Stone Tan Acquisition Corp STTA
September 24, 2009 - 6:49pm EST by
2009 2010
Price: 7.94 EPS N/A N/A
Shares Out. (in M): 41 P/E N/A N/A
Market Cap (in $M): 326 P/FCF N/A N/A
Net Debt (in $M): -265 EBIT 0 0
TEV (in $M): 61 TEV/EBIT N/A N/A

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Stone Tan Acquisition Corp (STTA) is a compelling US-listed Chinese financial services growth opportunity with only 26% downside to cash/book value.

STTA is a $265 million special purpose acquisition company (SPAC) that was formed by paper magnate Roger Stone and Richard Tan, a well-connected Chinese businessman who also has extensive experience in the paper industry.  STTA evaluated numerous potential acquisitions in China but did not find a deal suitable to the owners.  Instead, the company was able to secure licenses to operate 3 different financial services businesses in Chongqing City, China's transportation hub linking East and West - similar to Chicago's role in the U.S.  STTA will own stakes in a credit guarantee business (85%), a leasing company (95%) and a small business loan operation (100%).  The minority interest will be owned by the Chongqing government.

Based on information provided in the company's roadshow presentation ( and discussions with management, the pre-tax returns on equity on a fully-deployed basis for all of the businesses will comfortably exceed 25%.  Our modeling of the returns and discussions with similar China-based businesses indicate pre-tax returns of 20% to 40% (Information is provided on pages 17, 23, 24, 30, 31, 33 and 34 of the presentation that allows you to construct a basic model).  The company will not give a firm indication on when the $205 million investment in these three businesses will be fully-deployed, but our conversations with management lead us to believe it will be by the beginning of year 3 of operations.  Book value at closing will be approximately $5.85.  Assuming (i) no growth in book value in years 1 and 2 and (ii) STTA takes in warrants proceeds of $270 million and deploys that as well at the beginning of year 3, year 3 EPS for STTA at 30% pre-tax return on equity will be $1.86.  A business with this return profile and a large runway for growth (the credit guarantee and leasing businesses have national licenses) should trade at no less than 15x forward earnings or $27.90 per share.  Discounting that back two years to today at 15%, you get $21.00 per share.  (If you want to be more conservative, assume fully-deployed EPS in year 5 and discount the $27.90 back 4 years and you get $15.95.)

The stock currently trades at $7.94 because the deal has not closed.  The company is holding the vote in the next two weeks.  Most of the shareholders are so-called "SPAC trust buyers" who purchased the stock at a discount to the liquidation value of $7.98 using leverage and are in it to capture a yield.  These shareholders have no interest in evaluating the merits of the three financial services businesses, they just want their cash back - allowing fundamental buyers to purchase a compelling China growth story from effectively non-economic sellers.  Once these sellers are cleared out and the deal closes on October 15th, the opportunity to purchase this investment at 4.3x fully-deployed EPS and 1.35x current book value will likely no longer be available.  (If for some reason the deal does not close, you will get $7.98 per share back - so no deal risk downside.)

In summary, purchasing STTA at $7.94 per share affords you the opportunity to make 3.5x your money in 2 years with limited risk - with $5.85 per share in book value and a profitable business, your downside should be capped at 26%.  

Investment Positives

  • High return business model
  • Large opportunity to deploy earnings and future capital at high returns
  • Excellent management team
  • High growth economy and industry
  • Strong demand for products/services offered
  • Competition controlled by government who is minority owner (aligned with STTA)

Investment Risks

  • Limited history and small size of businesses that STTA will be extending credit to
  • Government dictates business rules in China - always subject to change
  • No historical financials - this is a start-up


Roger Stone has a stellar track record of investment both in the paper industry and in general.  He is 74 years old and stated that in his lifetime of investing this is the best deal he has seen.  Clearly he has an economic interest in saying that but this isn't a guy trying to sell you stock in his first venture.  Roger Stone and Richard Tan are currently buying $10M of STTA in the open-market. 

Morgan Joseph is running the roadshow and can be reached at 212 218 3725.


Approval of SPAC transaction, gradual deployment of capital

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