Saturday, September 26, 2009

The Wayward Son?

In February last year, Margin of Safety pointed out the special situations opportunity in Lion Asiapac Limited (LAP). LAP was trading at S$0.265 then. The value proposition was that if LAP were to dispose of its stake in Shanghai listed Anhui Jianghuai Automobile (AJA), the NET CASH on its balance sheet will swell to S$0.44 per share, a whopping S$0.17 above the then market price.

The ensuing financial crisis meant that LAP failed to dispose of the AJA shares above the price floor of RMB7.50. However, the recent recovery in global, in particular, Chinese equity markets have given LAP much cause for cheer. AJA has traded back up above the floor price, thereby allowing LAP to partially dispose of its stake.

As on 15 Sept, LAP has disposed approximately 2% of its 6.16% stake in AJA. The sales netted total consideration of Rmb189.46 million.

By our updated estimates, the net cash per share on the balance sheet increases to S$0.21 per share (assuming the 2% were all conservatively sold at S$0.21). Completing the entire disposal program means net cash per share of at least S$0.41, still way above today's market price for LAP at S$0.32 a share.

Enthused by the recent strong property sales in Chinese market, LAP had proposed to go into property development in China. The mandate, however, was wisely (in our opinion) thrown out by minority shareholders at an EGM yesterday. This effectively leaves the possibility of LAP being a company trading under net cash when the remaining stake in AJA are progressively disposed in the days ahead. Whilst management do not have a track record of doling out special dividends, there is little reason for a company to trade under its net cash value when it is not under any particular duress.

In recent meetings, minority shareholders have increasingly made their presence felt and views ahead. Besides vetoing the mandate to do property development, many have also loudly articulated the need for a special dividend. We expect increasing media focus on this tussle in the days ahead as the small investor turns up the heat on management for a special dividend from a company which will soon trade under its net cash value. Perhaps if you are convinced about the merits of our argument, you may wish to pick up several lots of LAP and make your voice heard too.


Thursday, September 24, 2009

A Return to the Gold Standard

October beckons and what an amazing twelve months it has been. Vindicating our golden call since July to go into S-REITs, we note that S-REITs as a basket are up about 17% in the past month, 36% in the past 3 months, outperforming both the property developers (+3% and +14% respectively) and STI index (+6% and +21% respectively). In July, we had lamented that "it is surprising that the S-REITs have not re-rated more strongly." In early August, we maintained our similarly bullish stance saying that S-REITs, "despite the run-up, still offer a very healthy spread to the risk free rate." and REITs are, "by and large, still very cheap".

The performance in last month was indeed robust as S-REITs are benefiting from a chase for yields. If fixed deposits are yielding a paltry 1% tops, perhaps CMT at 4.5% yield is still attractive. So there can still be upside remaining but we don't like to bet when the odds are only marginally in our favor. So choose judiciously if you still want to play this game because going forward, rates can only go up from here.

We continue to be bullish about high yielding equities in the near term. US rates are likely to remain on the floor as the authorities attempt to revive employment. Consequently, this results in a lot of cheap and easy money in the global system seeking returns. The run up in asset prices in HK is a case in point. A rich businessman has reportedly paid HKD40,000 psf for a one bedroom unit in Kowloon (not HK island!). The monetary policy mismatch brought about by the HK dollar peg is certainly fuelling a bubble in HK. Easy money from China is also flowing into HK. The situation is certainly worrying the local authorities who have warned the HK banks to tighten their lending standards. We suspect the pleads will continue to fall on deaf ears. So, in the next few months, residential prices will continue to rise in HK, Singapore and key gateway Asian countries, despite the currently half hearted efforts by the authorities to rein it in. Looking ahead, we wonder whether the HK property bubble would result in a de-pegging of the HKD to the USD? After all, both economics are structurally different today as night and day. No inflation will ensue in the US because they are still battling deflationary monsters. But in Asian countries like HK and China, it is inflation worries that is keeping us awake at night.

North of HK is of course China, the country touted as the new locomotive of the world. It is such a misnomer to label them a communist country when their citizens are probably amongst the most capitalistic and enterpreneurial in the world. It is also here in China where we find the comment made by the CIC chairman Lou Jiwei in late August most fascinating: “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose."

Certainly reminds us of the title of one of our past posts - Forever Blowing Bubbles, isn't it? Judging from CIC's recent investments into Noble Group, Poly HK, etc, his view also ties in to the lament in our last post: "Yes, the market is irrational. It may not really matter if we don't have understand why it is irrational. We just want to be able to profit from it."
So in the paper currency system, it is plain obvious that it is possible to monetize our way of problems. But will everyone raise their hands up and say they have had enough with the USD and Euro in the longer term? If the Yuan is still not ready to step up to the plate, perhaps what's in store for the world is a return to the Gold Standard. So perhaps it may be wiser to persuade your loved one that gold jewellery would make a better gift with the cash made from your S-REITs investments.