Well-known investor David Einhorn recently appeared at CNBC’s Delivering Alpha event in New York. He discussed why he feels the markets are broken.
One of Einhorn’s ongoing mantras is that passive investing has ruined investing.
“‘I view the markets as fundamentally broken,’ Einhorn said back in February on Barry Ritholtz’s ‘Masters in Business’ podcast. ‘Passive investors have no opinion about value. They’re going to assume everybody else has done the work,’” CNBC reported on Nov. 14.
Now, I’m not about to put Wang & Lee Group (WLGS) in the same company as the Magnificent Seven. Still, the Hong Kong-based construction company’s appearance in Barchart’s Top 100 Stocks to Buy on Monday in 27th position suggests that Einhorn could be right.
The company’s stock is up nearly 50% in the past five days alone and 610% over the past 52 weeks.
If you have never heard of this company, it’s okay; neither have I. By the end of this article, we’ll all have learned a little about WGLS stock. I’m not sure that’s a good thing.
What Does Wang & Lee Group Do?
Well, according to the Services section of its website, it provides:
- Low voltage electrical system installation;
- MVAC (Mechanical Ventilation and Air-Conditioning) system installation;
- Fire service system installation;
- Water supply and sewage system installation;
- Design and build solutions; and
- Many more.
No job seems too small or too large for the Hong Kong construction and infrastructure company to handle.
According to its latest 20-F, it’s been providing “construction contracting services” in Hong Kong for almost 45 years. Thus, it should have a significant revenue stream and a financial track record.
It generates significant revenue from the E&M (electrical and mechanical) market. My wife’s in the construction industry, so I know the E&M market is massive. The global MEP (mechanical, electrical and plumbing) market was valued at $50.3 billion in 2022. By 2032, it’s expected to reach nearly $139 billion.
So, they’re playing in a decent-sized market.
However, the company reports that its revenues from the E&M market over the past three years were $6.8 million in 2023, $4.2 million in 2022, and $4.1 million in 2021. Those aren’t big numbers, but at least they are growing.
I struggled to find data for the Hong Kong market specifically. I did find research from Frost & Sullivan, a market research consultancy, that HKEX News commissioned. In 2013, the E&M engineering market was 35.7 billion Hong Kong dollars ($4.59 billion), growing to 80.4 billion ($10.33 billion) by 2023.
If the 2023 numbers are anywhere close to accurate, Wang & Lee’s 2023 revenue in this market was less than a rounding error.
Does It Make Money?
On a GAAP basis, it has lost money in each of the last three fiscal years, according to S&P Global Market Intelligence. As I said, it had revenues of $6.8 million in 2023, generating an operating loss of $771,000 on those sales. Its last operating profit of $143,000 was in 2020 on sales of $4.1 million.
Of all the business it generates, the company’s Fitting Out segment, which includes the installation of fixtures and furniture, was its most profitable, generating a 69% gross margin in 2023 from $2.6 million in revenue. The segment’s gross profit contributed 74% overall.
Meanwhile, its Low Voltage Electrical Systems segment had the most revenue last year at $3.8 million. However, its gross profit was just $523,019, a 14% gross margin.
Calculating an average gross profit margin for the various segments over the past few years is challenging. For example, although Fitting Out had a 69% gross profit margin in 2023, it was 22% in 2022, 36% in 2021, 46% in 2020, and 24% in 2019.
I’m not sure what investors see in the company’s income statement that would prompt them to buy shares except that they’re low-priced, having traded under $5 for all but one day (Nov. 25) as a public company--it went public in April 2023 selling 1.6 million shares at $5 each.
The Company’s Valuation
Based on an enterprise value of $77.2 million, Wang & Lee trades at 11.2x its revenue and 13.4x its tangible book value per share. That said, it does have net cash of $3.3 million, so its balance sheet is okay for a micro-cap stock.
Bird Construction (BIRDF) is a small-cap Canadian construction company with an enterprise value of CAD$1.88 billion ($1.33 billion). It trades at 0.6x revenue and 9.4x tangible book value per share. Its revenue grew by 18% in 2023 to CAD$2.8 billion ($2.0 billion).
I don’t think there’s any argument that Bird is the superior company. Its shares are up 159% over the past year and 359% over the past five years.
The fact that some investors are opting for Wang & Lee Group over Bird Construction suggests David Einhorn is right--the markets are broken.
