Tuesday, September 30, 2008

Smile

Lets shift our focus away from the stock market and have a laugh.

Here are 10 Aphorisms of Modern Life.
1. Any horizontal surface left long enough will grow a pile of paper.
2. Checks you write hide in the banking system until there is not enough money in your account to cover them.
3. If you drop some coins on the floor, the tiny worthless ones will stay at your feet, while the valuable ones will roll miles away and settle under a Coke machine.
4. At banks or immigration counters, the other queue moves faster.
5. When a broken appliance is demonstrated for the repairman, it will work perfectly.
6. After you dismantle and reassemble any item, there will be one extra bit left on the desk.
7. All deals which are too simple to need a formal contract will immediately turn into legal battles.
8. If you say the words "Well, it can't get any worse," fate has a nasty habit of taking it as a challenge.
9. The only thing worse than losing a highly competitive tender is winning one.
10. Any spoon placed in the sink will position itself to produce the biggest possible fountain when you turn the tap on.

Monday, September 22, 2008

My view on Bright World takeover (Part 2)

In order for the BW takeover to become a reality, there are altogether 8 conditions to be fulfilled. They can be found in the pre-offer announcement in the SGX website. Currently BW is trading at about $0.34, a whopping 50% discount to the takeover offer by CAHC. I believe the main reason why BW is trading at such a low price is because investors are skeptical that all the 8 conditions can be fulfilled under such gloomy economic outlook.

Out of the 8 conditions, investors are mainly concerned on the following 3 requirements:
1) shareholders of the Offeror holding 33.33% or more of the IPO shares do not vote against the Offer Transactions and exercise their redemption rights in relation to their IPO shares;

Comments:
At this moment, i would rate the possibility of the rejection of the offer transaction and cash redemption by the current shareholders as low. Why do i say that?
Many other blank check companies have a redemption threshold of 20%, which makes it more difficult for such companies to consummate their initial business combination. Thus, because CAHC permit a larger number of stockholders to exercise their Redemption Rights, it will be easier for them to consummate an initial business combination with a target business which stockholders may believe is not suitable. CAHC has increased the redemption percentage to 33.33% from the more typical 20% in order to reduce the likelihood that a small group of investors holding a block of our stock will be able to stop them from completing a business combination that is otherwise approved by a majority of our public stockholders and to be similar to other offerings by blank check companies currently in the market.

2) the Group Companies’ profit after tax (PAT) for the six-month period ended on 30 June 2008, nine-month period ending 30 September 2008 and full year period ending 31 December 2008 should not decrease by 10 per cent or more as compared to the same period in fiscal year 2007.

Comments:
Unless you are an insider working in BW, it is impossible to forecast accurately the revenue for the next 2 quarters. However, i am aware that rising raw material cost and a slowdown in their customers' manufacturing activity can severely impact the bottomline. Baring a sharp drop in revenue, i dont see any problem with BW fulfilling the 10% condition. Using HY08 results, we are able to have a clear idea on how much more profit is need for the rest of the year.

PAT in RMB 000 (thousands)
6 mth:

Y2007 52586
Y2008 79003
9 mth:

Y2007 95350
Y2008 At least 85815 (HY08 achieved 82.8%)
12 mth:

Y2007 144865
Y2008 At least 130378 (HY08 achieved 60.59%)

3) The Chinese authorities may not approve this takeover.

Comments:
Investors who are aware of the recent failed bid by the Carlyle Group to acquire a 45% stake in Xugong Construction Machinery Co Ltd may be skeptical that this acquisition by CAHC, which is a foreign entity, will materialize. The failure of the deal has once again drawn attention to the political challenges facing foreign investors in China, especially in so-called "strategic" sectors. China is concentrating on its key strategic sectors and machinery is now a part of that. Probably a few years ago if a foreign company wanted to buy into such assets it wouldn't have created much trouble, but lately China has been trying to control them more. The key point is that they want these key industrial sectors to remain in Chinese hands, whether through funds or other channels. In my opinion, I believe the Chinese authorities will give the green light for this BW takeover because, ultimately, when the whole acquisition is completed, Mr. Wang, who is a Chinese national, will gain control of CAHC which BW is a wholly owned subsidiary.

Some investors may think, if it is such a good opportunity to double your money over the course of a few months, why are the insiders not buying?
I have extracted the answer from the pre-offer announcement by CAHC:
CHAC and the Sellers have agreed to refrain from taking any action that would be prejudicial to the successful outcome of the Offer. In addition, until the termination of the Offer or the consummation of the Transactions, CHAC and the Sellers have agreed not to solicit or enter in negotiations regarding an alternative transaction. Furthermore, World Sharehold has agreed to procure that Bright World and each of its subsidiaries (collectively, the “Group”) (A) refrainfrom taking certain actions without the obtaining the prior written consent of CHAC and (B) operate their business in the ordinary and usual course.

Does CHAC have the financial muscle to carry out this takeover?
As at 30 June 2008, there are USD125 million in CHAC trust account. After this whole acquisition is completed, they would have used up USD50 million as World Share's 77.42% equity ownership position in Bright World is paid for using CAHC’s shares. This leaves them with the cash holding of USD75 million to acquire any of the four companies controlled by Mr. Wang Wei Yao.

Since the announcement of this takeover news, there have been some positive developments in China’s machinery industry:
China's machinery industry reports a 17.4 percent increase in the added value in July, and a 20.9 percent rise in export delivery value, according to China's National Development and Reform Commission. Experts held that the reform of the value added tax (VAT) has helped boost the development of the industry.
It will drive enterprises to invest on fixed assets, such as machinery equipment, said Zhu Qing, director of the financial department with the Renmin University of China. He predicted that this policy would be carried out nationwide in 2009 on the ground of industrial restructuring and the declined economy increase rate.

The country's eight million companies will be allowed from next year to use fixed-asset
investments to offset valued-added tax payable to the government, according to sources. Analysts said reforming the tax system was a prelude to a new round of economic sweeteners from Beijing as policymakers struggled to cushion the impact of weakening global and domestic economies. The adjustment in value-added tax will mainly ease the burden on manufacturers that have large investments in fixed assets such as factories and machinery. Analysts estimate that the change will reduce funds flowing into government coffers by between 100 billion yuan and 150 billion yuan a year. Analysts said the top beneficiaries of the policy change would be machinery and equipment makers, which have large fixed-asset costs that can now be offset.

Readers can draw their own conclusions if this represents an excellent opportunity, as the potential gains outweigh the associated risks.

Monday, September 15, 2008

My view on Bright World takeover (Part 1)

This write-up on Bright World (BW) is divided into 2 parts. It contains my deductions based on publicly available info on the takeover of BW. Before I begin, please take note that i am vested in BW and my views may be biased. What is mentioned in this posting cannot and should not be taken as professional investment advice.

Lets recap what has happened so far:
On 21 July, China Holdings Acquisition Corp (CHAC) announced today that it will make an offer to acquire all the shares of Bright World Precision Machinery Limited. CHAC has entered into a definitive agreement with World Sharehold Limited (World Share), the majority shareholder of Bright World, pursuant to which World Share will tender all the shares it holds in Bright World in the offer to be made by CHAC. Bright World, together with its subsidiaries, is an established Chinese manufacturer of conventional and high-performance metal stamping machines that serves industrial companies in rapidly growing manufacturing sectors -- automotive, home electrical appliances and computer and telecommunications. The transaction, which has been unanimously approved by the board of directors of CHAC and is expected to be completed in the fourth quarter 2008 (barring any unforeseen circumstances), values Bright World at a minimum of approximately US$263 million (assuming CHAC acquires all issued Bright World shares, the initial shares of CHAC issued to World Share are valued based on the estimated redemption value of the CHAC shares and CHAC assumes Bright World's existing debt).

Under the terms of the definitive agreement, CHAC will issue to World Share, which is controlled by Mr. Wang Wei Yao, the nonexecutive Chairman of Bright World, a promissory note automatically convertible into a minimum of 19.9 million initial shares of CHAC in exchange for World Share's 77.42% equity ownership position in Bright World. For the remaining 22.58% of Bright World's shares held by other shareholders, CHAC will offer SG$0.70, or approximately US$0.51, per share in cash. If 90% or more of Bright World's shares are purchased, CHAC will increase its offer priceto SG$0.75, or approximately US$0.55, per share in cash. Also under the terms of the definitive agreement, World Share is eligible to receive additional CHAC shares, up to a maximum award of 3,765,000 shares, based on Bright World's realized profit for Fiscal Year 2008, provided such maximum award will be reduced, share-for-share, by the number of initial shares in excess of 19.9 million. World Share also will be eligible to receive an additional 1,000 CHAC shares for each 0.001% increase in Bright World's Fiscal Year 2008 net earnings (in Renminbi or RMB) above 20% compared with a base net earnings of RMB 144,863,000, up to a maximum award of 12,000,000 additional CHAC shares if Bright World's Fiscal Year 2008 net earnings exceed a base net earnings of RMB 144,863,000 by 32%.

The total number of initial CHAC shares plus additional CHAC shares that will be awarded to World Share shall not exceed a combined maximum total of 35,665,000 CHAC shares. If Bright World achieves the specified 2008 financial performance benchmarks, CHAC acquires all issued Bright World shares, the CHAC shares issued to World Share are valued based on the estimated redemption value of the CHACshares and CHAC assumes Bright World's existing debt, the transaction will value Bright World at approximately US$404 million. Under this scenario, the pro forma, fully diluted ownership of World Share in CHAC would be approximately 64% under the treasury stock method, assumingUS$10.00 per share. World Share also may receive a contingent payment as compensation for the foreign exchange impact on the funds in CHAC's trust account if the US dollar weakens against the RMB between signing and closing of the transaction.

Upon completion of the transaction, CHAC will seek to list its shares on the New York Stock Exchange. Messrs. Wang Wei Yao and Shao Jian Jun, non-executive Chairman and Chief Executive Officer, respectively, of Bright World, will continue in those roles with the combined company. With a gross plant production area of over 230,000 square meters, Bright World's product line includes over 100 models of metal stamping machines, with an emphasis on high performance metal stamping machines. Its product line also includes board cutting machines, bending machines, Computer Numeric Control (CNC) metal stamping machines and other complementary heavy machine tools. The company's vertically integrated structure allows it the flexibility to fulfill custom design stamping machine requests at competitive rates.Since 2005, Bright World has successfully refocused its product portfolio toward high-performance metal stamping machines that yield higher prices, enhanced margins and superior growth prospects.

From 2004 through 2007, in US dollar terms, Bright World achieved a revenue compounded annual growth rate (CAGR) of 33.5%, a net profit CAGR of 28.3% and an EBITDA (earnings before interest, taxes, depreciation and amortization) CAGR of 31.1%. For the first quarter of 2008, Bright World's revenues grew by 46.8% and its net profits increased by 57.9% inUS dollar terms versus the comparable period in 2007. The definitive agreement between CHAC, on the one hand, and World Share, Mr. Wang Wei Yao and Mr. Shao Jian Jun, on the other hand, also provides the newly combined company with a right of first refusal to acquire four other companies controlled by Mr. Wang Wei Yao that manufacture agricultural machinery, auto parts and components, lawn equipment and construction equipment. The new company plans to be able to grow through the use of cash flow from operations and cash available from CHAC's trust fund.

Tuesday, September 2, 2008

Value in textile industry? No way!

Below is a recent recommendation by one of the brokerage companies on the SGX comapnies involved in the textile industry:

Risk-reward ratio getting attractive. In fact, these textile companies are generally financially sound. They are in net cash position and are still garnering lucrative net margin of 26%-30%, rewarding investors with adecent ROE of >20%. As high-end textile manufacturers are relatively asset-heavy given their high capex investment, current low historic P/NTA of 1x also indicates opportunities to pick up shares in these companies at bargain prices.


But from the info i gathered, it seems like the picture is not so rosy.

A 2% increase in a value-added tax rebate for garment and textile exports – from 11% to 13% – was good news for exporters, but a sign of hard times for the export sector. Rebates had been cut or removed for many industries last year in an attempt to deflate China’s ballooning trade surplus, but struggling exporters prompted Beijing to reverse its earlier moves. The slowdown was most evident in relatively low tech sectors like textiles and apparel. In the first seven months of 2008, growth of garment and textile exports rose 7.67%, down from 24.4% growth over the same period last year. The General Administration of Customs said an appreciating renminbi, weak US demand, trade barriers and the earlier rebate reductions all contributed to the slowdown. While lower-end exports were more visibly affected, broader numbers were hit as well. In the January-July period, growth in overall exports was down 5.7 percentage points to 21.9% year-on-year, and the trade surplus fell 9.6%.

In the first quarter of 2008 alone, US apparel imports from China declined by nearly 10% compared with the corresponding period of 2007, reaching US$4.43bn. In terms of China's currency, the renminbi, the fall was an even greater 17%. China's drop in competitiveness stems from mounting costs on several fronts. Apart from higher costs of energy and raw materials - which manufacturers face all over the world - Chinese textile mills face greater costs in having to comply with growing environmental legislation. At the same time, Chinese apparel factories are having to cope with new regulations on working conditions. Furthermore, firms wishing to invest are finding it harder to obtain finance as the Chinese authorities have tightened credit in a bid to limit inflation. On top, Chinese exporters have been hit by lower export tax rebates. Labour costs have become a particularly serious issue for Chinese firms. At least seven major exporting countries in Asia can now offer lower labour costs than China. During the first quarter of 2008, US consumer expenditures on clothing and footwear (on an annualised basis) were 0.2% lower than in the first quarter of 2007 - after growing by 3.7% in 2007, 4.5% in 2006 and 5.1% in 2005.

Statistics of WebTextiles.Com showed that China's large enterprises produced 9.72 billion pieces of garments in the first half of this year, up 7.64% year-on-year, 6.7 percentage points lower than the growth of last year. The commodity retail price index was 107.5 in the first half of this year, up 7.5%, while the index of clothing declined by 1.62%; the CPI stood at 107.9, up 7.9% year-on-year, while the index of clothing fell 1.48%. On the contrary, the PPI rose 2.40% in June 2008, the same as that in previous month, but the PPI of clothing was at the record high level since 2006. Sales of clothing have entered slack season since July and the price will go downward. It is predicted that the market supply of clothing will be in great surplus, which will dampen the operation and development of textile industry.


Calling investors to pick up shares of companies in the textile industry is, in my point of view, premature. Generally, there are excess capacity and the prices are going down. Export markets are soft and manufacturing costs are rising. Textile, being a commodity, has got no power in terms of pricing.