SGOCO Group Ltd

SGOCO Group Ltd (NASDAQ: SGOC) is a Hong Kong-based conglomerate Company. The Company is engaged in the business of research and development of VR (Virtual Reality) technologies and device, energy-saving technologies, environmental protection money lending business (in Hong Kong) and property investment.

Investment Highlights – SGOCO Group Ltd – Avoid at USD 1.59

• In the first half of the financial year 2020, the Company has shown a significant decline in revenue and profitability margins.
• The Company has reported a negative ROE (return on equity) of 1.6% in H1 FY2020. The ROE remained in the negative zone from the past three years.
• As per valuation metrics, EV/Sales and Price/Earnings multiples are currently higher as compared to the corresponding multiples of the Electric Equipment & Parts industry, reflecting overstretched valuations.
• From the technical standpoint, 14-day RSI is supporting downward movement (around 55 level), which means the stock price could decline in the short term.

Key Risks

• Excessive competition in the industry could affect the revenue and profitability of the Group.
• Failure in cybersecurity could hamper operational performance as well as the reputation of the Group.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, due to lower SaaS & app development income and In-app verification service income, the revenue for the period declined significantly.
• The profitability for the period declined to $4,325, reflecting significantly lower revenue generated.
• The cash balance as on 30 June 2020 declined to $486,697 (31 December 2019: $1,324,344).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has shown a significant decline in financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance declined, with lower profitability margins. The cash balance also declined with a poor balance sheet. SGOCO Group’s revenue was significantly impacted by the foreign exchange as a reported currency USD (US Dollar), while the functional currency is HKD (Hong Kong Dollar). Due to the impact of the covid-19 pandemic, the Company experienced significant disruptions to business, supply chain and financial condition. The stock made a 52-week low and high of USD 0.7164 and USD 4.21, respectively.

Based on the above rationale, we have given an “Avoid” recommendation on SGOCO Group Ltd at the closing price of USD 1.59 (as on 13 January 2021), and with support from few catalysts needs to be evaluated at a later stage such as cost-effective measures taken.

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