Time To Accept A Punt On Nagacorp?
July 22, 2017
Edit
Nagacorp (3918 HK) is a companionship I have got followed for a while. The companionship owns a splendid asset - an exclusive monopoly license to operate a hotel-casino inwards Cambodia's working capital missive of the alphabet metropolis Phnom Phen out until 2035 (which is built out too operational). The companionship has been growing similar a weed, benefitting from growing tourism flows into Cambodia, too rising regional too (in particular) Chinese wealth (a substitution source of inbound tourism too gaming dollars).
The companionship took the pregnant downturn inwards Chinese VIP gambling activity inwards 2015-16 inwards its stride (which followed a Chinese corruption crack-down which striking Macau pretty hard), alongside the downturn barely registering inwards Nagacorp's financials. This reflected the property's mass-market appeal (about 50% of gross profit), coupled alongside its VIP positioning equally something of a 'poor man's Macau' (although it has also been speculated that companionship has benefitted from Cambodia's somewhat to a greater extent than 'off the radar' location too lax oversight). The casino also benefits from gambling tourism from Vietnam, where until lately gambling was outlawed (a modest relaxation of these restrictions is currently existence discussed/trialled).
Piquing my continuing involvement over the years has also been the fact that the stock has long been cheap, sporting a (prima facie) high unmarried digit PE; mid-high unmarried digit dividend yield, too a cyberspace cash residuum sheet. On the surface, it has long seemed similar a adept storey too an obvious buy. But alas, a niggling earthworks revealed the storey to locomote far to a greater extent than complex than that.
Digging a chip deeper
Unfortunately, the marketplace seldom hands out obvious gifts, or at to the lowest degree does non create so without a argue (it may non locomote a adept reason, but at that topographic point volition e'er locomote a reason, too y'all should know what it is earlier y'all invest). It looked too instinctively felt a chip besides adept to locomote true.
Some discount was warranted for the political opportunity of operating inwards Kingdom of Cambodia - specially because the taxation rates the companionship was paying were real low, too potentially besides depression to locomote politically palatable long term (indeed, the companionship was required to pay US$16m inwards additional taxes in conclusion year, too recent tidings suggests this extra-contractual 'levy' is existence repeated this twelvemonth equally well). In addition, the legalization of gambling inwards Vietnam was a opportunity (although the company's custom has since diversified to a greater extent than towards Chinese tourist flows). Nevertheless, the valuation appeared anomalously low, too the part cost had been falling for 5yrs despite strong operating performance.
I smelled a rat when I saw that the companionship had done several placements of novel shares to institutional holders inwards recent years. Why would the founder too major shareholder locomote willing to diluted his involvement at such a inexpensive part price, when the companionship was already cyberspace cash too highly cash generative? (the working capital missive of the alphabet needs of the company's Vladivostok expansion projection were insufficiently large too pressing to ask these working capital missive of the alphabet raisings).
A careful dig through the company's yesteryear filings revealed why. Several years agone (2011 if retentivity serves), the companionship decided to undergo a pregnant capacity expansion at its Cambodian premises, via the structure of 'Naga2', adjoined to the existing premises yesteryear an also to-be-constructed 'NagaWalk', that would characteristic high cease retail infinite (which Red People's Republic of China Duty Free has since leased).
However, instead of either funding this expansion from operating cash flow/borrowing, or conducting a typical part placement/rights issue, the companionship entered into an odd related-party financing system alongside its major shareholder - namely an understanding to number US$369m inwards convertible bonds at a time to come engagement alongside a conversion cost equivalent to Nagacorp's part cost at the fourth dimension the bargain was starting fourth dimension signed of HK$1.82. The major shareholder agreed to finance the evolution of the Naga2 too NagaWalk properties himself, too ane time the assets were completed too transferred into Nagacorp, the convertible bonds would locomote issued (US$275m worth for Naga2, too US$94m for NagaWalk), too both would locomote convertible to ordinary shares at HK$1.82.
While the inwards a higher house transactions were unusual, if that was all at that topographic point was to it at that topographic point wouldn't locomote a pregnant amount to locomote concerned virtually (or at to the lowest degree plenty to locomote concerned virtually for this to locomote a consummate deal-breaker). True - it would grant the major shareholder the powerfulness to effectively have got shares inwards a placement at the so share-price of HK$1.82 without incurring whatsoever upfront cash cost (with the cash instead deployed gradually over the structure menstruum of some 5yrs), but the major shareholder would also locomote underwriting the opportunity of whatsoever capex overruns, too the structure cost estimates did non seem excessively high (although this is hard to confirm, too at best it probable resulted inwards the privatization of a sizable structure evolution margin). On the flip side, he would forgo ordinary part dividends during this time, which have got been quite generous. All told, a modest chiseling of minorities perhaps, but non a consummate deal-breaker.
However, the existent employment came from the mode inwards which the companionship too the putatively independent directors interpreted a conversion-price-adjustment provision inwards the convertible bond document. Instead of the conversion cost existence adjusted exactly for stock splits, stock bonus issues, too discounted rights issues, which is the right too conventional approach, the adjustment provision was interpreted equally existence capable of invocation for any change inwards the nominal part working capital missive of the alphabet - fifty-fifty those arising from a regular part placement.
This had the practical termination of lowering the conversion cost every fourth dimension a part placement was conducted (e.g. if a novel placement of state 7% of the previous shares outstanding was conducted, the convertible bond conversion cost would locomote adjusted downward yesteryear comparable 7%; this effectively resulted inwards the major shareholder existence issued additional shares for costless on a 1:1 soil alongside novel shares placed inwards a working capital missive of the alphabet raising, resulting inwards double the minority dilution).
It also (1) created an incentive for the major shareholder to create additional unneeded part placements (who doesn't desire costless shares?); too (2) also created an incentive to incur additional capex for additional expansion projects inwards society to justify additional placements, whether such projects were economical inwards their ain right or not. Suddenly it was obvious both why such part placements had previously occurred, too why the stock cost was equally depression equally it was.*
Indeed, a number of part placement during 2011-16 had already resulted inwards the conversion cost of the convertible bonds existence steadily 'adjusted' downward to exactly HK$1.53, resulting inwards the convertible bonds existence entitled to locomote converted into hundreds of millions of additional shares. Furthermore, ane time the convertible bonds were issued (after the assets were completed too injected into the Nagacorp entity, which has happened recently), they were entitled to have dividends as if they had been exercised, but had no mandatory conversion date! This hateful that the major shareholder was unlikely to ever practise them (why create so - y'all are already getting the dividends) too proceed to savor a costless boot via a reduced conversion cost every fourth dimension a time to come working capital missive of the alphabet raising activity was undertaken (which, due to this distorted incentive, would probable occur semi-regularly). This meant the aeroplane of time to come shareholder dilution was uncapped too potentially significant.
Intriguingly, a provision inwards the master copy convertible bond round down betrays the fact that this heavy minority dilution was contemplated at the fourth dimension of issuance, equally at that topographic point is a provision stating (in ane of the few restrictions imposed on the conversion terms) that the conversion terms could non allow the major shareholder to cease upwardly accumulating plenty shares that it would termination inwards the companionship failing to come across the minimum free-float requirements imposed yesteryear the HKSE. This would entirely locomote threatened if the conversion cost was adjusted downward so significantly over fourth dimension that the number of shares issued diluted minority shareholders much to a greater extent than significantly than most investors understood would locomote the instance at the fourth dimension of the convertible bond agreement.
Cognizance of the inwards a higher house was a deal-breaker. As I was proceeding through my master copy inquiry process, I had accumulated a little seat (I uncovering having a little amount of coin on the employment sharpens one's focus), but straightaway sold ane time the inwards a higher house all became clear (for a little profit, equally luck would have got it). Without whatsoever potential bound on time to come dilution, valuing the shares was near on impossible (it is of import to never forget that the value of a part inwards the hands of a minority shareholder is non necessarily the same equally the value of the shares inwards the hands of a controlling shareholder and/or the value of the operating assets themselves).
I had unfortunately uncovered what appeared to locomote ane of the to a greater extent than egregious instances of minority shareholder abuse I had seen, carried out inwards wide daylight. I was surprised at that topographic point had been so niggling broker/media/activist give-and-take (true to form, most brokers blithely ignored the number spell also to a greater extent than frequently than non failing to properly dilute for the coverts inwards their multiple-driven cost targets). I was annoyed, at the time, that I had wasted a dyad of days of inquiry fourth dimension on the stock alongside so niggling to exhibit for it.
However, ane of the bully things virtually edifice upwardly noesis too sense equally an investor is that y'all never quite know when such noesis may come upwardly inwards handy ane time to a greater extent than downward the road. And equally fate would have got it, this yesteryear inquiry may yet bear witness useful (the wages of a noesis banking concern is also that it allows y'all to deed swiftly when circumstances change, equally y'all are able to diagnose the significance of novel events both to a greater extent than rapidly too to a greater extent than accurately than newcomers to the stock).
Recent over-reaching could locomote a catalyst for reduced time to come dilution risk
The inwards a higher house ruse has been going on for a while, but the major shareholder lately looks to have got overreached too pushed the envelope a chip besides far. As previously noted, the convertible bonds were issued inwards 2 separate tranches (one for Naga2 too ane for NagaWalk), too the major shareholder lately proposed to convert one but not both of the tranches into ordinary shares. This would so trigger the cost adjustment machinery inwards the other convertible tranche, resulting inwards the conversion cost existence adjusted downward to exactly HK$0.65 inwards the minute tranche. The outcome would locomote the issuance of an additional 600m odd shares to the controlling shareholder (representing virtually 14% of the previous fully-diluted part count).
The prior adjustments to the conversion cost seem to have got gone unnoticed yesteryear many institutional holders (many of whom, I mightiness add, handle significantly to a greater extent than coin than I, too have got significantly to a greater extent than operational resources), but this concluding adjustment was so egregious that it has finally been noticed yesteryear all. It resulted inwards an immediate cratering inwards Nagacorp's part cost from HK$4.20 to HK$3.30, too has also prompted a minority shareholder revolt, including from hedge fund Nine Masts Capital (who owns 0.9% of Nagacorp), which is challenging the understanding (reported yesteryear Bloomberg).
The extent of the part cost plunge, coupled alongside numerous investor protestations too increased media scrutiny (Nine Masts sent an opened upwardly missive of the alphabet to the board that was circulated to the media), appears to have got prompted some hasty too much-needed backpedaling. More specifically, it has resulted inwards a revised proposal that volition termination inwards the major shareholder instead exercising the 2 serial of the convertible bonds concurrently (subject to a whitewash waver from the HKSE to avoid the demand for a alter of command minority take-out offer, equally good equally minority shareholder approval), too also exercising them straightaway after the inwards a higher house approvals are secured.
If this concurrent conversion happens, it volition locomote a cloth positive for iii reasons: (1) it volition contrary the pre-existing 600m shares of extra dilution; (2) exactly equally importantly, it volition termination inwards the convertible bonds existence exercised inwards their entirety rather than remaining unexercised, which volition take additional dilution from time to come working capital missive of the alphabet raisings (and the incentive to undertake them); too (3) the revised proposal also demonstrates that the board too major shareholder have got some sensitivity to media too shareholder scrutiny (in theory at least, they could have got chosen to simply ignore Nine Masts missive of the alphabet too associated adverse publicity, although legal activity may also have got been threatened).
The tidings prompted an immediate rebound inwards Nagacorp's part cost to HK$4.20, reversing the previously priced-in touching on of #1. However, the touching on of #2-3 are yet to locomote cost inwards in my sentiment (the stock has since stitch to HK$4.70, but that appears to have got been triggered primarily yesteryear a real strong 1H17 result). In addition, it is possible that Nine Masts Capital and/or other holders will, equally business office of this process, challenge the prior conversion cost adjustment from HK$1.82 to HK$1.53 equally good (Bloomberg has reported that Nine Masts is attempting to create exactly that). If they succeed alongside this challenge, that volition locomote a cloth farther positive.
The stock remains inexpensive, at virtually 10x diluted earnings (PE) alongside a high-single-digit per centum of the company's marketplace cap inwards cash, too alongside a doubling inwards capacity next the Naga2 commissioning coming on flow from 4Q17. Inexpensive that is, on the real of import proviso that nosotros have got at nowadays seen the cease of cloth minority shareholder abuse.
Time to have got a punt?
A behave instance from hither is uncomplicated plenty - if the major shareholder wants to screw you, he volition most belike uncovering a means to create so, too so you'd locomote a fool to bet against it, too the independent directors have got shown themselves to have got been far from really independent to date. There is so an sufficiently high opportunity of time to come convertible bond issues and/or other 'creative' related-party transactions, which would hammer the part price, to steer good clear.
The bull instance would locomote that, inwards add-on to the obvious indicate that the stock is real cheap, that the the backlash too additional media scrutiny nosotros have got lately seen is probable to trim down the inclination of the companionship to endeavor similar such transactions inwards the future. In addition, the major shareholder at nowadays already enjoys a large shareholding of 60-65%, too HKSE regulations require a minimum free-float of 25%, limiting the capacity of the major shareholder to dilute minorities materially farther (at to the lowest degree if the companionship wishes to stay listed - an attempted total takeout at a discounted cost remains a pregnant risk). The major shareholder has also simply been a clever (although unethical) opportunist, too it is notable that the companionship has continued to pay out sizable dividends over its listed history, so minorities have got non been fleeced wholesale. Recent minority shareholder protests have got also non been ignored, equally they could have got been.
Time volition tell, but the stock remains a punt because of the incertitude created yesteryear the above. It is withal a punt I have got been prepared to take, too have got lately initiated a little seat at HK$4.70, because (1) I yell back the operating assets are easily worth HK$10/share or more, so a pregnant corporate governance discount continues to exist; too (2) because I create non believe the part cost has yet reacted sufficiently plenty to recent developments, which I believe have got significantly reduced the aeroplane of time to come dilution opportunity (i.e. the extent of the corporate governance discount has non shrunk plenty compared to the prevalent province of affairs in conclusion month). However, the seat remains little too depression conviction given the corporate governance risks involved.
LT3000
*Interestingly, the termination of the convertibles did non exhibit upwardly inwards diluted EPS until recently, because it was exactly an understanding to number convertible bonds alongside a laid conversion cost inwards consideration for the Naga2 too NagaWalk assets at a time to come engagement (i.e. the convertibles were non yet issued - exactly obligated to locomote afterwards issued); this is a loophole inwards accounting standards to state the least.
The inwards a higher house analysis is furnished for informational/entertainment purposes only, too is non to locomote construed equally investment advice. The writer provides no warranty whatsoever equally to the accuracy of the contents of the post, too reserves all rights to merchandise inwards whatsoever securities mentioned inwards whatsoever article at whatsoever time.
The companionship took the pregnant downturn inwards Chinese VIP gambling activity inwards 2015-16 inwards its stride (which followed a Chinese corruption crack-down which striking Macau pretty hard), alongside the downturn barely registering inwards Nagacorp's financials. This reflected the property's mass-market appeal (about 50% of gross profit), coupled alongside its VIP positioning equally something of a 'poor man's Macau' (although it has also been speculated that companionship has benefitted from Cambodia's somewhat to a greater extent than 'off the radar' location too lax oversight). The casino also benefits from gambling tourism from Vietnam, where until lately gambling was outlawed (a modest relaxation of these restrictions is currently existence discussed/trialled).
Piquing my continuing involvement over the years has also been the fact that the stock has long been cheap, sporting a (prima facie) high unmarried digit PE; mid-high unmarried digit dividend yield, too a cyberspace cash residuum sheet. On the surface, it has long seemed similar a adept storey too an obvious buy. But alas, a niggling earthworks revealed the storey to locomote far to a greater extent than complex than that.
Digging a chip deeper
Unfortunately, the marketplace seldom hands out obvious gifts, or at to the lowest degree does non create so without a argue (it may non locomote a adept reason, but at that topographic point volition e'er locomote a reason, too y'all should know what it is earlier y'all invest). It looked too instinctively felt a chip besides adept to locomote true.
Some discount was warranted for the political opportunity of operating inwards Kingdom of Cambodia - specially because the taxation rates the companionship was paying were real low, too potentially besides depression to locomote politically palatable long term (indeed, the companionship was required to pay US$16m inwards additional taxes in conclusion year, too recent tidings suggests this extra-contractual 'levy' is existence repeated this twelvemonth equally well). In addition, the legalization of gambling inwards Vietnam was a opportunity (although the company's custom has since diversified to a greater extent than towards Chinese tourist flows). Nevertheless, the valuation appeared anomalously low, too the part cost had been falling for 5yrs despite strong operating performance.
I smelled a rat when I saw that the companionship had done several placements of novel shares to institutional holders inwards recent years. Why would the founder too major shareholder locomote willing to diluted his involvement at such a inexpensive part price, when the companionship was already cyberspace cash too highly cash generative? (the working capital missive of the alphabet needs of the company's Vladivostok expansion projection were insufficiently large too pressing to ask these working capital missive of the alphabet raisings).
A careful dig through the company's yesteryear filings revealed why. Several years agone (2011 if retentivity serves), the companionship decided to undergo a pregnant capacity expansion at its Cambodian premises, via the structure of 'Naga2', adjoined to the existing premises yesteryear an also to-be-constructed 'NagaWalk', that would characteristic high cease retail infinite (which Red People's Republic of China Duty Free has since leased).
However, instead of either funding this expansion from operating cash flow/borrowing, or conducting a typical part placement/rights issue, the companionship entered into an odd related-party financing system alongside its major shareholder - namely an understanding to number US$369m inwards convertible bonds at a time to come engagement alongside a conversion cost equivalent to Nagacorp's part cost at the fourth dimension the bargain was starting fourth dimension signed of HK$1.82. The major shareholder agreed to finance the evolution of the Naga2 too NagaWalk properties himself, too ane time the assets were completed too transferred into Nagacorp, the convertible bonds would locomote issued (US$275m worth for Naga2, too US$94m for NagaWalk), too both would locomote convertible to ordinary shares at HK$1.82.
While the inwards a higher house transactions were unusual, if that was all at that topographic point was to it at that topographic point wouldn't locomote a pregnant amount to locomote concerned virtually (or at to the lowest degree plenty to locomote concerned virtually for this to locomote a consummate deal-breaker). True - it would grant the major shareholder the powerfulness to effectively have got shares inwards a placement at the so share-price of HK$1.82 without incurring whatsoever upfront cash cost (with the cash instead deployed gradually over the structure menstruum of some 5yrs), but the major shareholder would also locomote underwriting the opportunity of whatsoever capex overruns, too the structure cost estimates did non seem excessively high (although this is hard to confirm, too at best it probable resulted inwards the privatization of a sizable structure evolution margin). On the flip side, he would forgo ordinary part dividends during this time, which have got been quite generous. All told, a modest chiseling of minorities perhaps, but non a consummate deal-breaker.
However, the existent employment came from the mode inwards which the companionship too the putatively independent directors interpreted a conversion-price-adjustment provision inwards the convertible bond document. Instead of the conversion cost existence adjusted exactly for stock splits, stock bonus issues, too discounted rights issues, which is the right too conventional approach, the adjustment provision was interpreted equally existence capable of invocation for any change inwards the nominal part working capital missive of the alphabet - fifty-fifty those arising from a regular part placement.
This had the practical termination of lowering the conversion cost every fourth dimension a part placement was conducted (e.g. if a novel placement of state 7% of the previous shares outstanding was conducted, the convertible bond conversion cost would locomote adjusted downward yesteryear comparable 7%; this effectively resulted inwards the major shareholder existence issued additional shares for costless on a 1:1 soil alongside novel shares placed inwards a working capital missive of the alphabet raising, resulting inwards double the minority dilution).
It also (1) created an incentive for the major shareholder to create additional unneeded part placements (who doesn't desire costless shares?); too (2) also created an incentive to incur additional capex for additional expansion projects inwards society to justify additional placements, whether such projects were economical inwards their ain right or not. Suddenly it was obvious both why such part placements had previously occurred, too why the stock cost was equally depression equally it was.*
Indeed, a number of part placement during 2011-16 had already resulted inwards the conversion cost of the convertible bonds existence steadily 'adjusted' downward to exactly HK$1.53, resulting inwards the convertible bonds existence entitled to locomote converted into hundreds of millions of additional shares. Furthermore, ane time the convertible bonds were issued (after the assets were completed too injected into the Nagacorp entity, which has happened recently), they were entitled to have dividends as if they had been exercised, but had no mandatory conversion date! This hateful that the major shareholder was unlikely to ever practise them (why create so - y'all are already getting the dividends) too proceed to savor a costless boot via a reduced conversion cost every fourth dimension a time to come working capital missive of the alphabet raising activity was undertaken (which, due to this distorted incentive, would probable occur semi-regularly). This meant the aeroplane of time to come shareholder dilution was uncapped too potentially significant.
Intriguingly, a provision inwards the master copy convertible bond round down betrays the fact that this heavy minority dilution was contemplated at the fourth dimension of issuance, equally at that topographic point is a provision stating (in ane of the few restrictions imposed on the conversion terms) that the conversion terms could non allow the major shareholder to cease upwardly accumulating plenty shares that it would termination inwards the companionship failing to come across the minimum free-float requirements imposed yesteryear the HKSE. This would entirely locomote threatened if the conversion cost was adjusted downward so significantly over fourth dimension that the number of shares issued diluted minority shareholders much to a greater extent than significantly than most investors understood would locomote the instance at the fourth dimension of the convertible bond agreement.
Cognizance of the inwards a higher house was a deal-breaker. As I was proceeding through my master copy inquiry process, I had accumulated a little seat (I uncovering having a little amount of coin on the employment sharpens one's focus), but straightaway sold ane time the inwards a higher house all became clear (for a little profit, equally luck would have got it). Without whatsoever potential bound on time to come dilution, valuing the shares was near on impossible (it is of import to never forget that the value of a part inwards the hands of a minority shareholder is non necessarily the same equally the value of the shares inwards the hands of a controlling shareholder and/or the value of the operating assets themselves).
I had unfortunately uncovered what appeared to locomote ane of the to a greater extent than egregious instances of minority shareholder abuse I had seen, carried out inwards wide daylight. I was surprised at that topographic point had been so niggling broker/media/activist give-and-take (true to form, most brokers blithely ignored the number spell also to a greater extent than frequently than non failing to properly dilute for the coverts inwards their multiple-driven cost targets). I was annoyed, at the time, that I had wasted a dyad of days of inquiry fourth dimension on the stock alongside so niggling to exhibit for it.
However, ane of the bully things virtually edifice upwardly noesis too sense equally an investor is that y'all never quite know when such noesis may come upwardly inwards handy ane time to a greater extent than downward the road. And equally fate would have got it, this yesteryear inquiry may yet bear witness useful (the wages of a noesis banking concern is also that it allows y'all to deed swiftly when circumstances change, equally y'all are able to diagnose the significance of novel events both to a greater extent than rapidly too to a greater extent than accurately than newcomers to the stock).
Recent over-reaching could locomote a catalyst for reduced time to come dilution risk
The inwards a higher house ruse has been going on for a while, but the major shareholder lately looks to have got overreached too pushed the envelope a chip besides far. As previously noted, the convertible bonds were issued inwards 2 separate tranches (one for Naga2 too ane for NagaWalk), too the major shareholder lately proposed to convert one but not both of the tranches into ordinary shares. This would so trigger the cost adjustment machinery inwards the other convertible tranche, resulting inwards the conversion cost existence adjusted downward to exactly HK$0.65 inwards the minute tranche. The outcome would locomote the issuance of an additional 600m odd shares to the controlling shareholder (representing virtually 14% of the previous fully-diluted part count).
The prior adjustments to the conversion cost seem to have got gone unnoticed yesteryear many institutional holders (many of whom, I mightiness add, handle significantly to a greater extent than coin than I, too have got significantly to a greater extent than operational resources), but this concluding adjustment was so egregious that it has finally been noticed yesteryear all. It resulted inwards an immediate cratering inwards Nagacorp's part cost from HK$4.20 to HK$3.30, too has also prompted a minority shareholder revolt, including from hedge fund Nine Masts Capital (who owns 0.9% of Nagacorp), which is challenging the understanding (reported yesteryear Bloomberg).
The extent of the part cost plunge, coupled alongside numerous investor protestations too increased media scrutiny (Nine Masts sent an opened upwardly missive of the alphabet to the board that was circulated to the media), appears to have got prompted some hasty too much-needed backpedaling. More specifically, it has resulted inwards a revised proposal that volition termination inwards the major shareholder instead exercising the 2 serial of the convertible bonds concurrently (subject to a whitewash waver from the HKSE to avoid the demand for a alter of command minority take-out offer, equally good equally minority shareholder approval), too also exercising them straightaway after the inwards a higher house approvals are secured.
If this concurrent conversion happens, it volition locomote a cloth positive for iii reasons: (1) it volition contrary the pre-existing 600m shares of extra dilution; (2) exactly equally importantly, it volition termination inwards the convertible bonds existence exercised inwards their entirety rather than remaining unexercised, which volition take additional dilution from time to come working capital missive of the alphabet raisings (and the incentive to undertake them); too (3) the revised proposal also demonstrates that the board too major shareholder have got some sensitivity to media too shareholder scrutiny (in theory at least, they could have got chosen to simply ignore Nine Masts missive of the alphabet too associated adverse publicity, although legal activity may also have got been threatened).
The tidings prompted an immediate rebound inwards Nagacorp's part cost to HK$4.20, reversing the previously priced-in touching on of #1. However, the touching on of #2-3 are yet to locomote cost inwards in my sentiment (the stock has since stitch to HK$4.70, but that appears to have got been triggered primarily yesteryear a real strong 1H17 result). In addition, it is possible that Nine Masts Capital and/or other holders will, equally business office of this process, challenge the prior conversion cost adjustment from HK$1.82 to HK$1.53 equally good (Bloomberg has reported that Nine Masts is attempting to create exactly that). If they succeed alongside this challenge, that volition locomote a cloth farther positive.
The stock remains inexpensive, at virtually 10x diluted earnings (PE) alongside a high-single-digit per centum of the company's marketplace cap inwards cash, too alongside a doubling inwards capacity next the Naga2 commissioning coming on flow from 4Q17. Inexpensive that is, on the real of import proviso that nosotros have got at nowadays seen the cease of cloth minority shareholder abuse.
Time to have got a punt?
A behave instance from hither is uncomplicated plenty - if the major shareholder wants to screw you, he volition most belike uncovering a means to create so, too so you'd locomote a fool to bet against it, too the independent directors have got shown themselves to have got been far from really independent to date. There is so an sufficiently high opportunity of time to come convertible bond issues and/or other 'creative' related-party transactions, which would hammer the part price, to steer good clear.
The bull instance would locomote that, inwards add-on to the obvious indicate that the stock is real cheap, that the the backlash too additional media scrutiny nosotros have got lately seen is probable to trim down the inclination of the companionship to endeavor similar such transactions inwards the future. In addition, the major shareholder at nowadays already enjoys a large shareholding of 60-65%, too HKSE regulations require a minimum free-float of 25%, limiting the capacity of the major shareholder to dilute minorities materially farther (at to the lowest degree if the companionship wishes to stay listed - an attempted total takeout at a discounted cost remains a pregnant risk). The major shareholder has also simply been a clever (although unethical) opportunist, too it is notable that the companionship has continued to pay out sizable dividends over its listed history, so minorities have got non been fleeced wholesale. Recent minority shareholder protests have got also non been ignored, equally they could have got been.
Time volition tell, but the stock remains a punt because of the incertitude created yesteryear the above. It is withal a punt I have got been prepared to take, too have got lately initiated a little seat at HK$4.70, because (1) I yell back the operating assets are easily worth HK$10/share or more, so a pregnant corporate governance discount continues to exist; too (2) because I create non believe the part cost has yet reacted sufficiently plenty to recent developments, which I believe have got significantly reduced the aeroplane of time to come dilution opportunity (i.e. the extent of the corporate governance discount has non shrunk plenty compared to the prevalent province of affairs in conclusion month). However, the seat remains little too depression conviction given the corporate governance risks involved.
LT3000
*Interestingly, the termination of the convertibles did non exhibit upwardly inwards diluted EPS until recently, because it was exactly an understanding to number convertible bonds alongside a laid conversion cost inwards consideration for the Naga2 too NagaWalk assets at a time to come engagement (i.e. the convertibles were non yet issued - exactly obligated to locomote afterwards issued); this is a loophole inwards accounting standards to state the least.
The inwards a higher house analysis is furnished for informational/entertainment purposes only, too is non to locomote construed equally investment advice. The writer provides no warranty whatsoever equally to the accuracy of the contents of the post, too reserves all rights to merchandise inwards whatsoever securities mentioned inwards whatsoever article at whatsoever time.