Month: February 2018

“Where Art Thou, White Knight?” – LTC Corporation’s Privatization Offer.

My style is to normally have some frivolous stuff at the start, before jumping into the hardcore investing stuff.

705) white knight.png

But since I’m here paging for some deep pocketed white knight to look at unlocking the value for LTC Corporation (further), I’d better just get into it right at the get-go.

Last Friday (I think it was the 9th Feb), was one of those rare days whereby I literally bounced around with a spring in my step. EVERYTHING went well for me that day. Like everything. But I’ll just talk about 1.

It was 1 of those days whereby I could play tennis with a brick wall… and win. In short, invincible.

The day started with a barrage of text messages from some fellow investors:

696) LTC 1.jpg

For the uninitiated, Alain T is a fellow value investor, and I’ve previously published (with permission of course), his work on LTC & S i2i:

What Makes You Think You Can Win? The Case For The True Value Investor – LTC Corporation & S i2i Limited

As you can see, here we are, postulating about a possible privatization offer. We wouldn’t dare bank on that, but one can certainly hope. And the story continues:

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698) LTC 3.jpg

Then 15 mins later, we’re high-fiving each other:

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And it wasn’t just text messages. It was emails as well. Emails such as these put a smile on my face. Always nice to hear from fellow drs:

702) LTC email

So there we are. I took my own sweet time and only just got around to really looking at the offer documents yesterday (After my hot valentine’s day date, of course). Let me break it down right now.

LTC’s family dominated management is offering a buyout of all minority shareholders at an offer price of $0.925. At 1st glance, it’s a great deal. For starters, it exceeds the highest share price LTC has ever reached, since the year 2000.

703) LTC share price.jpg

This means that any shareholder who has bought shares in the past 18 years, would’ve made money. That’s pretty much everyone.

For me personally, since my ave. price is around $0.72, this would give me a ROI of about 28.3%. Not great, but not too bad either. Especially since it’s coming at a time when I’d like to liquidate something. So timing’s good.

Since the offer price is also a massive 45% gain from the last traded price before the trading halt, it’d also give a massive bump in portfolio values compared to the start of the year, so I’d really like to see how STI ETF beats me this year.

But the Chengs fail to illustrate how fantastic a deal they’re getting as well.

So let TTI illustrate it.

1. Offer price is at a steep discount to book value

As of the mrq, LTC’s book value is a massive 164.51 cents. This means that the offer price is a mere 56% of the book value. The Chengs are buying 164.51 cents worth of assets per share, for a mere 92.5 cents.

2. Steel prices are rising

As I’ve illustrated in previous LTC posts, LTC’s inventory is booked via a weighted ave cost method. This means that in a rising steel price environment, their profits are MAGNIFIED.

LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?

under “Inventory Accounting”

3. Solid Balance Sheet, FCF Generative

The Chengs are offering 92.5 cents… for a company’s whose book value is 164.51 cents, of which 28.6 cents are held as cold hard cash. The company has next to zero debt. ($4,000 of debt. LOL, yes! $4k!)

As I’ve illustrated in earlier posts as well, the company is also FCF generative, year in, year out.

4. Project Pipeline & Future Potential

I’m sure the Chengs know this.

LTC’s residential property development in Penang is proceeding well (Gem Residences).

Their SG industrial properties  (Lion Buildings) has previously been written down, and with it’s central position just beside an MRT station, as well as a backdrop of recovering demand for industrial spaces, there’s great potential for upwards revaluation of the property, even without redevelopment.

5. Lowball Offer Price

Perhaps, even the Chengs know this:

704) Offer price.jpg

The thing is, I can understand how hard this must be for a potential white knight to come and make a higher bid.

The Chengs control just under 50% of the company. Any offer price would’ve to extend to the shareholdings of the Chengs as well. And if the white knight is not looking to operate the company as a private entity, they have to worry about getting into a war and eventually having the Chengs sell out to them instead.

Although I think that’s a highly unlikely scenario.

The Chengs WANT this. They just want it cheap.

Hell, I think even at $1.10 per share, they’d snap it up in a jiffy! 

Cos even at $1.10, it’d represent a mere 67% to book value. That seems fair, since we do have to give a discount to book value for acquirers. (Again, I wrote about it some time ago. Steel players have to be acquired in it’s entirety, at a discount, since their book value mainly comprises rebar steel. It’s kinda like a “bulk discount” if you’re buying a lot of inventory at 1 go)

Remember the book value, the cash holdings, and the fact that their inventory would be inherently revalued upwards in an environment of rising steel prices.

What Next?

The acquisition offer is such that the offer will only be valid if the offerer receives acceptances resulting in the offerer owning at least 90% of the company.

That’s the threshold required to compulsorily delist the company. (Cos anyway, if it’s not, SGX will suspend trading in the company if the public float falls below 10%)

In other words, as it stands now, if the final result is such that the offerer does NOT own 90% of the company, this offer may cease to be valid.

They do reserve the right to lower the acceptance rate to 50% though, although they won’t be able to delist the company then. (They’d just acquire more shares)

Although the Chengs now collectively own just under 50% of the company, trying to get 90% acceptance is not that easy. We just need a few larger shareholders dissenting and holding out. And for all we know, that might be a real possibility.

705) Shareholder list.jpg

Bunch of secret shareholders hiding their holdings under nominee accounts in banks and brokerages.

Plus there’s the highly respected Morph Investments. Those guys are long term value investors, showing up in top 20 shareholder lists in various deep value situations, and they’re certainly extremely patient guys.

It’d be certainly interesting to see if they’d agree to let go of their substantial stake at a discount.  I wish they’d let me know their thoughts. I’d be happy to vote the same way they do.

So it’s certainly not impossible for the Offerer to fail to own 90% of the company. The holdings of the nominees alone would account for more than 10%.

Right now, the share price trades at a puny discount to the offer price, indicating that the markets generally do not think there’d be a competing offer, and that there’s a high likelihood of the offer succeeding.

So for minority shareholders, this presents a conundrum.

You see, it makes sense to just accept the offer right now. Simply cos if there’s a higher competing offer and LTC Corporation is forced to raise it’s offer as well, the new, higher offer price will be offered to those who accepted early as well.

But accepting the offer right now, also increases the odds of LTC Corporation reaching that 90% threshold, thus putting off any white knight from making an offer.

It kinda reminds me of the prisoner dilemna in game theory.

This is from Wikipedia, about the prisoner dilemna:

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is:

  • If A and B each betray the other, each of them serves 2 years in prison
  • If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)
  • If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)

So the most logical, best case scenario for the general good of both, would be for both to remain silent. Yet, remaining silent, runs the risk of serving 3 years if the other party betrays you.


Alright, so that’s where it stands with LTC Corporation.

Shareholders should be expecting offer documents to reach them sometime next week or the week after.

WHERE ART THOU, WHITE KNIGHT?

So guys, have a great Chinese New Year ahead!

Peace out.

 

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Divestment Of Shinsho Corporation & Kobe Steel – TTI’s Post-Mortem

1stly, some thanks is in order.

Lilin from SGX told me they’re sending “Team ThumbTack” (as they so affectionately put it) some red packets for CNY, and I was expecting a couple of packs in the mail.

Then my guard passed me this:

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Inside was a massive box of several packs of red packets.

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Wow, that’s enough for several CNYs. How’s that for some festive mood?

Plus they’re smart enough to have generic red packets that can be used regardless of which year it is.

So thank you, SGX!


3 months ago, in Nov 2017, I wrote about my investing thesis for Shinsho Corporation and Kobe Steel:

TTI’s New Core Position: Shinsho Corporation & Kobe Steel

As stated, I accumulated a position of 2,500 shares in Shinsho Corporation, and 2,000 shares in Kobe Steel

Experts In WEF Davos + Updates On Shinsho Corporation

Since then, both companies have reported Q3 results that have handily beaten market’s expectations, the share prices have shot up, and I have taken profit in 2 batches, the 1st being a sale of 1,000 shares of Shinsho Corporation at 4,100 JPY on the 1st Feb 2018.

690) Shinsho Corporation take profit 01022018

Results

To build my positions, I converted SGD 124,000 into JPY at a rate of 84.34291, ending up with JPY 10,458,521

Following complete divestment, I ended up with JPY 12,257,387, giving me a capital gain of approximately 17.2% for 3 months.

The real returns were further boosted by Fx gains, as the recent bout of volatility in the markets resulted in a rapid strengthening of the yen, and my conversion of yen to SGD was done at a rate of 82.784, resulting in a balance of SGD 148,064.

Real returns for the past 3 months or so is thus, SGD 24,064 or a ROI of 19.4%

Not too shabby for 3 months huh.

Post-Mortem

I’ve previously already described my rationale for my core positions, with a particularly large one in Shinsho Corporation, and a smaller one in Kobe Steel.

Since then, the markets have proven me to be largely correct. All japanese steelmakers have seen their share prices rally, but Shinsho’s and Kobe Steel’s have rallied much more strongly on most days compared to their peers.

Comparison Kobe Steel vs other share prices

As I said earlier, it’s really difficult taking up contrarian positions, especially when the markets continue to move against you AFTER you’ve completed your accumulation. And trust me, it ALWAYS does.

Expecting to accumulate right at the bottom, is akin to expecting to learn to fly right after jumping out of a moving plane. It just doesn’t happen. And when the markets continue to move against you, every day feels like an eternity.

Each time that happened though, I took solace in my research. In this case, I dug deep to analyze the trends in Japanese steel production figures, and compared that to the relevant market share of each player. I also kept track of Chinese steel production figures, particularly it’s export figures.

Japanese steelmakers are having a field day right now, from a rare combination of lack of cheap chinese steel exports, as well as huge demand from construction projects within Japan, in view of the Olympics 2020. Another source of huge demand comes from the Jap automakers, which have been ramping up production.

In 2017 to date, China has greatly restricted it’s steel production, choosing to consolidate within the industry and cut exports. This created a sudden void, and steel prices such as rebar steel (used in the construction industry) and hot rolled sheet steel (used by automakers) firmed up strongly.

My tracking of the production volumes also gave me the confidence to build a core position and hold resolutely.

The Japanese steel market is dominated by 3 players:

  1. Nippon Steel & Sumitomo Metal
  2. JFE Holdings
  3. Kobe Steel (a distant third)

With that, I figured that the overall industry figures would fairly accurately reflect the fortunes of the 3 players, proportionately.

The data that I have compiled and assessed, constantly gave me the confidence to be contrarian. Check it out.

691) Steel Products Orders.jpg

This table shows the steel products orders by end clients. Comparing y-o-y growth, hot rolled sheets (used mainly by automakers) and steel pipes and tubes (used in construction), showed the strongest growth of over 6% more than the corresponding period in 2016. (Highlighted in yellow)

Steel manufacturing is the largest division of Kobe Steel, and the largest contributor to earnings. Within the steel manufacturing division, these 2 particular sub types are the main types that Kobe Steel supplies.

As mentioned before, the huge demand on the industry, supported by the drop in chinese exports, resulted in a rare environment where steelmakers could raise prices on their products. In fact, domestic demand was so strong, that Japanese steel exports dropped by more than 10% y-o-y as producers found clients to take up their production easily:

692) Export numbers.jpg

In addition, we can see from the table that demand growth came mostly from construction projects and automakers.

I even went to investigate the steel product orders by regions, as I postulate that the higher the regional demand that Kobe Steel resides in, logically, the greater the business for Kobe Steel.

693) Orders by regions.jpg

Kobe Steel’s headquarters reside in Kobe, which is within Kansai.

In fact, Kobe Steel is the single largest employer within Kobe. That further gave me confidence that it is not in the interests of politicians to overly penalize Kobe Steel so as to cause insurmountable troubles.

Don’t bite the hand that feeds you, ya.

I prefer to look at y-o-y data for the periods I track, instead of month on month data, so as to smoothen out seasonal demands. The steel demands tend to be substantially stronger in 1H, with the lull being in the Oct-Dec winter period (which is Q3, as they all have a March year end)

Now, having digested all this data…….. logically, does a 40% drop in the share price due to this scandal seem kinda illogical? A 40% drop means the markets are pricing in a catastrophe type of scenario, and perhaps, even pricing in insolvency and bankruptcy.

TTI didn’t think so, looking at all the data.

But that’s not all. The best investments are always those that you have superior insights that would give you a competitive advantage over the markets.

So… How did I actually end up looking at Japanese steelmakers? (I actually hate to look at Japanese companies. The financials are presented differently from what I’m used to, the numbers in yen always look so large and it’s not fun for a number cruncher like me, and the english in their website is usually atrocious).

Answer: By chance, actually. 

I’d really like to say that I’m a genius who had the foresight to determine where the Japanese steel market was going, but it was really an idea that I chanced upon.

Because of my position in Dutech, I was actually tracking rolled sheet steel prices in China (that being a major cost for Dutech), and noticed rising prices. I also noticed a sudden drop in Chinese steel exports, and came across an article which described how the Chinese gov was consolidating the industry, shutting down inefficient steel mills and producing higher quality steel. They were also limiting steel exports in an attempt to regulate steel prices. (whether it’s by choice or due to political pressures, I wouldn’t know)

Specifically, when looking at the Kobe Steel scandal, I also knew that unlike the doomsday scenario that the press painted, it is more likely that Kobe Steel’s clients would work together with Kobe Steel, to contain the fall out, rather than go after Kobe Steel with pitchforks.

This confidence is gleaned from my previous investment in CDW Holdings.

Post-mortem Of CDW Holding Ltd Divestment

Grass Is Always Greener On The Other Side… + CDW Holdings FY16Q4, TTI’s Thoughts

CDW’s CFO Mr Philip Dymo, gave me precious insights into the manufacturing industry and corrected many misconceptions I had.

For example, I used to think that the manufacturer – client relationship is one where the power resides in the clients. It seems logical right? The manufacturer doesn’t have any competitive advantage, the client can just go to the cheapest manufacturer who can provide the same goods, at the lowest cost. What pricing power does the manufacturer have?

But in reality, their relationship is more like a partnership. At least for CDW’s industry, a client would need to accredit the manufacturer before beginning on a working relationship, and that process can take as long as… 2 freaking years!

In fact, for Kobe Steel, I believe some of their clients are actually aware of the discrepancies in their product specifications themselves. Complicit agreement is what this is.

Financials

I’ve been discussing Kobe Steel’s fortunes above, that’s because Shinsho Corporation’s macro fortunes really mirrors that of Kobe Steel’s.

For the financials though, let’s look at Shinsho’s, since that was my core position to begin with.

Q3 financials put many of the market fears to rest, and rewarded my positions heavily.

694) Kobe Steel earnings.jpg

Earnings definitely surprised the markets, coming in at 515.68 yen per share. Market’s fears of clients bailing out on Kobe Steel / Shinsho Corporation did not materialize. Earnings were just as strong.

More importantly, check out Shinsho’s forecasted earnings for the full year:

695) Kobe Steel forecasted earnings.jpg

Projecting full year EPS of 564.68 yen.

That’s actually very very close to my own estimate in my investing thesis.

TTI’s New Core Position: Shinsho Corporation & Kobe Steel

I wrote:

Shinsho Corporation

For 1H of fiscal 2017, reported EPS of 322.41yen

(assuming earnings for 2H comes in at 72% of 1H) FY17 EPS of 554.5 yen

At share price of 3140 yen,

That’s a forward PE of 5.6 times”


My own ascribed fair value for Shinsho Corporation is actually much higher than my divested price, at around 4,500 yen. That would give a forecasted PE of around 8 times.

I chose to divest now, and leave approximately 20% of gains on the table, because I need the liquidity right now. (No, I did not foresee the markets will suddenly turn volatile)

The needed liquidity is related to this:

PE Moving On To Pre-IPO; TTI’s Projected Returns: 1,000% Within 10 years.

Maybe I’d write about it at a later stage when the deal gets done and dusted.

Alright, that’s all I have for this post.

Have a good CNY ahead!

Wishing all readers a prosperous year ahead!

Cheers