|Shares Out. (in M):||89||P/E||2.6||2.1|
|Market Cap (in $M):||103||P/FCF||2.6||2.1|
|Net Debt (in $M):||-52||EBIT||48||58|
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I’ll first offer the PA and low liquidity disclaimer, followed by a China disclaimer and top off with a falling knife and a weak governance disclaimer.
That said, China Index Holdings (“CIH”) is a U.S.-listed Chinese company that trades at an extremely low valuation. I believe the worst of fears around the company are unlikely to come to fruition and that intrinsic value is much higher than today’s share price, likely by several times.
CIH is a provider of data and analytical services to the China real estate industry. Customers are mostly real estate developers and participants. The company models itself or at least views itself similarly to Copart (CPRT) in the U.S., though CIH is a small fraction of its size.
The company reports in two categories: (a) information and analytics services (SaaS) and (b) marketplace services. Within info and analytics is ‘data services’ and ‘analytics services.’ Data services is undergirded by the company’s proprietary data platform which contains various info on land specs and development activity in China. This is a recurring fixed fee business. The analytics services piece adds on various modules and customized reports. Within analytics is also the company’s Land SaaS tool which management speaks excitedly about. For (b) marketplace, this is further broken down into ‘promotion’ and ‘listing.’ Promotion includes fancy industry reports created by CIH that are distributed and used to promote clients brand names (i.e., a way for developers to boast and gain awareness). This also includes some event hosting and can have project-based revenues. Listing services allows clients to post real estate listings on CIH’s website and to generate leads.
Revenue over the past three years is shown below. Nice growth!
For 2020, top-line growth was guided to be >20%. This is in spite of the covid pandemic impacting results. CIH reacted to covid by not raising prices (whereas steady price increases are a usual feature of the business) and by virtualizing some in-person events at a lower selling price, and also adding new virtual events, many of which had strong interest and generated new customer demand.
On the recent earnings call, it was discussed that the company had >2,000 enterprise customers mostly across the developer landscape but that the company will continue to grow as developers become more savvy in using digital tools for their business. Additional growth will come from property managers, brokers, banks, and commercial real estate activities (most business is residential currently).
To make a high level observation, the database that underlies the info & analytics segment (and the company as a whole) is fairly well-known and seems well-regarded by industry participants in China.
CIH spun off from Fang Holdings (ticker: SFUN) in mid-2019. Fang’s business has been very challenged in recent years whereas CIH’s business had continued to perform very well but that value was obscured when CIH was part of Fang. This provided the motivation for the spin. Management expected CIH – as a standalone company – to flourish and receive a high valuation providing a nice source of value creation to struggling SFUN shareholders including the founder. Despite strong results at CIH, this never happened. There appear at least a couple key issues I'm aware of that are holding back shares of CIH, in addition to the small and underfollowed nature of the company. First, CIH remains under control of its and Fang’s Chairman, Vincent Tianquan Mo (“Mo”). Fang itself has come under some short-attacks and accusations of poor governance whereby Mo was accused of some self-dealing, though much of this was back in the 2013 timeframe and the company has continued to operate normally since then. More recently, of concern to investors is that on 12/24/19, Fang issued a release that Fang would purchase up to 15 mm of Mo’s shareholdings in CIH at 5.99 per share (which I believe was based on an internal valuation exercise at the time of spin) whereas CIH was only trading around $3 / sh. at the time. So far it appears that Fang has only purchased 5 mm of Mo’s shares. Separately, Fang purchased ~2.4 mm shares of CIH on the open market from August through Dec. 30 of 2019. So in a nutshell, Fang – which is also controlled by Mo – is using Fang’s money to buy up CIH shares -- shares that it had just spun off last year. But, most of what Fang bought is Chairman Mo’s own CIH shares for $5.99 while regular shareholders are stuck selling shares on the open market for $3 (at the time) or now $1. This has naturally left a sour taste in investors’ mouths. Now, it’s possible that there is a somewhat less sinister way of looking at this. In that version, the Fang board led by the Chairman, saw the 5.99 purchase announcement as a (misguided) way to catalyze value appreciation at CIH and still viewed CIH as a good investment at the 5.99 level (and where they could continue to purchase shares through the rest of the year even if the CIH share price went higher). Obviously, this didn’t work out and perhaps the fact that Fang has yet to proceed with further purchases (beyond the 5 mm) is acknowledgement that this tactic didn’t work and that it is too unseemly to purchase the founders’ shares at what would now be >5x prevailing market values.
Valuation, and ‘what’s the catch’
When looking at the valuation of CIH, the company has a market cap of ~103 mm and 57 mm of cash for an enterprise value of ~$50 mm (cash on a per share basis is >60 cents). Against that valuation, the company – on a TTM basis – earned $36 mm of net income with even better cash flow. So, valuation is ~3x trailing earnings or 1.4x on an EV basis. While this would be an attractive cigar butt valuation, CIH is a healthy growing business. As mentioned, CIH will grow >20% top-line this year (and will probably do even better on the bottom line) despite covid impact. The company is audited by KPMG in China.
Onto the catch: CIH as part of its spin has guaranteed convertible debt for Fang. Language from CIH’s 20F is pasted below. CIH was asked about this topic on the recent conference call but didn’t offer any detail or assurances.
In connection with our separation from Fang, taking into consideration of the outstanding aggregate principal amount of US$250 million at that time, we issued a warrant to each of the holders of such convertible notes, which entitles them to purchase for nominal consideration up to 6,977,150 Class A ordinary shares in the aggregate. In the event that holders subsequently decide not to convert the convertible notes, and instead, demand payment of principal and accrued interest upon maturity of the convertible notes, the warrant will be canceled and the right to purchase our Class A ordinary shares will be forfeited. In addition, we have also provided a guarantee for the benefit of the holders, under which we will be liable to the payment obligations under the convertible notes in the event that Fang fails to discharge its primary payment obligations under the 2022 Notes or certain circumstances relating to our company, including, among others, change- in- control transactions or certain fundamental changes to our share capital. In October 2019 and December 2019, Fang repurchased from certain holders of the 2022 Notes in an aggregate principal amount of US$82.94 million for a total consideration of US$83.78 million. As of the date of this annual report, an aggregate principal amount of US$167.06 million of the 2022 Notes remain outstanding
Based on the last sentence above, Fang itself has paid down the note in October and December of 2019 (another governance note: repayment was directed to Chairman Mo's holdings of the convertible) and $167 mm remains outstanding. Therefore, this amount could potentially become a liability of CIH. If this is the case, then CIH – using the $36 mm of trailing earnings – becomes 4.6 turns more expensive (I added this to the EV / EBIT valuation in the boxes atop this idea though the I left the PE multiples unadjusted).
In terms of its own repayment capacity, Fang is marginally unprofitable for the TTM period and is a struggling business. However, as seen by the recent repayment, it has material assets including cash. From its 4Q ’19 balance sheet, Fang has total debt of $722 mm (including the convert) while it has cash, restricted cash, and short term investments of $519 mm plus another $341 mm of long-term investments. Therefore, Fang appears to have sufficient asset coverage to pay off its debts and therefore I think there is a chance CIH does not become responsible for the convertible at all. As for what management will tactically do, CIH is debt-free and cash flowing and so the fear is that Mo may wish to tap into this source of liquidity for convertible repayment rather than liquidate Fang assets or use Fang cash flow. However, as CIH is clearly the healthier business, it may make more sense to try to remove the taint of this liability from CIH entirely to at least allow the CIH valuation to flourish (as originally intended post-spin). As of now, Mo owns ~$27 mm worth of both Fang and CIH and while he may be more emotionally tied to Fang (which also still has the more substantial EV), CIH may actually be a better ticket to improving his wealth.
Summing up, in CIH we have a unique situation with what appears to be a excellent little business hampered by governance issues and a potential contingent liability. On a quantitative basis, valuation is either ridiculously attractive or quite attractive depending on the treatment of the convert. Management has shown desire to realize the value in CIH via its spin and I think - given intrinsic value that is potentially a large multiple of CIH's share price - the incentive is sufficient for the company to figure out a way to realize this value going forward in a way that benefits all shareholders. The risks mentioned upfront remain, but at these levels, I think the upside of multifold returns is fair compensation.
-some form of repayment / clarity regarding the convertible
-reduction in U.S. - China tensions affecting ADRs (though this seems unlikely as the clear trend is the opposite and to date most small ADRs have been toxic investments)
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