GSOL - Global Sources

[bizaro86]

This was recently released to the public from Seeking Alpha Pro: http://seekingalpha.com/article/2088553-global-sources-special-situation-and-value

 

They're doing a tender offer at $10 for $50 million worth of shares, and the stock is currently trading just below $8. If every share in the company was tendered, you'd get 15% take-up. It seems likely based on the current price that nearly everything will get tendered, so the value of the remaining business is important.

 

They run tradeshows and magazines and websites for businesses sourcing from Asia. This seems like a defensible market niche to me, as people won't switch tradeshows to a competitor once the original has critical mass. The valuation seems very low already, and management is returning capital. I don't think businesses are going to stop importing goods from Asia any time soon, but there is a risk their products get disintermediated or replaced by Alibaba or something.

 

I don't have a position yet, since I just saw this today, but would appreciate any other thoughts. (especially a bear case!)

[constructive]

Who are their competitors? Alibaba.com comes to mind. Will they be the LinkedIn to Global Source's Monster.com?

[constructive]

Here's Spruce Point with the bear case:

 

http://www.sprucepointcap.com/Global%20Sources%20-%20Major%20Concerns%20With%20One%20of%20the%20Oldest%20China%20RTOs.pdf

[bizaro86]

Here's Spruce Point with the bear case:

 

http://www.sprucepointcap.com/Global%20Sources%20-%20Major%20Concerns%20With%20One%20of%20the%20Oldest%20China%20RTOs.pdf

 

Interesting, thanks for that! I certainly agree that the magazine business will die due to internet competition, and I wouldn't especially want to sign up to compete with Alibaba in the BTB online market. I do like exhibitions as a business, and the comment about them being the oldest chinese reverse takeover doesn't really concern me. If the company was an out and out fraud, continuing to return large amounts of capital to shareholders wouldn't likely be high on their priority list.

 

The comments about management buying overpriced Chinese real estate do concern me, as I wouldn't be very interested in owning a subscale chinese REIT.

[writser]

I also started looking into this after the tender offer announcements. A couple of random points so far:

 

* I wasn't really impressed by the bear case from Spruce Point. Remember, this was published in 2011, the year that all Chinese RTO's were discovered. The article more or less suggests that GSOL might be a fraud but they don't show any hard evidence. I think there's a reasonable chance the guy just wanted to cash in on his short position. Last year GSOL made 15 mio by selling property above book value. I don't know the fund though and I haven´t checked the balance sheet in detail either so take my opinion with a grain of salt.

 

* At first glance the numbers look nice. Average ROA last 10 years: 11%. Average ROE: 23%. Revenue grew 10% annually last 10 years, net income grew even harder.

 

* Market cap 270 mio. 150 mio cash. net income average past 10 years: 20 mio. So ex-cash it's trading at a 10 year average PE of 6 (and earnings have increased from 7 mio in 2003 to 30 mio in 2012)

 

* The founder started this business almost 40 years ago and it has been profitable every year (large read about the history of the company). He still owns ~48% of shares outstanding. Chances of activists getting involved: very small. On the flipside, it doesn't look like they are actively screwing over minority shareholders. I like the tender offers, looks like they understand a bit about capital allocation. Even though chances are the founder just wants to cash in.

 

* They have a kind of float; their Chinese suppliers pay upfront to be listed on their websites and to get access to tradefairs. Negative working capital. That's nice, but they don't really do anything with that. Balance sheet is extremely conservative.

 

* I would say that both businesses (especially the tradefair business) have a bit of a moat due to the 'network' effect but I am not familiar with the industry. Apparently I am wrong about that; their online- and magazine business seems to be deteriorating; competition is rising. On the other hand, their tradefairs are doing good. They're doing both huge B2B tradefairs and 'private' fairs where a large company like BestBuy can meet multiple Chinese suppliers at once.

 

* I like that it's not really a 'hot' stock: it's not followed by any analysts, no dividends, emerging markets are getting hammered lately, they issued a profit warning, the SEC has done some enquiries, it has the air of a Chinese fraudulent stock. On the SEC correspondence: at first glance it doesn't look very serious, the company answered all questions and everything looks reasonable. I am no expert on accounting principles though.

 

My opinion so far:

 

[+] Company has shown impressive ROE, earnings growth and returned money to shareholders the past decade.

[+] Company has been growing and profitable for 40 years, founder still has a huge stake so history suggests that they will find a way around the current problems.

[+] If they continue to grow and the market rerates the business upside is huge.

I haven't pulled the trigger yet. Still left to do: is there a margin of safety in the balance sheet? I am also totally clueless about the online revenue / competitive landscape. For all I know it could go to zero next year. Any feedback would be appreciated.

[Green King]

looks like the SEC is looking into them.

http://www.sec.gov/Archives/edgar/data/1110650/000000000013066277/filename1.pdf

[ItsAValueTrap]

Thinking aloud here.

 

The tender offer might actually be incredibly fair to shareholders.  (EDIT: I am probably wrong about that.)  Normally, if a CEO wanted to sell his/her shares, he/she would likely have an edge over shareholders.  Whereas with a tender offer, everybody has the same opportunity to tender their shares.  I think the tender is designed in a way that everybody should tender their shares.  Therefore, everybody essentially gets a "dividend" that is tax-efficient.

 

2- The tender offer that expired on Dec 19, 2008 was for $8.00/share.  It was massively oversubscribed.

39,117,162 Shares were properly tendered

The Company has accepted for purchase on a pro rata basis 6,250,000 Shares

http://www.sec.gov/Archives/edgar/data/1110650/000095016208000579/globalsctoiano4_122908.htm

Around 83.7% of shares were tendered.  (calculated from http://www.sec.gov/Archives/edgar/data/1110650/000095012308015952/y00625exv99waw5wb.htm )

 

The tender offer that expired on July 28, 2010 was $9/share.

38,793,060 Shares were properly tendered

The Company has accepted for purchase on a pro rata basis 11,121,000 Shares

http://www.sec.gov/Archives/edgar/data/1110650/000095016210000256/globalsctoiano2_080510.htm

Around 86.9% of shares were tendered.  (calculated from http://www.sec.gov/Archives/edgar/data/1110650/000095016210000201/globalsctoi_063010.htm )

 

I think the reason why GSOL is trading at a discount to the tender price is because the market anticipates that the tender offer will be massively oversubscribed???

[ItsAValueTrap]

Here are some quotes from the 40-year history book about the company (http://www.corporate.globalsources.com/METRICS/40YRS.PDF):

 

page 175

[Merle:] I am passionate about success and want us to succeed. I was not driven by money when I started this business, and I am not possessed by money now. But I know the resources necessary to operate a business, and we have demonstrated clearly that this company is a company where profit is important. I am passionate about consistent performance in order to survive in a very competitive market. I am passionate about the products we provide. I dearly love going out to talk with our advertisers. It’s an absolute pleasure for me to work in the field with our customers. I cannot tell you what a pleasure it is to come to work in the morning and to enjoy the people that I spend the rest of the day with.

 

page 89

In 1999, Merle decided to take the company public on the NASDAQ Stock Market in the United States – the stock exchange of choice for global technologyrelated companies. For a man described by friends and colleagues as low-key, intensely private and very protective of the business, this was a major decision. In the end, however, the reasoning was simple. Eddie Heng, who was the public company’s first chief financial officer, explains: “A listing gave us the vehicle to raise capital. Without the listing, our growth opportunities would have been confined solely to internal resources. A listing provided us with the opportunity to expand in the future.”

 

page 93

“In those heady days of megabuck deals, it would have been possible to sell the company for 15 times the price earnings ratio,” Merle says. “Financially, it was very attractive. Our real interest, however, was in perpetuating the company and what it could mean to tens of thousands of individuals and the wealth created for developing countries through the evolution of trade.” He adds: “The company was founded to further peace and understanding in the world by helping world trade develop. Our mission should be continued.”

[yadayada]

excluding sale of property they will make under 30 million, so it doesnt look that undervalued based on that alone.

[ItsAValueTrap]

As of May 31, 2000 (20-F):

 

Hung Lay Si Co. Ltd. owned 16,035,388 shares, which is 61.0% of the company

Merle A. Hinrichs owned 4,008,221 shares, which is 15.2% of the company.

 

Hung Lay Si has various related party transactions with Global Sources.  It also had deals with Merle.  Combined, these two parties owned 76.2% of the company.

 

Fast forward to the latest 20-F:

As of February 28, 2013

Merle A. Hinrichs owned 14,772,821, which is 42.97% of the company

Hung Lay Si "transferred all of the common shares owned by it to four unaffiliated separate entities. As a result, the related party relationship ended on 15 April 2011".

 

Combined, that's 42.97% of the company.

 

---

This company reminds me of Steve Madden (SHOO).  I don't mean that as a compliment.

You don't go long Steve Madden because management is so sketchy and because management participated in a pump and dump.

You don't short Steve Madden because there is a wonderful business underlying the stock.

[writser]

Some more ramblings.

 

* I contacted the company to ask them if they had any spare annual reports. A couple of days later I received a DHL package containing the latest 5 annuals. Not very significant but I have encountered worse. An interesting footnote in the latest 6K:

Management reviewed the usage of the office space as at December 31, 2011 and again as at December 31, 2012 and, based on the Company’s intention, the portion of the properties that is designated to generate rental income in the short to medium term has been re-classified as Investment Properties. The net book value of the portion of these properties classified as Investment Properties as at December 31, 2013 and as at December 31, 2012 was $89.6 million and $97.4 million respectively. The total net book value of these office properties including the portion classified as Investment Properties and the portion classified under Property and Equipment as of December 31, 2013 and as of December 31, 2012 was $134.5 million and $122.8 million respectively. The total market value of the office properties held as of December 31, 2013 and December 31, 2012 was $229.4 million and $219.7 million respectively, based on independent valuation reports prepared by Savills Valuation and Professional Services Limited, Hong Kong. We did not record the market valuation gains as we record our Property and Equipment and Investment Properties at cost less the accumulated depreciation.

* So book value of the real estate appears to be undervalued by $100m. This seems to be supported by their recent property sells. Is anybody familiar with 'Savills'? Side note: property prices in Asia might be a bit on the high side.

 

* I appreciate how they announced a tender offer for ~11% of their own shares in november 2008, the middle of the financial crisis, using cash on hand. As noted before, their capital allocation looks conservative but allright.

 

* Option grants seem a bit excessive for my taste but they're net buyers of shares by a large margin. Shares outstanding decreased from 47m to 36m in a decade.

 

* Revenue from tradeshows has grown from $2.5m to almost $90m in the last 11 years. Online revenue grew from $50m to $120m but has been declining rapidly to $90m in 2013. Print revenue has been declining from $40m to $13m. I like the tradefair segment. It's a slow, boring business and it seems to me there is a bit of a moat in organising these things. Net profit of this segment was approximately $7m last years. The internet segment is very profitable but I am note sure about their competitive position there.

 

* A conservative estimate of company value:

 

$120m - slap a 6x P/E on average net income for the last decade

$172m - real estate at 75% of last valuation.

$140m - excess cash

-$20m - non-current liabilities.

 

36.2 diluted shares outstanding makes over $11 per share. Not entirely correct since they use the real estate to organise the tradefairs etc. so I am double counting in a way. However, I used conservative multiples everywhere. The recently announced tender offer makes the valuation look even more attractive. I'm starting to like this. Is anybody else still  looking at it? Feel free to correct my horrible mistakes :).

[sbalsam]

Writser - I don't see any debt on the Company's Balance Sheet. Are you sure about that $25M negative adjustment to the valuation?

Steve

[writser]

First mistake found! :) Thanks, you are correct, no clue where I got that from. They do have $10m in non-current liabilities, I updated my post. It doesn't affect the valuation in a material way.

 

Actually, I forgot to add back a $10m minority interest. So $20m seems more reasonable.

 

* margin of safety: GSOL is trading now at NCAV + recently appraised value of real estate. But again, I am not familiar with the real estate market in Hong Kong nor with the appraiser.

[siddharth18]

Update - Tender terms are out now. There is an odd-lot provision.

 

http://www.sec.gov/Archives/edgar/data/1110650/000095016214000021/ex99_a1a.htm

[ItsAValueTrap]

Does anybody know what the heck this means?

 

To qualify for this preference, an Odd Lot Holder must tender all Shares owned by the Odd Lot Holder in accordance with the procedures described in Section 3. Odd lots will be accepted for payment before any proration of the purchase of other tendered Shares. This preference is not available to partial tenders or to beneficial or record holders of an aggregate of 51 Shares or more, even if these holders have separate accounts or certificates representing fewer than 100 Shares.  By tendering in the Offer, an Odd Lot Holder who holds Shares in its name and tenders its Shares directly to the depositary would not only avoid the payment of brokerage commissions, but also would avoid any applicable odd lot discounts in a sale of the holder’s Shares.  Any Odd Lot Holder wishing to tender all of its Shares pursuant to the Offer should complete the section entitled “Odd Lots” in the Letter of Transmittal and, if applicable, in the Notice of Guaranteed Delivery.

http://www.sec.gov/Archives/edgar/data/1110650/000095016214000021/ex99_a1a.htm

[ItsAValueTrap]

Maybe they did they goofed on the legalese and forgot to change both numbers?

 

The previous tender offer SEC filing states:

Odd lots will be accepted for payment before any proration of the purchase of other tendered Shares. This preference is not available to partial tenders or to beneficial or record holders of an aggregate of 51 Shares or more, even if these holders have separate accounts or certificates representing 50 Shares or fewer.

http://www.sec.gov/Archives/edgar/data/1110650/000095016210000201/globalsctoi_063010.htm

 

The tender offers thread here: http://www.cornerofberkshireandfairfax.ca/forum/strategies/odd-lot-tenders/150/

is discussing the same issue.

[ItsAValueTrap]

Turns out it was an error.

 

http://www.sec.gov/Archives/edgar/data/1110650/000095016214000023/sctoi_a.htm

[siddharth18]

Yes I noticed that when I read the tender offer terms and figured it was a copy-paste type error. They copied and pasted parts from the previous tender offer document and forgot to remove the 51 share clause.

[rainman]

Should I call my broker to tell them I want to take the tender offer?

[bizaro86]

Should I call my broker to tell them I want to take the tender offer?

 

Yes, if you want it you have to opt in.

[hillfronter83]

Anyone interested in GSOL at current level? Its real estate in China alone could worth the entire market cap and the operating business, while declining, generated over $25 million annually in FCF for the last ten years. In addition, the company has $103 million cash and some real estate in HK and Singapore worth tens of millions. This is the one of the cheapest stock I'm looking at.

[hillfronter83]

GSOL will tender for $50 million at $7.5/share.

[writser]

I am still following this name- no position though (unfortunately). The main thing that keeps me back is how they keep pouring their profits in real estate. Why on earth are they doing that? Another point is that a lot of cash on the balance sheet are customer prepayments - not sure they are allowed to spend all this.

[hillfronter83]

I am still following this name- no position though (unfortunately). The main thing that keeps me back is how they keep pouring their profits in real estate. Why on earth are they doing that? Another point is that a lot of cash on the balance sheet are customer prepayments - not sure they are allowed to spend all this.

 

I actually don't mind real estate buying. It shows the management is conservative in capital allocation. What are the alternatives here?

a. try to grow current business. Not too smart when you are going against Alibaba.

b. invest in stock market or acquire other business. Doesn't see current management has the expertise.

c. return capital to shareholders. They have been buying back shares through tender offer in recent years (maybe they should be more aggressive buying back). Paying dividend may not be a good option because of tax consideration.

 

At least most of the properties they bought are in the same area where the company rents, so they may have some understanding about the property value.

 

As for the prepayment, only $4 million is refundable under certain condition. So they can spend the cash as long as they can meet liquidity needs. Again, management has been very conservative by keeping high cash balance.

 

[writser]

Interesting, where did you find the refund information on the prepayments? I couldn't find it in the latest annual.

 

I understand your point with regards to the real estate but I don't completely agree with it. Why should a B2B trade facilitator start to go into real estate rentals? Why would they have an edge? Excess cash should be distributed if they cannot profitably invest it back in the business. Also, the CEO is evasive about the long term strategy of buying real estate - questions have been asked on past conference calls but I found his replies to be unsatisfactory (this is from memory). Finally, I am no expert but Hong Kong real estate wouldn't be my preferred asset class at this point.

 

I think GSOL has potential to be a reasonable investment. I certainly don't think it is a fraud (as was suggested by some people in this thread) but I'm not sure it will do great so I haven't pulled the trigger. I could see myself owning it at some point.

 

Bad things: the online business could decline rapidly, I am not sure about the profitability of the exhibition segment yet, they insist on buying real estate and don't seem to have no clear plan for the future.

Good things: the online business generates juicy cashflow, valuation is cheap and they seem to be ramping up returning capital to shareholders.