Lion Rock Group (1127 HK)

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During my trip to Hong Kong a few months ago, I had the privilege of meeting “CK Lau”, the Chairman and founder of Lion Rock Group (1127 HK － US$146 million).

Lion Rock Group is one of the largest book printers in the world. CK Lau built up the business from scratch by setting up printing operations in China back in 2005. Since then, he’s made a series of acquisitions, all at mid-single-digit P/E multiples or lower.

CK Lau is a brilliant individual. At his previous company, Cinderella Media, he generated annual returns for shareholders of 23% per year over 13 years.

Today, he focuses on building Lion Rock into a printing industry behemoth. The company has three separate businesses working together to satisfy the demands of book-readers or publishers:

• Printing operations in China, Malaysia and Australia through subsidiaries 1010 Printing, Opus Group and Papercraft
• Print services, helping publishers with one-stop solutions for delivering physical books through subsidiaries Asia Pacific Offset and Regent Publishing Services
• Publishing, through UK publisher Quarto

Book printing is a slow-growing industry at best. E-books and audiobooks will probably continue to take market share, though at a very slow pace.

On the other hand, the industry's decline enables proactive individuals like CK Lau to buy businesses on the cheap. He’s also proven himself nimble enough to cut costs and keep them profitable despite the industry headwinds. It also helps that Lion Rock focuses on coffee table books, cookbooks, and children’s books, as they’re less likely to be replaced by e-books.

The printing operations experienced headwinds during COVID-19 as its Malaysian plant had to close down and freight costs shot up to record levels. At the same time, during COVID-19, many rediscovered a love for reading. Today, Lion Rock has experienced a full recovery from the pandemic.

Lion Rock’s forward guidance has always been conservative. However, in the meeting with Lau, he was positive, stating that he was “looking at the golden years for the printing business”. I think he was referring to the fact that paper prices will likely remain low, and several subsidiaries, such as Quarto and Papercraft, have been restructured and become profitable.

I think it’s plausible that we’ll see some margin pressure from recent increases in freight costs related to the Houthi attacks in the Red Sea. In the medium term, I wonder whether paper prices might rise if and when the Japanese yen strengthens. But I think the forward P/E will still be just 6.5x with a 7.0% dividend yield.

A wild card is whether Donald Trump wins the US election and hikes tariffs on China-printed books. If so, Lion Rock would have to shift production from China to Malaysia. Lion Rock could also lose market share to Eastern European-based printers.

Other listed entities in Lion Rock’s corporate structure include Lion Rock’s Australian printing operations, separately listed as Left Field Printing (1540 HK － US$32 million). Left Field is an illiquid stock producing commodity books like black-and-white novels. But then again, it dominates the Australian market for book printing with an estimated 90% market share. That’s enabled it to raise prices in the past few years. And Left Field is less exposed to the risk of US tariffs on Chinese books.

Then there’s Malaysia-listed investment holding company JcbNext (JCB MK － US$49 million), one of Lion Rock's larger shareholders. On my numbers, the stock trades at a 34% discount to net asset value and has a 14% exposure to Lion Rock.

At the end of the day, Lion Rock is a bet on CK Lau. Despite his age of 72, he’s still very much involved in the business and wants to grow it further. It’s unusual to find such a capital allocator running a company at a P/E multiple of just 6.5x. We’ll see how long that continues to be the case.

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