Convertible Bonds + Bye Bye LTC!

Zero posts in the past few weeks, and for good reason too. Phew. I’ve been busy working on the convertible bond offering, and finally, I’ve some tangible results to show for it.

As I was discussing with a friend, life is really funny sometimes. Sometime ago, I was looking for potential co-investors and not getting much headway after meeting many different folks. Barely a week later, I’m now kinda flooded and am not really looking for any more capital.

There’s a limit to the amount of convertible bonds that’s allotted to me anyway. I have to keep some for myself afterall. It’d be weird if all my co investors end up getting a larger share of the pie than me. Don’t think they’d feel very safe with that arrangement either.

So that’s how life is like sometimes. Nothing actually happens for a long while, and when it happens, it all happens. I’m also kinda surprised that there’re a couple of accredited investors who have contacted me following the previous post. I really wasn’t expecting that. I just mentioned it in passing. In any case, even if it didn’t work out, it’s always nice to have met with, and made friends with, like minded investors.

But it also tells me that there’re some folks out there who are reading SG TTI, but perhaps errr, find it…. inconvenient to comment or share their thoughts publicly because of their visibility.

I’ve always suspected so.  Now, I know.

Please email me comments and thoughts though (thumbtackinvestor@gmail.com), I promise everything will be P&C unless otherwise approved.

Anyway, that’s the beauty of investing. There’s always something around the corner, something’s always happening, and if it comes our way, at the right time and with the right team……. the sky’s the limit. In Buffett’s words, you don’t have to swing at every pitch, just the right one.

So this represents kinda the major change in SG TTI’s personal portfolio: I’ve set aside around $500k – $600k for this pre-IPO convertible bond. I’ve vaguely written about it some time ago:

Today, I’m Going To Talk About Private Equity – TTI’s Personal Experience

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

1Q 2018 Report Card

This means that for the next 1.5yrs – 2yrs, this $500k will be a drag on my portfolio performance, since it doesn’t generate an immediate return and all coupons will be accrued. Upon vesting at IPO though… oh my, I think (and hope) there’d be some fireworks.

I’d be pretty pleased if the performance on the 1st trading day matches that of Asian Healthcare Specialists: closing 48% above it’s IPO price!

https://www.businesstimes.com.sg/companies-markets/asian-healthcare-specialists-and-slb-debut-above-ipo-prices

As mentioned earlier (PE Moving On To Pre-IPO; TTI’s Projected Returns: 1,000% Within 10 years.), my horizon is much longer, and I’m willing to hold, but it sure wouldn’t hurt at all if the 1st trading day’s performance is like that.

All my co investors will be smiling from ear to ear. I think many people will buy me many lunches then.

Using Asian Healthcare Specialists (AHS) as a comparison, our growth story is going to be much stronger than AHS’s. Much of their raised capital is going towards “working capital” whereas most of ours will go towards M&A and growth.

They are a local story, we’re already regional, and will eventually be pan Asia (that’s not going to be in the IPO prospectus, but the expansion is already well underway).

AHS had no public tranche and only 337 placees got shares (https://www.businesstimes.com.sg/companies-markets/asian-healthcare-specialists-shares-fully-placed-trading-on-catalist-to-commence). Well, our public float will likely be minimal (<20%) with most of the support for the IPO coming from insiders and/or related personnel.

Strong similarities there.

Anyway, congrats to Ho Bee Land chairman and CEO Chua Thian Poh. His 4.6million shares would’ve seen a niffy return in a relatively short time frame, and I think, this is just the beginning for AHS.

Ah well, that’s how it works. That’s how the rich get much richer. Access + opportunity + guts.

I guess I’d come back and update this exciting part after 1.5yrs.

---

In completely unrelated news……. ever wondered how the government comes up with corporate statistics and projections on stuff like corporate capital expenditures in the coming year, on business sentiment, amount of cross border investments etc?

By forcing requesting companies fill in surveys like this:

Yup. That’s for my privately held investment holding company.

And tbh, it’s quite a $%#$%@#% irritant. This is the 3rd freaking survey I’m asked to respond to in the past 12 months (I think, maybe more).

OK, it’s not addressed to me, it’s addressed to my investment holding company, but in a small holding company, the person responding to such surveys isn’t my secretary or my PA, cos… she doesn’t exist.

It’s me.

Or any one of the other directors. Or my accountant. (If I could get the cleaner lady to respond, I would….)

And responding to surveys takes time. And effort.

And in the corporate world, anything that takes time and effort, costs $$$.

So you can see why I find this a complete nuisance.

Oh, why don’t I just ignore it you say? Surveys are supposed to be volunatry isn’t it? Well, cos I really did just that once before, and received a few reminder emails AND calls! And when I ignored the calls, they called my accountant!

So yes, it is “voluntary”, but then again, it’s not really either. Bleh.

---

Finally, some happy news.

I’ve received payment of about $120k just last week for tendering my LTC Corporation shares in the privatization bid by the Chengs.

I’ve written so much about LTC Corporation before previously:

LTC Corporation (Part I)

LTC Corporation (Part II)

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

My Current Thoughts On LTC Corporation – FY17Q1 Results

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

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

I guess this would just be a closing review of LTC Corporation.

At the tender price of $0.925, my ROI is a mere 28.3%. I’ve recognized a total profit of $25,928 from this investment, after tendering 127,100 shares.

If I benchmark it against STI ETF, as we surely must, this certainly wouldn’t count as one of my greatest successes. In comparison to some of my earlier divestments:

Post-mortem of Hock Lian Seng Divestment

Post-mortem of Metro Holdings Divestment

The returns from LTC Corporation was at best mediocre and probably quite sad if I take into account the holding period of about 4 years. The only saving grace is that the funds couldn’t have come at a better time. To paraphrase WB, I’ve many right “pitches” coming my way, and I intend to really swing the bat furiously.

The Chengs have failed to privatize the company. This isn’t a surprise to me, and in fact, I’ve already expected this scenario in my private conversations with fellow investors. This is the 3rd delisting attempt that I’ve experienced, and somehow, the play book is the same.

At the offer price of $0.925, it’s still a steep discount to the book value. Some investors have refused to accept, and the Chengs have failed to garner the 90% stake they need to force a delisting. Yet, they went ahead to change the offer into an unconditional one, and bought out whoever has tendered.

They had to. The delisting offer process is not cheap, and the Chengs would’ve gotten financial backing to do so, even if they couldn’t fully delist.

So now, as it stands, the company remains listed, but with extremely low liquidity, since the Chengs own just over 85% of the company. Whoever has held out and not accepted the offer, would be unlikely to sell out at the open market now too, as it just doesn’t make sense (open market price is lower than offer price right now)

So both parties did not get what they want. The Chengs fail to delist the company, whoever held out and did not sell out, failed to get the higher price they hope for.

Following this offer, the Chengs are not allowed to make another privatization bid for 1 year according to SGX rules.

After 1 year, my best guess is that the Chengs will come back to buy out the remaining shareholders who have held out, at a higher price than the current $0.925. And this time, they’d likely succeed. That’s how it went with my 2 previous buyout offers, and I think it’d be similar this time around, since all parties would be forced to meet at a middle ground eventually.

It doesn’t benefit any party for LTC to remain a completely illiquid, yet still listed company. The listing doesn’t derive any benefit for the company, and there’s no counterparty to buy shares even if the Chengs want to liquidate. So it kinda defeats the purpose of staying listed.

Why then did I tender at $0.925?

Well, simply cos I can’t be sure that there’d be a higher offer after a year, or sometimes, it may take longer than a year. On top of that, I really do have better opportunities to deploy capital in right now.

And as much as LTC is “undervalued”, with this delisting attempt, it’s clear that LTC is the equivalent of the much vaulted “value trap” that value practitioners like myself always fear.

The book value is $1.64+, the offer price is $0.925 (a substantial discount to BV), and yet the tender went through mostly, except for the few guys holding out. This surely, must qualify as a long term “value trap”.

I chalk it down to market inefficiencies.

Efficient market hypothesis, which I hear is taught in many Ivy League business schools, means that when you’ve such undervaluation, some market entity comes in to correct the undervaluation for his/their own gains.  But this is not possible in this scenario, when the control of the company rests within the Cheng family and their entities, and when the local investing populace is docile and/or mostly passive and uninterested.

Carl Icahn and Bill Ackman would be shaking their heads furiously if they’re here.

So looking at this experience, how does TTI avoid future value traps?

I don’t know tbh. I don’t think it’s possible to definitively identify and avoid completely. That’s where the concept of MOS comes in. You can’t avoid them totally, but the MOS saves you from being consumed by 1.

In any case, if the worst a value play can do to me is to garner a lower return than that of a passive instrument, albeit still a positive one, in the long run, from a complete portfolio perspective, the results would still be very attractive. (For gods’ sake, you can’t be that unlucky to get into value traps all the time)

---

Oh yes, before I forget.

Since I’ve spent some time talking about IPOs at the start… a friend and fellow blogger did some pretty impressive work compiling IPOs a decade ago and what has since transpired. He included ALL IPOs, even those that are now dead and buried, so there’s no survivorship bias there.

Go take a look.

There are many names there that I haven’t even heard of.

http://growinginvestor.blogspot.sg/2018/04/a-review-of-sgx-ipos-of-year-2008.html

http://growinginvestor.blogspot.sg/2018/04/a-review-of-sgx-ipos-of-year-2009-2-for.html

The results are especially interesting to me right now, for obvious reasons. I’ve paid particular attention to healthcare plays.

Anyway, this is an apt way to end the post. Start it and end it with IPO stuff.

Exciting times ahead.

Advertisement

1Q 2018 Report Card

1st up, I’d clarify, as I’ve always done so for previous quarterly report cards, that I track returns using XIRR. So this means that the time value of cash is taken into account in the results, but it also skews the annualized XIRR figures for now, as it’d assume the exact same rate of return for the rest of the year.

For 1Q 2018, STI ETF produced a XIRR of 4.01%, inclusive of dividends.

TTI’s portfolio, inclusive of US holdings and options, produced a XIRR of 6.22%. 

AUM grew to $1,462,273.22, inclusive of capital injections, of which almost 35% is kept as SGD cash at the point of writing this.

TBH, I was a tad disappointed despite beating STI ETF slightly, in a period of heightened volatility. Perhaps my expectations were too high, but it felt like I was running away from STI ETF after 3 successful investments recognized in Q1:

1. Privatization offer for LTC Corporation (“Where Art Thou, White Knight?” – LTC Corporation’s Privatization Offer.)
2. Shinsho Corporation and Kobe Steel (Divestment Of Shinsho Corporation & Kobe Steel – TTI’s Post-Mortem)
3. Shorting Volatility (The Big Short: TTI’s Version. But Where Are My Millions?!)

Instead, what countered the profits from these successful investments were the continued drop in Dutech Holding’s share price (down about 25% YTD), Valeant Pharmaceuticals (down about 22% YTD), as well as the weakening of the USD vs SGD, since I have a substantial portion of the portfolio in USD denominated assets.

Cash levels stands at over $350k SGD, and will likely increase further, as I’d soon have to deploy cash into a private convertible bond offering.

This will become a big drag on my portfolio returns for the next 1.5 – 2 years, as I’d receive 0 returns from what is likely to be a sizable investment. Instead, the coupons will accrue, and at IPO, I’d (hopefully) see a massive ROI at 1 go.

After meeting and discussing with my hedgie friends just last week about a potential JV, I’ve new found understanding of how the industry works, and the complexities surrounding even making a simple investment like this. Perhaps I’m too naive, but I was expecting it to be a breeze.

The terms that I conjured up are fair (IMO) to all parties involved, and it is my sincere belief that we’d all pocket a tiny sum that is fairly assured, and in a relatively short time frame. And we can further discuss, at that point in time in future, whether to show hand further and throw good money after… good money, and explode our returns together.

It was what I view, to be a win-win-win deal for everyone, as with all deals that I structure. I’d never want to win alone, if it involves my partners losing out. Reputation is a lot more important than profits. Opportunities for profits abound at every corner, but reputation? we all only have 1 each. Once it’s gone, it’s gone. You gotta protect the ppl who trusted you.

But I did not anticipate stuff like fund mandates, external investor concerns and regulatory issues placing roadblocks in my plan.

Ah well, I’d still see if we can work around stuff like that.

If not, I’d have to go it alone then.

Alright, so this is a quick breakdown of my thoughts currently on my current holdings (SG only):

---

Alliance Mineral Assets

Much has been written about AMAL everywhere else, esp so in NextInsight, such that I’m not sure if there’s anything of value that I can add.

The Bald Hill project has finally started production last month, and lithium exports are expected to proceed in April.

The concentrates produced are also of a higher quality than expected, containing well in excess of 6% Li2O.

Their cost is given at ard USD 500 / tonne currently, but this is expected to come down next year to just under half of their USD 800 / tonne selling price, which would give them a more than 50% operating profit margin.

Also, Tawana’s CEO has indicated that he expects to export 10k to 15k of concentrate every month, giving rise to a target of 140,000 tonnes of concentrate for the full year.

So, based on these numbers, the total profit for this year, works out to be (880-500) X 140,000, x 50% = USD 26.6mil for Alliance, which works out to be 6.27 SG cents per share (using exchange rate of 1.31)

Based on the current share price of $0.37, that gives us a forward PE of 5.9x.

These figures are taken from recent interviews:
https://www.youtube.com/watch?v=mNtI68OWP8…
https://www.youtube.com/watch?v=mNtI68OWP8…

Of course, I’m not including any other gains from Tantalum so there’s some MOS there.
And on top of that, they’d probably announce increases in their reserves soon (Current mine life is only 3.5 years), so there’d certainly be some catalysts there.

Of late, AMAL’s partners, Tawana and offtaker Burwill, have shown signs of accumulating AMAL shares further. Market chatter is for Tawana and AMAL to merge. Burwill has openly set aside a sum to possibly further acquire AMAL’s shares.

All in, it’s all good news.

I think the current share price represents a steal for AMAL.

LTC Corporation

The privatization offer is underway.

As of the most recent news, the Chengs collectively own and have acceptances that give them just over 80% of the company. The Chengs are also continuing to accumulate from the open market.

Yet, this means that they need to convince shareholders to accept to give them another 9% or so of the outstanding shares, within the next 2 weeks (until the deadline). This seems like a tall order.

9% can’t be just minority shareholders. Certainly, it means that there are some large shareholders who are holding out. Yet, I don’t forsee a counter offer coming. Someone’s just unhappy with the offer, but is unwilling to counter offer.

If the Chengs fail to garner the required 9% within these 2 weeks, they would have failed to privatize the company, but would’ve the option of still proceeding to buy the shares that have been tendered, or to call off the whole deal altogether.

Any scenario may materialize right now, TTI’s view is that the Chengs will fail to privatize, but proceed to accept tendered shares. (Launching a privatization is costly, I don’t think they want to walk away without any results to show for it)

SGX rules state that they’d also not be allowed to make a new offer if this lapses and fails, for a period of 1 year.

Now… we all know the Chengs want to privatize this. It makes no sense for them to own 80% of a listed company with next to zero liquidity. Especially since they already had control of the company to begin with. Yet, whoever is holding out wants a higher offer.

So my best guess is that the Chengs will come back after a year with a higher offer and succeed with the buy out.

Again, any scenario may play out, I’m just postulating here, based on my past experiences with privatizations (and I’ve had quite a few)

BBR Holdings

The financial results have improved dramatically in 2017, compared to the prior year.

At least they stemmed the losses from their loss making projects.

Yet, going forward, there’s nothing exciting on the order books. Order books are getting depleted, with no new projects announced.

I won’t be too critical though, cos the last time they went all out for projects, they ended up not taking care of their margins, and when there’s even some variation, the projects sunk into losses.

Thus far, the company is not getting much results to show for their heavy investments into PPVC and all that new DfMA technologies. This is a major disappointment for me.

Somehow, this company just seems to like to have a lot of activities, do a lot of stuff, without bothering about their bottomline. Activities over results.

I’ve spoken to a few privately owned developers, and none are too optimistic about DfMA. All have indicated that they’re happy to let the listed companies go ahead and experiment, run up losses, while they sit back and watch how it proceeds. This is 1 fine example of why it’s not always best to be the first to try out new stuff.

By the end of 2018 though, almost all of BBR Holding’s projects are slated to be completed, so it’d be unthinkable that they do not win any new projects from now till then.

I’m watching the gov tenders closely… come on BBR, there are 34 PPVC tenders up for grabs. BBR is the pioneer in PPVC, and has invested heavily in PPVC technologies and projects, and is still investing in a yard for their modular units for PPVC.

Surely, as pioneers and leaders, they should be able to win some of these projects, and with a certain margin too. If they are not, then why the heck get involved?!

I’ve said this a gadzillion times: many public listed companies’ management just want to show activity. So that shareholders think they are actually doing work. We really want the bottomline, not activities. I don’t care if u sit in the office and smoke crack the whole day, if the bottomline keeps increasing!

Having said that, I’m at least a bit more optimistic with their latest mixed development project, the en bloc of Goh & Goh Building.

The site is situated just opposite an MRT station, right at the start of Bukit Timah Road, with a wide and long frontage that’s along the main road, and if done well, a mixed development there has massive potential.

Their previous mixed development, The Wisteria, in Yishun, is slated to TOP in Q2 2018 (which is essentially right now)

The residential part is already fully sold. The commercial part has 2 floors, and is currently 75% occupied. (I know the occupancy rates and the rental numbers because my company was looking at taking up a space there, but it didn’t materialize.) I don’t think it’s appropriate to make public, the exact numbers, so I shan’t.

The Wisteria will at least, provide BBR and their partners, with a steady cashflow from management of the mall.

Geo Energy Resources

I can’t believe the share price is as low as it is right now.

Probably the markets are discounting the share price heavily over fears of China’s potential coal import restrictions. On the contrary, China’s crackdown on coal is likely to IMPROVE Geo’s fortunes further, as they close local mines and opt for low ash, high calorific value coal, which Geo sells under Geo Coal.

Also, Q4 2017 has several extraordinary expenses arising from royalty payments and write offs.

Of all my holdings, I’m pretty much the most optimistic on Geo Energy in the short to mid term.

Dutech Holdings

The 1 bug bear that dragged down, what would otherwise be stellar returns not just this past quarter, but the past several quarters in fact.

The usual story applies.

The integration of Metric continues. Johnny has still not been able to cut costs as quickly as he’d like. The company continues to face headwinds in the High Security segment, from previously high steel prices (it has come down a bit of late), lowered demand for safes, and correspondingly, the markets have punished the company with a rapidly declining share price.

I have spent a couple of weeks digging deep into Dutech Holdings, and my view has not changed.

I’d wait till after the AGM to make my move, but if it stays as pessimistic as it is currently…. it’s gonna be really hard for me to sit on my hands and not do anything.

Q&M Dental Group

Enuff said.

I think a buy out of sorts is in the works, but I have no idea when it’d happen, if it’d happen.

My relatively small holdings of 60,000 shares at $0.608 reflects my uncertainty.

---

My view is that in the near term, the uncertainty and volatility in global markets that we have seen in the past week will subside. Markets will be more green for the next week or so.

But then, what do I know about global macro stuff.

As always, good luck to all, and godspeed.