Description

SiS International (529 HK) has been written up on VIC before in 2011 (see the post by JT1882). This write-up is of course dated but does a great job of summarizing the value of several key assets. The reason for the new piece is to that the key value unlocking catalyst may now be at hand.

SiS International is a Hong-Kong listed, small-cap holding company which while extremely cheap (price to tangible book of 0.42x, price to our estimate of NAV of 0.39x), generally would scream value trap. However, the controlling shareholder behind SiS, the Lim family, has a clear plan for the business and have demonstrated multiple times they actually follow that plan. In addition to that, the key driving force behind the company, Mr. KH Lim, is a highly-regarded businessman who previously built up an IT distribution company from scratch and sold it to Jardine Matheson in late 2010 for $130M USD. He is well known in the distribution industry and we have done reference checks among Ingram Micro and TechData executives who know him and speak highly of his abilities, ethics, and business practices. In 2014 an Asian private equity fund set up by John Scully (former CEO of Apple) set up a joint venture with Mr. Lim where he would earn part of the economics of the fund for his expertise, see for example: (http://www.prnewswire.com/news-releases/sis-forms-joint-venture-with-john-sculley-ex-ceo-of-apple--pepsi-cola-co-backed-inflexionpoint-asia-255626841.html.

Tellingly, although the partnership never ended up materializing in terms of completed transactions, Mr. Lim kept his portion of the GP interest not personally but via SiS. In another example of his abilities, Mr. Lim used much of the proceeds from his IT distribution sale to invest in Japan properties in near the nadir of the market in 2012, well before Abe came and the property market took off. Even better, he invested in tourism assets in Japan (hotel sites) which are booming currently (see for example: http://www.wsj.com/articles/tourists-flood-japan-as-nation-struggles-to-receive-them-1453182278).

In another example of his approach, he seeks to mark his balance sheet as conservatively as possible. He has told us for the investment property line in the balance sheet (which makes up the vast majority of the NAV), he takes three different appraisals and picks the lowest. We have tested this as we engaged Jones Lang Lasalle to do a high level review of SiS’s Hong Kong assets (the investment properties are almost all in Hong Kong or in Japan) and they valued the assets at ~ 50% higher than the balance sheet value.

The importance of focusing on management is obvious among Hong Kong small-caps, especially holding companies and property companies. These companies can trade at large discounts due to poor governance, poor capital allocation, and a lack of any catalyst. We think SiS not only avoids the governance and capital allocation problems that plague the sector but actually has better governance and better capital allocation than many Western firms.

The key issue then remaining is the catalyst. Mr. Lim has a plan where for each of the holding company’s main business lines (distribution, investments, and property) he seeks to incubate the asset in the holding company and then spin it off into its own public company. He did this with the company’s mobile IT distribution asset in 2014, and he did it last year with another investment in South Asia. He is now considering spinning of all the property assets into a REIT. This would be tremendously value creative as the holdco shareholders will receive shares in the REIT directly. In previous examples and in this case, our guess is he wouldn’t spin it off completely but keep a controlling stake in the firm vs. the hold-co and then spin-off the remainder to SiS holdco shareholders. In terms of timing, there is no firm timeline he has given but he has noted that his timeline for monetizing value is 4-6 years and that the property division began in earnest in 2012.

In terms of asset value, the key drivers are valuations of the properties, which on the books are valued at a cap rate of 4.8% to 6.4% for the Japan properties and for the HK properties are valued based on market comps. We checked the cap rate range with a Japan property consultancy familiar with SiS’s assets and verified SiS is being conservative (we were told 4-5% would be the appropriate range) and as mentioned for the HK ones we engaged JLL to do a high level review and they suggested ~ 50% upside to the book value. The only other key differences between our NAV and the company book's value are a) SiS’s stakes in three publicly-traded companies which we value at the market price and b) the value of a potential shell company SiS has which in HK currently go for very high valuations. However, all this doesn’t really matter as the bulk of the value is in the properties.

Finally, we note that unlike most companies in the sector, management is happy to speak with investors and is quite transparent. We can probably put people in touch if helpful. 

Catalyst

Spin-off of REIT