Victor Lo took the reins as CEO of Gold Peak Industries (Holdings) Limited’s (HKG:40) and grew market cap to HK$666.99m recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down Lo’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.
What has been the trend in 40’s earnings?Profitability of a company is a strong indication of 40’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Lo’s performance. Recently, 40 released a profit of HK$20.36m , which is an increase of 1.23% from its last year’s earnings of HK$20.11m. This could be a sign of a successful turnaround since 40 has not always been profitable, given its average EPS of -HK$0.0022 over the past five years. Given earnings are moving the right way, CEO pay should echo Lo’s valued-adding activities. During the same period, Lo’s total compensation dropped by -14.23%, to HK$10.24m.
What’s a reasonable CEO compensation?Despite the fact that no standard benchmark exists, as remuneration should be tailored to the specific company and market, we can determine a high-level base line to see if 40 deviates substantially from its peers. This outcome can help shareholders ask the right question about Lo’s incentive alignment. Normally, a SEHK small-cap has a value of HK$2.61B, creates earnings of HK$245M, and pays its CEO at roughly HK$3.3M per year. Accounting for 40’s size and performance, in terms of market cap and earnings, it seems that Lo is paid more than other SEHK CEOs of small-caps, on average. Though this is simply a basic calculation, shareholders should be aware of this expense.
What this means for you:
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in 40, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about 40’s governance, look through our infographic report of the company’s board and management.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of 40? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.