Wednesday, February 06, 2008

A Lunar New Year Angpow

The Lunar New Year of the Rat is upon us. Whilst the Chinese associate a splash of the color red with an abundance of good fortune and luck, the recent spate of blood letting in the markets is something which we could do with less of.

In the coming year, we hope all investors have good health and wealth. We, here at MOS, thought it would be opportune to attempt to offer you a "red packet" by introducing a cash rich company which has the potential to offer shareholders a special dividend "angpow".

Lion Asiapac Limited (LAP) (Bloomberg: LAP SP, SIN:L08) is a holding company with diverse business lines. It has been listed on the SGX since 1981. It is now engaged in the manufacturing of electronics and automotive components and limestone processing. The bulk of its revenue comes from the electronics business, which as you would expect, isn't wildly profitable.

However, what distinguishes LAP from other companies is its strong balance sheet. The balance sheet is clean and has little liabilities. It presently has a net cash position of S$0.05 per share. In addition, LAP holds a 6.16% stake in Anhui Jianghuai Automobile (AJA). AJA is listed on the Shanghai Stock Exchange. In fact, the stake in AJA is worth more than the market capitalization of LAP! At this point, we believe value investing enthusiasts are starting to appreciate why we are getting excited.

In a move which may unlock its hidden value, the management of LAP has recently announced that they intend to dispose of their entire stake in AJA. AJA is trading in the market at about RMB8.21 today. But assuming the entire stake is disposed at the desired minimum price of RMB7.50 (about 30% below present market price), the net cash per share on LAP's books will swell to S$0.44 per share. This is S$0.17 above the current market price of LAP.

There are obviously risks in every investment. This trade is no exception. The first that comes to mind would be the inability to place out the AJA block given the poor market sentiment. Another would be that the cash is trapped in LAP and not returned to shareholders. To this end, it is noted that the circular explaining the disposal indicated that the proceeds would be used for working capital and deployed into money market instruments. Hence, LAP may not distribute the excess cash to shareholders in the form of an "angpow" or special dividend.

As with every new year, everyone has renewed hopes and aspirations. Should the disposal be successful, minority shareholders will all be hopeful that the management of LAP would offer some festive cheer by doling out a payback to supplement the historical 3.7% yield. Could this be the reason why LAP closed flat at S$0.265 when the STI plummeted over 100 points today?



Post a Comment

<< Home