Sunday, May 29, 2011

AEI Corp (AEI SP) - May 2011 updates

Hi all, 

Apologies for the delay in updates for this one. This is a really small position for myself but is no excuse to not keep up to date with. I will have to decide whether to up it or to pare it soon.

  • FY results, profits halved from $8.5 to $4.1m with a topline rise of 19% and COGS of 43%
  • Cash went from $33m to $22m largely due to 
    • dividends paid out of $7.8m and capex for the new auto plant of $4.7m
    • Debt is now $1m and finance leases of $1.8m 
  • Firm bought back $1.6m worth of shares from the market as well
  • Cheaper imports and rising S$ continues to tighten margins
  • Precision engineering and electronics is still the main business core vs. construction
  • Aluminium prices, labor costs are the main costs 
  • The new China Auto plant is pending approval and estimated to start in 2H 2011.
  • There was a weakness in prices when the auditors issued a qualified opinion on the firm 
  • This is in relation to the convertible bond to M2B of $3.2m covering over $200m of assets
  • M2B has entered into several agreements, one of which to Qtrax, the world's largest free legal music site, major in China, Indonesia and Malaysia. 
  • Im confident the loan is well covered and AEI is adopting a wait and see attitude to loan conversion
  • I am also not bullish on the new venture, which requires a gestation period and probably works on monetizing ad revenues while allowing users to connect and download free music/videos. Anyway, if venture fails, M2B fails, AEI will have a very high chance to get back the $3.2m in cash.
  • If M2B becomes wildly successful, AEI will convert to equity and participate in M2B, bringing in new cashflows. 
  • In whole the qualified opinion is definitely not negative and price decline is unwarranted
  • I will wait for results of the new China plant to decide if I should make any changes to the position. 
"To make large returns from a small capital base, you need to be a plunger."

Disclaimer: Author owns shares in AEI Corp

Wednesday, May 11, 2011

Nanyang Holdings (212 HK)

All in HK$
  • Firm originally does textile operations which is weakening 
  • Currently the firm is transformed into a property investor and a financial holding company
  • Income comes from 50% rental income and 50% dividend income so dont expect PER to be low
Investment thesis (simple)
  • Firm currently is about $26 per share with 41.37m shares so is about $1.0 bn market cap 
  • Asset play (holds investment in banks and real estate far exceeding its market value)
    • Insiders holds 50%, are on common boards on SCSB
    • SCSB also recently requested a rights issue for expansion
      • Nanyang will end up with 4.4% after injection of around $155 mm. 
      • (SCSB holds a 57% stake in Shanghai commercial bank license in HK)
    • If firm does not sell any assets, with its $55m cash, it has to borrow $100 mm to finance the purchase
    • With current borrowing rates low and SCSB dividend over 5% historically and 22% (post 20% tax) if 2010 dividend of $0.81/sh is taken over rights price of $2.63 per share, the purchase is accretive
    Financials (clean)
    • Breakdown of firm's worth
      • $1.0 bn of commercial/ industrial property (All operating, yielding income and indeptly assessed)
          • Fortress Tower, (near Victoria Park and 1km from Causeway Bay, prime area)
          • Nanyang Plaza, (near Kowloon and has a carpark in an area starved of space)
          • Tai Ping Industrial, (near Tai Po Science Park, limited quantity held)
      • $1.1 bn worth of Shanghai commercial and savings Bank (SCSB) otc shares (3.8% stake)
      • $0.21 bn of liquid securities (Mainly 2/3 hk listed equities and 1/3 debt paper)
      • ($0.22) bn of total liabilities + ($0.016) bn of dividend payable (ex May 15)
    • SCSB is expected to do well
      • ROE of 10.7% and ROA of 0.7% vs peers of ROE 3.5% to 10.4% and ROA of 0.1-0.9% (Both ROA and ROE peers comps are average on the lower end)
      • Cost to income is at 49.4% vs peers of 40-74%, while dividend yield is 8% vs peers of 1-4% 
      • Peers are at 1.4 - 2x PBR and the only significantly superior bank is Wing Hang Bank.
    • NAV of SCSB is $19.6 b
      • At 1.8 - 2 x PBR, the 3.8% stake is worth 1.34 - 1.494bn
    • Post rights, SCSB will have NAV of $22.23bn, and Nanyang will own 4.4%
      • At 1.8 - 2 x PBR, the 4.4% stake is worth 1.76 - 1.96 bn
    • Firm is mid-large sized by market value but is illiquid (However institutions wont touch it too!)
    • Income is dependent on rentals and SCSB dividends, any impact to both will hit the firm
    • Property market cooling for commercial / industrials
    • Share price on a consistent uptrend even on bad down days and that is a good sign and perhaps a catalyst in itself. 
    • The situation has vastly improved and past prices serve no good use
    • Most people missed this opportunity as it is reported as an AFS in the statement and SCSB gave a bonus and 2010 bumper dividend, bumping up the 3.8% stake valuations by 2x.
    • Even in worst case where all investments are halved, theres still a 10% upside (unlikely to half)
    • Rental income is expected flat as HK cools residential and not commercial/ industrial properties
    • Some elementary calculations (Didnt use calculator and approximate figures only!)
      • Bank stake                     =   $1.76 - 1.96 bn
      • Property                         =   $1.00 bn     (< assessed value)
      • Liq securities                  =   $0.20 bn
      • JV, tax assets, PPE        =   $0               (Total $0.18 bn)
      • Total liabilities                =   $(0.336bn)  (Include div, new debt)
      • Total business value   =   $ 2.624 - $ 2.824 bn
    Potentially, we can expect a gain of 2.6-2.8x monies based on current value of $1 bn
      • Thats if the assets are all fully valued
      • On a timeline of 2-3 years, 17 - 34% IRR expected
      • I do not mind holding this to get a dollar for 35 cents, beats chasing yields
      • Even if only valued to 50% of their realizable value, gains are still 1.3 - 1.4x 
    Disclosure: The author is vested in the above mentioned company