast-growth segments (which include high horsepower engines, aerospace, and medical accounts) grew at 14% p.a. between 2019 and 2024, now account for 1/3 of the revenues, and will likely exceed 50% of revenues by 2026.

2.2.1. Driver 1: The AI Data Center Revolution (High Horsepower Engine Segment ~20% Group Revenues)

The standout performer in Impro's portfolio has been the High Horsepower Engine (HHE) segment. In FY2024, this segment's revenue surged by an astonishing 58.6% year-over-year to HK$785.8 million, growing from 10.8% to 16.8% of the Group's total revenue, with positive growth acceleration in 2H, from 43% to 75%.

In contrast to and $2722.hk, which we have written about extensively in our previous research, Impro’s AI exposure differs significantly in two aspects:

1. Impro serves both International and Chinese domestic clients, with America accounting for 50% of group revenues. By contrast, Chinese domestic revenues only account for 17.5% of the group’s total revenues in 2024.

2. Rather than directly manufacturing/assembling engines, Impro produces a range of key components used in the assembling of engines, including: Cylinder Block, Cylinder Head, and flywheels for leading manufacturers, including Cummins, MTU-Yuchai, and Weichai.

   

2.2.2. Driver 2: Riding the Aerospace Recovery Wave

Impro's Aerospace segment delivered decent performance in FY2024, with revenue growing 26.8% year-over-year to HK$538.6 million and accounting for 11.5% of total sales. This robust growth was achieved despite well-publicized production issues at its key downstream customer, Boeing, which impacted demand in the second half of the year, indicating the powerful underlying momentum in the business. Overall, with a resumption in Boeing Max deliveries, this bodes well for the second half of the 2025 outlook compared to the cautious tone of management at the end of 2024.

The commercial aerospace market is amid a multi-year supercycle. After the pandemic-induced trough, a combination of pent-up travel demand and the need to replace aging fleets is driving unprecedented demand for new aircraft. Global aerospace industry revenues are projected to grow 12% in 2025, with aircraft deliveries forecast to surge by 23%. Both Boeing and Airbus are sitting on massive, multi-year backlogs that will take the better part of a decade to clear, suggesting that demand will continue to outstrip supply for years to come.

2.2.3. Driver 3: The Nearshoring Advantage (Mexico SLP Campus)

A cornerstone of Impro's long-term strategy is its "Global Footprint" initiative, the most significant manifestation of which is the ongoing development of a large-scale manufacturing campus in San Luis Potosí (SLP), Mexico. This is a major strategic investment, with the company committing to spending over US$300m on the project's completion and expansion. Phase I of the campus, comprising five plants, is now largely complete, and Phase II construction has already commenced to meet the burgeoning demand for high-horsepower engine components in North America.

The strategic rationale for this campus extends far beyond simple labor arbitrage or logistics savings. It is a direct response to the shifting sands of global trade and the increasing premium that North American OEMs place on supply chain resilience and regionalization. The trade tensions between the U.S. and China, compounded by the severe disruptions experienced during the COVID-19 pandemic, have fundamentally altered the risk calculus for major industrial companies.

By establishing a state-of-the-art, multi-process manufacturing hub in Mexico, Impro is transforming its value proposition to its North American customers. It is evolving from a "China-plus" supplier into a genuine "local-for-local" manufacturing partner for clients like Caterpillar and Cummins. This move serves as a critical geopolitical hedge, insulating a growing portion of its business from potential tariffs and logistical bottlenecks associated with its Chinese operations. More importantly, it allows for deeper integration into its customers' North American R&D, product development, and just-in-time production cycles. This strategic proximity and alignment can unlock opportunities for new, higher-value business that might have previously been inaccessible to a purely China-based supplier due to country-of-origin requirements or internal risk assessments. The Mexico campus is therefore a powerful de-risking agent for the business and a catalyst for future growth that should command a higher valuation multiple for the revenue streams it generates.

However, as Mexico remains in the ramp-up phase, this business is currently loss-making on an EBITDA and operating profit basis, depressing wider group earnings.

2.3. Navigating the Cycle in Legacy Markets (~60% of group revenues in FY25)

While the secular growth drivers are reshaping the company, Impro's legacy segments remain exposed to traditional economic cycles. Between 2019 and 2024, slow-growth segments grew topline at 2% CAGR.

The Construction and Agricultural Equipment segments are currently facing a cyclical downturn, with revenues declining by 6.7% and 23.0%, respectively, in FY2024. This weakness is corroborated by commentary from key customer Caterpillar, which reported a 19% sales decline in its Construction Industries segment in its most recent quarter, citing changes in dealer inventories and softening demand. Broader industry forecasts predict that the global construction equipment market will experience another year of negative growth in 2025 before a recovery begins to take hold in 2026, with the key North American market expected to decline by as much as 11% in 2025.

The Automotive segment, Impro's historically most significant end-market, accounting for 1/3 of group revenues, saw a modest 3.2% sales decline in FY2024, with a 2.0% increase in passenger car components being offset by an 8.3% drop in the commercial vehicle market. This segment is navigating a complex environment characterized by macroeconomic uncertainty, high interest rates impacting consumer demand, and the ongoing, capital-intensive transition from internal combustion engines (ICE) to electric vehicles (EVs). However, despite the well-publicized demise of the auto industry, we believe leading peers, including Impro, pure-play Chinese peer Changyuandonggu, and Mexican pure-play Nemak, have all managed the transition responsibly well, reporting stable gross profits despite significant headwinds from EV adoption.

Section 3: Management and Corporate Governance: Founder's Conviction Signals Deep Value

3.1. Management and Board Structure

Impro Precision is a founder-led organization, a characteristic often associated with long-term strategic vision and a deep commitment to the business. Mr. Lu Ruibo, who founded the company in 1998, continues to serve as both Chairman of the Board and Chief Executive Officer.

The company acknowledges in its corporate governance report that this dual role represents a deviation from the Hong Kong Stock Exchange's Corporate Governance Code, which recommends the separation of these positions to ensure a balance of power and authority. The Board justifies the current structure by highlighting Mr. Lu's foundational role and extensive experience in guiding the Group's growth, which it believes is in the best interests of the company. This risk is mitigated by a strong board structure, which includes a majority of independent non-executive directors on its key committees, and a board composition of four executive directors and three independent non-executive directors, ensuring a significant independent element to provide oversight and challenge.

3.2. Capital Allocation and Shareholder Returns

Impro's capital allocation strategy reveals a strong and direct commitment to delivering shareholder value, though it manifests in a manner that is distinct from many of its peers.

The company has demonstrated a robust and consistent dividend policy. For FY2024, a total dividend of 16.0 HK cents per share was declared, which equates to a dividend payout ratio of approximately 49% of the adjusted profit attributable to shareholders. This commitment is not a recent development. Since its IPO in June 2019, Impro has distributed cumulative dividends of approximately HK$1.16 billion. Remarkably, this figure exceeds the total proceeds of HK$1.15 billion that the company raised from its public offering, signaling a powerful commitment to returning capital to its owners.

While the company has a general mandate from shareholders authorizing the repurchase of up to 10% of its outstanding shares, there is no public record of the company having executed any corporate share buybacks. This is a notable point of divergence from many publicly listed companies that utilize buybacks as a primary method of returning capital.

However, the absence of corporate buybacks is overwhelmingly compensated for by a far more powerful signal of intrinsic value: massive and repeated insider purchases by the Chairman and CEO. Through his personal holding company, Mr. Lu Ruibo has engaged in a significant program of acquiring additional shares on the open market. Since the beginning of 2022, he has executed seven separate purchase transactions, accumulating a total of 200 million shares for a total consideration of over HK$420 million. This aggressive buying has increased his ownership stake to approximately 71.9%, representing an investment of a substantial portion of his net worth.

Section 4: Valuation: Undervalued and Misunderstood

Our valuation analysis indicates that Impro Precision remains significantly undervalued. The market currently assigns the company a multiple reflective of a low-growth, cyclical industrial business, failing to account for the structural shift in its earnings towards secular growth drivers and its strengthening competitive moat. We believe the half-year results, slated for the 12th of August, could catalyze potential re-rate.

Section 5: Key Investment Risks

An investment in Impro Precision is subject to several key risks that must be considered:

• Geopolitical and Regulatory Risk: With a significant portion of its manufacturing assets still located in China, the company is exposed to the ongoing trade and political tensions between the U.S. and China. While the Mexico facility mitigates this risk, it is not eliminated. Further, the United States government and regulatory bodies are increasingly aware of and concerned about Mexico's role as a potential "backdoor" for Chinese goods to enter the US market and circumvent tariffs. Trade data clearly shows a surge in Chinese investment in Mexico and a corresponding increase in Mexican imports of Chinese intermediate goods, particularly in the automotive sector. This trend will undoubtedly be a central focus of the USMCA's scheduled joint review in 2026. At that time, the Rules of Origin or provisions related to investment from non-market economies could be significantly tightened.

• Execution Risk: The successful and timely ramp-up of the Mexico SLP campus is a critical component of the investment thesis. The project is large and complex, and any significant construction delays, equipment installation issues, quality control problems, or cost overruns could negatively impact the company's financial results and delay the realization of the facility's strategic benefits. Furthermore, currently the facility is under specific regulatory inquiry initiated by the United States regarding labor practices at the Mexico facility, which represents a tangible near-term risk that could result in financial penalties, reputational damage, or operational disruptions (link).

• Key Person Risk: The company's strategy and vision are heavily influenced by its founder, Chairman, and CEO, Mr. Lu Ruibo. His deep industry knowledge and entrepreneurial drive are significant assets. Furthermore, his ~72% ownership stake gives him effective control over the company's strategic direction. His unexpected departure would create a leadership vacuum and significant uncertainty for the business.

We believe we have identified another setup in Singapore, offering diversified exposure to the world’s most highly sought-after Real Estate, coupled with exposure to the world’s most powerful drone company. This business has many parallels with Hong Leong, as Hong Leong’s subsidiary, China Yuchai Limited which we previously also profiled, was the largest external shareholder until 2019.

Furthermore, the ability to acquire such a defensively diversified portfolio of assets at ~6x normalized earnings and more than 50% discount to our intrinsic NAV assessment represents a highly compelling risk-reward.

The new board also appears to agree with our evaluation, not only beginning to buy back shares at prevailing market prices, but also actively communicating its intentions to the market.

1.1 The Thakral Story: A Century of Adaptation

Thakral Corporation’s ($AWI.SI) history is a compelling narrative of entrepreneurial adaptation and strategic evolution spanning over a century. The Group's origins trace back to 1905 when Sohan Singh Thakral, after years of peddling textiles in Bangkok, established a retail shop named Punjab Store. An early indication of the family's forward-thinking business acumen emerged in 1936 with the opening of a branch in Japan, a strategic move that provided direct access to textile suppliers and improved margins.

The modern iteration of the Group began to take shape in 1952 when a 19-year-old Kartar Singh Thakral was tasked with establishing a Singapore branch, Thakral Brothers. Under his leadership, the business underwent its first major transformation. Recognizing the immense potential in emerging technologies, Kartar Thakral pivoted the company into electronics distribution in 1975. By leveraging its long-standing presence in Japan, the company secured crucial distribution rights for major Japanese consumer electronics brands, positioning it perfectly to capitalize on the global electronics boom of the 1970s and 1980s.

This venture grew so substantial that Thakral Corporation was established as a separate entity in 1982 and was subsequently listed on the Mainboard of the Singapore Exchange in December 1995. The company further demonstrated its strategic agility by successfully penetrating the Chinese market with these electronics brands as soon as the country reversed its communist policies, leveraging a textile business presence it had maintained there since the 1960s.

1.2 The Strategic Pivot to Asset-Backed and Lifestyle Ventures

As the consumer electronics market matured and became saturated, the Group executed its next major strategic pivot, shifting from a trading-focused business model to one centered on long-term, asset-backed investments. This transition reflects a deliberate decision to build a more resilient and predictable earnings base, moving away from the inherent cyclicality and lower margins of pure distribution.

The initial foray into real estate involved the creation of an Australian publicly listed entity, Thakral Holdings Group, which grew to become one of the largest foreign owners of hotels in Australia, including Melbourne's Hilton on the Park, The Menzies in Sydney, Sofitel hotels in Queensland's Brisbane Central and Gold Coast as well as Novotel Hotels on the eastern seaboard. In 2012, Brookfield Asset Management eventually acquired its Australian assets at a 50% premium to market price, but a 20% discount to NTA as the market became clouded over the Eurozone crisis.

The contemporary investment strategy of Thakral Corporation crystallized in October 2010 with the Group's first direct real estate investment in a property project in Melbourne, Australia. This was followed by the establishment of TCAP Pte Ltd in 2011 to formalize the origination and management of real estate projects. The company expanded into Japan's property market in 2013 with the acquisition of commercial buildings in Osaka.

However, the most transformative move was the 2015 joint venture with the Puljich family, seasoned operators of over-50s lifestyle resorts in Australia. This venture, officially branded as GemLife in 2016, marked Thakral's entry into the highly attractive land-lease community sector, an asset class characterized by strong demographic tailwinds and stable, recurring revenue streams. The Group's journey is aptly summarized by its CEO, who noted, "We've re-invented ourselves from VCRs to Drones", a statement that encapsulates a century-long history of successful adaptation and forward-looking strategy.

2.0 Analysis of Core Business Segments: Dual Engines of Growth

Thakral operates through two primary segments—Investments and Lifestyle—which function as dual engines driving the Group's growth. The Investment division provides a stable, asset-backed foundation with long-term recurring income. In contrast, the Lifestyle division targets high-growth consumer trends with a more capital-light, high-turnover business model.

2.1 GemLife: The Crown Jewel (~50% of NAV)

GemLife, Thakral's Australian property investment, has evolved into the Group's most valuable asset, representing ~50% of group NAV and a leader in the premium over-50s lifestyle resort sector.

Why anyone would want exposure to Australian property assets would be a reasonable question for any value investor to ask, considering Australia is well documented as having one of the world’s most expensive property markets by any value measure.

We believe this is justified by the fact that, despite expensive property prices, Australian cities generally rank extremely high by any global livability index measure, as shown below.

Furthermore, Australia distinguishes itself from other Scandinavian countries that rank equally high on such surveys by being a migrant friendly country, with approximately 30% of the Australian population born overseas.

Do you aspire to have a better quality of life by moving to Zurich? It's better to start learning Swiss German early; knowing only High German may not be enough.

Despite the valuation, for Chinese buyers, who have historically been the largest foreign buyers of Australian property in recent years, this is a simple value trade given that Chinese property is even more expensive on a price-to-income basis.

Chinese buyers aside, it is also an open secret that other wealthy investors are also buying property across Australia and New Zealand like candy, with German-born Peter Thiel allegedly building Doomsday bunkers in New Zealand.

Business Model: GemLife operates under the Land Lease Community (LLC) model, the details of which can be found in the company’s prospectus (link). It is a financially compelling structure that benefits from two distinct and complementary income streams. First, the company generates upfront development profits from the sale of high-quality, prefabricated homes to residents. Second, and more critically for long-term value, it collects recurring, inflation-adjusted weekly site fees from homeowners who lease the land on which their homes are situated. This creates a growing annuity-like income stream that provides excellent revenue visibility and stability.

Scale and Growth Pipeline: Since its inception as a joint venture in 2015, GemLife has experienced rapid growth. As of March 2025, it had 1,862 occupied homes across its resorts, generating an estimated A$19.4 million in annual recurring site fees. The growth trajectory is well−defined, with a total development pipeline of approximately 6,500 homes, providing a clear roadmap for expansion through to 2033.

IPO and Value Crystallization: In a landmark event for Thakral, GemLife completed its IPO on the Australian Securities Exchange (ASX: GLF) on July 3, 2025. The offering raised A$750 million at a market, providing a transparent and public valuation for the asset. Following the IPO, Thakral's stake was diluted from 31.7% to a still substantial 16.8%, a holding that remains a cornerstone of its investment portfolio.

As Gemlife uses a stapled-security trust structure – a structure only familiar to Australian investors and designed to minimize tax leakage - Thakral provided an update to the market on the financial implications, which result in a near doubling of its statutory NTA, as shown below.

However, as we highlight in the valuation section later, even this NTA likely significantly undervalues the company, with our fair NAV assessment at over S$3.00.

Furthermore, as Gemlife had previously operated with extremely high leverage as a private entity, Thakral extended S$28.4 million of debt to Gemlife in 2024. With the repayment of such debt at Gemlife’s IPO, this also frees up significant capital at the corporate level. The company has begun actively repurchasing shares on the market after halting its activity at the end of 2024.

2.1.2 Core Property Portfolio: Stable Anchors in Japan and Singapore (~20% of NAV)

Complementing the high-growth GemLife venture is a portfolio of stable, income-generating commercial properties in Japan and Singapore.

Japan: Thakral has a long and distinguished history in Japan, dating back to 1935. Today, its Japanese portfolio consists of six landmark commercial office buildings and one hotel in Osaka, the country's second-largest city and one of the world's 7th most livable cities, as shown in our diagram above.

These assets serve as a cornerstone of stability for the Investment division, generating strong and consistent rental income, underpinned by a high average occupancy rate of 96%. The Group actively manages this portfolio, opportunistically recycling capital through strategic divestments, such as the profitable sales of the Riverpoint Kitahama Building and Hotel WBF Namba Motomachi. Overall, the demand/supply dynamics look quite positive for Osaka over the foreseeable future

Singapore: The Group owns an office property at The Riverwalk, located in a prime area along the Singapore River. This asset provides another steady stream of recurring rental income, contributing to the overall resilience of the Investment division's cash flows.

2.2 The Lifestyle Division: Tapping into High-Growth Consumer Trends (~20% of NAV)

Thakral’s transformation from a loss-making China-centric electronics distributor to a consistently profitable and geographically diversified value-added partner of choice over a decade timeframe is simply remarkable in our view.

In a testament to its capabilities, DJI, the world’s largest drone manufacturer with 70% market share, chose Thakral as its exclusive distributor in 7 countries across South Asia.

The business has historically lost around S$10 million per annum since 2012, during its transformative years. However, since 2022, the company has been consistently profitable (even factoring in all corporate overheads) and generated an operating profit of S$10.2m in 2024, representing a 90% year-over-year increase, according to our calculations.

2.2.1 The Drone Revolution: An Ecosystem Strategy (~50% of Lifestyle Division’s Revenue and even higher profit contribution)

Thakral’s entry into the drone market is a masterclass in strategic execution, replicating the successful playbook from its electronics distribution era. The company identified the drone sector as a key long-term growth area and moved decisively to establish a dominant position in South Asia, highlighting in its 2015 annual report: “The Lifestyle Division has also transformed its portfolio with new products such as drones and a stabilized digital action camera manufactured by DJI, the world leader in drones”.

For those unfamiliar with DJI, this US select committee hearing provides an American perspective into the business (link).

Core Partnership: The cornerstone of the strategy is the exclusive distribution partnership with DJI, the undisputed global leader in drone technology, with over 70% market share.

Thakral holds the rights for DJI's full range of consumer, enterprise, and agricultural drones across seven South Asian countries, with India being the key focus market.

Building the Ecosystem: Thakrel’s strategy extends beyond mere distribution to create a defensible, integrated ecosystem.

• Upstream Integration (Components): To capture a larger share of the value chain, the Group established Bharat Skytech, a B2B subsidiary that specializes in critical drone components and batteries. This unit supplies local drone manufacturers in India, positioning Thakral as a pivotal player in the development of the domestic drone industry. Bharat Skytech has already commenced generating revenue, marking a key operational milestone.

• Downstream Integration (Software & Services): Recognizing that hardware is only part of the solution, Thakral has invested in Skylark Drones, an India-based leader in enterprise drone software and services. In 2024, Thakral increased its stake in Skylark to 23%, solidifying its access to the high-margin software layer of the drone economy.

This comprehensive approach—partnering with the global hardware leader while simultaneously investing in the local component and software ecosystem—provides Thakral with multiple avenues for growth and a significant competitive advantage. The strategic acquisition of an existing Indian company in late 2023 provided the on-the-ground infrastructure and a team of approximately 130 employees, allowing the Group to bypass years of organic setup and scale the DJI business rapidly.

2.2.2 Beauty, Fragrance & Nespresso

The Group manages and distributes a portfolio of leading beauty and fragrance brands, including Maison Margiela, Ralph Lauren, and Miu Miu, primarily in the lucrative Greater China market. This is complemented by strategic investments designed to capture upside from adjacent high-growth areas.

A key example is its equity stake in The Beauty Tech Group (formerly CurrentBody.com), a global leader in at-home beauty devices. This investment has already yielded unrealized valuation gains, and The Beauty Tech Group is exploring a potential IPO on the London Stock Exchange, which could serve as another significant value-unlocking event for Thakral. Currently, Beauty Tech Group is held on Thakral’s books at ~S$17m; this stake alone could be worth over S$50m at the rumored IPO price of £350m.

Further demonstrating its ability to secure partnerships with premier global brands, Thakral obtained the official distribution rights for Nespresso in India. It launched a dedicated e-commerce platform in December 2024, followed by the opening of the first Nespresso boutique in a premier New Delhi mall in March 2025, positioning it to capture the rapid growth in India's premium coffee market.

3. Governance and Capital Allocation: Prudent Stewardship for a New Era

Thakral's corporate governance framework has undergone a significant and positive evolution, striking a balance between the long-term vision of its founding family and robust independent oversight. The Board of Directors is structured with a majority of non-executive directors, and independent directors constitute half of the board, ensuring no single individual or group can dominate decision-making.

A pivotal moment in this evolution occurred at the April 2025 Annual General Meeting with the retirement of the Group's 91-year-old founder, Mr. Kartar Singh Thakral. This generational transition was accompanied by the landmark appointment of Mr. Lim Swe Guan as the new Independent Non-Executive Chairman. Mr. Lim's distinguished career includes senior roles at the Government of Singapore Investment Corporation (GIC), where he was the Global Head of the Corporate Investments Group for real estate.

His appointment brings an exceptional level of institutional credibility, deep real estate expertise, and a rigorous governance mindset to the board's leadership. This is not merely a procedural change but a powerful, deliberate signal to the market of the company's commitment to professionalizing its governance to attract institutional capital.

While the Thakral family remains deeply involved, ensuring continuity and a strong alignment of interests with shareholders, a blend of seasoned family leadership and enhanced independent oversight creates a robust governance structure.

Already, we are beginning to see early signs of change, with the company taking a much more proactive approach to investor relations activities, which culminated in its first analyst research published in June 2025 (link).

This mirrors the approach that we have seen at Hong Leong Asia and China Yuchai. In fact, CYD (and by extension H22) was the largest shareholder in Thakral up until 2018, highlighting the close intertwined fortunes of two of Singapore's wealthiest dynasties.

Thakral’s management has demonstrated a disciplined and shareholder-focused approach to capital allocation, utilizing a dual strategy of consistent dividend payments and opportunistic share buybacks to deliver industry-leading returns to shareholders.

The company has a long and consistent history of returning capital to shareholders through biannual dividends. This commitment is formalized in a dividend policy, effective from FY2025, which targets a payout that is the higher of a base payment of 4.0 Singapore cents per share or approximately 20% of the net profit attributable to shareholders. With the IPO of Gemlife and the potential listing of Beauty Tech Group, we believe substantial opportunities also exist for special dividends beyond what’s already publicly announced.

In addition, the Board maintains an active and regularly renewed Share Buyback Mandate, with the authority to repurchase 10% of its shares outstanding at present. Most recently, the board purchased shares in July 2025 at a price of up to S$1.40, while the board has stopped repurchasing shares as of the 11th, we believe this is to satisfy listing rules as the company is prohibitied purchasing shares one month immediately preceding the announcement of its half-year and full-year financial results (slated for the close of trading on Wednesday August 13th).

4.0 The GemLife IPO: A Transformative Financial Catalyst

The IPO of GemLife on the Australian Securities Exchange was more than a liquidity event; it was a transformative catalyst that fundamentally reset the financial position and valuation proposition of Thakral Corporation.

For years, the substantial value of GemLife was embedded within Thakral's balance sheet as an investment in an unlisted associate, making it difficult for the market to accurately assess. The IPO crystallized this value by assigning it a transparent, public market capitalization of A$1.58 billion. This event effectively removed the valuation ambiguity and forced a re-evaluation of Thakral's intrinsic worth. Demonstrating its long-term belief in the venture, Thakral subscribed for additional shares during the IPO, cementing a final holding of 16.8%. This entire stake is subject to escrow arrangements until at least mid-2026, ensuring a strong alignment of interests with new GemLife shareholders.

The IPO also triggers a crucial change in accounting treatment. With its stake falling below 20%, Thakral will no longer use the equity method to account for GemLife. Instead, it will be treated as an "investment at fair value through profit or loss". This means that going forward, Thakral's income statement will no longer include a share of GemLife's profits. Instead, it will reflect two new items: dividends received from GemLife and periodic, non-cash fair value adjustments based on the movement of GemLife's share price on the ASX. This will make Thakral's reported earnings more volatile but also more directly reflective of the public market's valuation of its key asset.

5.0 Sum-of-the-Parts (SOTP) Valuation

To determine the intrinsic value of Thakral's diversified portfolio, the Sum-of-the-Parts (SOTP) valuation methodology is the most suitable approach.

6.0 Key Risks: The most significant risk to our thesis lies in Gemlife, given that it accounts for nearly 50% of the group’s valuation

Regulatory Scrutiny and Peer Contagion Risk: The Australian LLC sector has recently faced heightened scrutiny following a landmark ruling by the Victorian Civil and Administrative Tribunal (VCAT) against peer operator Lifestyle Communities (ASX: LIC). The tribunal declared LIC's Deferred Management Fee (DMF), or exit fee, clause void because it was calculated on the future sale price of a home, which was not a quantifiable amount at the time of contract signing as required by Victorian law. This ruling triggered a severe decline of over 38% in LIC's share price and created uncertainty about potential liabilities from refunding past fees, estimated to be as high as $250 million. It is critical to note that GemLife's business model is fundamentally different and is insulated from this specific risk, as it does not charge exit fees. However, the case has drawn negative media attention to the sector and may lead to broader regulatory changes, particularly in Victoria, which could impact all operators.

Property Price Dependency: The LLC model is intrinsically linked to the broader residential property market. GemLife's target customers are typically downsizers who fund their purchase by unlocking equity from their existing family homes. A significant or prolonged downturn in Australian house prices could reduce the amount of equity available to potential buyers, thereby slowing the rate of new home sales and impacting development profits.

Construction Cost Inflation: The Australian construction industry is experiencing significant cost pressures from material price inflation, supply chain disruptions, and skilled labor shortages. These factors can compress developer margins and cause project delays. GemLife is partially insulated from this risk through its vertical integration strategy, which includes in-house construction capabilities and its own concrete production facilities, giving it greater control over costs and timelines compared to peers reliant on third-party contractors. Nonetheless, sustained, industry-wide cost inflation remains a key risk to profitability.

As value-focused investors, our framework is designed to identify mispriced securities where a clear path to value realization exists. Since launching this publication in February 2025, we have navigated a turbulent market by adhering to this process. Below is a summary of our five profiled ideas and their respective performance to date for transparency.

The Problem: A Cheap Stock with Poor Capital Allocation

$2722.HK has long been statistically cheap, currently trading at approximately 0.5x its book value. In our view, this persistent discount is justified, as the company has historically struggled with poor capital management, resulting in value destruction in its core business divisions.

The Catalyst: An Impending Shift Towards Shareholder Returns

• We believe we are at an inflection point. A series of recent, concrete actions signal a fundamental change in corporate strategy, driven by a new board with a strong mandate. Our thesis rests on the following evidence:

  1. New Board with Financial Expertise: On June 12, 2025, the company appointed a new board stacked with executives with strong financial and capital markets backgrounds, suggesting a pivot towards a more shareholder-focused agenda. Link)

  2. Explicit Focus on Dividends: On June 13, a corporate WeChat post explicitly detailed a new focus on capital allocation. Chairman Zhao was quoted emphasizing a focus on dividends, optimizing asset allocation, and improving returns on existing assets. This is a marked shift in public rhetoric. Link)

  3. Unprecedented Transparency and Incentives: On June 20, the company conducted a reverse investor roadshow and published the full transcript—a highly unusual act of transparency in this market. Furthermore, the company is reportedly seeking approval for a new share incentive scheme, which would align management interests directly with shareholders. Link)

Valuation & Precedent Case Study

• The primary driver for a re-rating of $2722.HK is an improvement in capital allocation. We project that a reduction in losses within its core business, combined with a higher dividend payout from its profitable Cummins joint venture, will unlock significant value. Under this scenario, a re-rating to 1.0x book value is conservative, implying a potential 100% upside from the current price.

• Chongqing Department Store: The key actor in the $2722.HK turnaround is Yufu, a financial shareholder. We can see a playbook for their involvement from their role in the turnaround of Chongqing Department Store since 2020. Despite a brutal environment for Chinese retail (where competitor Yonghui's stock halved and peers went bankrupt), Yufu successfully guided the company to stabilize operations, grow earnings and protect shareholder value, demonstrating its capability as a constructive, hands-on investor.

  

• Lastly, for those readers unfamilar with the city of Chongqing, we would highly recommend a visit if you ever stop by China, China Donald Trump Approves!

  

  @trumpbyryanChongqing is a multi layer city#trump #china #chinatravel #chongqing #travelchina #ishowspeed

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The Impossible Trinity of Collectibles: Beanie Babies

In our previous note, we highlighted the challenge of maintaining the impossible trinity:

1. Maintaining Exclusivity & Veblen Status: Preserving Labubu's high perceived value and desirability, which is intrinsically linked to its scarcity and high secondary market prices.

2. Achieving Aggressive Sales Growth & Shareholder Returns: Fulfilling the corporate imperative of a publicly traded company to scale revenue and profit across its intellectual properties, particularly Labubu, to meet elevated market expectations.

3. Ensuring Social Harmony & Favorable Regulatory Environment: Navigating public sentiment by preventing chaotic scenes and managing the adverse effects of scalping, while maintaining positive relations and avoiding intervention from the Chinese state.

This article explores these concepts in greater detail from the perspective of Beanie Babies, one of the greatest consumer trends during the 1990s era and leverages content from the book: “The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute”

Beanie Babies: An Introduction to the Plush Paradox

For those who may not recall, Beanie Babies were small, under-stuffed beanbag animals, typically retailing for around $5. Conceived by Ty Warner in 1993, they were initially intended as "fun playthings for children." However, their unique "floppiness" and "poseability," achieved through PVC pellets rather than traditional stuffing, quickly set them apart from conventional plush toys. This seemingly innocuous innovation laid the groundwork for a speculative frenzy that would transform them from simple toys into coveted investment vehicles, driven by irrational exuberance and the human propensity to chase perceived quick gains.

1. Maintaining Exclusivity & Veblen Status

Warner's genius lay in his meticulous, almost obsessive, attention to product design and a shrewd, albeit often accidental, approach to supply. He personally groomed animals at trade shows, plucking around eyes for "eye contact" and blow-drying fur to enhance thickness, ensuring a perceived high quality.

The cornerstone of Beanie Baby exclusivity was the engineered scarcity. Warner frequently employed a "rolling mix" strategy, discontinuing older styles and introducing new ones, creating a "ticking clock" incentive for buyers. The concept of "retirements" was a masterstroke, initially a serendipitous outcome of supplier issues (e.g., Lovie the Lamb) that was quickly adopted to "plant the seed in consumers' minds that the Beanies they could buy on the primary market for $5 would be retired and immediately take on a higher value on the secondary market." Warner even hoarded over $100 million worth of retired Beanies in a warehouse rather than selling them, a testament to his commitment to maintaining scarcity.

Distribution was tightly controlled, exclusively favoring "mom-and-pop toy and gift shops" and famously refusing to sell to mass merchants like Walmart. This preserved a "special" and exclusive aura, preventing them from being perceived as cheap commodities. Unpredictable shipping schedules and strict order limits further fueled the "Beanie Chase," creating a palpable sense of urgency. Accidental product variations, such as the royal blue Peanut the Elephant (whose color was deemed "too dark" after a few thousand were sold), inadvertently created highly coveted "oddities" that became worth thousands.

However, the pursuit of exclusivity faced significant challenges. The soaring perceived value led to a rampant problem with counterfeits. It was estimated that "roughly one-quarter of Beanies on the market for $1,000 or more were fakes," burning high-ticket collectors and making them reluctant to pay for more rare items.

2. Achieving Aggressive Sales Growth

Beanie Babies initially struggled, with retailers hesitant to order them. However, the combination of engineered scarcity and burgeoning collector interest ignited a remarkable sales trajectory. Word-of-mouth, fueled by children bringing the pocket-sized toys to school, sparked regional interest.

The emergence of early collectors, particularly in the Chicago suburbs, who meticulously tracked variations and traded pieces, laid the groundwork for a broader market. Stories of quick profits, even if exaggerated, spread virally, creating a "feeding frenzy" and drawing in new participants. The media played a crucial role, with self-published books touting "ten-year predictions for their values" and magazines asking, "How Do You Protect an Investment That Increases by 8,400%?" Economist Robert Shiller noted that the news media, far from being detached observers, were "an integral part of these events."

The advent of eBay proved pivotal, providing an accessible online secondary market for price discovery and trading that scaled the craze nationally. By May 1997, $500,000 worth of Beanies were sold monthly on eBay. The McDonald's promotion massively amplified mainstream buzz, creating an "enormous imbalance between demand and supply" and leading to rapid sellouts and frenzied customer behavior. This culminated in Ty Inc.'s annual sales reaching an astounding $1.35 billion in 1998, with Warner's pretax income surpassing $700 million – exceeding Mattel's and Hasbro's combined earnings.

However, Warner's strategic decision to partner with McDonald's for the Teenie Beanie Babies Happy Meal promotion, while a calculated risk for mass exposure, ultimately diluted the brand's exclusivity. McDonald's offered unparalleled access to a mainstream market, producing 100 million Teenie Beanies – enough to supply every household in America within weeks. Despite Warner's intent to drive new consumers to gift shops for larger Beanies, this mass exposure, paradoxically, contributed to the perception of oversupply.

By 1998 a USA Weekend poll found that 64 percent of Americans owned at least one Beanie Baby.

3. Ensuring Social Harmony & Favorable Regulatory Environment

Initially, Beanie Babies were perceived as "fun playthings for children," fostering a "warm and fuzzy" sentiment among early collectors. However, as the market transformed into a speculative arena, this social harmony rapidly eroded.

The shift from a children's toy to an adult investment led to irrational and extreme behaviors. People went to astonishing lengths: collectors "racked up $1,000-per-month long-distance charges" calling stores nationwide , some ordered "a hundred Happy Meals and asked the cashier to keep the food" just for the Teenie Beanies , and one collector "smashed her two-year-old’s head into a door while rushing a gift shop with a mob."

Financial recklessness was rampant, with individuals using "daughter’s $100,000 college fund as capital" for Beanie Baby handbooks or spending over $100,000 on collections believing they would fund college educations. The mania even devolved into criminality and violence, including theft of Teenie Beanies from McDonald's, armed robbery of gift shops for $5,000 worth of Beanies (leaving cash untouched), and tragically, murder over a "Beanie Baby deal gone bad."

Even a U.S. Trade Representative, Charlene Barshefsky, was stopped at Customs for illegally acquiring Beanie Babies in China, leading to public denouncement.

Retailers, too, faced immense frustration due to unpredictable shipping, unfilled orders, and price gouging by resellers, leading some to stop carrying the products altogether. Ethically, the toys became too valuable to be given to children in therapy groups for dying parents, as parents prioritized perceived investment gains over the children's comfort.

The Collapse of the Trinity: An Inevitable Implosion

The Beanie Baby bubble's collapse was not a sudden event but a multi-stage process, driven by the inherent contradictions of Ty Inc.'s impossible trinity.

The market became oversaturated by 1998. In January 1999, Ty released 24 new Beanie Babies, the largest product introduction in its history, overwhelming collectors and making it "virtually impossible to collect 'all' of the Beanie Babies." "Overproduced 'commons'" began stacking up and selling below retail, sometimes "two for $6" at flea markets.

The loss of perceived value was critical. In January 1999, the expected price increases for newly retired pieces did not materialize, shattering the ingrained belief that "Beanies going up in value upon retirement was not an immutable law of nature." eBay's transparency, which once fueled the craze, now exposed the market's stagnation and decline in real-time, leading to widespread pessimism.

Warner's desperate attempt at a "surprise" mass retirement followed by an online "vote" to "bring them back" was widely perceived as an "obvious gimmick" and "transparent market manipulation," further eroding consumer trust and the brand's mystique. The media, once amplifying the craze, became "bored."

Finally, the shift in consumer interest to new fads like Pokémon, coupled with the arrival of retired Beanie Babies in discount stores like Dollar Tree, signaled the complete end of their exclusive aura and investment fantasy. The "warm and fuzzy" sentiment was replaced by the unsavory reality of "creepy, belligerent men" and women "carting wheelbarrows full of Beanie Babies" even when they couldn't afford basic necessities for their children. Ty's annual sales fell 25% in 1999 and plummeted by over 90% by the early 2000s.

The Enigma of Labubu: A Toy That Broke the Mold

In a world hungry for the next big thing, Labubu isn't just a toy; it's a cultural phenomenon. This "ugly-cute" creature, with its signature wide grin and nine sharp teeth, has exploded from a niche collectible into a global fashion statement, a coveted accessory dangling from designer handbags, and a potent symbol of cultural cachet. Its rise has been nothing short of meteoric, sparking frenzied demand, epic queues, and even reports of chaotic scenes and physical altercations at retail locations worldwide.

At the heart of this global sensation stands Pop Mart, the Beijing-based powerhouse that has masterfully scaled Labubu's appeal. Pop Mart has rapidly transformed the designer toy market, pushing these once-niche items into the mainstream. But this remarkable success has ushered in a profound strategic dilemma, one that can be best understood through the lens of an impossible trinity.

The company finds itself caught between three inherently conflicting objectives in its quest for sustained success with Labubu:

1. Maintaining Labubu's Veblen good status: Keeping it exclusive and highly desirable.

2. Satisfying escalating shareholder expectations for growth: Selling a lot of Labubus.

3. Ensuring social stability and retaining state support: Avoiding public disorder and regulatory backlash.

This isn't just a business challenge; it's a high-stakes tightrope walk. Let's unpack this trilemma, exploring the intricate dance between market demand, corporate strategy, consumer psychology, and the ever-watchful eye of the Chinese state.

The Labubu Code: Why Everyone Wants a Piece

Labubu's journey to global icon status is a fascinating blend of design genius, shrewd marketing, and evolving consumer desires. Its distinctive "ugly-cute" aesthetic—mischievous yet endearing—has resonated across demographics, particularly with adults drawn to playful, nostalgic items. This unique visual identity ensures instant recognition and sparks a curiosity that transcends age.

A major accelerant for Labubu's viral explosion was the undeniable power of influencer and celebrity marketing. The toy's global visibility and demand skyrocketed after BlackPink's Lisa posted an Instagram photo with her Labubu doll in April 2024. This single endorsement transformed Labubu into a coveted fashion accessory, seen dangling from high-end handbags and sported by other A-listers like Rihanna, Dua Lipa, and Kim Kardashian. It wasn't just a toy anymore; it was a symbol of taste and cultural affiliation.

Beyond celebrity glam, Pop Mart's strategic embrace of scarcity and surprise has been instrumental. The "blind box" format, where you buy a sealed box without knowing which specific version you'll get, creates a "lottery-like" thrill and an enticing element of surprise. This, coupled with limited editions and ultra-rare "secret" figures, engineers a sense of urgency and exclusivity, driving speculative buying and repeat purchases. It's a gamified buying experience that pulls consumers "off of infinite scroll and into line for the latest drops".

The global fanbase and community engagement have further amplified Labubu's appeal. Social media platforms buzz with collectors sharing their passion, showcasing rare editions, and fostering a strong sense of identity and belonging. Labubu's versatility also allows for personal expression, making it an extension of individual taste and even home decor.

According to the latest Google Trends data, Labubu’s popularity has recently surpassed Bitcoin and is on track to surpass Nintendo over the next couple of days.

Labubu was created by Hong Kong artist Kasing Lung as part of his "The Monsters" story series, drawing inspiration from Nordic folklore and mythology. The character debuted in a picture book trilogy in 2015 and is part of a larger universe with companions like Zimomo, Tycoco, Spooky, and Pato, each adding narrative depth. Labubu’s narrative is not extensively developed or widely known as other popular IPs in China such as Hello Kitty (which surprisngly is not a cat, but a British girl in London), LinaBell (a fox who loves mysteries in the Duffy the Disney Bear universe), Detective Conan (a teenage detective turned child), My Little Ponies (adventures in Dream Valley), Paw Patrol (rescue dogs led by a young boy ), or Ultraman (an alien defender).

However, this perceived lack of a prescriptive narrative for Labubu paradoxically contributes to its mass appeal. For modern, collectible IPs, a less rigidly defined backstory, combined with a strong visual identity and strategic marketing, can enhance global resonance. This approach allows consumers to "project their feelings" and "create their own story," fostering a deeper personal connection and customizability. It echoes Sanrio's deliberate choice for Hello Kitty, which has no visible mouth so people can "project their feelings onto the character". This signals a departure from traditional IP models where extensive lore is paramount, suggesting a new, more adaptable pathway for character brand building in the digital age.

Beyond its commercial triumph, Labubu's global ascent carries broader implications for China's economic narrative. Created by a Hong Kong-born artist and scaled globally by a Chinese company, Labubu's success is being explicitly lauded by Chinese state media. Publications like Qiushi, the Communist Party's top theoretical journal, have praised Pop Mart's creativity and Labubu's popularity as tangible evidence of China's transformation from a "producer of low-value goods" to a "hub of innovation" and a "global incubator where seeds of creativity are sprouting everywhere". This perspective suggests that successful, globally recognized intellectual properties like Labubu are viewed as strategic assets that contribute to China's soft power and influence on the global stage, signaling a deliberate and significant shift in national economic policy towards high-value, creative industries.

The Veblen Paradox: When Desire Fuels Disorder

Labubu's market dynamics perfectly illustrate the characteristics of a Veblen good: demand for the product increases as its price and perceived exclusivity rise. Pop Mart has masterfully cultivated this status through its deliberate strategy of limited runs, randomized drops, and the inclusion of "secret" editions within its blind box series. This engineered scarcity transforms the act of acquisition into a competitive pursuit, elevating the toy's desirability to a fever pitch.

This carefully managed scarcity translates directly into significantly inflated prices on the secondary market. Resale prices for Labubu collectibles frequently soar, ranging from $90 to $400, often double or triple the retail price. Most recently, a rare blue Labubu was auctioned for ￥1.08m (approx USD$150k).

The intense demand, however, has come with real-world consequences, with significant "safety concerns" at Pop Mart stores, particularly in the UK, leading to temporary pauses in in-store sales. These incidents highlight the tangible public order challenges arising from the scarcity model.

A significant and pervasive issue stemming from this demand is the proliferation of professional "scalpers" and organized "syndicates" who acquire large quantities of the dolls to resell them online at exorbitant markups. This practice deeply frustrates genuine fans and alienates core collectors, who find it increasingly difficult to purchase items at retail prices.

The "blind box" mechanism, while a wildly successful sales tactic, is a sophisticated psychological strategy that gamifies the purchasing experience. By introducing a "lottery-like thrill" and the pursuit of elusive "secret" figures, Pop Mart taps into powerful behavioral patterns that can be highly addictive. This gamification amplifies the Veblen effect by adding an element of chance and reward, driving repeated engagement and consumption. However, this strategy also carries a significant dark side: when combined with extreme scarcity, it creates an environment ripe for exploitation by scalpers and leads to consumer frustration and even public disorder. This demonstrates how a highly effective marketing strategy can inadvertently foster negative social consequences, creating a "demand-side" moral hazard where the company benefits from the hype while its loyal customer base endures frustration and unsafe purchasing conditions.

The substantial and rapidly escalating secondary market prices for Labubu, coupled with the emergence of organized scalper syndicates, clearly indicate that Labubu has transcended its identity as a mere toy or collectible. It has evolved into a speculative asset class, attracting professional arbitrageurs who view it primarily as a vehicle for profit rather than personal enjoyment. This transformation creates a parallel economy that both fuels the initial hype, by creating artificial demand, and simultaneously exploits genuine consumer desire. This poses a systemic challenge to Pop Mart's brand integrity and its ability to control its market. This phenomenon highlights a broader trend of "hypebeast" culture extending beyond traditional categories like sneakers and fashion into new consumer product sectors.

The Shareholder's Shadow: Pop Mart's Growth Imperative

As a publicly listed company on the Hong Kong Stock Exchange, Pop Mart operates under immense pressure to deliver consistent and aggressive financial growth to its shareholders, with the share price increasing 200% year to date and the stock now trading at 50x normalised forward earnings, this is alot of Labubu’s to sell into prepetuity to justify the current valuation even factoring further potential earnings upgrades to come.

Pop Mart's growth strategy is a complex balancing act between maximizing a proven domestic formula and navigating the unique challenges and opportunities of a globalized market. The aggressive overseas expansion is not merely about capitalizing on Labubu's viral hype; it is a strategic imperative to diversify revenue streams. This diversification helps to mitigate risks associated with economic fluctuations in a single market or potential regulatory shifts, particularly in China where government oversight can be significant. The rapid international growth introduces new layers of complexity in managing brand perception, supply chain logistics, and local market demands, as evidenced by the temporary sales pauses in the UK due to safety concerns. The company's dual imperative involves maintaining its dominant position in China while successfully integrating and expanding into diverse international markets.

The Impossible Trinity: Pop Mart's Strategic Conundrum

Pop Mart finds itself at the nexus of a challenging strategic "impossible trinity," a set of three inherently conflicting objectives that cannot be simultaneously achieved to their fullest extent. These three goals are:

1. Maintaining Exclusivity & Veblen Status: Preserving Labubu's high perceived value and desirability, which is intrinsically linked to its scarcity and high secondary market prices.

2. Achieving Aggressive Sales Growth & Shareholder Returns: Fulfilling the corporate imperative of a publicly traded company to scale revenue and profit across its intellectual properties, particularly Labubu, to meet elevated market expectations.

3. Ensuring Social Harmony & Favorable Regulatory Environment: Navigating public sentiment by preventing chaotic scenes and managing the adverse effects of scalping, while maintaining positive relations and avoiding intervention from the Chinese state.

The inherent conflicts among these objectives create a complex web of trade-offs for Pop Mart.

Conflict 1: Scarcity vs. Mass Production. The very essence of Labubu's Veblen good status and its ability to command high secondary market values relies on controlled, limited supply and engineered scarcity. This deliberate restriction fuels hype and desirability. However, a publicly traded entity like Pop Mart is under immense pressure to deliver consistent, aggressive sales growth and expand its market footprint to satisfy shareholder demands. Flooding the market with Labubu products to meet these ambitious sales targets would inevitably dilute the character's exclusivity, cause a significant collapse in its secondary market pricing, and ultimately erode its status as a Veblen good. This direct inverse relationship between supply volume and perceived value presents a fundamental strategic tension.

Conflict 2: Scarcity Leading to Social Issues. While the strategy of engineered scarcity effectively drives hype and demand, it directly contributes to significant consumer frustration, the proliferation of scalping activities, and chaotic scenes at retail locations. This alienates core fans who are unable to purchase products at retail prices and creates negative publicity for the brand. The company's successful marketing strategy, which relies on creating artificial scarcity and leveraging the "blind box" thrill, inadvertently creates a "demand-side" moral hazard. The very conditions that fuel Labubu's Veblen appeal also incentivize scalpers and lead to chaotic consumer behavior.

Conflict 3: Social Stability as a "Hard Red Line" for the Chinese State. The Chinese state media has been overtly supportive of Pop Mart's innovation and global success to date, viewing it as an example of China's economic transformation and soft power projection. However, this support comes with an implicit social contract. Maintaining social stability is a paramount objective for the Chinese Government. Any significant social problems, such as widespread public disorder from chaotic queues or pervasive consumer dissatisfaction stemming from scalping and perceived unfairness, could be deemed a "red line" by the state. This creates a non-negotiable constraint for Pop Mart. Should the social costs of its scarcity model become too high, the state could swiftly intervene, forcing a fundamental shift in business practices that might prioritize social order over commercial strategy or brand equity. Complicating matters, China's governance landscape is profoundly shaped by the cyclical regulatory pattern encapsulated in the phrase "一管就死,一放就乱" (tight control leads to stagnation, loose control leads to chaos).

Navigating the Trilemma: We Watch From the Sidelines

Navigating this complex "impossible trinity" demands that Pop Mart adopt a multi-pronged strategic approach, balancing its commercial ambitions with its brand integrity and social responsibilities. For now, we will watch patiently as the story unfolds.

The good:

• The 2024 results were largely known, given the core earnings driver of 2722 is from CQ Cummins.

• Operating income of the core Chongqing business was broadly in line with our expectations (￥44m vs. ￥37m)

• However, this income included a ￥173m inventory provision, excluding which operating income would be closer to $￥200m.

• As a result, operating cash flow conversion is much stronger than expected, taking the business from a net debt position of ￥269m in the half to a net cash position of over ￥1bn by the end of 2024.

• Working capital days continue to decline, setting up the business well into 2025 earnings, where management alluded to a significantly lower level of write-downs and provisioning.

  

• For CQ Cummins, the company continues to ramp production at its new plant, with an annual production capacity of 23,000 units. This contrasts with its 2024 production of ~16,000 units, highlighting a significant volume upside opportunity.

• The opportunity for growth in large domestic diesel engines remains big and will benefit all players we have covered, including CQ Cummins and CYD.

• With increasing U.S. Tariffs, we have observed an increase in prices for imported engines, and as a result, the domestic industry fundamentals remain optimistic for 2025.

The interesting:

• At the CQ Cummins press event, John Iain Barrowman, previously the Vice President of High Horsepower Operations of Cummins group, highlighted that CQ Cummins has the most advanced high horsepower plant of Cummins and the best engine factory in all of China.

  

• Since Yufu has taken over 2722’s parent company, the asset manager is still working through its plans to restructure the wider group, suggesting more changes.

The not so good:

• Dividend payout ratio stood at ~30%, which detracted from a more immediate stock price re-rate thesis that we were hoping for. Nevertheless, today's 6 %+ forward dividend yield remains attractive and sets a price floor for the stock.

• Tencent, one of Cummins’ key partners, did not significantly increase its capex guidance for 2025 at its own 2024 full-year results, another distraction for a near-term re-rate for 2722. Nevertheless, we believe there is potential for Tencent to revise capex guidance upwards in the following months, which could result in increased demand for CQ Cummins’ products.

Final Thoughts on 2722:

Overall, the valuation of 2722 remains significantly attractive, with a strong industry backdrop and supported by a 6%+ dividend yield at the current market price.

Market Volatility

We have been taking advantage of price dislocations to rebuild positions in core businesses we like, including CYD and H22. Given the wild intra-day price swings and the industry backdrop, it should not be difficult for CYD to re-test its previous highs once the market stabilises. While we like the fundamentals of the industry and are very happy to be long volatility, equally, it should be possible for astute investors to build a profitable arbitrage strategy between the two securities and achieve significantly lower portfolio volatility.

This note describes our previously undisclosed position in further detail, following recent correction, it is now at a similar valuation set-up to CYD at the beginning of February before the rally.

For industry background, please refer to our CYD initiation note (link).

Description

What would you be willing to pay for the number one global AI data center power generation market leader in an oligopolistic industry that earns 25% EBIT margins, just completed a new plant upgrade while generating 60% ROIC, and is expected to grow 20%+ p.a. This company consistently pays out all its earnings as dividends. 20x PE? 30x PE, 40x PE? Well now you can have it all at less than 7x!

Financials

But what's the catch?

This company is wrapped up in a Chinese state owned industrial conglomerate: Chongqing Machinery & Electric Co (2722 HK) and currently undergoing significant market reform.

Chongqing Cummins Engine Company Cummins Overview

Cummins (CMI US) the global diesel engine market leader established three major joint ventures in China, with Chongqing Cummins Engine Company (CQ Cummins) manufacturing the largest diesel engines serving the industrial and power markets.

CQ Cummins was established in 1995 as a joint venture with 2722, which grants the company non-exclusive and non-transferable patents that leverage Cummins Inc’s expertise to manufacture and sell large diesel engines in China. The agreement, originally due to expiration in 2025, was extended to 2040 in May 2022, and a new plant was put in place with an annual production capacity of 23,000 engines (vs. 15,000 in the previous factory) (1). Most importantly, as part of the renewal, CQ Cummins gained license to produce the QSK60 engine range (2), one of the most common engines used in Chinese data centres and across the Asia-Pacific region.

While Cummins Chinese JVs collectively earn 10% net profit margins through the cycle, CQ Cummins is the most profitable margin-wise, generating 15-25% EBIT margins over the past decade. This is due to several factors including:

1) Large diesel engines were historically used in large-scale industrial and mining operations, which has been less susceptible to electrification trends.

2) There continues to be a significant technological gap between Chinese domestic engines and foreign high horsepower engines, with Cummins commanding a ~30% price premium versus domestic data center peers (Weichai and Yuchai) despite being manufactured in China due to superior reliability driving lower total cost of ownership.

3) Oligopolistic market structure, with Cummins, Caterpillar, and Rolls Royce commanding ~70% of the global market, in China Cummins has around 40% data center market share historically.

4) Diesel engines occupy a unique position where they represent a tiny proportion of project capex/opex, but having high efficiency and operational uptime is critical for client success, therefore clients are less price sensitive.

Although highly profitable, diesel engines were supposed to be a low growth cash cow industry, until generative AI changed everything. With significant capital investment to support the build-out of new data centers, diesel engines have become a key requirement in ensuring safe and secure backup power generation, in China, regulations mandate that all data centers have diesel engines as backup generation.

As a result of massive incremental demand, there is currently a significant global shortage in backup diesel generators, with order books extending well into 2026, coupled with double-digit price increases. On its 2024 full year results call, Caterpillar highlighted "it’s all about how quickly you can increase capacity for your reciprocating engines". Cummins recently announced a $200 million investment across its U.S., England, and India manufacturing sites to meet rising power generation demand on its full year 2024 results call.

In China, the AI capex cycle has lagged the US by approximately one year, with Bytedance first signaling a doubling of data center capacity investment at the end of 2024 and Alibaba highlighting a significant uptick in capex for the next 3 years at its recent full year results. Tencent, another key industry player, should report its 2025 capex plan on its results call later this month. As a result, demand for diesel backup generators in China is expected to increase from ~3,000 units in 2024 to at least 4,500 units in 2025.

For CQ Cummins, earnings have already begun inflecting. On the Q2 2024 Cummins results call, the company highlighted: “Sales of Power Generation equipment in China increased 36% in the second quarter, primarily driven by accelerating demand in data centers. This helped drive aggressive financial performance at our Cummins Chongqing joint venture within our Power Systems business.”

While 2722 has not reported 2024 results, one can deduce the net income generated from Cummins' own 2024 10K report, which showed CQ Cummins earnings up 67% yoy in 2024 vs. 13% growth in 2023, this compares to Cummins other Chinese joint ventures, which show broadly stable earnings year on year with overall revenues down due to weak China truck market.

Chongqing Cummins Outlook

Cummins highlighted at Barclay’s Industrial conference in Feb 2025: “ China, of course, is a massive market, big for us. In the power systems relevant space, power generation in data centers and the mining space has remained quite intense for the last several years. And we see -- we expect that to continue this year. “

Given CQ Cummin's significant capacity expansion completed in 2022, I forecast 30% earnings growth in 2025 and 25% in 2026, with upside risks in these numbers, supported by industry channel checks and commentary from peers. MTU Yuchai, a similar joint venture owned by China Yuchai (NYSE: CYD) and Rolls-Royce, highlighted on its 2024 full year earnings call:” We are refusing further orders because we cannot take any due to the capacity constraint on the component supply. But I would say then in the 2025 it's very significant growth compared to last year, it's at least 30%”

Historically, the CQ Cummins has paid ~100% of its earnings to CMI and 2722, however, 2722 has only chosen to distribute ~35% of its profits to shareholders, instead opting to invest in the core business, which consists of manufacturing general industrial machinery.

Like many SOEs, these businesses are not highly profitable and exist to support the local economy, generating employment and local tax revenue, with the core business historically generating around RMB100m in operating income yearly, enough to cover annual interest expense.

What's changed?

In China, state owned enterprises are controlled by the local State-owned Assets Supervision and Administration Commission (SASAC), and Chongqing SASAC is the ultimate beneficial owner of 2722 through control of its parent Chongqing Machinery & Electronics Holding (Group) Co., Ltd. (CQMEHG), a ¥46bn annual revenue industrial conglomerate.

However, like 2722, the CQMEHG has historically suffered from poor capital allocation and on February 10^th, the Chongqing SASAC boss Zeng Jinghua visited CQMEHG headquarters to oversee its reform and development, emphasizing the need to accelerate restructuring by March 31^st, 2025 (3).

On February 26^th, 2025, 2722 announced that Yufu Holdings is taking control of 2722’s parent company, CQMEHG, and by extension 2722 from the SASAC (4). Yufu Holdings has expertise in active management and investment execution, including corporate restructuring, asset optimization, and capital allocation.

While impossible to pre-empt what changes Yufu will bring for 2722, this represents free optionality upside. One key change would be to see if the dividend payout ratio is lifted for 2722. In aggregate, dividends from Chongqing SOEs have increased substantially over the past few years, and 2722 has lagged the change.

Valuation

Math: If you believe the core CQ Cummins business is worth at least 7x 2025 EBITDA (base-case valuation), the stock is a Buy. Conversely, the stock is not worth holding if CQ Cummin’s is only worth 5x EBITDA/7x PE. However, given the 6% dividend yield at ~HKD$1.05, I fail to see meaningful fundamental share price downside should the company resume dividend payout at 35%.

Cummins (CMI) and China Yuchai (CYD), two direct comparables to 2722, currently trade at a forward PE of over 15x, with CYD only achieving such a record valuation over the past few months as investors increasingly became aware of its long-term earnings tailwind from its data center exposure. Locally, Weichai (000880) trades at closer to 40x PE and Cummins India (500480) trades on a similar valuation level.

Short-Term Trading Dynamics

In contrast to CYD, where we were one of the first investors globally to spot its potential in the data center market, 2722 has already experienced significant volatility, as short-term traders jumped on and off the Chinese AI bandwagon over the past few days, with little regard for fundamental value.

As earnings and dividends come through, we expect the stock to re-rate. It is not difficult to envision 2722 becoming a multi-bagger over the next few years through market reform, increasing the payout ratio from the current 35% to 50% alone, would see the share price floor be established at around HKD$1.5 level given the 6% dividend yield on offer.

Risks

The most significant uncertainty lies with what Yufu will bring for 2722, overall, we believe that the free optionality upside combined with the current valuation support is enough to warrant an investment in 2722. However, position sizing is essential given the share price volatility and current ownership base.

Despite decoupling risks between China and the west, we are not concerned about Cummins' long-term commitment to the Chinese market as China is one of Cummins' most essential profit drivers (~20% group profits) as well as a key manufacturing and innovation hub (alongside the Americas and India hub). On the 2024 Analyst Day, management highlighted: “We are moving capacity into India and China from some of our higher-cost locations because our customer base is residing in those countries.”

Source:

(1) https://ccec-engine.com/chongqing-cummins-new-base-officially-put-into-operation/

(2) https://mp.weixin.qq.com/s/8tLXGTXv30AL_gKX6p7ALQ

(3) https://www1.hkexnews.hk/listedco/listconews/sehk/2025/0226/2025022600733.pdf

(4) https://www.cls.cn/detail/1939658

While we were correct to de-risk and switch from CYD to H22 ahead of results, the recent turbulence at Hong Leong’s property empire, City Developments Limited (currently in trading halt), may have contributed to idiosyncratic share price volatility for H22. We do not believe the newsflow at City Developments has any impact on the day-to-day operations for H22.

Rightfully, investors focused their attention on the outlook for the data centre business on the CYD conference call. While management didn’t delve much into financial details, their positive outlook aligns with our original thesis.

CYD’s reported FY24 revenues and earnings missed our estimate by 3% and 16% respectively, while optically disastrous, it is essential to understand the fundamental reason: CYD appears to be strategically exiting low-returning businesses and making significant write-offs during the process:

While revenue was lower than expected, gross margins were much better, with like-for-like gross margins improving 200bps in 2H, much greater than the 70bps we had expected.

Further, management took ~¥200m one-off costs above the line in 2H24, including ¥31m R&D impairment cost and ¥175m in receivable provisions, resulting in cash-costs % of revenue increasing from 6.65% in 1H to 10.77% in 2H.

As the full accounts of CYD have not been released and management didn’t delve into the details on the conference call, this analysis is based on H22’s published 2024 preliminary accounts, which are denominated in Singaporean Dollars.

Adjusting for these two above the line items, net income attributable to shareholders would be closer to ~¥430m in 2024 (vs. ¥286m in 2023), representing 50% yoy growth and a significant 12% beat vs. our original estimate of ¥386m.

Although earnings may lie, cashflow doesn’t, with the business generating significant cashflows, we estimate CYD’s operating cashflow’s increased ~40% yoy (vs. 23% eps growth) and CYD’s net cash balance increased from ¥3bn at the beginning of the year to nearly ¥4bn at the end of 2024. Unfortunately, management did not initiate any further share buyback programs.

At the H22 level, building materials growth slowed into 2H, with revenues down 2.5% in the half. However, cashflow is the standout, with the company’s net debt outside of CYD decreasing from S$496m to S$250m over the past 12 months.

Given the strong cashflow generation, management declared a final dividend of 3 cents per share, taking full year dividends to 4cps and up 100% vs. 2023, representing a payout ratio of 35%.

Realistically, there is a significant opportunity to increase dividends much further (100% payout) as capex is materially lower than depreciation expense. With net leverage now below 2x at the H22 level, it is yet to be seen if the company takes a more proactive approach towards capital management.

For now, we are happy to collect the nearly 6% forward dividend yield (assuming similar 35% payout in 2025) as we wait patiently for the stock to re-rate.

Financials：

Given our understanding of the one-off costs for CYD, we have further upgraded the FY25 and FY26 numbers, as shown below, with forecasts now roughly ~20% ahead of sell-side consensus at the EPS level.

H22 P&L Estimates:

Valuation:

H22’s valuation remains very attractive relative to CYD, as shown in the sum of the parts analysis below, and we will continue to hold for now after switching from CYD ahead of yesterday’s result.

Update 2025/03/06:

Overall, the company’s executives appear to have agreed on our initial take on valuation assessment and over the past few days we can see a flurry of insider transaction activity, including the Chairman and CEO both materially increasing their holdings in the company.

Our channel checks suggest the industry fundamentals appear to be getting better since we published the initial take, with 2025 data center diesel engine industry shortfall projected to be larger than we had initially expected, due to strong data center capex from clients, this is driving both increasing price and longer orderbook. Further, Yuchai is also likely expanding production capacity faster than our initial forecasts.

While that’s shy of our bull case ($26.10), the speed and risk profile screamed 'non-fundamental tailwinds.' We’ll take the win, thank the market gods, and move on: we focus on maximizing risk/reward, and when the facts change, we change.

Where to next? We’ve rotated into H22.SI, profiled here [Link], and another AI data center play we’re keeping under wraps for now as we build our conviction. Here’s the thinking: H22, CYD’s parent company, offers a backdoor into CYD’s value at a steep discount. With ~50% of H22’s worth tied to its 45% stake in CYD, it’s lagged behind CYD’s recent run. H22’s net asset value (NAV) suggests it should trade near $1.30—30% above today’s price. In other words, buying H22 now is like time-traveling back to snag CYD at $15.00, assuming the market catches up.

CYD kicked off this Substack as our highest-conviction pick, and we’re proud of how it played out. Stick around—we’ll keep digging up intriguing companies to share.

Yonex Co., Ltd., founded in 1946, has solidified itself as a dominant player in racket sports, particularly in badminton and tennis. Known for its superior craftsmanship, cutting-edge technology, and strategic marketing, Yonex holds a 60%+ global market share in badminton and is rapidly expanding in tennis.

Despite earnings compounding at 40% annually over the past five years, the stock remains undervalued, trading at just 8.5x forward EBITDA. With continued earnings growth projected at ~20% per year, the combination of new leadership with President Mrs. Yoneyama (Founder’s American-educated granddaughter (1)) taking the realms paves the way for improved capital allocation, an activist investor push (2), resulting in recent buybacks (3) and a growing global footprint presents a compelling investment opportunity.

2. Company Overview

Yonex’s history spans over seven decades, during which it has built a robust brand identity associated with excellence in racket sports. The company’s portfolio includes advanced badminton rackets, tennis racket, shuttlecocks, footwear, and sports apparel.

Yonex’s higher purpose mission is to get more people to love sports, which unites people of different ethnicities together and there is no better way than to be in a racket sports game. On the Joe Rogan show, Elon Musk once remarked on the significant health benefits of engaging in racket sports—stating that they can extend life expectancy by up to 9.7 years (4), the longest among any sports.

3. Market Landscape Overview

3.1 Global Market Size and Growth Opportunities

Badminton and Tennis:

The combined market size for both Badminton and Tennis equipment is currently around 5 billion USD and is expected to grow by single digits over the next few years (5) (6). However, in recent decades, Badminton has been increasing faster than Tennis, driven by strong growth out of Asia (China stands out in particular). By contrast, Tennis participation rates have fallen significantly over the decades in the Western world, driven by changes in shifting leisure preferences, albeit this trend appears to have reversed post-COVID as increasingly people focus on health and well-being (7).

While this is not a large total addressable market category like apparel, this also insulates the business from new competition and disruption, as the up-front investment cost required to build a new brand, manufacturing, and distribution capabilities would likely significantly outweigh the benefits when speaking with industry insiders, the only notable new entrant is Apacs in 2002 without much success.

Further, as the cost of a new racket is small relative to the total cost of playing the sport (i.e. $200 racket vs. $40 per hour of court rental or $50 per hour of coaching), the industry has relatively strong pricing power, as evident in Yonex’s nearly 50% gross margins.

3.2 Competitive Landscape and Market Share Insights

Badminton:
Yonex is widely recognized as the dominant player in the badminton market. Other competitors include Victor and Li-Ning. My channel checks suggest Yonex has over 60% market share globally, with Victor having around 20%. At the professional level, it is not uncommon for Yonex to command over 80% market share.

Tennis:
In the tennis segment, the competitive field includes Wilson (~35% market share), Head (~30%), Babolat (~15%), and Yonex. In recent years, Yonex has been gaining significant market share through strategic product launches and increased marketing and collaboration efforts, especially targeting juniors and females.

4. Strategic Analysis: Yonex’s Market Position and Growth Strategy

Yonex’s competitive edge lies in its pioneering ISOMETRIC design—which expands the “sweet spot” by 7%, combined with advanced material science, including its integration of advanced materials such as HYPER-MG

and Nanometric composites that enhance power, control, and vibration dampening.

This technological prowess is complemented by its meticulous manufacturing process, with high-end rackets produced in Japan under stringent quality controls and traditional craftsmanship that ensure exceptional consistency and performance. This contrasts with its competitors, who have China-dominated supply chains. On the Q324 Amer results call, Amer Sports highlighted that its Wison business ”segment would be most impacted, predominantly tennis rackets, baseball bats, and basketballs. We have some degree of flexibility to adjust our supply chain, but price increases will be the primary tool we utilize, should tariffs occur.”

Going forward, the key growth priority will be focused on becoming a more international business, as highlighted in its 2023 strategy day (8), East Asia still dominates its sales, by contrast, the APAC region only accounts for ~13% of Wilson’s revenues (9).

As a testament to Yonex's progress, 19th seed Madison Keys recently won the Australian Open Women’s Singles, defeating both the world No. 1 and No. 2 in back-to-back matches. She had only recently switched to Yonex after her contract with Wilson ended in 2024 (10). Meanwhile, in the Men’s Singles, Ben Shelton reached the semifinals with his Yonex.

Although world No. 1 Novak Djokovic withdrew from the semifinals, it was eye-opening to watch him train with his former rival turned coach, Andy Murray, who had recently retired from professional tennis while sporting a Yonex after claiming “I tried lots of different rackets. I tested them with Hawk-Eye when I was able to and I loved the Yonex (11)”

7. Financial Performance and Outlook

Yonex recently reported its Q325 results (12), with revenues up 27% yoy, including 36% (~30% in RMB terms) in China (~50% of group revenues and ~70% of group profits), this contrasts with Wilsons, reporting only 11% growth for the quarter (13). My channel checks suggest strong sell-through growth in China for Q4 for Yonex.

For the full year, Yonex maintained its guidance for 10bn net profit, which was upgraded from 9.3bn at the year half-year result. However, as my modeling below suggests, absent either a disastrous top-line outcome or the company spending significantly more on marketing investments than expected, I believe the company will likely beat earnings by ~10%, paving the way for further upgrades to come.

8. Capital Allocation

Being a family-run company, Yonex has historically suffered from poor capital allocation, with a large net cash balance sheet, however more recently the company has made a clear commitment to the market to better return excess cashflows to shareholders, as detailed in its 2023 strategy day.

This progress is also carefully being watched by shareholders, with Activist investor Hibiki Path Advisors on board and detailing in its public letter (2) an opportunity to further increase the return on equity, including through the reduction in advertisement cost as a percentage of sales from the current 15% of sales, to peer average of 7.5%.

Overall, I believe while there is an opportunity to optimize costs, equally, I agree with management’s view of investing for future growth, especially going after the North American Tennis market, with my analysis suggesting Wilson currently generating over $350m in revenues from Tennis related sales vs. $110m for Yonex. As shown below, Google Trends data suggest there has been a significant recent uptick in interest in Yonex Tennis rackets worldwide.

9. Valuations

While the valuation in Yonex has increased somewhat recently, I still believe its current forward valuation of ~8.5x my FY26 EBITDA estimate is undemanding relative to peers, which typically trade on 10-20x EBITDA and see significant upside opportunity. With peers trading around 15x+ EBITDA except for 8022 Mizuno, which is a lower gross margin and return business as shown in the comps table below.

Source:

(1)

(2) https://www.hibiki-path-advisors.com/en/engagement/post-7906/

(3) https://www.nasdaq.com/articles/yonex-co-announces-strategic-share-buyback

(4) https://www.instagram.com/crunchtimecoaching/reel/C-ZDLwRAEly/?hl=en

(5) grandviewresearch.com

(6) grandviewresearch.com

(7) https://www.ustasocal.com/news/surge-in-tennis-participation-led-by-growth-in-diversity/

(8) https://www.yonex.com/media/wysiwyg/07ezone/230517_Global_Growth_Strategy_GGS__240509_.pdf

(9)https://www.sec.gov/Archives/edgar/data/1988894/000110465924001168/tm2322981-10_f1.htm

(10) https://www.benrothenberg.com/p/madison-keys-racket-racquet-yonex-wilson-bjorn-fratangelo-australian-open-max-eisenbud

(11) https://www.theguardian.com/sport/article/2024/may/23/andy-murray-tennis-racket-switch-hunt-for-edge

(12) https://ssl4.eir-parts.net/doc/7906/ir_material_for_fiscal_ym3/172141/00.pdf

(13) https://s203.q4cdn.com/960646696/files/doc_financials/2024/q3/3Q-2024-AS-Slides-FINAL.pdf

In my previous post (link), I profiled CYD. I concluded that it is likely significantly under-valued based on the future growth outlook potential, with a base-case scenario of nearly 100% upside from the data center opportunity alone. This analysis covers CYD’s parent company, Hong Leong Asia (HLA), listed on the Singapore stock exchange under H22.

The key conclusion is while HLA equally remains undervalued (+40% base case upside), it is to a lesser extent than CYD given its recent share price increase (+65% from lows vs. +35% for CYD). However, as there appears to be more liquidity on the Singapore line, H22 may be more appropriate for those looking to acquire a more meaningful position, while also benefiting from a more diverse business operation.

Corporate Overview

HLA is a subsidiary of the Hong Leong Group, a conglomerate with interests spanning financial services, manufacturing, property development, and hospitality. The Hong Leong Group was founded in 1941 by Kwek Hong Png, who immigrated to Singapore from Fujian, China, in 1928. Starting as a general trading firm dealing in ropes, paints, and ship supplies, the company expanded into various sectors over the decades.

Mr. Kwek's entrepreneurial spirit laid the foundation for the group's growth. His son, Kwek Leng Beng, currently serves as the executive chairman of the Hong Leong Group in Singapore. Under his leadership, the group has further diversified its operations and solidified its presence in multiple industries. Hong Leong Asia Ltd. (SGX: H22) operates as the group's industrial manufacturing and distribution arm, focusing on sectors such as diesel engines, building materials, and rigid packaging.

In 1993, HLA expanded into the Chinese market by acquiring a controlling stake in China Yuchai International Limited, a Bermuda-registered company listed on the New York Stock Exchange under the symbol CYD. China Yuchai, through its subsidiaries, holds a 76.4% equity interest in Guangxi Yuchai Machinery Company Limited (GYMCL), a leading engine manufacturer in China. GYMCL produces a wide range of light, medium, and heavy-duty engines for various applications, including trucks, buses, passenger vehicles, construction equipment, marine vessels, and agricultural machinery, however as mentioned in my previous report, the largest opportunity is the datacenter opportunity.

However, not everything has been perfectly smooth between HLA and Yuchai historically, as HLA held a special share that granted substantial control over Yuchai, including the authority to appoint key executives and veto shareholder resolutions. This structure led to disputes between HLA and other stakeholders within Yuchai, as HLA's control was perceived as a constraint on the company's strategic decisions.

Today, the company appears to have moved on from its previous governance issues, and there are many recent positive governance signs worth noting:

At the HLA level:

• Recent insider transactions: Purchase of 145,000 shares by Mrs. Kwek in August 2024.

At the CYD level: This is discussed in more detail in my previous report

• Share incentive scheme for the Data Centre business completed in June 2024

• $40m buyback completed in October 2024

• Activist Shareholder switching from a 13D to 13G filing

Building Products Business Overview

Outside of CYD, HLA’s primary business consists of its Building Materials division, which includes cement, pre-cast concrete products, ready-mix concrete, and quarry products that supply customers in Singapore and Malaysia. The group also owns a ~20% stake in BRC Asia, Singapore’s leading steel reinforcement solutions provider in Singapore.

Overall, construction demand in the past few years has been strong, with the Building and Construction Authority (“BCA”) projecting another robust year in construction activities for 2025 and currently expecting construction demand to rise to S$50bn in 2025, up from S$44bn in 2024, representing a 10% increase. (1)

Valuations

Financials

Source:

(1) BCA Construction Demand Report (2025)

China Yuchai Limited (CYD) is one of China’s largest diesel engine manufacturers, boasting strong global partnerships, including a 50/50 joint venture (JV) with Rolls-Royce’s MTU division. The company is poised for an earnings inflection driven by surging data center demand for backup power generation solutions. Despite 20% p.a. earnings growth potential over the next five years, CYD trades at an astonishingly low valuation of 2x EBITDA, 0.3x book, 30% free cash flow yield, and a net cash balance sheet that supports 90% of the company’s market cap. This stands in contrast to its peers, which have experienced substantial re-ratings. Enhanced corporate governance, coupled with a long-term activist investor on board, has led to significant buybacks, with the company repurchasing nearly 10% of its outstanding shares in recent months to take advantage of the valuation discount.

Historical Context and Market Trends

CYD’s core asset is a 76% stake in Guangxi Yuchai Machinery Co., one of China’s largest diesel engine manufacturers in China.

Historically, Guangxi Yuchai has focused on the heavy-duty truck (HDT) market, which has faced several challenges in recent years:

1. Economic Slowdown: Since mid-2021, the broader economic slowdown has elongated replacement cycles and dampened demand for new sales

2. Fuel Mix Shift: Domestic sales of diesel engines have declined from ~98% in 2016 to ~55% as LNG and new energy vehicle (NEV) engines gain traction.

3. Stringent Emission Standards: Increasing regulations have added pressure on the traditional diesel market.

Between 2013 and 2023, CYD’s on-road engine sales volumes dropped 65%. However, the company offset this decline by shifting its mix to higher-value, larger engines and increasing off-road engine sales. This resulted in stable revenues, with average sales prices doubling over the decade, albeit with some gross margin pressure, with gross margins declining from ~20% to ~16%. Positively, gross margins are inflecting.

Industry Outlook

The Chinese HDT market is entering its fifth year of correction after peaking in 2020. Historically, the industry follows five-year up/down cycles, suggesting a potential recovery is nearing. Government trade-in policies, which heavily influence industry demand, are increasingly supportive.

Cummins, in its recent Q424 results presentation, highlighted that it expects its overall 2025 China revenues to be “flat to up 5%”, driven by negative 5% to positive 10% growth in the heavy and medium-duty truck demand and “strength in other markets, particularly power generation, where demand is expected to remain high as data center momentum continues.”

Growth Opportunities in the Off-Road Segment

CYD has successfully diversified into off-road applications, with volumes increasing from 121,000 units in 2013 to over 170,000 units in 2023. The most promising growth avenue lies in the power generation market for data centers. Large data centers require substantial backup power, typically supplied by diesel generators.

Total Addressable Market (TAM)

Diesel engines (~60% of total genset value) are combined with alternators and control systems to produce generator sets (gensets). Genset demand correlates with data center capacity expansion. JLL estimates 10GW of new projects to break ground in 2025 vs. 7GW completions ^(1). Channel checks suggest every 2MW of capacity requires around 8 gensets, translating to a TAM of ~40,000 units globally for the existing pipeline. However, with current annual production of only ~10,000 units globally and a ~US$300,000 ASP per genset, the market size is ~$3 billion.

Cummins estimates the data center TAM at $6 billion in 2023, growing to $12 billion by 2030 ⁽²⁾. This discrepancy versus my bottom-up estimate arises from Cummins’ integrated business model, which includes installation and long-term service contracts as part of its group revenues. Currently, CYD mainly manufactures diesel engines, relying on third parties to produce gensets.

Supply Constraints and Market Dynamics

The current global annual production capacity for large gensets is ~10,000 units, dominated by Cummins, Rolls-Royce MTU, and Caterpillar, which hold ~70% market share. Chinese players Yuchai and Weichai have a current combined capacity of ~1,000 units, with plans to double capacity in 2025. While Chinese production primarily serves domestic demand, long-term opportunities exist for global expansion through JVs like Yuchai/MTU.

Due to the demand-supply imbalance, a significant multi-year backlog exists globally, with Caterpillar highlighting “it’s really all about how quickly you can increase capacity for your reciprocating engines” on its recent Q424 results call.

As a result, domestic substitution opportunities are rising due to extended lead times from international players. Recent price hikes and strong demand have resulted in ~50% incremental EBITDA margins for leading global manufacturers when analyzing their recent quarterly results, with channel checks suggesting price increases across the Chinese domestic supply chain too.

In China, regulations mandate diesel backup for data centers, creating domestic demand for ~3,000 gensets in 2024, which is expected to grow by at least 50% in 2025, with strong incremental growth expected to be driven by increasing demand from tier-1 players including Bytedance, Kuaishou, Tencent, Alibaba, etc.

Manufacturing data center-grade gensets requires significant technical expertise, including the production of critical components like crankshafts and cylinder blocks. Testing and validation, including thousands of hours of continuous operational uptime, further complicate market entry for new players, especially into tier-1 supply chains, where reliability is arguably more important than cost.

The recent success in Chinese AI models including Deepseek could provide a catalyst and drive broader Chinese domestic AI data centre demand by tier-2 and 3 players according to Jevon’s paradox. This represents a further potential opportunity for domestic players including Yuchai, although this is not the base case expectation.

Earnings Sensitivity for CYD

CYD’s exposure to data center growth comes through two channels:

1. Revenue from Other Products and Services: This segment accounted for ~24% of revenues in 1H24, albeit only a small portion is directly related to data center applications through Yuchai’s YC16V and related product range, not only is the company expanding capacity through capex investment, Yuchai is also proactively marketing its product range at industry trade shows as shown in its recent Linkedin posts.

Conservative assumptions (¥1.2m RMB/engine, 30% incremental operating margins, 15% tax rate) suggest every 100 incremental engines manufactured by CYD could add up to ~¥23m in net income for CYD equity holders, with a pathway to 1000 engine sales by 2027, this could represent ¥230m net income.

2. JV with MTU: The JV produces the Series 4000 large engines for power solutions including data center applications. In 2023, CYD sold over 500 Series 4000 engines, with a portion serving data center applications. With earnings up 86% yoy to ¥75m, this segment alone contributed ~25% of CYD’s ¥286m net income in 2023. The partnership expanded to include Series 2000 engines in August 2024 ⁽³⁾. There is an opportunity for this division to triple earnings attributable to CYD to over ¥200m by FY27.

The earnings bridge below provides an indicative overview of how CYD could compound earnings at ~20% per annum over the next few years even assuming no earnings growth contribution from its core HDT market, this is despite the HDT market likely currently at the bottom of the cycle.

Financials and Valuation

CYD trades at 2x forward EBITDA, 7x forward P/E, and 0.3x book value. With a potential 20% annual earnings growth over the next few years, the risk/reward skew appears highly favorable.

The cash on CYD’s balance sheet (¥3.5bn RMB) adds optionality, particularly given precedent transactions like Energy Monster’s (NASDAQ:EM) recent take-private deal at 0.8x net cash value, highlighting the significant value in onshore cash to the right owner.

In June 2024, CYD announced an employee share incentive scheme, where business leaders were invited to purchase shares in the “Marine and Genset” division (MGP) that holds 50% of the MTU JV stake, with MGP being valued at ¥2.48bn by CYD ⁽⁴⁾. Insiders eventually acquired a 6.5% minority stake for ¥83m, implying a ¥1.3bn value for MGP, factoring in minority and illiquidity discounts. As the valuation was completed before Rolls-Royce’s August announcement of expanding the partnership to also include the production of Series 2000 engines, the value of MGP has likely only increased further since the share incentive scheme. In the long term, there may be an opportunity for MGP to IPO and further crystalize the value of this business segment.

As the scenarios below show, to justify the current share price, investors are either placing significant discounts across all segments (Bear scenario 1), valuing the core business at 0 (Bear scenario 2), or valuing net cash at 0 (Bear scenario 3), these appear very conservative relative to how its peers are being priced.

Peer Comparison

CYD’s closest domestic peer, Weichai Heavy Machinery (SHE:000880), has recently seen a significant share price increase, reflecting the market’s recent recognition of its future earnings potential. Global peers including Caterpillar and Cummins have also seen strong performance driven by their respective power solutions business segments and typically trade at more than 10x EBITDA.

Offshore, The Weichai group also owns a controlling stake in Power Solutions International (NASDAQ: PSIX), which has seen its share price increase, with the stock now trading around ~12x FY25 EBITDA.

CYD’s largest shareholder, Singapore-listed Hong Leong Asia (SGX:H22) generated ~2/3 of its operating income from CYD in 1H24, and has seen a significant re-rate in its share price relative to CYD beginning August 2024.

Shareholder Activism

Hong Leong Asia holds ~45% of shares in CYD and controls board appointments, which may deter some investors. However, Shah Capital, the third-largest shareholder with a 10% stake, has actively engaged with management since 2008⁽⁵⁾ and as recently as June 2024, called the management team “extremely indifferent to his requests” in unlocking value for shareholders⁽⁶⁾. However, Shah’s recent shift from a 13D ⁽⁷⁾ to a 13G ⁽⁸⁾ in the August 2024 filing suggests confidence in recent corporate governance changes, including the $40m share buyback completed in October 2024.

Sources:

(1) https://www.us.jll.com/en/trends-and-insights/research/data-center-outlook

(2) Cummins 2024 Investor Day Transcript

(3) https://investor.cyilimited.com/news-releases/news-release-details/yuchai-and-rolls-royce-power-systems-expand-mtu-yuchai-powers

(4) https://e643d83b-83a6-46b5-b7c7-de0fb4425763.usrfiles.com/ugd/e643d8_3b6c9901b0854e26bc2f6efbbaa0cf4d.pdf

(5) https://www.bizjournals.com/triangle/stories/2009/06/01/story4.html

(6) https://www.shahcapital.com/shah-outperforms-market/

(7) https://investor.cyilimited.com/static-files/be52cb3c-9ec2-45f6-ad21-9217507feedb

(8) https://investor.cyilimited.com/static-files/d5bc546a-7145-4918-9098-1f3f7d21e1f9