I like ACTS. It trades at a negative enterprise value and management has been buying back as many shares as possible over the last couple of years. On the last two cc's they've mentioned doing a tender offer to buy back a bigger chunk of shares since the daily volume restricts how much they can purchase. The best thing about the company is it seems to be gaining good traction with its new product line of SOC's for the tablet market. The negative is every semi company in the world is targeting the same market so it's way too early to tell if they'll make any money from it. Regardless, the company is worth more than its current enterprise value of -$12 million.
I definitely agree that this adds a tremendous amount of credibility to the company. This should end the "cooking the books" and "cash audit" noise. I'm not sure why so many shareholders are complaining about the $5.48 price since the company has been trading well below that number for the last 5 years. Said another way, TPG is willing to buy 20% of the company at a price that was a 5 year high just two weeks ago.
Another point to add to your list is that this could and should be a trigger for other institutional investors to make investments in XIN. For as smart as the big money is, there is definitely a follow the herd mentality. Now that TPG has taken a large stake, I would be shocked if other institutional investors don't follow suit. More institutional investment will drive the price up much closer to fair value.
Less than a year ago XIN was trading for 30% of book value and had a PE of less than 2. It should now be evident to everyone that that deal that looked too good to be true then was actually true. I'm betting the share price will double again in the next twelve months.
Sentiment: Strong Buy
On page 32 of this year's annual report management said that Lenbrook industries more than doubled its orders to DSWL last year. Lenbrook had been a long time customer and the increase in orders was the first tangible evidence of management's ongoing effort to convert existing significant customers to major customers. Lenbrook accounted for 11% of sales last year.
It's small, but really the first scrap of news that indicates any kind of growth for this company in years.
I think some investors are disappointed and nervous because there was no pre-announcement on revenues like last quarter and are selling in case earnings disappoint. No pre-announcement likely signals that revenues will be in line with management guidance, which is 50% YoY growth for the quarter. It's had to be disappointed with that kind of top line growth. I agree this is a good time to add shares.
I think the 700k SF project could be worth between $10 and $15 per share once built and stabilized. There is probably an additional $5 of value on top of that from the other assets and the remaining land. However, if I was sole owner of the company I would never want to sell the property.
This downward slide since earnings is no surprise and will probably continue. As the share price continues to fall with little hope of a near term catalyst to turn things around, shareholders are feeling significant pain. I'm sure nearly everyone on this board is aware that this stock traded for net cash value at sub $5 just over a year ago and could easily fall that low again.
However, from a strict asset play the company is getting more and more interesting. My quick and dirty valuation of the company's assets excluding the re-development site is in the low $6 range. At that price I love the idea of getting the Shenzhen land for free. It'll take several years to realize the value, but those with patience will have a high probability of being rewarded.
You are mostly correct in the description of a VIE, however, XIN is not a VIE. It is a Wholly Foreign Owned Enterprise (WFOE), which means the shareholders ultimately own all of the company's assets.
The VIE structure is way to get around the Chinese law which restricts foreign investment in some industries. Real Estate is not one of those industries.
There are still substantial risks, but this is not one of them.
I understand that working capital would have to increase to support a higher sales volume. However, AR has increased disproportionately to everything else. In 2006 JST had $27m in AR and $19m in inventories. At then end of 2012, they had $147m in AR and only $30m in inventories. JST days sales of inventory has decreased from around 69 days to 42 days, while days sales of AR has increased from 98 days to 212 days during the same time period. In absolute terms AR has increased five fold while inventories have increased 50% and sales have grown 150%. Why have they been able to grow sales so much without having to grow inventories along with the sales?
Interestingly, inventories did drop 20% between 2011 and 2012, which you would expect when sales decrease. AR on the other hand, increased by another 10%.
Since 2006 JST has increased their book value by $130m, but nearly all of it, $120m, is in the form of increased Accounts Receivables. In 2006 they had $83m in sales and $27m in AR, just under 4 months of sales. In 2012 they had 212m in sales and $147m in AR, or over 8 months of sales. They seem to be extending massive amounts of credit to their Chinese customers to promote sales.
Even with the slow down in Q1, they still did not generate any cash from their AR.
My fear is that they might have a revenue recognition issue or they are not reserving enough against uncollectable receiveables. I know they went IPO and pay a dividend, but such a large AR balance looks suspicous.
I raised my stake as well. The reason I raised it is because I believed the company would be running at full capacity by the end of the year. I thought they would earn $2.50 per share this year. I valued the EMS business at $20 per share based on a 8x TTM earning multiple. Plus, the re-zoned land could provide some additinional upside/margin of safety. I knew they had a highly concentrated customer base, but given the confident outlook management had after Q4 and the fact that they really had just started producing LCM's for Apple I thought the probability of them losing the business this year was very, very low.
Unfortunately, what I thought was a nice margin of safety could now be the entire investment.
I don't believe Kellog or Khan had or have insider information and the fact that the stock dropped 30% after they bought would support that conclusion.
However, they haven't closed the LCM business yet. I've learned that the 15 million unit order is for a "new" device, which probably means the Iphone 6. I would say that there is a very good chance they will get additional orders for Q4 since the customer would be crazy to switch suppliers after the new model started production and during the peak holiday season.
The company may yet earn between $1 and $2 per share after all. Unfortunately, I don't think many investors will be willing to pay much of a multiple for those earnings.
Regardless, based on the last CC the investment thesis has probably changed for all investors including Kahn and Kellog. It'll be more telling if they are picking up share this quarter than their actions last quarter.
I wish I could be as optimistic about you that this switchback is technical in nature. I have a feeling it has more to do with the possibility that the company many transition from being a fast growing EMS company to a real estate project in Q4.
I did some work on liquidation value of everything except the development parcel. Here is what i came up with on a per share basis:
$4.44 - Current Assets less current liabilities 3/31
$0.95 - Wuxi land and buildings (recently developed assume sold at cost)
$0.50 - land parcel that the company was going to relocated to in Shenzhen
$0.30 - Salvage value of equipment
The big questions that no one can answer is what is the development parcel worth? I did verify that there is a 60% tax for a land sale, which is why the company will not liquidate it. Based on construction costs and rents the company provided, I estimated that a developer would pay roughly $200 per buildable foot for the parcel, which would value the land between $4 and $5 per share on an after tax basis ($10+ per share pre tax).
However, assuming a complete liquidation I estimate shareholders would net around $10 per share before fees, plus whatever after tax profit they make in the next couple of quarters.
If they do successfully develop the 700k sf office building, I estimate the stabilized asset would be worth roughly $12 per share of which $4 would be the cash from the balance sheet the company would use to develop the property and the remaining land would be worth $3.50 a share after tax for a total of around $15 per share. However, you would have to wait four or five years to realize the value.
I share your pain, but It sounds like they jumped out of bed more than were kicked out.
The reasons to hold are: 1) The negotiation is ongoing and it is likely that some value will be salvaged. The "third party" Koo mentioned was in the picture when Apple selected NTE just a year ago. It's resaonable to think they are using this third party to squeeze NTE as much as possible. By announcing a willingness to walk away completely, NTE is clearly letting the customer know they've squeezed too much. Now it's up to the customer to decide to compromise or take on the risk of ramping up a brand new supplier in time for the next release.
2) Yes, the land! If they self fund the development, which it sounds like they are planning to do, once stabilized the phase one 700k SF asset will be worth somewhere between $500 psf and $800 psf ($350m and $560m) with no leverage on it.
I'm not going to buy here without more information on the land and the contract negotiations, but IMO there is plenty of reason to hold.
I've spent some time looking for it as well. After much searching I believe I've located it. For some reason Google translates the road it's on as "Nantai Road" with an "n" instead of "Nam Tai Road." If you map Nantai Road Shenzhen, China, you should be able to find the parcel. It's about 12 acres that is adjacent to the G107 highway and backs up to a canal. Your assessment of the area being a down and dirty industrial area seems accurate from the satellite images.
I've also done research into the Qianhai "Hong Kong Shenzhen Modern Service Zone" and have concluded that Nam Tai's factory is at least 4 miles away from the special 15 sq km zone. I do not doubt that the factory has been re-zoned as the company says, but I'm pretty sure it is not in the actual economic zone. I hope NTE can provide some more clarification on this point.
However, $1 per share is way too low. That price would value the land for about $45m which is $3.75m per acre and $15 a buildable foot for the new zoning. I don't think you can find infill commercial land, industrial or office, in any major city in the US for that price much less one the largest and fastest growing in China. At the end of the day, rents for commercial property drive land value. Office rents in Shenzhen are comparable to Boston at around $60 to $70 psf.
My estimate for fair value is anywhere between $50 per buildable foot to $100 per buildable foot, which would value the parcel between $150m and $300m or around $3 and $6 per share. It may be higher, but since it is not in the actual special zone I wouldn't bet on it at this point.
I hope I'm wrong, but I feel good that a $3 to $6 per share value is a fair range. Anyone who would claim it's worth a lot more needs to make the case that rents will be much higher than in Shenzhen center or even the real Manhattan for that matter.
I fully agree with your assessment on the real estate value. In fact, I believe DSWL's liquidation value is likely much higher than its book value of $6.38 because of the real estate.
Let's hope we see the value reflected in the share price sooner than later.
I'm not much into technicals but it seems like $2.60 is a key resistance point for DSWL. This recent move up seems to be in sympathy to the overall market rally. Hopefully, it can break through $2.60 with some volume and start an uptrend to fair value.
I'm not holding my breath for a major move until DSWL can turn the fundamentals around. I am optimistic we'll see improving YoY results this year and that should get the share price moving. DSWL remains one of my favortite value stocks even though it's gone nowhere but down since I took my first position three years ago.
Any thoughts on when we'll see revenues grow again?
Sorry to see you go. I hope you decided to re-enter just so you continue to contribute to the board.
When evaluating the risks surrounding XIN keep in mind that the price to book ratio at less than .5 provides a big margin of safety against real estate market declines. The way I look at it, XIN builds condos for around $100 psf and sells for around $130 psf. However, because of the PB ratio a new shareholder's basis in XIN's condos is closer to $50 psf. The calculation is a little more complicated than that but you get the idea. Even if the market price drops to the point of being below XIN's cost and leads to an accounting loss, the new shareholder still makes money on the sale since she basically bought the condos for 50 cents on the dollar.
I am worried about losses on their land positions should the bottom fall out of the market. I think they have around $250m tied up in raw land ($50 million in NYC which is safe). If Chinese land prices fall by 50%, that could lead to $100m write off, but the balance sheet is strong enough to sustain even a sever and unlikely event like that.
I've just started to follow JST and would like to take a position. My biggest concern that I haven't seen a good explanation for is why its account receivables are so high. It has $151m in AR as of 9/30/12 versus TTM revenues of $220m. This is over 9 months of sales in receivable. As comparison ABB has roughly 3 months of sales in AR.
No way should any company wait 9 months to collect cash on a sale. I'm concerned there may be some kind of revenue recognition issue with the accounting. Does anyone have a good answer?
I want to thank you for bringing the quality problems to the attention of this board. I spent a couple of hours yesterday pasting the links you posted into the google translator to try to find out more information. It's very difficult to get this kind of local information on a Chinese company from the US so you have definitely done us all a valuable service.
From what I can tell there are three primary complaints by the homeowners. 1) The exposed sprinkler pipes, 2) the kitchen wall that cannot be removed easily because of gas piping and 3) the owners of the new building cannot use the same common green area as the owners of the older buildings.
From the article it seemed like the XIN spokesperson said the company was going to address the first two complaints, but the owners wanted additional cash compensation. Is this a correct read on the situation or is there more to the issue?
My impression was that XIN was a respectable developer since it has been in business for over a decade. Are these issues isolated to this project or does XIN have similar trouble with other projects?
I do feel for the homebuyers. Who wants exposed sprinkler piping in their homes? I hope the company management will address the complaints fairly. I have to believe it was a mistake by the developer to approve a commercial design for a residential building, but the architect needs to shoulder a lot of the blame as well.
I reply would be appreciated. Thank you
You might be becuase this is actually a pretty good idea. Can you provide a list of US listed companies with 50 year ground leases in Qianhai?
I don't think I would buy them blindly, but a windfall appreciation in real estate can make a company look much more interesting than it might otherwise look.
I found the below land comp with a quick google search. This is not a perfect comp, but provides at least a ballpark idea of what land in Shenzhen is worth. Typically residential land is more expensive than commercial land, but can vary dramatically by location.
The GFA of 182,100 square meters is 1.96 million SF. CNY 2 billion is $320 million. The purchase price is $163 per buildable square foot.
Applying the same $163/SF to NTE's 3 million SF of GFA would imply the land is worth around $489m.
Excuse the sensational headline, but the point is the land is worth a big number. Keep in mind NTE will have to build a new factory as well.
China Overseas Land Buys Land in Shenzhen for CNY 2 Bn
Nov 29, 2012 10:55 AM GMT+0800 | Prepared by ChinaScope Financial | Source: Netease
•On November 28, the Shenzhen branch of China Overseas Land and Investment (0688: HKG) purchased a land parcel in Shenzhen for a total of CNY 2 billion, or CNY 10,900 per square meter of gross floor area (GFA), representing the highest land transaction price in Shenzhen this year.
•The land plot is designated for residential purposes and covers a site area of 151,787 square meters or GFA of 182,100 square meters.
•Over the first ten months this year, China Overseas Land spent a total of CNY 15.52 billion on land purchase in many second-tier cities including Foshan, Kunming, Dalian, Yantai, Tianjin, Hangzhou, and Shenyang.