WH - WSP Holdings

[king888]

Merger Arbitrage plays .

 

This article sum it up nicely

http://seekingalpha.com/article/778771-wsp-holdings-limited-bursting-at-the-seams-and-set-to-explode

 

Oaktree Capitol of Howard Mark holds 6.9% . Oaktree's Head of China , Dennis Zhu ,is also a WH Independent Director. 

[king888]

The buyback is not effective for illiquid stocks because company can't buy more than 10% for average daily volume in the past 30 days . 

 

UTSI is cheap because of China discount. But it actually has businesses outside China as well.  I bought when it dipped below $0.90 but sold out around $1.00 .Because I believe another Chinese stocks has better risk/reward profile such as WH (going private offer at $3.00 and Oaktree as a major shareholder, trading at 0.18x PB  ) .

 

How do you know they are real and not manipulating the stock ? I would love to see how. TIA :D

 

Hi Green King,

I visited their plant in Rayong ,Thailand by myself. And I also talked with workers and security personnel  before I met the manager  .  I believe WSP is legit. But  because of the anti-dumping policy from US, they have faced many difficulty since the ipo in 2007.  WSP invested a lot to expand capacity . But when USA started to use AD against Chinese OCTG pipe , this capacities in China turned out to be very excessive .  So they founded the OCTG plant in Thailand in order to avoid AD from US & other countries but it is still fractal to its entire businesses

 

Another major shareholder is UMW holding which is one of biggest public company in Malaysia. The sole lender or WSP's facility in Thailand is Bangkok Bank (#1 bank in term of total asset).Bangkok Bank is very conservative to lend to someone so I think is good sign in some degree. Total loan approved is around $56 million. 

http://www.stockfocusnews.com/index.php?mo=3&art=575876

 

Here is the picture of the plant that I took when I visited their facility

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77041970

 

 

[Green King]

Thx

What do you expect it to make if the deal fall through ?

Is this normal business economics for the pipeline industry ?

 

[king888]

Thx

 

Is this normal business economics for the pipeline industry ?

 

This is normal environment for OCTG industry especially  from China. AD & excess capacity make it worst. You can view more info of OCTG's industry outlook by MetalBulletinResearchhere ->

http://www.brighttalk.com/webcast/5680/40303

 

MBR expects OCTG market to recover in 2015-2016 if I remember it right. And they also point to new oppotunity in middle-east & South Africa  market.

 

IMO, management wants to take company private because they want to save cost to ensure that the company can survive to the up-cycle when it comes. And exiting from US stock exchange will open a new market with the countries in US sanction list.

 

50.9% is held by Chairman  and another 22.5% held by UMW holding.  So 26.6% is the public float .So it costs roughly $16 million to make this deal done.  Because UMW decided to hold its stake when WSP gone private.  UMW's decision was unofficially announced by its IR  http://investorshub.advfn.com/boards/read_msg.aspx?message_id=81941362

I can confirm this because I send an email to UMW's IR and he replied the same.

 

 

What do you expect it to make if the deal fall through ?

 

This is the key question. With all the reasons I point out . The deal can collapse if the backer (HDS Investment) walk away.  But I think zero is far from happen.  The "borrowings due within 1 year" looks big but if you look back in the history ,it is always in that level  for last couple of year since the AD.  So if this "borrowings due"  is fatal ,it should be bankrupt by now.  They always got the extension or new credit revolver from the bank. And they sold many assets to raise cash.Recently, the sales of Houston unit was finalized in November for $43 million (http://investorshub.advfn.com/boards/read_msg.aspx?message_id=82848835)      WSP books advanced impairment loss of  $4.6 million in this Q for this asset sale.

 

Generally, loss per Q is $15-20 million.  But after the Thailand's facility running in full capacity (not restrained by AD) , the loss should go lower .  So I believe WSP can stay liquid until 2015 to wait for the up-cycle in the industry.  And if the deal fail, the share price might fall back to $1.1 which  lowest price in the trading record .  Or even worse fall back to trade at 0.10xPB which results in $0.90 a share.  But I expect this is unlikely to happen. Because $15-16 million is just a small cash for HDS Investment. 

[Hielko]

I have a very small position in WH. I'm reasonable sure that the company is real, that's not the problem here, but think the risk of the deal not going through is significant based on the poor financial performance and the fact that there has been a lot of time between now and the initial non-binding offer.

[king888]

I have a very small position in WH. I'm reasonable sure that the company is real, that's not the problem here, but think the risk of the deal not going through is significant based on the poor financial performance and the fact that there has been a lot of time between now and the initial non-binding offer.

 

The financial condition now is more or less the same as last year when the going private deal was announced last year.  IMO, the delay is from UMW's side, but now they have a green light from UMW .

 

UMW also expects this deal to be completed by 1Q13  . 

[HJ]

How do you guys think about the risk that the insiders will change their bids to a lower price?  The book value has declined by a non-trivial amount since the offer.  To the extent that UMW will retain their piece, they really could just try to screw down the minority shareholders?

[king888]

How do you guys think about the risk that the insiders will change their bids to a lower price?  The book value has declined by a non-trivial amount since the offer.  To the extent that UMW will retain their piece, they really could just try to screw down the minority shareholders?

It was an offer from 3rd party not the insiders. 

 

http://www.sec.gov/Archives/edgar/data/1418225/000148662011000018/d28928_ex99-1.htm

According to the proposal letter, HDS has had preliminary and informal communications with Expert Master Holdings Limited ("EMH") and certain other significant shareholders of the Company, and HDS believes that EMH and certain other significant shareholders of the Company would be interested in pursuing a potential transaction pursuant to which an HDS special purpose vehicle would (i) acquire all of the publicly held shares of the Company for cash and (ii) exchange shares of an HDS special purpose vehicle for shares of the Company held by EMH and certain other significant shareholders of the Company. EMH is wholly owned by Mr. Longhua Piao, the Company's Chairman and Chief Executive Officer, and is currently the majority shareholder of WSP Holdings owning 50.9% of the total outstanding shares. The proposal letter indicates that funding for the proposed transaction would come from HDS's own capital. A copy of the proposal letter is attached hereto as Exhibit A.

 

 

Going private deal will cease further impairment of WSP in UMW's financial .

  In 2011 , UMW took a  RM133 million loss on WSP investment (from declining share price and net loss).  So if the deal is finalized at $3, UMW will book around RM180 million gain  from share price appreciation.  I think it is mutually benefit for public shareholder and UMW .

 

And de-listing from US market will make WSP able to do business with countries in US-sanctioned list such as  Iran, Syria and Sudan .

http://www.sec.gov/Archives/edgar/data/1418225/000000000011058172/filename1.pdf

 

So I guess it is a win-win situation here between WSP itself, UMW and minority shareholders ( except those who has higher cost-basis )

 

 

[HJ]

Totally missed that.  Was just assuming it was coming from the chairman.  Don't know if it makes me feel better or worse about how firm the offer is?  Has EMH indicated their suport for the deal?

[king888]

Totally missed that.  Was just assuming it was coming from the chairman.  Don't know if it makes me feel better or worse about how firm the offer is?  Has EMH indicated their suport for the deal?

 

http://edge.media-server.com/m/p/263nfyo5/lan/en

 

This is from 2012 Q1 conference call.  There was a question asking "Did management involve in this buyout as part of a buying team ? "  in 00:13 .  The answer was "Mr.Piao (CEO and owner of EMH) is getting involved in the transaction "  That's all I can find now .

 

And this is from UMW's analyst reports.

http://upload.xinhua08.com/2012/1128/1354088521326.pdf

However, UMW will not dispose its

23% stake in WSP and be a minority holder in the Newco should H.D.S

Investment’s proposal to take WSP private by 1H13 is successful.

 

[bennycx]

Why won't EMH and UMW and HDS act together to under bid to a lower price since they are not cashing in?

[HJ]

King888,

    Thank you for all your due diligence. 

    I also noticed that your list MCOX and LAS as your positions.  Are these sort of a basket play on the bombed out US listed Chinese companies?  I have some interest in figuring out ways to play in this neighborhood as well.  How do you rank these 3 side by side?  Do you have a feel for the management at these places at all?

 

Thanks again.

 

[king888]

King888,

    Thank you for all your due diligence. 

    I also noticed that your list MCOX and LAS as your positions.  Are these sort of a basket play on the bombed out US listed Chinese companies?  I have some interest in figuring out ways to play in this neighborhood as well.  How do you rank these 3 side by side?  Do you have a feel for the management at these places at all?

 

Thanks again.

 

It is some kind of basket play but I didn't buy as a pure basket. Only 3 names is too few to diversify anyway. They are Chinese companies that I feel comfortable and assume that outright fraud is unlikely.  The easiest ways to spot a fraud is to go through 20-F filings page by page.If it looks suspicious ,it probably a fraud.  If the profit margin is too good to be true ,it is.  There are plenty way to spot these fraud but it takes time.  And even if it is not a fraud , the business might be not in good shape.  Some Chinese companies are legit but were built by quick acquisitions to make it sizable to list in NYSE,NASDAQ ,so this is not sustainable case to invest.

 

 

MCOX -  This is an easy one.  Having Sequoia Capital and Sina as a majorshareholder should be a confirm that it is legit business.  And M18.com is well-know eCommerce website in China.  So the fraud is not a problem here.    But the problem is the declining revenue and net loss due to strong competition in eCommerce space .    They decided to relaunch M18.com as an online marketplace with a co-operation with Giosis .   Giosis is 51% own by Young Bae Ku ,a founder of Gmarket which was sold to eBay . And another 50% own by eBay    The new M18.com also has eBay logo at the footer.

http://ir.m18.com/releasedetail.cfm?ReleaseID=722716

The 49% ownership of eBay in Giosis was not mentioned in Mecox's press release . But it is in various press and Qoo10.com website.  And I also confirm this info with Mecox's IR.    The balance sheet of Mecox is still very strong ($43 million in cash and structured bank deposit) . They commits a share buyback plan so it means they try to enhance shareholder value.   

 

 

LAS - It is a car dealership business which is dealing with major car companies.So the revenue should be harder to falsify. The problem the company has is with Car Quota system in Beijing which began in 2011.  And I also check profit margin and inventory day , cash circle  . It is in line with another two Chinese car-dealerships businesses listed in Hong Kong. My friend who live in Beijing also confirmed that he has seen ads / showrooms of LAS.    And CFO/IR is responsive to many of my questions.  Recent Quarter is the first loss quarter which is normal because it is expanding business. And this year they are building the biggest VW 4S dealership in the world in Beijing . And they can't said that in public press if is not true because VW can sue them or terminate contract if it is a blatant lie.  But to be honest  after LPH's hit piece ,I might have to go to Beijing to see their business with my own eye to gain more confidence.  I live in Bangkok so it is not far from there.

 

To be honest,  there are full of fraud in China.  It is dangerous to invest but it also represent a big  opportunity. 

I started investing 11 years ago in Thailand Stock Market.  And back in that time, there were a lot of stock trading at just 3-5x PE valuation.  Why ? Because no one care to invest. Most of the participants were day-traders, chartists. They didn't believe in looking into financial statement and make a valuation because they assumed that there were many frauds (And it was a lot of fraud 12-13 years ago).  As of today, Thailand stock market are one of best performing market in the last decade.  I know many retail investors who made 100x - 200x gain during this period by just purely long equities ( we don't have much derivatives here)  .  It might not 100% the same as  US-listed Chinese space nowaday. But I think it is comparable somehow.

   

 

 

[HJ]

Why did you decide on those names though?  There are several other names, which I also feel fairly certain that are not frauds (primarily because you can trace back to see how cash got on their balance sheets).  Valuation wise, they've all been pounded to oblivion, but it's very difficult for me to assess their future business prospects. 

 

I feel like you need to make some sort of decision regarding the management's ability to create value in China, as well as their integrity to treat the minority share holders fairly.  Do you feel like you derive enough comfort from reading SEC filings, searching for relevant information on the web, or even walking through their facility?  What I find, often times, is that for those management team whose integrity you can feel comfortable with, I have doubt over their execution ability in China, and for the entrepreneurs that I have confidence are good operators in China, I often times have doubt in their integrity (thinking of what they probably needed to do to get to where they are, makes me worry to be on the receiving end of some of those tactics).  How do you get over those 2 hurdle at the same time?

 

In the case of Mecox, by the way, I'm not sure if Sequoia's involvement is necessarily a positive.  Looking at how they structured their deal in the case of ADY, for example, the minority public share holders doesn't necessarily benefit  from their involvement.  Neil Shen definitely have the right business connections, but I don't know, for example, what to make of Muddy Water's allegation of his potential dealing with the Focus Media crowd.  I do suspect that he has made a lot more wealth for himself than the investors in his fund over the past decade (that's from relationships who know his business past reasonably well). 

 

The couple with more cash on their balance sheet than market cap that I'm looking at includes ACTS and ATV.  I just don't know what to make of their forward looking prospect, and how the management will be able to bring out those values other than just shrink the company and pay the cash out as dividends (STV has been doing that), but the company pays a tax dividending out the cash and the discount you are getting end up not as much as you think because of that?

[king888]

Why did you decide on those names though?  There are several other names, which I also feel fairly certain that are not frauds (primarily because you can trace back to see how cash got on their balance sheets).  Valuation wise, they've all been pounded to oblivion, but it's very difficult for me to assess their future business prospects. 

I chose these names because there have some changes to growth future business prospect. And it appear that they are legit with good balance sheet (except WH) or good operation's track record so the downside risk is minimal.  You can't be 100% sure about execution ability. There are other names that appear to be legit and has strong balance sheet such as ACTS that you mentioned but I have not look into it yet.  I think 4-5 names is the maximum for me. I can't scale to look more than 5 at the same times.

 

You can't be certain in execution in any companies even in US. So I believe limiting your downside is more important task. If things go wrong , the strong balance sheet can help. And having at least 2 major shareholders (China-based) is better for corporate governance  . For example, WSP has EMH,UMW and Oaktree China.  Mcox has Sequoia ,Sina and Dongxiang. LAS has chairman and another venture fund.  And now Mcox is partnered with Gmarket's founder and eBay . It is a good sign ,IMO.  But these are not 100% guarantee that they will succeed. 

 

IMO,most of the allegation against FMCN , EDU  or QIHU are exaggerated . The business practise of these companies might not be in western standard.  For FMCN, it did some transactions that benefit insiders.  But even in State-owned enterprises , these practices exist. So we have to live with that as long as the insider does not steal all cash or fake a major portion in revenue. 

 

All of the above are just my 2 cent anyway.

ATV looks interesting ,I might dig deeper. Thanks for the idea 

 

[HJ]

We are veering into a broader topic.  This is after all, a WH board.  So first, I do agree it looks like the prospects for a successful going private transaction here is fairly high.  With UMW and EMH essentially not economically affected by this, I guess we are relying on Oaktree to keep everybody honest.  The worry now is if the bidder just goes away or tries to lower the bid.  I bought a small position at the end of last year, but would like to get bigger if I can get more comfortable with new information. 

 

I just realized that we might have had an exchange of thoughts regarding IDI a while ago.  IDI and ACTS are 2 that I can get comfortable with the management integrity, but question their execution capability in the context of today's business environment in China.  It feels to me like domestic environment (outside of real estate and rail infrastructure) has generally been on a one way deterioration trend since 2006-2007.  ACTS has made wave before, but it was in a different macro environment, and in a little competed product category (mp3 players) where there was no big player playing in the pond.  They were also starting from a much lower capitalization.  So return achieved was satisfactory.  With tablets, all the domestic handset maker and Lenovo are there in the mid to lower tier category.  They may also be quite over-capitalized for the profitable business opportunity that they have in front of them.  Of course, there are plenty of unprofitable ones if they chose to wade into that pond.

 

In the case of ATV, you can also see from their history that retail environment has gradually deteriorated since 06-07, and competition have picked up.  I keep on thinking of the pre 2005 days as  the golden days of doing business in China.  Advertising cost was low, and the first movers made a lot of money.  Think of the money Shi Yu Zhu made selling Melatonin in China, pre his Giant Interactive days.  But ATV just started a joint marketing effort with MetLife in China.  Depending on the nature of business deal that was struck, I'm quite sanguine about that outlook, as there is generally a lack of investment alternatives in China until the asset management products recently, and lately there has been some doubts thrown on that as well.  AIA has had a lot of success among the Chinese middle class, and I think with a world class brand like Met, there is a lot of possibilities.  The company trades at less of a discount than ACTS, and SAIF is behind that company.

 

But with these companies, you are buying a bundle of cash at a discount, when it's not clear that they have a business that needs that much capital.  If they pay the cash out out, they pay a tax repatriating capital out, and you pay a dividend tax in the US.  So the leakage is something like 30%, far from optimal.  That's why I actually think WH may in fact be a better play depending on your  confidence in the deal.

 

 

[Hielko]

Seems like the going private transaction is going to happen: http://finance.yahoo.com/news/wsp-holdings-limited-enters-definitive-130000451.html

 

Premarket last trade at $2.75 while it's going private at $3.20. Still a pretty good opportunity imo.

[king888]

Looks like someone (Oak ?) was working behind the scene to up the final price from $3 to $3.20  . Anyway, congrat to anyone holding on this name including me  ;D

[LC]

Looks like someone (Oak ?) was working behind the scene to up the final price from $3 to $3.20  . Anyway, congrat to anyone holding on this name including me  ;D

Just bought a little at 2.95...Figure the free 8.5% was worth it. And as a newbie investor I don't have much experience in actually going through a process like this, so I'm looking at is as a lesson as well!

[Hielko]

I also added to my position (@2.83). Your return will be a bit lower than 8.4% though, you should expect a $0.05 ADS cancellation fee.

[LC]

I also added to my position (@2.83). Your return will be a bit lower than 8.4% though, you should expect a $0.05 ADS cancellation fee.

Yes you're absolutely right, I just read that (see Pa, I'm learning!). It changes my expected return to 6.66%, which granted isn't anything spectacular but nice enough to get my feet wet in terms of participating in non-market driven events.

[LC]

Quite a drop today...not sure if anyone still holding this.

[king888]

I sold all of my position on the first date of definitive agreement news.  I think the bear thesis in SeekingAlpha is nothing new.  The breaches of debt covenant  is old news which has appear in annual report for a few year already.  But late quarter and annual filings might be bad sign.  Anyway, we will know the going-private result in August 21.  If the share price fell below $1.5 , I might consider buying it again.