Wednesday, May 11, 2011

Nanyang Holdings (212 HK)

All in HK$
Background 
  • 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
    Risks
    • 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
    Expectations 
    • 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

    6 comments:

    Jack Phang said...

    Hi,

    I like your post. I will be following your post often. I sincerely invite you to visit my blog - www.jackphanginvestment.com.

    Have a nice day!

    Regards,
    Jack

    MTH Investments said...

    Hi Jack,

    Nice blog you have there, I like your URL.
    Anyway, I do cover Msia too. let me know if you see any good firms there. Im open to discuss.

    Cheers
    Mervyn

    redcorolla95 said...

    Hi,

    this is a great post. To me the valuation is very sensitive to the bank, and over a long enough time horizon.

    The credit risk profile looks good - largely Taiwanese rather than mainland, although it's not clear which sectors they're exposed to since 'Other sectors' is more than half of their loans.

    Are you concerned that a slowdown in China be quite bad for Taiwanese companies?

    Also, if you expect that the ROE going forward would be 10.7%, adjustments for their investments excepted, would be very close to the cost of equity? In which case the P/B should be a lot closer to 1 than 1.8-2x.

    Anonymous said...

    Hi,

    this is a great post. To me the valuation is very sensitive to the bank, and over a long enough time horizon.

    The credit risk profile looks good - largely Taiwanese rather than mainland, although it's not clear which sectors they're exposed to since 'Other sectors' is more than half of their loans.

    Are you concerned that a slowdown in China be quite bad for Taiwanese companies?

    Also, if you expect that the ROE going forward would be 10.7%, adjustments for their investments excepted, would be very close to the cost of equity? In which case the P/B should be a lot closer to 1 than 1.8-2x.

    cheers
    redcorolla95

    MTH Investments said...

    Hi there,
    Re statement 1 - yes it is, in fact over 50%

    Slowdown in China will impact largely Chinese SME banks such as China Merchants bank orBank of Communications as they are the ones most exposed to the over investments as well as Chinese AMCs and government debt issuing bodies.

    Second concern is on property loans exposure which SCBC is not exposed to a large extent. It is predominantly a trade finance and commercial loans and saving banks allowing for remittances between China and Taiwan. In short, I believe the focus is more on Taiwan rather than China and a slowdown will not or at least impact less versus other Chinese banks.

    This year's adjustments (-300 million NTD) is much less than last years (+500 million NTD). So 2010 earnings is lower vis 2009 and equity in 2010 is only 200 million NTD lower than 2009. So I would think that 2010 ROE is understated in some sense. I think one way is to take out all investments and back-compute the ROE without the exceptionals. ROE going forward is likely to improve, cost of equity not too clear what you are referring to here but should not be close since the firm uses leverage and cost of debt is definitely way under 10% atm.

    More importantly, their expenses have been declining across the board, in interest expense to operating expense at the clip of 15-20% decline. So that to me is good.

    PENNY STOCK INVESTMENTS said...

    Great rundown on company.

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