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.

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.

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.