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Nam Tai - Value Idea Contest Submission

July 11, 2013 | About:
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).
1993: People from Hong Kong and Taiwan moved to Canada in anticipation of the 1997 transfer of Hong Kong from Britain to China. Nam Tai founder Koo moves to Vancouver where he lives for several years. Tadao Murakami takes over as CEO of Nam Tai. Koo remains chairman.

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.

35024_1373482555Eeil.png

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.

Management

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.

WOW!

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.

35024_1373482556u2z5.png

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.


Financial Strength

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.35024_13734825565ZMw.png

Real Estate

The company owns significant real estate:

35024_1373484416K8M7.png

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.

35024_13734825577j18.png

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.

Value

A pessimistic estimate of the value of the land use rights in Bao’an is $2,500 per square meter. That’s $750 million worth of value, undeveloped. 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]

Specific Risk

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.

Catalysts

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.

In Short

Nam Tai is well managed, well capitalized and dirt cheap.



Read more:


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.

RevPAR.

Shenzhen RevPAR.

Management's plans for the real estate - Q&A section of call transcript from Seeking Alpha

Disclosure:

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.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 4.0/5 (28 votes)

Voters:

Comments

paulwitt
Paulwitt - 1 year ago
LOS ANGELES--(BUSINESS WIRE)--

Glancy Binkow & Goldberg LLP announces that a class action lawsuit has been filed in the United States District Court for the Southern District of New York on behalf of a class (the “Class”) comprising all purchasers of the securities of Nam Tai Electronics, Inc. (“Nam Tai” or the “Company”) (NTE) between August 6, 2012 and April 26, 2013, inclusive (the “Class Period”).

Batbeer2,

FYI: The above information is from Yahoo dated July 9, 2013. After reading your well-written article I decided to check out NTE (since I dwell in the Chinese microcap space). Class action lawsuits are certainly nothing new with this asset class.

GL

batbeer2
Batbeer2 premium member - 1 year ago
Hi Paulwitt,

Thanks for the kind words and info. That bit of news escaped me. I'll look into it. If memory serves, Mr. Koo has a law degree. Nam Tai has won some big cases in the past. In any case, they defend their reputation vigorously. Someone better tell those lawyers Nam Tai is not the type of company that settles out of court just to avoid the hassle.

It seems to me lawyers in the US file this stuff against any stock that has dropped more than 30%. Those are also precisely the stocks I'm attracted to :o)
sapporosteve
Sapporosteve premium member - 1 year ago
Hi Batbeer,

Thanks for the write-up.

I was wondering why there was such a large drop in the price in April?

regards

Steve
batbeer2
Batbeer2 premium member - 1 year ago
Hi Steve,

>> I was wondering why there was such a large drop in the price in April?

My best guess is that it was caused by the comments, by management, about closing down production. In the article I highlighted that bit in the timeline at 2013. The news came out at the end of April. You can read about it in the transcript of the conference call I linked to.

FWIW, I think management is milking this. They'll have to vacate the premises anyway so they are not going to compete on price. They're just generating as much cash from the contract as they can.

When the customer leaves for another supplier, they shut down the place to redevelop the land. Best case, the client needs a few more months before they're able to switch and the cash pays for the move to Guangming.

If you think about it from the perspective of opportunity cost, they won't be building new facilities in Guangming soon. Redeveloping the land in Bao'an comes first. It's worth more.

Unless they spin out or sell the RE, I would expect them to throttle down production. They'll just keep the facility in Wuxi going while they work on redeveloping the land in Bao'an, Shenzhen. Investors won't like the uncertainty and that could cause some market risk but it is perfectly rational.

Also, Nam Tai's dividend has always been erratic. The dividend crowd may be (rightly) worried that management has other plans for the cash.

SeaBud
SeaBud premium member - 1 year ago
Thanks for the write up. As a value investor, this looks interesting, but I have two questions.

- Even where security laws are supposedly "strong", I do not truly trust company reports. In general, I simply do not trust Chinese (or any country with questionable security laws) companies in their reporting, nor do I trust that the Chinese government will not play a role in affairs (void rent agreements, leases etc.). How confident are you that such events will not pervert the value analysis (ie, all of a sudden the NTE "owned" land is siphoned out at greatly reduced value?).

- My career was spent in consumer electronics and contract manufacturing is vicious (look at the single digit margins for a business that requires labor and capital investment!). Given management age and competition, might this be a swan song for their core business? I have no clue as to the answer but would appreciate any thoughts on their future competitiveness.

Thanks for the idea and considered thoughts!
batbeer2
Batbeer2 premium member - 1 year ago
Hi Seabud,

>> In general, I simply do not trust Chinese (or any country with questionable security laws) companies in their reporting, nor do I trust that the Chinese government will not play a role in affairs (void rent agreements, leases etc.).

I can't help you there. FWIW I personally think the Chinese government is as (un)predictable as the US government. Hong Kong has faired well under Chinese rule and owning land in Shenzhen has generally been both profitable and safe over the past 40 years.

If you want to get an idea of the predictability of the US system, read up on Gyrodyne co. and their struggles with New York.

Mind you, I'm neither American nor Chinese. Both systems are foreign to me. Were I an American, I would probably stick with US companies.

>> My career was spent in consumer electronics and contract manufacturing is vicious (look at the single digit margins for a business that requires labor and capital investment!). Given management age and competition, might this be a swan song for their core business?

I'm not too worried about margins. Nam Tai used to buy the components of a calculator ($10) stick them together and sell the result for $25. They charged $15 for the service. That's a high margin business.

Now they buy the components of an iPad screen ($120), stick them together and sell the result for $135. They still get $15 for the service provided. Those are not the actual numbers but you get the idea. Margins are low but turnover is high. If you back out say $150 million of excess cash and do a Dupont analysis of the core business, I think the results would be impressive.

If this is the swan song of the core (manufacturing) business, fine!

For more than 20 years, they used that land for manufacturing. They returned a lot of cash to shareholders in the process. Now they just call it quits and sell the land at a huge profit. I can live with that.

If mr. Koo's plan is to swindle fellow shareholders, he has had a lot of patience. He could have done it in 1983, 1993 or 2003. He didn't. Why would he do it in 2013?

superguru
Superguru - 1 year ago
Hi Batbeer -

I have been reader of your articles for a long time. I have learned a lot from you.

As you are Europe based, do you see any good values in Europe currently?

batbeer2
Batbeer2 premium member - 1 year ago
Hi Superguru,

>> I have been reader of your articles for a long time. I have learned a lot

Thanks, so have I.

PostNL is still cheap and GBL is worth a look. Other than that, I track Michelin, Schindler, Akzo, Unilever and something called koninklijke brill. Up north you have Rella and Investor AB. Chandan Dubey wrote a good case for a small French holding with a significant stake in Peugeot. FFP SA.



FWIW, I think Akzo is cheap now. I may write about that one sometime.

I also like Tesco plc a lot.... that depends on your definition of Europe though.

The hunting in Italy isn't too bad either.

SAES savings shares, Natuzzi, Brembo was cheap some months ago, Buzzi unicem, Pirelli maybe....
svoleti7
Svoleti7 premium member - 1 year ago
Please note that Nam Tai is a favorite of Irving Kahn, the oldest value investor in the world-who worked directly for Ben Graham in the early days. He takes "great delight in finding a cheap stock" and I believe he added to his position in the $13 range in March. As of this morning it is more than 50% below his recent purchase. Thanks for the timely write-up Mr BatBeer. I purchased some during this morning's sell off.
coconoun
Coconoun - 1 year ago


The company should start to buy large postions in Google & Apple or if alll partys are interested merge together !
gurufocus
Gurufocus premium member - 1 year ago
The company is sold at lowest P/S ratio ever:

paulwitt
Paulwitt - 1 year ago
OK, here's a gift. Check out CNTF*.

* I don't own it because I don't know what they are going to do with all the cash! ROFL

eggtrader
Eggtrader - 1 year ago
Regarding the Class action lawsuit, keep in mind many if not all of these are filed to get free advertising for the law firm. The more lawsuits they file resulting in more exposure they may feel that helps them pick up business. Correct they pick companies that have lost 30% or more in value.
eggtrader
Eggtrader - 1 year ago
Question for Batbeer? Your 40 year historical review of NTE is quite accurate, which to me is simply amazing because all the information used to write this piece could not of been gathered simply by reading old annual reports and filings. Unless you spent countless weeks of DD, how else could you of written up your report going back literally to the founding 40 years ago. You noted all of the highlights and lowlights with laser focus accuracy. My guess is that you have probably been closely following NTE since way back in the 80's and you decided to write this piece now because this is so mis-priced again like when NTE was only 5 dollars in the mid 90's before it shot up to the 30's in a matter of months one year. My question is i'm curious how long have you been following NTE, I have known NTE since the 1990. Also, how did you research the real estate? Do you have personal experience in RE in the Hong kong ,Shenzhen areas. Personally I have know NTE for longer than i care to admit and I have made and lost money of its shares, my losses came from bad timing of my buys and sells. Now I agree is a great time to buy. But, how do you recall the history so well as time has eroded most of my memories of NTE and Koo's business red letter events even though I had some concentrated positions in this Value stock and watched every news feed. Probably why my timing was so bad. Your report literally was like a 30 year acid flashback. Thanks for the report
batbeer2
Batbeer2 premium member - 1 year ago
Hi Eggtrader,

Thanks for the kind words.

NTE has been on my radar since the Kahn brothers first bought. I guess about 5 years. I started on this article about 4 weeks ago. If you asked me how many hours I spent in the last few weeks, I guess about 50-100. I think it makes sense. If I were looking to buy a car, I would spend about as much time. The sums involved are roughly the same.

I loathe crunching numbers but I love "crunching" history. This is how I get an idea of the "DNA" of a company. You can simply google "Nam Tai history" and "Shenzhen history" and you'll find 75% of that timeline. The hard part is getting the questions right.

One thing I omitted is how Mr. Koo got expelled for a while from the Hong Kong stock exchange after he took NTEEP private. That episode in itself is worth another article. IMHO this was just one more case where mr. Koo acted in the interest of fellow shareholders even at his own expense.

I've never been in China. As for researching the RE, I read some reports by global RE agents that have offices in Shenzhen. I compared the numbers to valuations in places like Hamburg, Aukland, Norfolk, Hong Kong and my hometown, Rotterdam. Prices everywhere are volatile but the results I found for Shenzhen weren't out of whack with general global values. Some would argue China deserves a discount. I don't think so. China is a very big place and Shenzhen has an interesting role. If memory serves, urbanization in China is still at 60% or so. In the US it's 80%. The pearl river delta is home to some 110 million people; and growing. This to me indicates I'll probably live to see the day Shenzhen outgrows Tokio. There aren't many statues of Deng Xiaoping. One is in Shenzhen. They're right, that is where he belongs.

If you invert, you're paying less than $50m for 300 000 square meters of commercial land in one of the 20 most important economic centers of the world. You get the rest of the company for free. That's absurd.
svoleti7
Svoleti7 premium member - 1 year ago
http://online.wsj.com/article/SB10001424127887324731304578193323337104806.html

Dec 12, 2012

The 107-Year-Old Stock Picker

...... He likes agriculture stocks—where, as he put it, "the sun does the work for you." Also, he sees "a bad need for improved capital investment" in basic industries. Among his favorite stocks: Nam Tai Electronics , NTE +3.04% a Chinese maker of high-tech components, and Monsanto , MON -0.38% the seed and herbicide giant.In some ways, Mr. Kahn says, these are the good old days.

kder86
Kder86 - 1 year ago
NTE does appeared to be somewhat undervalued but from recent articles about Qianhai, it sounds like current land owners in Qianhai may not even be able to keep their land and redevelope it without paying a lot more money out of pocket.

http://www.thestandard.com.hk/news_detail.asp?pp_cat=15&art_id=135354&sid=39925841&con_type=3

"China International Marine Containers, Shenzhen International Holdings, and China Merchants Group own large tracts of land in the new special economic zone.

Many believed the companies would stand to enjoy a huge windfall as development inflates land values in the area. But such hopes were dashed when details of land-use arrangements at Qianhai were announced recently. According to the announcement, existing owners have to pay additional premium at market value to change land use and also take part in competitive bidding to retain ownership.

Some see this as de facto land resumption by the government, in which companies are turned from beneficiaries into victims."

It sounds like current land owners in the new special economic zone may have to outbid others just to keep their own land. Afterwards they have to pay the government so they can redevelop the property.

jmichael
Jmichael - 1 year ago
Batbeer have you ever had any discussions with Mr. Kevin McGarth head of Investor Relations for NTE concerning the future of NTE. He, like you, is a wealth of information concerning this company and is able to articulate Mr. Koo's vision. Thank you for such an excellent article. My average pps is 13.32 but I I still believe in this company. I have posted how to find your blog on Yahoo's stock site for NTE and I wish all would read your commentary.
batbeer2
Batbeer2 premium member - 1 year ago
Hi Kder86,

Thanks for the info. I didn't know that.

Nam Tai's land is just outside of the Qianhai zone.

From my understanding of the current system in Shenzhen, if there's an auction of the rights after it's been rezoned, the current owners will get a significant chunk of the price realized - some of it is taxed away.

Nam Tai's situation in Bao'an is a bit different from what's going on with Qianhai. The rezoning has taken place already.


@ Jmichael,

I haven't contacted mr. McGrath. Maybe I should. See if he can shed some more light on plans they have for the development of the land. Even some drawings of the current site would be helpful.
batbeer2
Batbeer2 premium member - 1 year ago
>> but if I know NTE management at all they would wait at least 5-10 years before acting on this opportunity and I think NTE management would first want to re ignite sales and profits in their existing factories.

We shall see. If memory serves, more than 75% of their current revenue is from Shenzhen (Bao'an) and that factory is now sitting on commercial land. They can't legally continue production there indefinitely.

As long as the thesis holds I say: If the stock goes up from here, fine. If it goes down, even better.

If it goes down to 1 cent, I'll be sitting on the board with mr. Koo and having lunch with Peter Kellogg and Irving Kahn. The stocks I buy are the ones I want to go down.
ecotycoon
Ecotycoon premium member - 1 year ago
good article sound good at the first look

jmichael
Jmichael - 1 year ago
I am eagerly anticipating any new information you may uncover concerning NTE.

yaronguru
Yaronguru - 1 year ago
Hi Batbeer2,

Real estate valuation: you suggest different methods, but never quite come down on one. How do you get to $400 million as a pessimistic assessment?

Specifically, did you subtract the development costs from the rental income?

Typically, you might try to calculate the value of a real estate project by estimating the present value of the cash flow that it may yield and subtracting from it the total cost of the development. Here, for stage 1 of the development (700K sqft):

Rent per sqft: $5 monthly (mgmt's estimate on Q1 conference call)

Annual rent for 700K sqft: $42m

After-tax income from rent (taxed at 20%): $33m

Present value of income stream at 10% discount rate: ~$200m

Development costs:

Development cost per sqft: $232 (mgmt's estimate on Q1 conference call)

Total development cost for 700K sqft: 162m

NPV of real estate: 200m - 162m = 38m

Extrapolating for 3m sqft: Total value of real estate = ~$160m

What in this calculation strikes you as wrong? And could you please state more clearly your own calculation? Thanks!

Yaron
batbeer2
Batbeer2 premium member - 1 year ago
Hi Yaron,

Thanks for some good questions.

>> Real estate valuation: you suggest different methods, but never quite come down on one.

1) You are right, I do not come down on one. Do not expect me to come down on one. I think it is important not to come down on one. If I need to do the math, I just go looking for another stock. One that is so cheap I don't have to.

More likely that not, you're less lazy than I am. In that case, I suggest you invert... take the price of the company (ex cash) and calculate the implied price of the land. See if that makes sense to you.

>> What in this calculation strikes you as wrong?

2) I believe you have calculated a precise answer to the wrong question.

Your calculation gets you the present value of a building that doesn't exist. It does not get you the value of the land. That is the asset that does exist. It will exist even after the building you've have modeled has been torn down.

The question is not, what is the NPV of a building that could be developed on Nam-Tai's land.

If the above seems somewhat vague to you I'll attempt to answer that question again, now using terms that are foreign to me but may come natural to you. You are using a 10% discount rate on an asset that has been appreciating at double-digit rates over the past three decades. Also, with a mortgage, your cost of capital is probably closer to 5% than 10%.

3) One more way to think of the value of land as opposed to the value of buildings is the housing market. You can often see a pairs of (practically identical) houses trading for 300k and 3m. They both cost roughly 250k to build. The only difference is location. The former is sitting on land worth 50k while the latter is sitting on land worth 2.75m. At times, the owner of the 3m house will rent it out at a price that reflects the replacement cost of the building. I believe this is precisely what is going on in Shenzhen's office market right now. Office space (as opposed to retail and hotel space) is being rented out at a cost that reflects the replacement cost of the building but not the land.


>> And could you please state more clearly your own calculation?

I got to $400m by multiplying $40m by 10. As you point out, management has indicated it's $42m but I prefer round numbers. 10 times annual rent is a general rule of thumb used by an old and rich RE investor I know. While the market does fluctuate, buying at a discount to that generally works out well over time. My own understanding of this rule of thumb is that it covers the replacement cost (depreciation) of the building and leaves enough money to service the mortgage.

In effect, paying 10x rent for some RE, implies you are paying nothing for the land itself. This is generally not the rational state of affairs in a city.... which explains why that old investor is rich :o)

By buying at a discount to 10x rent, he was being paid to own the land.


My thesis remains:

>> 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.

Remember, we don't need to know a man's weight to know he's fat or a woman's age to know she is old enough to vote.
yaronguru
Yaronguru - 1 year ago
Batbeer2,

Thank you for your reply! I agree with you that precision in calculations is not the key in this case; but I would call for more precision in our ideas.

I am afraid I disagree with you on what economic value for a real estate property means.

You state:

"You can often see a pairs of (practically identical) houses trading for 300k and 3m. They both cost roughly 250k to build. The only difference is location. The former is sitting on land worth 50k while the latter is sitting on land worth 2.75m. At times, the owner of the 3m house will rent it out at a price that reflects the replacement cost of the building. I believe this is precisely what is going on in Shenzhen's office market right now. Office space (as opposed to retail and hotel space) is being rented out at a cost that reflects the replacement cost of the building but not the land."
[color=#333333; font-size: 12px; line-height: 18px]

Why would this ever be the case? If you owned a 3m house, why would you rent it out based on its replacement cost and not its economic value, based on its location? Another way of putting the question, is this: if a property is being rented out at a certain rate, and that is the market rate, what does it mean to say that the economic value of that property is actually much higher than what is reflected by the rent? Economic value, after all, just is the cash flow that a property can generate (discounted to the present).

Further, when you rent out office space, you are renting out the building and [/color]the land on which the building is located. After all, it's your land, and your building, and you'd be making a mistake not to charge for the use of both.

Finally, when applying a x10 multiple to the annual rent on the building in question, I believe it's a mistake not to take into account the investment that must go into the construction of the building. It's a huge cash outlay upfront that you'd be ignoring. I imagine that your RE investor friend applied the multiple when purchasing buildings already in-existence, which is an entirely different matter.


Yaron
batbeer2
Batbeer2 premium member - 1 year ago
Hi Yaron

>> Why would this ever be the case? If you owned a 3m house, why would you rent it out based on its replacement cost and not its economic value, based on its location?

I can think of half a dozen reasons but the main point is that it is quite common. A long time ago I got thrown out of econ 101 (seriously!) for pointing out stuff like this.

Specifically in Shenzhen, they're building offices at a rate that's probably unmatched anywhere on the planet. IMHO they're renting out those buildings just so they can service the mortgage and finance the next project. This too shall pass.

>> Further, when you rent out office space, you are renting out the building and the land on which the building is located. After all, it's your land, and your building, and you'd be making a mistake not to charge for the use of both.

Again, there are many instances where people charge only for the building while they're betting on apprecation (through inflation or otherwise) of the land to make a profit. Many millionaires out there made their fortune through that "mistake".

>> Finally, when applying a x10 multiple to the annual rent on the building in question, I believe it's a mistake not to take into account the investment that must go into the construction of the building. It's a huge cash outlay upfront that you'd be ignoring.

Fair point. That is why I didn't add back the cash on the balance sheet. I think the building would cost some 180m to develop and they have 200m or so of cash on the balance sheet now. From the article:

>> $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.


In short, if you have a model that says Nam Tai is worth less than $9, doubt your model.
batbeer2
Batbeer2 premium member - 1 year ago
Nam Tai releases some very interesting quarterly numbers.

- The facilities in Wuxi are closed now and held for sale. This has caused some non-cash charges for the quarter.

- The NEW industrial site in Shenzhen may not be developed and may be sold if the company can't generate a decent return on investment there.

- The company released the first of a series of valuation reports for the land in Bao'an. According to the first report, the land can be developed at a cost of roughly RMB 1.5B ($200m) and would fetch RMB 3B ($400m) in a sale. For tax reasons, that is probably not what they'll do. They intend to develop for lease/rent.

Due to some DCF parameters which I consider absurd, they come up with a net present value of RMB 200m ($30m) for the project. Meanwhile, just 10 km away, similar plots of roughly 50 000 square meters of raw land are selling for 0m. in Bao'an, where Nam Tai is situated, rights are selling for more.

The company now sits on $225m worth of cash. Shares are down to $6.30 which means the company currently trades around NCAV. You get the PP&E for free.

Since I wrote the article, I have learnt China's current five year plan calls for an annual 13% wage increase. Going forward, I expect Nam Tai to exit the labour-intensive EMS business and transform itself into a real estate business. They will use a lot of cash in the process. It would be rational for management to cut the dividend.

FWIW, I think Nam Tai is well managed, well capitalised and dirt cheap. Nothing new there.

I also think there is significant market risk for the shares. Current (EMS) analysts will be dropping this from their radar and it will take some time to develop a new shareholder base.

>> The stocks I buy are the ones I want to go down.

I may get my wish.
brianymleung
Brianymleung - 1 year ago
Hi Batbeer2,

What is the rationale in buying stocks and wanting them to go down?
batbeer2
Batbeer2 premium member - 1 year ago
Hi Brianymleung

Good question.

It's only rational if you're a net buyer of stocks.

I expect to spend a significant portion of my income buying stocks over the next couple of decades. As far as I'm concerned, the cheaper they become, the better.

Hamburgers get cheaper and everyone is happy.

Socks get cheaper and ,,

Stocks get cheaper and everyone panics.....

I figure that's because, in the end, most market participants want to turn a quick profit by selling to the next fool. They don't really want to own the business, they are trying to outwit the market. That's fine by me but it's not my MO. I only buy shares of businesses I would want to own outright. Forever.

There is no principle to it, it is just a matter of playing monopoly while all the talented analysts out there are busy playing poker. I know I could beat Bobby Fisher at almost anything. Just not at chess.

That's the theory.

In practice, each month I usually have some cash to spare. I invest that. As the stock goes down, I don't have trouble sinking more cash into a given idea (to a point). However, if they go up, I simply cannot bring myself to buy above my original price. This means I have to start looking for something else.

That's tough. I spend a lot of time researching all sorts of stocks but I generally find just one stock each year that I can sink a lot of cash into. You'll note I pass on 90% of the ideas I write about. Not because I think they're bad ideas but because they are not cheap enough for my taste or the long-term (as in multi-decade) prospects of the business are less than great.

2009 I was buying USG. 2010 it was WPO, 2011 it was COCO and 2012 it was DJCO. I still own all of them. I traded in and out of some others, but that's my main portfolio. In each, I invested my entire savings for that year. I just can't do that if they run up.

This year, depending on the price action, it may be Tesco plc or Nam Tai. Should Tesco drop 15%-20% I can sink A LOT of cash into that without batting an eyelid. I may even sell out of Nam Tai or some other stock. On the other hand, If Nam Tai drops below NCAV, then I guess I've found my stock for 2013.

Worst case, they both run away from me and I have a problems putting my excess cash to work between now and December.

In short, there are two stocks I would like to see going down. Tesco plc and Nam Tai. Those are the two I would like to buy a lot more of. Emotionally, I can only do that if they drop below my original price. As of today, neither of them is.

Hope this makes sense to you.

varunfriend
Varunfriend premium member - 1 year ago
Hi Batbeer2,

Do you think they are getting out of their core business .. and if so does this become a pure play for undervalued real estate assets that will be monetized and revalued over time?

thx

Varun
brianymleung
Brianymleung - 1 year ago
Hi Batbeer2,

This makes perfect sense.

I invested on-and-off +20 years in NTE. I did well in 1992 and did OK again in 2003/2004.

I started to accumulate my current holding in NTE from 2008/2009 with an average cost of $7/sh. I have +100,000 shares. Being a value investor, I did not sell any of my holding in NTE in 2012/2013 when prices were between $14 to $16. For the time being, it sure looked as a big mistake on my part.

I am still betting on Koo. I am comfortable with him steering the ship.

I am not a real-estate developer but there are ways for NTE to develope the raw land w/o dipping into its own cash while maintaining ownership. Licensing a third party developer to develope it's raw land is an option.

NTE gets from the developer-

1. Licensing fee for the right to develope the land.

2. % of the total rental revenue or a monthly fixed royalty fee, which ever is higher, when the developement is completed



Obviousely, this is easier said than done. And there are possible regulatory hurdles in China.

Your thoughts?

batbeer2
Batbeer2 premium member - 1 year ago
Hi Varun,

I don't think they want to get out but I do think they will be forced out. If they remain disciplined in their capital allocation, it seems inevitable.

Wages in China are rising and wages in Shenzhen are higher than elsewhere. Unless they set up operations in another region with much cheaper wages, the core business is in trouble.

So, yes.

@ Brianymleung.

Yes, I think they will find ways to develop without spending the full $200m out of pocket.

buydirtcheap
Buydirtcheap - 1 year ago


Hi Batbeer2:

I first want to congratulate you on a nice article and thread here on NTE. I, like you, look for companies that are cheap and preferably beaten down. I chuckled when I read your hamburger analogy.

It's now about a week after a pretty dismal quarterly earnings report and outlook. And yet, the stock has now recovered to the 7s. Why? You might expect the stock, after that type of horrible quarterly report, to go down to the $4 range, where I (and you perhaps) might be able to get our cheap shares.

My hope is that, with the next quarterly earnings, the company will announce definitively that it shut down its Shenzhen factory and will pay no future dividend in the year 2014 (Do current investors think anything else is likely?--I certainly do not, based on JDI transferring business to another supplier +/- a month or two here or there). NTE will therefore not have any revenue while it develops the Shenzhen property, and possibly, the shares will descend into a cheap enough range where you and I may be able to place our bets. I for one like the prospects of Qianhai real estate, and I really don't care how NTE makes its money, EMS or otherwise. I also think Koo is quite a smart businessman. I am willing to wait a few years for a multiple bagger, so to speak.

My worry is that, especially with the recent stock price in the 7s, some investors (hedge funds or astute real estate investors) are willing to pay a higher price than you or me. What do you think? I for one am willing to be very patient on this one, although I am not ready to buy at current levels...
batbeer2
Batbeer2 premium member - 1 year ago
Hi Buydirtcheap

Sorry about the slow response. I just noticed your comment; I was offline for a week (by choice).

>> And yet, the stock has now recovered to the 7s.

Your guess is as good as mine. Maybe we just witnessed the transition from EMS investors to RE investors. If so, it was incredibly fast.

>> NTE will therefore not have any revenue while it develops the Shenzhen property, and possibly, the shares will descend into a cheap enough range where you and I may be able to place our bets.

You and me both. I have a position already but I'd sure like to see this dip into NCAV territory.
batbeer2
Batbeer2 premium member - 10 months ago
OK, just in case there was any doubt about the relevance of land use rights, Nam Tai's management has come out and said it. In their latest release they now describe themselves as:

"We are an electronics manufacturing and design services manufacturer in the midst of t ransforming ourselves into a real estate company."

This is no longer an EMS company with significant "hidden" value in the real-estate. This is a real estate company being born.

China is exporting its labor-intensive industry to Indonesia and Vietnam by raising the minimum wage at double-digit rates. Shenzhen is leading this push. This policy is part of the current five-year economic plan.

IMHO the EMS business of NTE is in runoff. The RE business makes sense given that China (and especially Shenzhen) is investing heavily to replace that industry with services based (financial) industry.
jisare
Jisare - 10 months ago
Hi batbeer2,

Thanks for the nice article.

I did a very rough estimation on the land cost if the industrial land of NTE will be converted to commercial land as I'm worried initially that NTE will have to bid for the land, which could cost over 1 billion.

it turns out the company will only need to pay for the "base price" for the land conversion set by the shenzhen government, (http://www.microsofttranslator.com/bv.aspx?from=&to=en&a=http://www.banq.cn/html/16087.htm) which is 4000yuan/m2*50,000m2=200million yuan. the number looks reasonable in the shenzhen context.

and this makes 200mil USD looks enough for Mr. Koo to finish the development.

does this make sense? anyone who is more familiar with this matter?

of course, there is still risks that NTE screws up the relationship with the government and won't get the requisite permit.
batbeer2
Batbeer2 premium member - 10 months ago
Hi Jisare,

Thanks for the kind words and the link.

I think your estimate of CNY200m ($33m) is about right. DTZ did the math based on the same 2013 "base price". Check out pages 8, 9 and especially 16 of their calculation to get idea of the fees NTE needs to pay to acquire the land-use rights (as retaill/office/residential space) for the next 30 years.

Interestingly DTZ also include the historical (acquisition) cost of current land-use rights. That is irrelevant to the thesis given that the current rights have already been paid for.

In any case, the $240m NTE now has should be enough. Also, they should be able to lever up (a mortgage) to fund most of the development cost. They probably could pay for the entire project in cash but I'd be surpirsed if they did.

What I'm more worried about is that they also need a new facility for production. With wages rising fast in Shenzhen, I think that would be a dumb investment.
jisare
Jisare - 10 months ago
Thanks for the DTZ report link. I check the DTZ report. I think they include the acquisition cost is because NTE don't have to pay the full land cost. The remaining 40years of industrial land right has some value which should be deducted.

A bit off topic, I always wonder how do you find so many relevant materials such as the DTZ report?
batbeer2
Batbeer2 premium member - 10 months ago
>> I always wonder how do you find so many relevant materials such as the DTZ report?

I found that report on Nam-Tai's IR site here. I think they mentioned it in one of their conference calls. Like you, I knew this was a very important factor in the analysis. It jumped at me as I was browsing the transcript of one of their conference calls (maybe it was a 10q) and went to their site.

If you like to find stuff that's a bit off the beaten track, the best place to start is to read up on the competitors of any company you're intereted in. I was working on Goodyear it was cheap. As always, I checked out the competition.... and found Michelin. At the time, it was cheaper and better.

Sometimes APOL will provide information to the public that is very relevant to COCO,

RRD will talk about stuff that has a direct impact on QUAD

You'll learn a lot about OSTK by reading the annual reports of NILE and AMZN.

In looking at PostNL, I'll also reseach Oesterreichishe Post and the guys in Sweden and the UK. In fact I'll look at the USPS too even though that one is not publicly traded.

etc. etc.

In short, if you want some interesting background on a company, reseach the competition. Some will disclose stuff that others don't. You look at them all and focus on the key differences.

Of course, they all spend a lot of money to broadcast the message that somehow their product is better. (Goodyear's tires are different from Michelin's; an iPhone is superior to a galaxy s4). That's the message these companies will be shouting at you as a consumer. As an investor, you can assume that this is by definition the consensus view.

Instead you ask yourself "why is inventory turnover higher at A compared to B". Maybe you'll find that car manufacturers are buying Bridgestone tires because Bridgestone has production plants in Japan, near the factories. Meanwhile, trucking companies and airlines prefer Michelin because they have a global distribution network. Of course, anyone can build a plant near a factory but it will be very tough to replicate Michelin's network. That is not the kind of stuff you'll discover if you go asking your friends which kind of tire they prefer. More likley than not, their answer (and your own preconcieved ideas) will reflect the advertising budget.

If you have no idea who the competition is, check out morningstar.com. They provide a decent list of "industry peers". You'll only know if they're direct competitors if you read up on them. In any case, you're likely to find a company you've never heard of. If you're lucky, you'll find one that's cheaper and better than what you started out with.

Just some thoughts.
brianymleung
Brianymleung - 9 months ago
Hi Batbeer2, Their latest 3rd Q release NTE no longer describe themselves as an electronics manufacturing and design services manufacturer in the midst of transforming ourselves into a real estate company. The part- "in the midst of transforming ourselves into a real estate compny"-is no longer in the description. Check it out. This really caught my eyes...how do you see it?
batbeer2
Batbeer2 premium member - 9 months ago
Where did you catch that?

In their latest filings with the SEC they still describe themselves as:

We are an electronics manufacturing and design services provider in the midst of transforming ourselves to a real estate development company.

I'd rather they didn't mess around with those texts but I would't read too much into it. My guess is some lawyer preferred it that way.
brianymleung
Brianymleung - 9 months ago
Hi Batbeer2, Go to Namtai's website and, click investor news on it's 3rd quarter result, which is the latest news release from Namtai. There is no mentioning of transforming the company into a real estate development company. The company did mention it in the two news releases prior to the 3rd Q release. Normally, a company don't change its business descriprion from one new release to the next.....maybe I am readig too much into this
batbeer2
Batbeer2 premium member - 9 months ago
BTW....

The company has released two additional feasibility studies for the RE

by Jones Lang & Lasalle and Rider Levett and Bucknall.


@ brianymleung

Yes, it's missing from the report on their site..... good catch.

There's a limit to what I can explain :o)
batbeer2
Batbeer2 premium member - 8 months ago

@ Paulwitt

The class action has been dismissed by the court with prejudice.

When a lawsuit is dismissed, the court may enter a judgment against the plaintiff with or without prejudice. When a lawsuit is dismissed without prejudice, it signifies that none of the rights or privileges of the plaintiff are lost or waived. A court may also enter judgment with prejudice, however. This signifies that the court has made an adjudication on the merits of the case and a final disposition, barring the plaintiff from bringing a new lawsuit based on the same subject. Often a court will enter a judgment with prejudice if the plaintiff has shown bad faith, misled the court, or persisted in filing frivolous lawsuits.

batbeer2
Batbeer2 premium member - 7 months ago

-

double post

batbeer2
Batbeer2 premium member - 7 months ago

Nam Tai is liquidating its production lines. The stock can now be bought at a significant discount to NCAV; most of which is cold cash. Shareholders are being paid to own the RE. 

An NCAV controlled by able and honest managers who communicate regularly and candidly. That is a rare stock. The kind I come across once or twice a year at most.

>> After April 2014, we intend to sell all of our machinery and production lines in all our facilities. We expect the sales will be finalized around end of July 2014.

Upon the cessation of our core business of LCM production, our management will thoroughly focus our efforts on developing two parcels of property in Gushu, Shenzhen, and Guangming, Shenzhen, respectively, by converting these two parcels of land into high-end commercial complexes. 

All of this does not affect the thesis. In fact, it clears up some of the uncertainty. 

 

>> Market risk - NTE is a volatile stock, It has traded at a discount to net cash in the past and may do so again.

 

Maybe I shouldn't have said that.

maartenpieters
Maartenpieters - 7 months ago

Batbeer,

Thanks for the analysis. This stock was on my watchlist since I read it.

Bought some stock today. The upside potential in combination with the safety of this investment is unique.

Regards,

Maarten

batbeer2
Batbeer2 premium member - 7 months ago

You already earned some money by waiting before you bought.

Hope you make a lot more by waiting before you sell.

happybee
Happybee - 7 months ago

Batbeer,

Thanks for this interesting idea and analysis. I am new to this post and have been trying to understand the latest valuation analysis based on DTZ and JLL. Would appreciate your thoughts on how you interpret this numbers for a fair assessment on such stock.

First, let's look at DTZ report:

Option 1: Held for Leasing

Gross Investment: 1,516,537,150 RMB FNAV: 212,717,617 RMB (or US$35M)

Option 2: Property Right Transfer

Gross Investment 1,579,413,402 RMB FNAV: 100,817,000 RMB (or US$16.8)

(With $1 USD = 6 RMB at the moment)

Then JLL report, 3 options:

Option A (Part sale, Part Lease)FNPV = US$266,464,960

Option B (Leasing of all property types)

FNPV = US$106,485,420

Option C (Sale of all property types)

FNPV = US$125,712,470

batbeer2
Batbeer2 premium member - 7 months ago

Hi Happybee, welcome!

First off, those reports try to estimate the present value of the project. That is not the same as the value to the investor. Here are two examples of how the IRR to the stock holder could be different from the IRR of the project as calculated by those firms:

1) The reports add the cost of the land use rights into the cost for the project. For the stock owner today, (part of) the cost is already expensed. This item alone has a significant impact on both the margin and IRR to the stock holder.

2) Management could take on a mortgage of $800m (at say 7%) to finance the project. That wouldn't change the project itself but the leverage would have a significant impact on the IRR to the investor. The company could pay a $300m dividend in a matter of months and still have a better balance sheet than most RE companies I've seen. I'm not saying this will happen. I'd bet against it. Just pointing out another way by which the IRR to the stockholder could be different from the IRR of the project.

In short, though the numbers in those reports appear to be precise, they are not neccesarily a good indication of the IRR to the owner of the stock.

As to your question....

The report by Jones Lang and Lasalle makes most sense to me. As I see it, their plan would cost roughly $500m and five years to develop (p74). The result would have a market value of $1100m (p90). The present value of the difference would depend on taxes and the discount rate used. $250m seems reasonable enough.

Tax-wise it would be better to lease than to sell. In a hybrid scenario, JLL lets the property generate about $20m of annual cash (p76) by 2019. That's after the cost has been recouped through a partial sale (p76).

This report by DTZ says it would cost $220m (p16) to develop and the result would be worth $440m (p17). DTZ's plan is for offices and apartments. Without a hotel, the cost is lower and so is the value. The office space takes a very long time to generate enough revenue to recoup the cost so the NPV isn't so great.

And then we have Rider Levett and Bucknall. Their plan too includes a hotel. Their estimate of the cost is roughly $500m (p26).

Just to check for sanity.... RLB's plan calls for six 30 story towers with retail on the ground floor, office space and a hotel. The floor plan would cover 20% of the currently available land. Common sense tells me that six 30 story buildings in Shenzhen could indeed be worth north of $1B.

FWIW, I beleive this is not going to take five years. I wrote the article in july and a lot has happened in mere months. There's a name for this, it's called "Shenzhen speed".

Hope this helps.

happybee
Happybee - 7 months ago

Hi Batbeer,

Thanks for the quick analysis. Finding the "fair value" of this hidden property seems to be a wild guessing game. From what you have here, you are putting a range between $250M (JLL), $440M (DTZ) to $1Bil (RLB) value depending on what we end up getting. Given most listed property companies in China are trading at around 50% discount to NAV, is it fair to say the fair price of this stock should be:

JLL : ( $360M latest book value + $250M property ) / 45M shares * 50% = $6.78

DTZ: ($360M latest book value + $440M property ) / 45M shares * 50% = $8.89

RLB: ($360M latest book value + $1Bil property ) / 45M shares * 50% = $15

If you believe JLL makes the most sense to you, does it mean the stock is actually trading near fair already?

Thanks

batbeer2
Batbeer2 premium member - 7 months ago

>> If you believe JLL makes the most sense to you, does it mean the stock is actually trading near fair already?

Ehm.... no.

I wouldn't know if most listed property companies in China are trading at a 50% discount to NAV. I'll take your word for it. If they are, it doesn't affect the thesis.

The thesis being that this well-managed company is trading at a meaningfull discount to a pessimistic estimate of the value of its assets.

 

>> RLB: ($360M latest book value + $1Bil property ) / 45M shares * 50% = $15

You'd have to back out $500m of costs from RLB's estimate leaving you with essentially the same figure as JLL.

JLL and RLB come to similar conclusions; spend $500m to build a hotel and offices worth $1B. Because of taxes and time, the present value of that idea will be about 50% of the gross profit (present value = 0.5 x ($1B - $500m)).

DTZ is the odd one out. They're planning to spend less but also earn less. They're doing it in a similar timeframe so the present value is much lower.

portfolio14
Portfolio14 - 7 months ago

Hi Batbeer2,

Now NTE trades below NACV and operation will be discontinued, the thesis here is we are getting the PPE for free. Or more importantly, we are getting the land use right of their Bao'an factory for free. But if that land use right worths only one dollar, it doesn't worth the risk because the upside is 1/250m = 0.0000004%

So, the key is to have a rough idea how much the land use right worths.

Recent transaction in the nearby Qianhai area in July 2013 was about RMB 16,000 per sq m (gross floor area). Say NTE's 260,000 sq m (GFA) can command the same price. Price = 16,000 x 260,000 = RMB 4B.

But all those feasibility reports are telling a different story. e.g. The DTZ report, p.16, land cost is merely RMB 60m. It's in a completely different order of magnitude. 4B vs 60m.

All these feasibility studies should be using opportunity cost, not historical cost, right? Otherwise the NPV is meaningless. If I can sell something for 4B in the open market, why do I want to use it as a 60m asset to build something? What do I miss here?!

Another thing which is confusing is, in the JLL report, p.80, land cost is USD 51m. This is again in a different order of magnitude. USD, not RMB. How do they get that?

batbeer2
Batbeer2 premium member - 7 months ago

Hi portfolio14,

>> All these feasibility studies should be using opportunity cost, not historical cost, right? Otherwise the NPV is meaningless. If I can sell something for 4B in the open market, why do I want to use it as a 60m asset to build something? What do I miss here?!

I don't think NPV is meaningless if it is not based on opportunity cost. Having said that, I agree that it is important to asses this (opportunity) cost. Thanks for an excellent question.

First off:

I think DTZ gets to RMB 60m ($10m) because their plan is for building appartments. Given that Nam Tai already has dormitories in place, they can avoid some fees by recycling the rights to the dormitories to build appartments (p6, red cover/green cover).

JLL's plan calls for offices, shops and a hotel. This means they can't recylce the rights to the dormitories. They'll have to pay a fee for converting the rights. That is probably why JLL gets to $50m. Unlike DTZ, JLL doesn't break down the cost though so this is just an uneducated guess on my part.

Secondly:

There is no open market for land use rights in China. You can't just sell your land (use rights) to the highest bidder. Only the government may sell rights. I think the 4B you get to is based on government auctions.

When rights are auctioned by government because the former tenant is unable or unwilling to (re)develop the land, the old tenant can get (a portion) of the proceeds but there's a huge tax penalty. This is what happend at Qianhai.

From a buyers perspective, either you buy fresh new rights from government and build something for yourself or you rent some property from someone who owns some rights (that would be Nam Tai).

In short, whereas those auctions do not reflect a fair market (or liquidation) value of Nam Tai's rights, they are definitely an indication of the economic value of the land.

The system is probably a bit different from what you are used to but it does make sense to me. At any rate, it is not anarchy or a lottery. It is based on the basic Chinese (constitutional) law that all land is the property of the people and thus cannot be owned by any individual. You'll note "people" is not the same as "government".

When the Shenzhen local authorities rezoned the old area at Bao'an, Nam Tai demanded a new plot of land. Sure enough, local authorities found them a cheap new site for industrial use just outside the city. In due course, Nam Tai decided not to relocate their EMS operation to the new site. Instead, they've elected to extend the lease on the old site and (re) develop that first.

So now they are sitting on two unused plots in Shenzhen. What they've done is arrange for a new site for industrial purposes (pan B) while saving up enough cash to redevelop the old site (plan A).

Precisely because management is thinking about opportunity cost, they've decided not to construct a production facility at the new site at this time. My guess is they will eventually build some sort of facility there, just not for their own (former) EMS business. Whatever they build there, they will be renting out to someone.

They milked the EMS business for as long as they could and now they're calling it a day. I think I mentioned this possibility before.

Hope this answers more questions than it raises.

P.S.

If anyone with better knowledge of rules and regulations in Shenzhen is able to chime in, please do.

portfolio14
Portfolio14 - 7 months ago

Hi Batbeer2,

Thanks. I'm still digesting the numbers.

I believe your $400m valuation is based on the $40m p.a. rental income of only the *1st Phase* 65k sq m (700k sq ft) project in their original plan mentioned in 2013Q1 conference call.

But their total GFA is ~300k sq m. So, if they now build to the full potential and lease out everything, the rental income should be a lot more. However, look at the full leasing option in the JLL report. They model a stable net cash inflow after 2020 to be merely $48-54m p.a. The numbers don't add up.

What do I miss?

batbeer2
Batbeer2 premium member - 7 months ago

>> What do I miss?

Off the top of my head....

JLL proposes to sell of a chunk of property after the build is complete to recoup the cost. The remainder generates steady stream of cash.

So that stream does not come from the full 300k sqm. They use a discount rate of some 9% from day 1 so the "recouping" of the cost does imply a decent return.

Please note my original estimates were made with about 10% of the information we have now. If anyone got the impression that those numbers were very rough guesstimates, all doubt has been removed now. So take those numbers for what they are/were worth.

Re opportunity cost....

Check out the fourth comment (my second) on this thread.

portfolio14
Portfolio14 - 7 months ago

Hi Batbeer,

The JLL option (Option B) I referred to proposes 100% leasing, no sale. (table on page 84, "net cash flow" row.)

So, my puzzle remains, if the 65k sqm project referred to in the Q1 conference call can generate $40m p.a., why does the full 300k sqm project can generate only $48m p.a.?

I must make a silly mistake somewhere.

portfolio14
Portfolio14 - 7 months ago

batbeer2
Batbeer2 premium member - 7 months ago

Yeah, I see what you mean. I quote the transcript from SA (emphasis mine):

>> M.K. Koo - Chairman and CFO

So I think there is a rental charges and then we have another charges, it is the management fee. Management fee is for maintaining. There may be private or public area or for security training. So that is another income. So the management can handle the job. So only the rental charges are possibly around the $40 million. We had the custom (inaudible) is normal. So here $40 million is for whole year, fortunately for the 700,000 square feet building.

mr. Koo was talking about a 700k sqft building generating $5 per sqft of rent. He mentioned the $5 /sqft on that same call (just before this quote).

$5 x 12mts x 700000sqft = $42m so that adds up.

JLL is talking about 270k sqm (3m sqft). JLL's numbers imply rental income of

$50m / 3m sqft / 12 mts = $1.50 per sqft per month.

FWIW, I think $1.50/sqft per month is too low even if you mix in the appartments (which probably generate a bit less revenue than an office). I couldn't rent a decent office at $5/sqft in my neck of the woods and I don't think it would be easy to find a decent office at $2/sqft in Detroit.

Shenzhen is not Detroit.

In short, yes, it seems there's a huge discrepancy between mr. Koo's comments and the reports. I'm betting heavily with mr. Koo on this one but I'll continue to use JLL's numbers to be on the safe side.

Thanks a lot, I totally missed that!

portfolio14
Portfolio14 - 7 months ago

Hi Batbeer,

Many thanks!

I continue to do my DD. In case you are interested. Cross-reference to the DTZ report. The all-leasing proposal on p.19 suggests a total rental revenue of $1.6B (RMB 9.8B) over a total payback period of 27 yrs. That works out to be $59m per year. Again, this is more inline with JLL's figures than Koo's.

Btw, do you have other references detailing the circumstance of the Boa'an rezoning? e.g. When did the local gov announced it? What exact rights/liabilities do the existing right owners have? I think it was first mentioned in NTE's quarterly report in 2013Q1.

Cheers.

portfolio14
Portfolio14 - 7 months ago

I'm checking out offices available for rent here http://office.sz.soufun.com. (If you open in Chrome, it gives you a translate button.)

Typical ones go for RMB 50-100 / sqm month, that translate to USD$0.8-1.6 / sqft month. (Notice the coversion from metres to feet)

I'm wondering where Koo got his $5 figure. In Chinese Yen?!

batbeer2
Batbeer2 premium member - 7 months ago

>> I'm wondering where Koo got his $5 figure. In Chinese Yen?!

Maybe he has a plans for a hotel.

20sqm rooms with RevPAR of 0 gets you there. If the manager of the hotel needs $50 per room per night to pay for the cost of operating the hotel, your cost base comes in at $150 per room per night. This is still cheaper than the average hotel in Shenzhen.

Or....

The guy/gal at SA who did the transcript made some typos.

portfolio14
Portfolio14 - 7 months ago

Nah. I listened to the recorded audio from NTE's website. He did say "5 dollar", twice. And he did say "office".

DfiinancialH
DfiinancialH - 7 months ago

Hello, reading your comments I have 2 observations to make.

1. I think koo's figure was a gross figure so that would have to be compared to the "total cash inflows" line rather than "net cash flow". That's 20m higher usually

2. Maybe 5 HKD? That would be less than 0.8USD... just guessing

batbeer2
Batbeer2 premium member - 7 months ago

>> Nah. I listened to the recorded audio from NTE's website. He did say "5 dollar", twice. And he did say "office".

Right. Well, in due course we will know if he was telling us something he really shouldn't have (maybe he has some offers already) or if his numbers were simply wrong. I wouldn't rule out the former but it is not critical to the thesis.

Mr. Koo is well connected in HongKong and for sure some respectable Honk Kong businesses will be looking to rent some property near the Qianhai area now.

portfolio14
Portfolio14 - 7 months ago

Thanks Batbeer!

Btw, do you have other references detailing the circumstance of the Boa'an rezoning? e.g. When did the local gov announced it? What exact rights/liabilities do the existing right owners have? I think it was first mentioned in NTE's quarterly report in 2013Q1.

batbeer2
Batbeer2 premium member - 7 months ago

I first read about it here: http://english.sina.com/china/p/2010/0701/338043.html

I did some work and traced it back to the announcement by the Shenzhen city authorities (they have a reasoable site). Most of the important stuff is in Chinese and when I wrote the article I was a heavy user of Google translate. I no longer have those links.

You can get an idea by reading this: http://en.wikipedia.org/wiki/Chinese_property_law

Keep in mind that the land in Bao'an is urban land so you can skip the stuff that deals with collectively owned rural land.

It gets interesting after the consitution was ammended in 2004. Since then:

"The lawful private property of citizens shall be inviolable. The country shall protect in accordance with law citizens' private property rights and inheritance rights."

portfolio14
Portfolio14 - 7 months ago

[double post]

portfolio14
Portfolio14 - 7 months ago

Thanks Batbeer.

I am aware of the info you linked. But these are "macro" level policy changes. What I'm more interested in is the details in the local rezoning of Bao'an industrial areas: what are clauses attached the redevelopment of the region? which exact areas are being rezoned from industrial use to commercial use?

Do you know?

batbeer2
Batbeer2 premium member - 7 months ago

>> what are clauses attached the redevelopment of the region? which exact areas are being rezoned from industrial use to commercial use?

Do you know?

No.

AFAIK, all industrial activity in the district of Bao'an will stop and be relocated to the newly created industrial zone of Guangming.

batbeer2
Batbeer2 premium member - 7 months ago

On the off chance that anyone reading this

a) finds him/herself in NYC and,

b) prefers his/her beer/coffee/tea with an unhealty dose of ugly/illiquid/cheap stocks.....

This flying Dutchman will be in NYC for presidents day. Drop me an e-mail if you'd like to talk stocks offline. You can find the e-mail adress on my GF profile.

portfolio14
Portfolio14 - 7 months ago

Batbeer,

I wish I were in NYC. Have a good trip! :-)

Btw, are you familiar with TGS -NOPEC? I've been thinking about it since X'mas.

portfolio14
Portfolio14 - 7 months ago

I emailed NTE investor relationship and got a reply today. It confirms what I suspected. The $5 Koo mentioned in the conference call was in RMB.

Btw, I'm long NTE with you. No matter how I cut it, it's cheap with downside well protected.

p.s. My office has 2 Dutchmen. Dutch people are great guys! :-)

batbeer2
Batbeer2 premium member - 7 months ago

Thanks for following it up with IR. I asked them some other questions a while ago but never got a resonse.

I'll look at TGS and let you know what I think.

portfolio14
Portfolio14 - 6 months ago

Hi Batbeer2,

http://www.portfolio14.com/2014/02/nam-tai-net-net-with-mutliple-bagger.html

I don't think there is anything new to you. Cheers.

batbeer2
Batbeer2 premium member - 6 months ago

-

batbeer2
Batbeer2 premium member - 6 months ago

Hi Portfolio14,

It seems your timing is much better than mine.I think the stock was at $6.80 or something when I wrote this about 6 months ago. Since then, the stock is down.

You wrote at $6.10 or thereabouts.... and now the stock is up. Nice work!

portfolio14
Portfolio14 - 6 months ago

I wanted it to fall so I can buy more.

portfolio14
Portfolio14 - 6 months ago

Just read the FY13 annual report. Notice 2 things:

- They said they will fund the property development with their existing cash and interest on cash, not borrowing.

- They said "Up to the complete cessation of our EMS business around April 2014, we continue to be an electronics manufacturing and design services provider to a select group of the world’s leading telecommunications and consumer electronic products OEMs." Not sure what it means in practice.

swnyc2
Swnyc2 - 5 months ago

NTE is up 15% to $7.30 after the market closed. Anyone know why?

portfolio14
Portfolio14 - 5 months ago
batbeer2
Batbeer2 premium member - 5 months ago

It's final. NTE is not going to double. They're changing the ticker to NTP.

Nam Tai Electronics, Inc. today announced that it will change its name to Nam Tai Property Inc. The Company is also scheduled to begin trading under a new ticker symbol (NTP) on the NYSE at market open on April 22, 2014.

So here I'm wasting valuable screen space by explaining why I think Nam Tai is a very good EMS company and then they just quit and move into another line of business within a matter of months. Who said anything about "Shenzhen speed".

FWIW I think there'll be some cash popping up on the balance sheet as a result of the liquidation of their EMS business. It will be interesting to see if they keep it all to fund their RE ambitions.

batbeer2
Batbeer2 premium member - 4 months ago

So now we know.

The balance sheet is now even better than it was. Current assets of $315m with cash of $250m; total liabilities of $19m.

Nam Tai announces it will spend up to million buying back stock. They expect to complete the repurchase program by November.

The company trades at or near NCAV and is buying back stock. That is very good for the value of the remaining shares. The "hidden" value of the land (if any) is magnified.

Camue01
Camue01 premium member - 4 months ago

Hello Batbeer/Portfolio14/all,

thanks for the ideaand the continuous coverage and interesting discussions of Nam Tai. I was looking at the feasibilty report posted a few days backon Nam Tai's website.

So they are looking to build this in two phases:

Phase 1 should include Enterprise Incubator, Pilot Production Center, Apartments and Underground Parking at a total cost of 1.37 bn RMB (220 mm USD).

Phase 2 comprises of "Headquarters Building", two office buildings and a boutique hotel aith a total investment of 900mm RMB (145mm USD).

On page 25, the study estimates the total revenues and net income from the project for the 20 years as 3.9 bn RMB revenues and 3.04 bn RMB net income. So overall, the study estimates a profit of around (3.04 bn - 1.37 bn - 0.9 bn RMB) = 770 mm RMB = 124mm USD, undiscounted over 20 years . This appears significantly lower than the numbers given above and mentioned on the calls by Mr. Koo. However, the fact that NTP are posting the study on their website means that in my view, it should not be ignored and it makes me a bitmore sceptical about the prospects.

Is there anything I am missing here? Would you see a reason why you would expect the numbers to be on the conservative or aggressive side? Most studies I have seen in the past were on the optimistic side as people wanted to get stuff realised.

Batbeer, I agree that the stock buyback is a good signal and the balance sheet looks strong at this point.

Thanks, Camue

batbeer2
Batbeer2 premium member - 4 months ago

Hi Camue01,

>> Is there anything I am missing here?

The report you link to is for the site in Guangming. That is raw (undevelopped) land. Guangming is a new district of Shenzhen. You'll find the plot about 10km northeast of the runway of the Shenzhen airport (northern end). At the point where Guangming avenue runs due east/west there's a junction with Dongchang road. That's the spot. Satellite pictures show the junction itself is still under construction and the plot consists of raw land (some shrubs).

The numbers I discussed before are for the site in Bao'an. That site is the long-time production facillty (with dormitories). If you are looking for it, you can search for "Nantai road" in Shenzhen. On the mainland it seems they spell Nam Tai as Nantai. The plot is about 2 km southeast of the runway (southern end). Satellite images (google) show it's now an industrial area.

If you use street view on the Guangshen highway (g107) you can see Nam Tai's buildings on your left as you "drive" north. https://www.google.nl/maps/place/Nan+Tai+Lu/@22.6032872,113.8612176,16z/data=!4m2!3m1!1s0x3403ec7e2a802395:0x5d2c13263e0d9a6e

In the original thesis, the raw land in Guangming was thrown in for free. I get the sense that local authorities are in a hurry to develop Guangming. That's probably why Nam Tai has promptly received all the permits they need to commence construction.

Redeveloping the older site in Bao'an is a larger and IMHO more complex project. On the flip side, I think the the permits for that site will be even less of a problem. The dormitories (residantial) were already there so they may not have to change that if they want to build appartments.

Hope this helps.

P.S.

When I wrote the original artice I "drove" down the roads in Bao'an with street view. Now it seems that function has become unavailable in that area.... You'll have to take my word for it.

Camue01
Camue01 premium member - 4 months ago

Thanks for clarifying Batbeer. My bad confusing the projects. You can certainly see that I have not been to Shenzhen a lot (in fact never!)...

I think it will be interesting to see which moves Nam Tai undertake in terms of financing. At this point they have about 250-300 mm USD in Cash of which they may spend 40mm for share repurchase. Developing Guangming will require an investment of 340mm USD per the feasibility study. Also, Bao'an will require maybe 400-450mm USD. Against real estate collateral, Nam Tai can probably raise some debt which they can probably carry easily or alternatively they may try to sell some of their finished projects before finalising the rest.

batbeer2
Batbeer2 premium member - 4 months ago

>> Also, Bao'an will require maybe 400-450mm USD. Against real estate collateral, Nam Tai can probably raise some debt which they can probably carry easily or alternatively they may try to sell some of their finished projects before finalising the rest.

Yes, that seems reasonable. Selling would cause a significant tax hit though. A mortgage seems more likely. However, Portfolio14 found a comment somewhere that they were not going to use debt to finance the development. If that is indeed the case, it will take a very long time. It would also be the first RE company I've ever seen with no debt. We shall see.

>> You can certainly see that I have not been to Shenzhen a lot (in fact never!)

You and me both. Hongkong is on my list though; maybe someday. The metro to the Shenzhen airport passes by the Bao'an site.

Anyone going to Hongkong/Shenzhen one of these days? I would appreciate some pics of the area. There's a police (car) park nearby and I wonder how the infrastructure around the site is today.

Camue01
Camue01 premium member - 4 months ago

That would certainly be very interesting (even though going on a Pan-Chinese trip myself also sounds like a nice prospect). If we go, here are some more ideas of what to inspect:

I was looking at some other property plays in China/Hong Kong. There were decent write-ups on Keck Seng (184 HK) and Asia International (129 HK) on Valueinvestorsclub. They are different situations form Nam Tai because their assets are developped already rather than in transformation such as Nam Tai and in different locations (in the case of Keck Seng mostly in Macau, Asia International mostly Hong Kong.

Looking at their financial statements they both look dirt cheap in my opinion. In fairness, they do not have a Mr. Koo who has been a strong capital allocator for a long time and no long-standing history of a Nasdaq listing (they are both listed in HK). However, they appear to own interesting assets and may also be worth a look.

To me, the entire sector looks very interesting despite (or because) obvious concerns on the Chinese property market.

Thanks for the great coverage again

Camue

batbeer2
Batbeer2 premium member - 4 months ago

Yes, I have seen some (other) interesting RE ideas in Shenzhen, Hongong and Macau. Some are at least as cheap but in those cases, management is also more of a question mark.

Unless I win the gurufocus contest, I don't have a budget for trips like that though.

muellerwol
Muellerwol - 4 months ago

What worries me, is that NAM TAI has a track record as a manufacturing company, but not as a real estate developper. In this business, NAM TAI is a start-up with no track record and no long-term experience in the real estate market, even if they hired an experienced architect now. If you have no experience in this business, there is a risk to underestimate the costs of the projects and to overestimate the return of investement. Often, people are dazzled by nice 3D computer animations of office and residentual buildings, which are part of the virtual world. The real world are some old buildings plus naked land.

batbeer2
Batbeer2 premium member - 4 months ago

>> What worries me, is that NAM TAI has a track record as a manufacturing company, but not as a real estate developper.

Fair enough.

Then again, everything that is now there was built by Nam Tai. What you call "some old buildings with naked land" are not sheds and shrubs. These are substantial high-tech production facilities with dormitories for hundreds of workers. These workers are brought in from other Chinese provinces and live on the premises for months. The dormitories in Bao'an come with a swimming pool, recreational facilities and a restaurant.

In a sense, Nam Tai has already built and operated hotels and offices in Shenzhen. They built them from scratch and used them for their own EMS operation. They recouped their cost and generated a healthy (admittedly lumpy) profit too.

This time round, they are building them bigger for others to use.

In short, one can look at the facts and reasonably conclude that it's a start-up. Alternatively, one could conclude that they've simplified their business model.

buydirtcheap
Buydirtcheap - 4 months ago

Recent buyback is a very good sign. Patience will be rewarded and ignorance will be punished, especially those who speak of naked land. Try to buy the next land auction in Qianhai. Ask Silverstein Properties why they put their chips on the table in Qianhai.

For those on the sidelines, I suggest now is the time to buy, and if, by chance, it dips lower, average down. The stock will rise in anticipation of the finished construction, so don't be surprised if the stock is up this next year. Koo is an excellent executive, and he will be managing others that have the real estate experience.

batbeer2
Batbeer2 premium member - 3 weeks ago

A year has passed. While the company has made a lot of progress, the stock has gone precisely nowhere.

- The EMS business has been liquidated. Wat investors are now left with is a pile of cash and two plots of land in Shenzhen.

- Management flatly stated that maximising the value of that land is its top (in fact only) priority.

- Thanks to the reports by independent Real Estate agents, the value of the land is less uncertain.

- Also, the land in Wuxi is being sold back to government. This will leave just the two plots in Shenzhen and an even stronger balance sheet.

And since a few weeks we know how Nam Tai intends to finance the project without loading up on debt. This was not clear a year ago. Nam Tai is looking for a partner to form a joint venture. I will be very interested to see who they partner with and what that partner is willing to bring to the table for a stake. This will be a crucial indication of the fair value of the assets.

in my view there's a possibilty that a potential partner turns into a cannibal and opts to buy Nam Tai. Why pay anything for a stake if you can get the land for free?

In my opinion the thesis is stronger now. A year ago the land was a hidden asset. Since then management has done everything conceivable to unhide that asset.

Ah well, it would be inconsistent to blame the market for staying irrational if that irrationality is what created the opportunity in the first place.

batbeer2
Batbeer2 premium member - 2 weeks ago

Nam Tai just bought back 1.3 million shares (from a total of 45 milion).

Including the buyback of 500k shares in July, I estimate that they've now spent roughly $15 million of their m buy-back authorisation.

batbeer2
Batbeer2 premium member - 1 week ago

Nam Tai has just released some appraisals for the market value of the land (still including the plot in Wuxi).

Estimates came in at CNY 1.3B to 2B.

I think that's USD 200m to 300m. The stated book value of these assets is less than $30m.

200m - 300m is lower than my original estimates but it is a lot of value to get for free. $300m worth of cash (no debt) plus $200m worth of raw land is $500 worth of value. That works out to roughly $12 per share.

In my defense it seems the land was appraised as industrial land (what it is now). My estimates were based on what management plans to turn it into (mall/hotel/office). In any case, the stock seems to be worth twice its current price. As management buys back shares at a discount to book, the difference between per-share value and per-share price grows exponentially.

maartenpieters
Maartenpieters - 6 days ago

I agree that the difference between per share value and per share price grows exponentially with the buyback. However, I am concerned about the valuation gap and when it will close.

The market currently does not recognize the real book value of the assets, which are valued at 30M on the balance sheet. Also the company communicated in the last press release that it won't update the book value with the new reports estimations of asset value.

Currently NTP trades way below book value. I think there are 2 reasons:

  1. is the ceccesation of the manufacturing activities which caused a large part of the investor base to exit the stock
  2. is the low valuation of the assets on the balance sheet.

The buyback make's point 2 even worse. The cash will reduce and the assets will stay at 30 M. Normally a buyback is a good catalyst to close the valuation gap, but in the case of NTP it may even increase the valuation gap. Of course, the buyback is very good for the long term shareholders.

I think that it may take a long time till the real value of the assets are recognized by the market. If the market needs 4 more years to recognize the real value of the assets the return is not very spectacular. But still good.

I would love to buy more NTP if I could see a clear catalyst in place to close the valuation gap. Completion of development is a clear catalyst but is still 3-4 years away from us.

At this time I am not buying extra shares in NTP, I hope that the share price stays depressed so I can buy more at the same price a year from now.

Batbeer, or others on this forum: do you see more near term catalysts to close the valuation gap?

batbeer2
Batbeer2 premium member - 6 days ago

>> do you see more near term catalysts to close the valuation gap?

No.

In fact I would expect mr. Koo to buy back shares slowly and not trigger any near-term events. That way he maximises long-term value. He's not as young as he once was so more likley than not he's doing this for his children, for charity or just to leave behind a great legacy.

Ironically it is the old ones that take the long-term view.

All this would lead me to think it's not going to be anything fast.

Just speculating here.

P.S.

Then again, look back and think about what has happened in a year.

This time last year I don't think many people would have thought the EMS would be a distant memory today. Many analysts were discussing the P/E ratio based on their expectations of the iPad mini and number of screens Nam Tai was likey to assemble for that device.

It may be interesting to go to SA and read some stories from Q1 2013 and compare that to where we are now. Nothing wrong with SA, many (profesisonal) analysts including some very smart people at VIC took the same view.

In any case, I think it's fair to say mr. Koo hasn't wasted any time.

Please leave your comment:


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