Leading Yu Tak International Holdings Limited (SEHK:8048) as the CEO, Xia Li took the company to a valuation of HK$171.14M. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Li’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability. Check out our latest analysis for Yu Tak International Holdings

What has been the trend in 8048’s earnings?

Earnings is a powerful indication of 8048’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Li’s performance in the past year. Recently, 8048 produced negative earnings of -HK$10.09M . However, this is an improvement on prior year’s loss of -HK$30.64M, which may signal a turnaround since 8048 has been loss-making for the past five years, on average, with an EPS of -HK$0.0077. Since earnings are heading towards the right direction, CEO pay should be reflective of Li’s value creation for shareholders. Over the same period Li’s total remuneration increased by 52.21% to HK$942.00K. Although I couldn’t find information on the composition of Li’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in 8048’s share price can move the actual level of what the CEO actually takes home at the end of the day.

Is 8048’s CEO overpaid relative to the market?

While one size does not fit all, as compensation should account for specific factors of the company and market, we can determine a high-level thresold to see if 8048 deviates substantially from its peers. This exercise helps investors ask the right question about Li’s incentive alignment. Normally, a SEHK small-cap has a value of HK$2.61B, produces earnings of HK$245M, and remunerates its CEO at roughly HK$3.3M per annum. Usually I’d use market cap and profit as factors determining performance, however, 8048’s negative earnings reduces the effectiveness of this method. Analyzing the range of remuneration for small-cap executives, it seems like Li is paid aptly compared to those in similar-sized companies. On the whole, even though 8048 is loss-making, it seems like the CEO’s pay is sound.

Next Steps:

Hopefully this article has given you insight on how shareholders should think about 8048’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. If you have not done so already, I urge you to complete your research by taking a look at the following: