Description

Summary: A conservative capital structure, trading at identifiable tangible equity value, houses a very profitable but declining online business, and a smaller but high potential trade show business. Founder alignment through significant equity ownership has returned significant excess cash to shareholders historically via tenders.

Why?

A) Margin of safety

Asset value:

Tangible BV of $6.75 per share, dominated by partial ownerships of 5 office buildings in Shenzhen, Shanghai, Hong Kong and Singapore.

$6.75 per share = in millions: (173.339 equity less 40.138 intangibles and other plus 94.9 property revaluation by Savills less 24.25 author’s estimated year-to-date 10% valuation decline on whole property portfolio)/30.183 shares.

The company also has a substantial $2.67 per share of net deferred income (i.e. interest-free customer money) on balance sheet, which is relatively conservatively used, and whose potential value is therefore ignored. Debt has not been used during the company’s 14 year public history.

The real estate portfolio exceeds current operational needs, producing rental returns that comprise about 10% of operating income. Since the other 90% of operating income would only be slightly reduced in the event of a sale of all properties, though not a scenario planned by management, it seems that the market is largely discounting either the company’s tangible assets or its earnings power.

Earnings power valuation:

EV/EBIT                                                                      7.0x

EV/trough EBIT (2009)                                               12.6x

B) Opportunity

The exhibitions business has grown from a standing start in 2003, parlaying a broad customer list and deep industry/regional knowledge, into something that could be sold now for at least half the stock price. One third of this has been acquired (established tradeshows like simmexpo.com), the rest was completely organic growth. This one segment could be worth the whole current stock price within a few years, depending on the pace of acquisitions using the cash generated by the online business or more efficient balance sheet management.

Why not?

1. Chinese business listed in US via reverse merger
2. Potential value destruction

Why not why not?

1. Earlier (2000) reverse merger than the fraudulent variety, with clearer economic rational (print dominated media company transitioning to online). Former PwC Asia Chairman joined the board in 2000 at listing, after PwC HK had been the company’s auditor while private; he continues to serve today as non-executive director and audit committee financial expert. Non-executive board members are internationally credible and longstanding despite limited compensation and significant reputational downside. Nasdaq one day halt in April 2012 caused by clerical error at the company during tense period for Chinese US-listings; cash balances subsequently externally verified. $200 million in cash returned to shareholders via three tenders since 2008, and though founder has participated (most recently at $10 per share), he maintains a 41% stake and one year ago purchased 3% of outstanding for his foundation at $7.45 per share.
2. Not in the company’s history, but clearly possible for its future.

Shareholders

Only one 13D shareholder other than the founder has ever filed in the 14 years since being public: Gabelli, one year ago, who continues to increase the number of shares owned despite June 2014 tender for 15% of shares outstanding.

Disclaimer: No action is being recommended. This is not investment advice and is not intended to be distributed in any jurisdiction where it would contravene local laws. The author or affiliated parties might buy or sell this or related securities without further notification. 

Catalyst

N/A.