Description

Thesis

SiS International is an HK-listed, Singapore-based holding company that owns a collection of assets in real estate, IT distribution, and payments across Asia. With a NAV of HK$13.25 and a share price just over HK$3.50, the company is selling for just over 25% of NAV – despite being led by an honest management team that has compounded its share price at 23% per annum since the 2003 market trough in HK – more than double the return of the Hang Seng index. While the discount to NAV has persisted for some time – and to some degree will continue to do so – the current discount is egregious and the company’s upcoming spinoff of its Japanese real estate assets, representing a large part of the company’s valuation, could be a catalyst for investors to properly value the company.

History and management

Mr. Lim Kia Hong founded SiS International in 1983, following his return to Singapore from Seattle, where he studied business administration at the University of Washington. Along with his family, he delved into IT distribution, helping set up channels, branding, and distribution for emerging US technology companies that didn’t have a presence in Asia. SiS became one of the first distributors of emerging technologies, from the Dyson floppy disk in 1983, to Symantec and WordPerfect software in 1987, to smartphones in 2002. In 2011, Jardine Matheson acquired the company’s IT distribution business in HK, Singapore, and Malaysia. The two companies had been competing for decades and SiS had been the leader during the majority of the time.

With the proceeds of the sale to Jardine Matheson, the company expanded into Japanese real estate starting in 2012, in particular hotel properties. This was a well-timed move, as the company began buying properties when the JPY/USD was below 80 (now 110) and Japan’s tourism sector has since flourished.

In 2000, SiS invested in Thailand’s second largest IT distributor (SiS Thailand, SIS TB). The company went public in 2004, and SiS increased its stake to nearly 64% in 2017.

In 2011, SiS acquired a stake in Information Technology Consultants Limited (ITCL, ITC BD), one of the leading providers of ATMs in Bangladesh and a provider of payment gateway services.

In 2015, SiS performed a spinoff of its HK mobile distribution on to the HK stock exchange (SiS Mobile, 1362 HK).

In 2018, SiS announced that it would spinoff its Japanese real estate assets into a separately-listed company (SiS Hospitality, further discussed below).

Mr. Lim’s vision has been to incubate a certain business line for a number of years and then realize that value either via a spinoff or outright sale. The upcoming spinoff of the Japanese real estate assets is the next step in that vision. For more background, please see the good summaries written by jt1882 and briarwood.

Background

SiS’s primary business lines are IT distribution and real estate. A quick primer on IT distribution:

Distributors serve several important functions for vendors, particularly in emerging markets where vendors have little experience. First and foremost, distributors provide market access. When a company such as Apple wants to enter a market, it has little knowledge of the operating environment and instead must rely on a distributor. The distributor provides information about the competitive environment, creates relationships between Apple and its eventual customers, and provides Apple with real-time sales and inventory data. Second, distributors provide vendors with logistics, from breaking bulk (separating large deliveries into smaller parcels for specific customers), to the actual delivery of the products and reverse logistics (taking back returned products) when required – complicated functions that are better outsourced to a distributor. Third, distributors manage the significant credit risk of thousands of customers. Apple has neither the background nor the time to study the balance sheets of thousands of different customers in an esoteric market with whom it has never had a relationship. Distributors perform credit analysis on the customers and their respective currency hedging operations given the significant currency fluctuations in emerging markets. If a customer has committed to paying for a shipment in US dollars 60 days later, both the distributor and supplier (Apple) need to be sure that it will happen irrespective of any depreciation of the local currency.

Ultimately, IT distributors reduce costs for vendors and allow vendors to turn fixed costs into variable costs and minimize investment in working capital. The costs of warehousing, order processing, inventory logistics, product support (pre- and post-sales), account management, warranty claims, and so on are all reduced when outsourced to a distributor. Instead of holding large amounts of inventory in a warehouse, the supplier can outsource that function to a distributor. In addition, given their established relationships, knowledge of credit histories, and deep knowledge of the market and associated trends, distributors can avoid or minimize the bad debts and inventory write-downs that a direct vendor would otherwise face.

On the other side of the equation, distributors offer many advantages to buyers of IT products. They offer a significant proportion of products on demand, reducing the amount of inventory customers need to carry themselves. Distributors also provide better credit terms than the vendor, which reduces the working capital required for the business. Third, distributors provide delivery logistics and superior supply chain solutions. When a system integrator requires disparate products from different vendors, the IT distributor can provide all the products at once as opposed to a multitude of different shipments.

SiS owns 64% of Thailand’s second largest IT distributor (with a #1 position in certain verticals) and also owns 52% of SiS Mobile, a mobile phone distributor based in HK. The company used to be profitable but is now a mere shadow of its former self given the intense competition and is break-even.

A brief background on the company’s real estate assets:

SiS owns valuable real estate in HK and Singapore, including the 8^th floor at 9 Queen’s Road Central and the 23^rd and 33^rd Floors at the United Centre on 95 Queensway. More recently, SiS has focused on Japanese real estate, in particular hospitality assets. For more information on these assets, please see the final pages of the company’s annual report (http://www.sis.com.hk/2019/e529_AnnualReport20190429.pdf) as well as the application proof filed with the HK regulator (https://www1.hkexnews.hk/app/sehk/2019/2019050601/documents/sehk201905070017.pdf).

The final business worth mentioning is the company’s business in Bangladesh:

SiS owns 38% of ITCL, which is the largest ATM installer in Bangladesh and also owns Q-Cash, the largest payment gateway in Bangladesh. The company generates revenues installing the ATMs, maintaining them, then profiting from the transactions occurring on the ATM and the POS network across the country.

Valuation

SiS International currently has a market cap of HK$1bn.

If you add up its 52.3% share of SiS Mobile, 63.5% share of SiS Thailand, and 37.6% share of ITCL (all publicly-traded and at undemanding valuations), their combined value is HK$857 million. Deconsolidating these companies from SiS International’s financials yields approximately HK$200 million of net cash at the holding company at year-end 2018 and therefore a total value of HK$1.1 billion. This alone exceeds the market value of the company. For reference, SiS Thailand alone is generating HK$165 million of annual EBIT, or HK$105 million attributable to SiS International.

Based on the company’s current valuation, investors in SiS International receive its Hong Kong, Singapore, and Japanese real estate for free. At year-end 2018, the HK/Singapore real estate had a NAV of ~HK$2.1bn (valued by Cushman & Wakefield, CBRE, and Knight Frank based on unit sale comps), and the Japanese business had a NAV of HK$750 million (4.3%-5.9% cap rates). The company’s real estate segment is generating a run-rate EBIT of HK$120 million.

So, the current market cap of HK$1bn compares to a HK$3.7bn NAV. Even if we assumed that all three publicly-traded vehicles were worth 0, for the $1bn valuation to be accurate, the real estate would have to be worth around HK$1bn and therefore would imply high-teen cap rates in supply-constrained geographies in a world of zero interest rates.

Catalyst

In December 2018, management announced the spinoff of the Japanese hospitality assets. Such a transaction would isolate Japan from the rest of the business, raise new primary capital, give the business access to improved financing, and would possibly enhance the valuation of the entire entity.

SiS expected to raise HK$554m from the issue of new shares in the listing of SiS Hospitality and expected the valuation of the company to be HK$2.4bn, which would equate to 2x book value (I assume 1x book value for the valuation above).

The spinoff, named SiS Hospitality, was meant to go public in HK this year, but the recent events have caused a delay. Management is waiting for the right time to spin off these assets and is alternatively considering listing the company in Japan. Whereas the company is more comfortable being listed in Hong Kong given its history on the exchange there, the Japanese market is more likely to yield a higher valuation.

Risks

The greatest fundamental risk to SiS is bad capital allocation. Fortunately, Mr. Lim has never bet the farm on any single asset and manages quite a diversified portfolio.

Catalyst

Spinoff and separate listing of SiS Hospitality