Why I Bought New Century Holdings HK

HK:0234
Price	HK$ 0.154
Market Cap	HK$ 888.58 M ($ 114 M USD)
P/E TTM	5.7 x
Div yield	5.8 %
P/BV	0.63
Price/Netnet	1.13
ROE	11.0 %

I am currently armchair travelling through Hong Kong. My first words are: WOW! It is bargains galore!

Hong Kong gets a bad rap from me because of its proximity to China. I would not invest in China because I have heard of too many cases of fraud. In addition China's economy depends too much on government-driven construction. I feel China has to be in a real estate bubble now.

I first looked at Hong Kong after hearing about the Third Avenue Funds' investments in Hong Kong real estate companies. Some Hong Kong real estate companies are incredibly cheap; for example, Wheelock is selling for half of book. However, I backed off after looking at the Third Avenue holdings. The companies often have too much real estate in China, and they almost always are family majority owned.

Recently, I looked closely at small caps and they are much better, in part because they are too small for the smart money. The small caps have even better balance sheets and are less exposed to the real estate market. My first find is New Century Holdings Hong Kong (HK:0234).

New Century's ticker goes back at least 18 years. That is the extent of the online information at HKNews. However, 13 years ago it was called Multi-Asia International Holdings. And it was a money-loser basket case. It tried to do a number of ventures, from film processing to manufacturing to real estate. But that doesn't matter now. What matters is the net operating losses (NOL) that it had in the books in 2001. I believe the potential tax savings from the NOL is the reason that the current management, the family of Mr. Huang Cheow Leng, took over the company as New Century Holdings. Initially, in 2001, the Huang family owned 52% of the company. Today the family owns 65%.

In the last 12 years the family has built quite a company. The family has turned the company into a hotel and cruise ship and gaming enterprise. The family owns not only New Century but a number of other businesses, one of which sold New Century two cruise ships. These two cruise ships were the primary business of the company early on. In 2013, the company operates four segments and their operating incomes were in millions HK$:

• cruise ship - 50.2
• hotel operations - (0.1)
• property investments - 53.3
• securities trading - 116.5.

The following table shows the company's growth. The equity growth has been more than 20% CAGR! And though the drawback to equity growth is dilution, the growth makes up for the dilution, as the table shows. The significant share growth came in 2003, 2004 and 2008. In 2003, it was a rights issue, so the company got equity capital. In 2004 it was related to a convertible loan from the Huang family for the cruise ships. And in 2008, it was for a further share issue to third parties. So the company has been busy raising and putting capital to work. Today, the company has plenty of excess capital. This is despite a generous 6% dividend.

	Basic Shares	Diluted Shares	Dividends HK$	Equity HK$	Huang Family Interest
2002	1896.8	1896.8	0	97	0.52
2003	3325.6	3325.6	0	175
2004	3326	3378	0	232
2005	3355.2	3864.4	25.4	397	0.56
2006	3841.1	4571.9	39.3	610
2007	4655.6	4881.8	48.2	741
2008	5595.6	5645	0	1095
2009	5765.2	5765.2	20.2	985
2010	5765.2	5765.2	34.6	1143
2011	5765.6	5765.6	52	1323
2012	5767	5767	52	1316
2013	5767	5767	52	1406	0.65

The company's only long term debt is a loan equal to about 10% of the equity to the Huang family. But this loan is interest free and has no due date. On the asset side of the balance sheet, about a third is in investment properties, a third is in securities on the Hong Kong stock exchange, and a little less than a third is in cash. So the balance sheet is highly liquid. And what isn't liquid is mostly properties in Hong Kong, Singapore and Indonesia. They do not own properties in China as far as I can see.

I feel like buying this stock is like buying a Hong Kong stockmarket ETF, with a decent debt-free moneymaking cruise ship and property investment business thrown in for free.

Overall, the New Century seems to be relatively transparent. The company regularly file notices regarding operations and ownership. And the company values its assets and its depreciation reasonably. So, the family ownership does not appear detrimental to the minority shareholders. Still, as a minority shareholder, I will be vigilant. Mr. Huang has three children and one niece as executives directors of the company. They are compensated from $100k to $250k USD. They all also have a generous options package, which currently is underwater.

As a final note, I must remind the reader that New Century is a little-known smallcap stock with very concentrated control in an emerging market. I have done my best to decipher their filings, but I am sure my data has some errors here and there. So, if anyone wants to invest in this company, he should do his own research! And he should also read the disclaimer on the right.

My Plans for the SEB and Sterihealth Offers

Seaboard Corp is offering to repurchase $100 M USD in common stock through a dutch auction. The offer gives shareholders the opportunity to tender their shares at a price between $2500 and $2950. The company will pick the lowest price that allows it to buy $100 M worth of shares. Anyone who tenders at or below the chosen price will be selling their shares at the chosen price. The stock was at  $2350 before the announcment. The news caused the stock to pop, and it is now at $2615

This means the market thinks the chosen price will be above $2615. No one will tender his shares below $2615 because when he can sell it today. On the other hand, buyers are hoping to buy below the chosen price, and then tender. Those buyers must expect a large enough premium for their risk exposure. Say it is $100. Then, the market expects the chosen price to be $2715.  Considering their mediocre results last few quarters, I will tender some shares at $2700, $2800 and $2900.

Sterihealth's largest shareholder Dan Daniels recently offered to take the company private at $1.75. The vote is on June. Today it is trading at $1.73. This means that the market believes the transaction will happen. If the transaction happens, the shareholders will get their payment on June 26. This means that today's buyers expect to make a $0.02 gain within a little over a month. I am selling my shares today at $1.73 and I will forgo the $0.02 because I believe I can return greater than that by investing the capital.

The above is my understanding of two transactions. It may have errors or omissions. Please read the disclaimer on the right.

Tachibana Eletech and Fujimak Results Fail to Satisfy Investors

TSE:8159
Price	¥ 1161.00
Market Cap	¥ 25078.12 M ($ 246 M USD)
P/E TTM	6.5 x
Div yield	2.0 %
P/BV	0.57
Price/Netnet	0.65
ROE	8.8 %

Tachibana Eletech (TSE:8159) and Fujimak (TSE:5965) both reported 2013 results and both stocks tanked by 10% in the last month.

Tachibana's revenue was ¥141.9 B versus ¥123.8 B the previous year. The company earned ¥3.8 B versus ¥2.8 B the previous year. In addition, the company increased its dividend to ¥23 from ¥20 a year ago. The stock dropped mostly because the company's 2014 revenue and income guidance was ¥146 B and ¥3.5 B, respectively. And the company intends to give a ¥22 dividend. The market may be disappointed by the guidance, but I don't think that justifies such a low stock price.

In view of the disappointing stock price, I find myself doubting my thesis on this company. Tachibana Eletech is a wholesaler of factory automation and related products. Such a business requires a large large balance sheet. So, now I think being a netnet in this line of business isn't as attractive as in some other lines of business. This is something I am learning to appreciate. Nonetheless, when I bought I had such a margin of safety that I am still sitting on a USD gain today.

TSE:5965
Price	¥ 719.00
Market Cap	¥ 4712.04 M ($ 46 M USD)
P/E TTM	4.1 x
Div yield	2.8 %
P/BV	0.40
ROE	9.6 %
LT Debt/Equity	0.33

Fujimak had a similar story. Their 2013 results were great. Revenue was ¥36,276 M versus ¥32,713 M the previous year. Income was ¥1146 M versus ¥1246 M the previous year. See numbers in the box; the company's numbers relative to market cap are tremendous.

However, the stock tanked because management expects a -44% income drop in their 2014 guidance! But then again I have noticed that these standard projections are always quite conservative. And both companies have expressed worry about the consumption tax increase that comes into effect in April. But as usual, I think the market is discounting the macro issues too much. I wouldn't be surprised if the worries of slowdown don't pan out and these two companies do better than expected in 2014.

ITIC Q1 Earnings Fall

ITIC
Price (May 7)	$ 66.00
Market Cap	$ 134 M
P/E TTM	10.9 x
Div yield	1.6 %
P/BV	1.04
ROE	9.6 %

Investors Title Insurance Company (ITIC) recently reported Q1 2014 results. Revenue was $28.5 M versus $26.8 M the previous year. The company earned $1.0 M versus $3.4 M the previous year. To me, the results were decent overall. The company's revenues fell by a million yoy in the previous quarter and this quarter made up for it. So revenue was flat the last six months versus a year ago. The quarterly decrease in income was solely due to an almost $3 M increase in reserves expense. These things happen, but it doesn't materially affect the soundness of the results. The paid-out claims are a tiny fraction of premiums. What matters is the revenue and SG&A. So I am encouraged that the company can still generate flat revenues with the low interest rates causing less refinancing activity.

Installux and KCLI Report Good Earnings

KCLI
Price	$ 42.00
Market Cap	$ 460.66 M
P/E TTM	15.4 x
Div yield	2.6 %
P/BV	0.62
ROE	4 %

Installux (STAL) recently reported preliminary year end results for 2013. Revenue was € 108.4 M versus € 113.2 M the previous year. The company earned € 8.1 M versus € 6.7 M the previous year. Revenue decreased 4.3% due to a struggling French economy. But remarkably, earnings were up 20.8% due to much improved margins. The company has not published the full annual report so I don't have the balance sheet numbers. But at this rate the company probably trades slightly above book and at 9 times earnings. The stock is up more than 50% since I bought it a year ago.

Kansas City Life Insurance (KCLI) reported Q1 2014 results. Revenue was $70.6 M versus $78.8 M the previous year quarter. The company earned $5.5 M versus $5.2 M the previous year quarter. The earnings increase was primarily due to realized gains. The company earned $0.50 per share.

Most interestingly, however, is that the company increased equity by $20 M due to unrealized gain and earnings. That is four times the reported earnings! I do wonder how they did this. I read in their 10K that every percentage rise in interest rates causes a $150M drop in equity and vice versa. Their equity is about $750M.

I mentioned KCLI because I just bought back some stock after closing my position a few months ago. I initially bought a year ago at $37, and then sold recently at $48 and now re-bought at $43. So, I have shown that a trader can buy low, sell high, and buy low again. And I can do this indefinitely with KCLI.

Ok, ok, I couldn't resist a tongue in cheek reference to short-term trading.