Monthly Archives: February 2016

Company 9/8/2015 Position Size

Company 9/8/2015 Position Size

On January 29, 2016, the share price of Company 9/8/2015 declined by roughly 60%.  We now know that the decline in the company’s share price was due to forced selling by a new strategic shareholder as well as the company’s chairman. In total at least 11.6% of total shares outstanding were sold to forced selling. At the time of the forced selling, the company also announced that it was going to place shares.

The forced selling temporarily decreases the share price but eventually the company’s valuation will revert towards the value derived from business fundamentals. More concerning is the company not disclosing insiders’ pledged shares.  Also, the cancelled placement is evidence of the company’s desire to raise more capital, which does not make sense given the cash on the balance sheet and the company trading at its net cash position. The size of placement is slightly larger than the Chairman’s current shareholding so it raises the question is he trying to cash out.  Although the share placement was cancelled, the concern will remain over future share placements.

Despite the concerns surrounding transparency and the share placement, the company is trading just above its net cash level.  The current valuation is appropriate if the company is a fraud.  Evidence points to the company not being fraudulent.  Forensic accounting analysis does not show any red flags. The company just received investment from a strategic shareholder with significant resources and expertise in due diligence. The company’s sales were also validated by a credible third party using point of sales data.  Given there is a high probability that the company is not fraudulent, we see significant upside given the company is trading just above net cash and below its net current asset value.  We purchased just under USD10 million on February 1, 2016 and February 11, 2016 increasing the position size back to our maximum position of 15%.

We planned on increasing the company’s position size by USD16 million but the lack of transparency on the chairman’s share pledge and the announcement of a canceled placement decreased our confidence in management.

Honworld Position Size February 1, 2016

Honworld Position Size February 1, 2016

We have decided to stop selling Honworld.  The share are now under HKD5.00 and are undervalued offering a 12% EBIT yield. There is still a risk with the shareholder charging shares to ensure a note of his holding company was subscribed to.  Given the evidence pointing to the founder’s passion for the business and his family legacy with the business, it seems highly unlikely the founder would put his ownership of the company at risk.  Capital allocation continues to be a concern, but the business economics, the passion of the owner operator, and the valuation trump the concerns.

 

We sold just under 7.98 million shares for total proceeds just over USD4.77 million.  Honworld is now just under a 10% position.