Sunday, November 06, 2005

Bargain technology VC

Hotung Investment [HIH SP, 1 Nov: US$0.09, listed on Singapore Exchange (SGX)]

HIH SP is a Taiwanese company involved in the business of venture capital investments, securites and fund management. The venture capital business is a high risk - high return model. The management of HIH had a very credible track record in the 1990s but its recent record has been patchy. With a market capitalisation of US$114 mil, it is a penny stock by any standards.

Even though HIH reported rather dismal results in 2Q05 in August [Losses in 1Q05: NT$163 mil and 2Q05: NT$333 mil.], it may be poised to make a number of divestments in the upcoming months. Some of the companies in its venture capital portfolio which it could divest include: (a) Nanya - a IC substrate supplier for Intel's central processing unit, (b) Genius Optical - one of the largest maker of lens for cameras fitted in mobile phones, (c) Himax - Taiwan's largest driver integrated circuit company. We expect value of HIH to be unlocked when a profitable divestment is made by listing one of these technology companies. This may take place when sentiment towards technology stocks in Taiwan improves.

According to filings with the exchange, US deep value house, Third Avenue Management LLC holds a substantial stake in HIH. The stake is likely to be purchased by Amit Wadhwaney who pulls the strings for Third Avenue's International Value Fund. Once dubbed by the media to be "one that shuns the crowds", Amit appeared to have quietly built up its stake in HIH from half a globe away. As an acolyte of value guru Martin Whitman, Amit's fund has racked up about 26% return in the 12 months ending April 2005. Since the fund's birth about 3.5 years ago, its annualised returns is a most encouraging 22.5%. Will HIH prove to be another gem in the bag for Amit?

Attractiveness: The P/BV ratio is 0.5x => NTA per share is US$0.18. HIH also has US$0.038 in cash.

Substantial shareholding reporting of Third Avenue to SGX
17 Aug: 5.53% to 6.12%
26 Aug: 6.12% to 6.44%
29 Sep: 6.44% to 6.81%
06 Oct: 6.81% to 7.06%
31 Oct: 7.06% to 7.98%



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