Apac Resources 1104 HK
June 17, 2011 - 7:43am EST by
aubrey
2011 2012
Price: 0.40 EPS n/a n/a
Shares Out. (in M): 6,875 P/E n/a n/a
Market Cap (in $M): 352 P/FCF n/a n/a
Net Debt (in $M): 43 EBIT 0 0
TEV ($): 309 TEV/EBIT n/a n/a

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Description

Investment Case
APAC (1104 HK) is a Hong Kong listed investment holding company. Its assets are three big stakes in quoted mining companies, net cash and a smaller portfolio of quoted commodity stocks. It also has a small commodity trading business which is not really material to the investment case. The current (16th June, 2011) value of the three stakes (25.6% of Mount Gibson, MGX AU. 29.0% of Metals X, MLX AU. 14.8% of Kalahari Resources, KAH LN) plus the net cash plus the estimated market value of the portfolio of commodity companies (small, only 7% of assets and diversified) is around HKD0.83 per share. The current share price is 48% of this, HKD0.40 per share.
I have shorted the three big stakes leaving a pure discount play. You may wish to leave it unhedged or just hedge the big stake, Mount Gibson, which is 67% of the assets. This discount has been incredibly volatile. I have tracked it back over 4 years at 6 monthly intervals (ie when you get a snapshot of the balance sheet when the company reports). It has ranged from a premium of +39% to a discount of -56% in December 2010, it is currently -52%. Interestingly the discount may be inversely correlated with commodity company valuations. At the bottom of the market in December 2008 it was a premium of 22%, 6 months before (when all was rosy and commodities were booming) it was a discount of 23%. Whether this means anything for future discounts I don't know.
Risks/Negatives
1. They could spend their cash (and more) on something stupid. Management sound sensible but don't they always.
2. The cost of the hedge is expensive. 3.5% for the principal value which adds up to a 7% charge on my underlying APAC investment.
3. Corporate governance risk. Hong Kong is not bongo-bongo land but US blue chip this aint.

Catalyst

No real catalyst. If I was pushed I would say that 28% of the company has just been bought by a company backed by a major Hong Kong investment house (at HK$0.70 per share, a 75% premium to the current price) and that they may shake up APAC to do something about the discount and get some of that 75% premium reflected in market value. But now I'm making it up.
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    Description

    Investment Case
    APAC (1104 HK) is a Hong Kong listed investment holding company. Its assets are three big stakes in quoted mining companies, net cash and a smaller portfolio of quoted commodity stocks. It also has a small commodity trading business which is not really material to the investment case. The current (16th June, 2011) value of the three stakes (25.6% of Mount Gibson, MGX AU. 29.0% of Metals X, MLX AU. 14.8% of Kalahari Resources, KAH LN) plus the net cash plus the estimated market value of the portfolio of commodity companies (small, only 7% of assets and diversified) is around HKD0.83 per share. The current share price is 48% of this, HKD0.40 per share.
    I have shorted the three big stakes leaving a pure discount play. You may wish to leave it unhedged or just hedge the big stake, Mount Gibson, which is 67% of the assets. This discount has been incredibly volatile. I have tracked it back over 4 years at 6 monthly intervals (ie when you get a snapshot of the balance sheet when the company reports). It has ranged from a premium of +39% to a discount of -56% in December 2010, it is currently -52%. Interestingly the discount may be inversely correlated with commodity company valuations. At the bottom of the market in December 2008 it was a premium of 22%, 6 months before (when all was rosy and commodities were booming) it was a discount of 23%. Whether this means anything for future discounts I don't know.
    Risks/Negatives
    1. They could spend their cash (and more) on something stupid. Management sound sensible but don't they always.
    2. The cost of the hedge is expensive. 3.5% for the principal value which adds up to a 7% charge on my underlying APAC investment.
    3. Corporate governance risk. Hong Kong is not bongo-bongo land but US blue chip this aint.

    Catalyst

    No real catalyst. If I was pushed I would say that 28% of the company has just been bought by a company backed by a major Hong Kong investment house (at HK$0.70 per share, a 75% premium to the current price) and that they may shake up APAC to do something about the discount and get some of that 75% premium reflected in market value. But now I'm making it up.

    Messages


    Subjecttaxes
    Entry06/17/2011 11:05 AM
    Memberlordbeaverbrook
    thanks for the idea.  do you think it would make sense to subtract out deferred taxes?   if so, what is the cost basis of the holdings and what is the applicable tax rate

    SubjectRE: taxes
    Entry06/20/2011 07:10 AM
    Memberaubrey
    Good question. The short answer is I don't know. I've had a look at the filings and there isn't enough information. I will get on to the company. Good question and one I should have asked already. Thanks.

    SubjectRE: Why does this exist?
    Entry06/20/2011 07:11 AM
    Memberaubrey
    Don't think it has a raison d'etre really. Sadly I don't have an inside line on whether it is about to cease existing either though that would almost certainly be a good thing for investors. Sorry.

    SubjectRE: taxes
    Entry06/20/2011 07:30 AM
    Memberjohn771
    As a Bermuda corporation operating in Hong Kong, my guess is that APAC will not pay tax on sale of shareholdings.  The financial statements say: "The Group has no significant unprovided deferred taxation at the reporting date."

    SubjectFraud Risk
    Entry06/28/2011 06:51 AM
    Membervalue_31
    How do you get comfortable with Fraud Risk? Auditor is Graham H. Y. Chan & Co.  Do you know them?  Are they reputable? 

    SubjectMargin
    Entry07/06/2011 05:37 PM
    MemberLukai
    Thanks for the post. It looks like these guys are pledging a little over half of their investments in these listed securities to a stock-brokerage to secure margin loan facilities which they're ostensibly then turning around and betting in the commodities market. I looks like the value of these pledged securities is roughly in line with the NAV discount.

    SubjectRE: Margin
    Entry07/12/2011 10:33 AM
    Memberaubrey
    Hi Lukai. I'm not sure I understand what you mean. They do have about HKD400m in 'other securities' which have some borrowing raised against them of around HK160m but on top of that there are the stakes in MGX, MLX and KAH. What do you mean when you write that this accounts for the NAV discount?

    SubjectRE: Fraud Risk
    Entry07/12/2011 10:36 AM
    Memberaubrey
    They have just changed auditor from Mr Chan to Deloitte so I guess that is a step in the right direction (CCME notwithstanding...) but my main comfort is that the company do actually own these stakes so while we could be defrauded any number of ways this isn't an outright fraud (ie Mount Gibson's annual report says that APAC owns 27% of it). I take your point though, good as Mr Chan is I'm glad to see him go.
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