The case for Nam Tai is simple. The company trades at a meaningful discount to book. This is remarkable in light of the fact that the book value of the assets understates fair value whereas the book value of the liabilities overstates the future cost to the owner. The company is run by people with a decades-long track record of enriching fellow shareholders.
Business & History
Nam Tai Electronics Inc. is a contract manufacturer of electronic devices and their key components. The company manufactures LCD panels, and modules, RF modules, digital audio broadcasting (DAB) modules and CMOS sensor modules. These components are used in tablets, mobile phones, laptops, cameras and entertainment devices. Its services include hardware and software design, component purchasing and assembly and post-assembly testing. The company was founded in Hong Kong in 1975 and has its main manufacturing facilities in Shenzhen, a city separated from Hong Kong by a small river (Sham Chun River).
Major customers are Sanyo, Sharp, Sony and Texas Instruments.
Competitors include Flextronics, Foxconn and Jabil Circuit.
1975: Mr. M.K. Koo founds a trading company to market calculators and other consumer goods from Taiwan, South Korea and Japan to Hong Kong customers. Calculator sales proved successful, so Koo took steps to ensure the quality, supply and cost of his product by starting his own manufacturing facility in Hong Kong. Koo recruited executives from the Japanese electronics industry to take advantage of their experience with the precision and efficiency of Japanese manufacturing methods.
1979: Shenzhen, with a population of 30,000, is designated the first of China's Special Economic Zones. This marks the beginning of the first private real-estate developments in China since the establishment of the Communist Party in 1949. Shenzhen was chosen because it could easily connect to the capital and management resources of Hong Kong. Today, the city has a population of about 10 million. About 6 million of these people are workers who return home on the weekends and live in factory dormitories during the week. Shenzhen is home to the Shenzhen Stock Exchange as well as high-tech companies, such as BYD, Huawei and Skyworth.
1980: Nam Tai commences manufacturing operations in Bao’an, a district of Shenzen to take advantage of lower labor and material costs. The company's sales grows to $53 million in 1985. The company diversifies into products such as digital thermometers, electronic blood pressure meters, electronic scales and typewriters.
1988: Nam Tai Electronics Inc. is reincorporated in the British Virgin Islands. The Virgin Islands do not tax share transfers, income or dividends between parent companies and subsidiaries. The following year Nam Tai goes public on the Nasdaq.
1991: Shenzen airport opens in Bao'an district. This airport is currently undergoing major expansion with a new terminal and a second runway. In comparison with Hong Kong’s airport, just 30 km away, Shenzhen Airport offers greater connectivity to Chinese cities at lower (domestic) rates.
1992: Nam Tai acquires acquires a 50-year lease for land in Bao’an. Initially, the company builds a manufacturing facility consisting of approximately 160,000 square feet, 39,000 square feet of office space, 212,000 square feet of dormitories, a full-service cafeteria and a swimming pool.
Over the years the company makes several additions to these facilities, including:
- Additional rights for land of approximately 280,000 square feet bordering on the existing facilities (1999).
- The company doubles its production capacity by constructing a five-story, 138,000 square foot production facility, including one floor for assembling, one floor of office space, one floor for warehouse use and two floors of class 5,000 and 10,000 clean room facilities (2002).
1999: Nam Tai buys the J.I.C. Group for $32.8 million. J.I.C. had been making LCD panels and components since 1983. In 2002, Joseph Li becomes president; he was a cofounder of J.I.C. Later, Li takes over the CEO position. Nam Tai lists J.I.C. Technology on the Hong Kong stock exchange but retains control.
2003: The company begins construction of a $40 million facility in Bao’an to meet demand for high-end telecommunications products. With strong technological capabilities and broadening manufacturing expertise, Nam Tai begins to make cell phones and other products in "semiknockdown" form. Nam Tai takes care of all but the last few production steps. The product is shipped in an incomplete state to take advantage of lower tax rates for unfinished products.
2005: The company announces plans to take private two of its publicly traded units in which it holds a controlling stake - Nam Tai Electronic & Electrical Products (NTEEP) and JIC Technology. The move is unsuccessful as Nam Tai is unable to obtain the required 90% of the stock in either company.
2007: J.I.C’s expertise combined with Nam Tai’s state-of-the-art production capacity enables a six-fold increase of earnings. Net income for the year 2007 comes in at $70 million. That’s roughly the amount the company spent on the J.I.C. acquisition plus the expenditure on the new facilities in 2003. All of the profit is returned to shareholders in the form of dividends. In fact, from 2003 to 2008, the company pays out a cumulative dividend of $250 million. Those dividends alone are worth more than the company’s 1999 market cap of roughly $200 million.
2008: Mr. Koo returns as CEO, Nam Tai sells its J.I.C stake for $51 million. 2009: Nam Tai successfully completes the privatization of Nam Tai Electronic & Electrical Products Limited, or NTEEP, by tendering for and acquiring the 25.12% of NTEEP that we did not previously own. Nam Tai now owns all assets, including any land-use rights, outright.
2010: In Shenzen, the Special Economic Zone (SEZ) is expanded to include Bao’an district.
The company discontinues production of box-built products such as Bluetooth headsets and calculators and narrows its focus on key component assembly for telecommunication products.
2012: A parcel of land of 1,270,000 square feet in Guangming Hi-Tech Industrial Park is released to Nam Tai by the Shenzen authorities for industrial use. The company retains the land use rights to its existing location in Bao’an. Created in 2007, Guangming is Shenzhen’s newest district.
In light of Shenzhen government's project to convert Bao’an from an industrial area into a commercial district, Nam Tai’s existing facilities may now consist of hotels, malls or offices with a total floor plan of approximately 3 million square feet. The company plans to develop a quarter of the available land for a building with a floor plan of approximately 700,000 square feet.
In Wuxi, another Chinese city, Nam Tai commences production of high-resolution liquid crystal display modules (“LCMs”) for tablets and the Shenzhen manufacturing facility begins mass production of high-resolution LCMs for smartphones in September. The company‘s revenue doubles to exceed $1 billion for the first time 2012.
2013: The company expects to extend its production of LCMs for smartphones for its customers to September. This new purchase order does not alter the customer''s decision to eventually transfer its orders to suppliers with lower assembling charges. Management announces that unless market conditions improve, the company may have to halt its LCM production by September to minimize losses and preserve cash.
Nam Tai is the life work of Mr. Ming Kown Koo. He currently serves as chairman and CFO. He owns 12% of the stock, a stake he has held for as long as anyone cares to remember.
Mr. Koo’s salary for serving as Nam Tai’s chief financial officer during 2010, 2011 and 2012 was $1.00 per month. In addition to his duties as Nam Tai’s Chief Financial Officer, Mr. Koo acted as president of the publicly traded subsidiary NTEEP. His salary for serving as President of NTEEP was approximately $1 million per annum. He is also entitled to receive reimbursement for the cost of his Hong Kong apartment.
None of this was payable if Nam Tai replaced Mr. Koo with a suitable candidate within three years. In October 2010, Nam Tai appointed Joseph Li as chief financial officer. In November 2010, as a consequence of his wife’s health, Mr. Li resigned and Mr. Koo resumed the position of CFO. Under his employment agreement, Mr. Koo’s salary remains at $1.00 per month. Mr. Li’s appointment as Nam Tai’s chief financial officer within the three-year period terminated the company’s obligation to pay Mr. Koo the approximately $1.6 million the company had accrued since 2009.
If Mr. Koo wishes to terminate his employment with Nam Tai, he must provide one year’s prior notice.
Mr. Koo’s business partner is Peter Kellogg. Kelogg is a member of the New York and American stock exchanges and sits on the board of numerous organizations including the U.S. Olympic ski team and Goldman Sachs Advisory. Mr. Kellogg holds 6.4 million shares of Nam Tai directly and holds another 5.7 million shares through I.A.T. Reinsurance.
In 1973, Peter took over as CEO of Spear, Leeds & Kellogg, a company his father had helped found. He turned the firm into a market maker during the '80s and '90s. In 2000 he orchestrated the sale of the company to Goldman Sachs for $6.5 billion. He invested the proceeds in I.A.T.
Together the two hold more than 30% of the shares. The CEO position has been held by various experienced operators (often managers from Japanese consumer electronics manufacturers).
Competition and Profitability
Nam Tai is well run and more efficient than some of its much larger competitors. The company has a lot of room to grow. It pays its suppliers much sooner than any of its competitors.
If the company brings days payable in line with the competition, $25 million of cold cash mysteriously appears on the balance sheet. That's ten days of revenue.
Another way to look at this data point is to realise that the competition has been inflating their cash flow by paying their suppliers a little later each year. In contrast, Nam Tai's days payable has been steadily decreasing. This is important since the EMS business is as much about controlling your supply chain as it is about manufacturing.
Why is this cheap?
The company warned that it may have to shutter LCD module operations altogether if the market doesn't improve. Those operations are precisely what propelled last year's spectacular growth.
The company is followed by EMS analysts. They are focused at forecasting next quarter’s production of iPads, iPhones and PS4s. They can accurately calculate the impact that will have on Nam Tai’s EPS. Of course they also analyze the other companies in the space and track all the leading indicators. However, they don’t get paid for reporting the (potential) value of the company’s real estate. That’s not what they were trained for or are expected to do.
Most websites will tell you Bao'an is outside of Shenzhen's special economic zone. That is no longer the case.
A (satelite assisted) look at Bao'an will show you it's an industrial mess. Shenzhen's decision to move Industrial activity to Guangming hasn't yet had its effect on Bao'an. If you're looking for Nam Tai's building, it's at Nantai road number 2. Note the second "n". The land is a mile east of Gushu station (Luobao metro line) near the Shenzhen airport. The building is adjacent to the G107 road.
With $200 million worth of cash and no debt, Nam Tai’s balance sheet is as strong as any balance sheet I’ve ever seen. On the liability side, Nam Tai has $27 million they have earmarked for dividends. That is not money going to suppliers, banks or bondholders. That is cash for shareholders.
The company owns significant real estate:
The land in Bao'an has been rezoned and is to hold 3 million square feet of malls, office space or hotels. That's roughly 300,000 square meters.
The current market value of such real estate is between $3,000 and $25,000 per square meter. Malls and hotels need lots of space on the ground floor which comes at a premium.
These prices may reflect a huge bubble or a rational expectation that real estate prices in Shenzhen will continue to converge with prices in Hong Kong. In that case, they have a long way to go.
Rental prices, however, do not have such a speculative element. They reflect the current economic value. As a rule of thumb, I use 100 times monthly rental income as an indication of the property's value. In stock parlance, that's a multiple of 8.5 on annual rental income.
For the hotel space, I use revenue per available room (RevPAR) of $125. Assuming rooms of 50 square meters, that works out to $75 per month per square meter.
A pessimistic estimate of the value of the RE is $2,500 per square meter. That’s $750 million worth of value. Since I like using round numbers, I figure the company, including all the other assets, is conservatively worth $900 million. This works out to a nice round $20 per share.
The lowest reasonable estimate of the value of the real estate is $400 million. That’s 10x the annual rental income on the building they plan to develop and a lot less than recent transactions of used office space imply. $400 million works out to roughly $9 per share.
$9 per share implies:
- The land and facilities in Wuxi are worthless.
- The remaining rights in Bao’an are worthless (230,000 square meters, commercial).
- The raw land in Guangming is worthless (130 000 square meters, industrial)
- All the cash on the balance sheet, including any cash they earn between now and September is spent developing that building.
- Land in Shenzhen ceases to appreciate over the next couple of decades.[/list]
Market risk - NTE is a volatile stock, It has traded at a discount to net cash in the past and may do so again.
Cash burn - If Nam Tai chooses not to sell any of its assets and develops all of the land, including the raw land in Guangming, that would cost about $1 billion. The company would have to lever up.
Regulatory - Regulators are unpredictable, even in China.
Management age - I'm a fan of M. K. Koo. I wish he were in his 30s.
Floods - Typhoons, Tsunamis and a rapidly growing city in the Pearl river delta don't mix well.
Spin-off - Nam Tai has sold some of its non-core assets in the past and listed some of its subsidiaries. They could do it with their real estate.
Contract win - Any positive news about future contracts. The company is priced as if it will never gain another contract ever.
Nam Tai is well managed, well capitalized and dirt cheap.
Reminiscences of a Stockblogger has an article worth reading about Nam Tai.
Quarterly SEC filing.
Shenzhen daily news.
Property rights in Shenzhen.
Shenzhen Retail property market. Shenzhen Office property market.
Management's plans for the real estate - Q&A section of call transcript from Seeking Alpha
This is not a recommendation to buy or sell anything. I own shares of Nam Tai. I have no position in any of the other stocks mentioned.