North Asia Strategic 8080 HK
September 19, 2011 - 5:24am EST by
aubrey
2011 2012
Price: 0.04 EPS $0.00 $0.00
Shares Out. (in M): 13,576 P/E 0.0x 0.0x
Market Cap (in $M): 64 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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Description

The investment case
North Asia Strategic ('NAS') is a private equity vehicle which looks to me as if it is going to liquidate. It consists of a net cash pile of HK$ and US$ worth HK$716m (market cap is HK$500m). It also holds three unquoted businesses which last year (in aggregate) generated HK$30m in EBIT before central costs of around HK$25m (most of which is a management fee). The businesses are a distributor selling Japanese electronics into China, a Chinese fishmeal/fish products business and a loss making Burger King franchise in HK and Macau.
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My preferred valuation basis  is to value only the current assets of the business and on this basis the share is worth 6.8c, or it is trading at 54% of a probable liquidation value. Alternatively, a sum of the parts putting the two profitable businesses on a PE of 10x, liquidating the loss making operation at twice the operating loss and a pretty hefty liquidation charge for the company as a whole values is at 8.5c, or more than twice the current market cap. This would be the upside case.
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The catalyst (somewhat speculative) is that almost all of the previous private equity management has been removed from the board by the largest shareholders (Goldman Sachs Asian Special Sits and a couple of European institutions) in the last year or so and it looks, to me, as if they are waiting for a punitive managment payoff to run out in April 2012 before liquidating the business. This would be the ideal situation though clearly there is a risk they want to keep investing in China or do something else with the vehicle.
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Risks
There are a number of risks.
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1. Taxation: the tax position on any proceeds from selling the profitable businesses is unclear though it is difficult to see how this could be very bad news given that the more they are sold for the more net proceeds we get. It shouldn't affect the downside protection as the cash of HK$700m or so should be able to be returned without tax issues as happened last year with a special dividend (after the sale of a business).
2. Getting cash out of China on any sale of business may well be difficult for the distributor (which seems to be based in Hong Kong) and probably very difficult for the minority 40% stake they hold in the mainland china fish business. Again it doesn't really hurt the downside case but there must be a risk if they go into liquidation mode that they can't get full value for these businesses.
3. This is an emerging market. Hong Kong minority protectioins are pretty good and we are dealing with three mainstream European institutions who should play by the rules but we aren't going to be able to sue them for full full value like we might in NYC.

Catalyst

See above
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    Description

    The investment case
    North Asia Strategic ('NAS') is a private equity vehicle which looks to me as if it is going to liquidate. It consists of a net cash pile of HK$ and US$ worth HK$716m (market cap is HK$500m). It also holds three unquoted businesses which last year (in aggregate) generated HK$30m in EBIT before central costs of around HK$25m (most of which is a management fee). The businesses are a distributor selling Japanese electronics into China, a Chinese fishmeal/fish products business and a loss making Burger King franchise in HK and Macau.
    -
    My preferred valuation basis  is to value only the current assets of the business and on this basis the share is worth 6.8c, or it is trading at 54% of a probable liquidation value. Alternatively, a sum of the parts putting the two profitable businesses on a PE of 10x, liquidating the loss making operation at twice the operating loss and a pretty hefty liquidation charge for the company as a whole values is at 8.5c, or more than twice the current market cap. This would be the upside case.
    -
    The catalyst (somewhat speculative) is that almost all of the previous private equity management has been removed from the board by the largest shareholders (Goldman Sachs Asian Special Sits and a couple of European institutions) in the last year or so and it looks, to me, as if they are waiting for a punitive managment payoff to run out in April 2012 before liquidating the business. This would be the ideal situation though clearly there is a risk they want to keep investing in China or do something else with the vehicle.
    -
    Risks
    There are a number of risks.
    -
    1. Taxation: the tax position on any proceeds from selling the profitable businesses is unclear though it is difficult to see how this could be very bad news given that the more they are sold for the more net proceeds we get. It shouldn't affect the downside protection as the cash of HK$700m or so should be able to be returned without tax issues as happened last year with a special dividend (after the sale of a business).
    2. Getting cash out of China on any sale of business may well be difficult for the distributor (which seems to be based in Hong Kong) and probably very difficult for the minority 40% stake they hold in the mainland china fish business. Again it doesn't really hurt the downside case but there must be a risk if they go into liquidation mode that they can't get full value for these businesses.
    3. This is an emerging market. Hong Kong minority protectioins are pretty good and we are dealing with three mainstream European institutions who should play by the rules but we aren't going to be able to sue them for full full value like we might in NYC.

    Catalyst

    See above
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