Unveiling the shrouds of secrecy

Li XiaoChao reported that China March CPI figure was 8.3% in March compared to 8.7% in Feburary which was a relief to everyone following successive astronomical rise in inflation that broke decade high.

GDP also slowed to 10.6% in the first quarter compared to 11.7% in the same period last year.Wow!Seems like Premier Wen economic cooling measures are working like a charm. Soon after, analysts started commenting that China is very much a sturdy ship on its own with internal consumption taking up the slack of reduced exports. Decoupling has arise with the financial turmoil plaguing the Anglo Saxons pretty much contained and will not derail China growth to superpower status.

However, various sources have confirmed that actual March CPI figures was in excess of 10% and GDP figures was between 7-8%. Chinese spin doctors have once again hoodwinked the global financial community, throwing statisticians and economists into disarray. Meanwhile, there are great divides in the upper echelons towards implementation of economic measures in steering the precarious economy onto safer grounds. The customized GDP figure is a loud message to the provincial governors to stop their mindless pursuit of investment inflows as the economy is overheating and not in any dire need of capital inflow. In fact, the actual figures painted a picture closer to reality where numerous SME across industries have shut down in recent months; the widespread carnage will eventually trickle down to all pockets of the economy and affect everyone down the food chain.

While listed companies may be registering high growth and profits, however their receivables may even be rising at a faster rate. The confluence of high interest rates, RMB appreciation, high oil and raw material costs, abolition of VAT rebate, new labour Act and desperate government cooling measures will soon bring an economy to its knees. Be mindful that I am not a doomsayer but the truth of the Chinese economy is far from what ivory tower analysts portrayed it to be. Sure there are emerging bargains that are ripe for cherry picking but the risk reward ratio is not as favorable as compared to other emerging markets.

I am filled with bafflement when the NDRC reported that property prices will likely trend higher in the coming months due to an influx of foreign funds in the coming months. Are the bankers behind those funds living in their own ivory towers?

From my understanding, several US funds are actively sourcing for Chinese property projects but the risks far outweigh the rewards(Currency appreciation and low USD borrowing rates) in the short/med. term and my interactions with numerous funds confirmed my belief that they are only on the lookout for short term business opportunities that limit their risk exposure amid the volatile and highly uncertain global outlook. The medium term property outlook isn’t all that rosey either as there is a flood of Grade A commercial and retail spaces coming upstream soon. Just look at the upcoming IFC, Mori building and the number of composite projects ongoing in the bund…In fact Shenzhen/Beijing is a solid testament to the implosion of unbridled optimism.

Residential sector is not a bed of roses either as investment in completed residential apartments is controlled and subjected to various punitive fees imposed by the government. Furthermore, the upstream property developers are also starting to feel the pinch amid the government crackdown where credit lines have virtually come to a halt. The only bright spot is a dearth of quality high end apartments in the market catering to expatriates which might warrant further price appreciation in the short/med term.

Perhaps the land bureau and decision makers can be given a lesson in economics 101. Lesson 1: prices are determined through the interaction of the demand and supply and the curtailment of property supply will only inevitably drive prices up. So what is the government agenda behind the skew of property cooling measures? Cooling or feeding the exuberance?

Lastly, the recent appointment of the national people congress brings an impressive lineup of pragmatic and knowledgeable ministers that is going to herald china into a new economy. However decision making is still concentrated in the hands of a mighty few and blogged down by fractional alignment, hopefully factional disagreements will tone down and that each individual will work for the good of the nation rather for himself.

Cash is King!!!

Company Description

Lion Asiapac Limited(SP LAP), through its subsidiaries, operates in the electronics business in China. The company, through its subsidiary, Advent Electronics Pte., Ltd., engages in the distribution of semiconductors and related components, turnkey project management, and the sale of network and telecom products. Lion Asiapac also involves in limestone processing, as well as produces and supplies quicklime, a raw material for steel making principally to the steel mills and the construction industry in Malaysia. In addition, it trades automotive components.


Proposed Disposal of Anhui Jianghuai Automobile

LAP’s EGM to dispose off its 6.16% stake(79million shares) in Anhui Jianghuai Automobile (ch 600418, AJA) at a price not less than RMB7.50 has been approved on 18th February, in a deal potentially unlocking $118 million in cold hard cash, or $0.294 per share.

An analysis of AJA’s liquidity revealed that it was trading at above RMB 8 for the past 3-4 weeks with average daily trading volume of 8million shares and an abnormal spike of 39million shares was observed on 28th March. Henceforth, we can reasonably conclude that the proposed divestment has been smoothly completed at $118million or RMB7.50/share for prudent analysis(LAP proposed to divest AJA at not less than RMB7.50/share).


Proposed Disposal of Hefei Jianghuai Automotive

LAP board of directors has also earlier approved the disposal of Hefei Jianghuai Automotive(HJA) for $14.4million of which $6million has already been paid. The transaction is expected to be finalised in the next few months as PRC regulatory approval has already been secured from the purchaser.


Huge Margin of Safety

Cash and cash equivalents 53.4 mil
Disposal of AJA 119mil
Disposal of HJA 8.4mil

Total Cash 180.8mil
Total liabilities 47mil
Total cash net of liabilities 133.9mil
Total outstanding shares 406,155,224
Net Cash per share 0.33

By FY2008, total cash per share will hit $0.45 and cash net of total liabilities will be $0.33. Based on current share price of $0.27, LAP is trading at a sinful 18% discount to net cash and 47% discount to NAV of $0.51.

It is laudable that such an anomaly exists on SGX because in fact I am exchanging my dollar for $1.22 in cash and $0.67 worth of assets. It is a screaming buy for investors at current valuation due to the extremely attractive risk reward ratio and the perfect place to anchor your funds during current market volatility. Moreover, LAP’s market cap at a mere 108 million with an astounding cash hoard of 180 million come mid 08 will be an inviting target for raiders like Carl Icahn.


Life After Divestment

After divestment of its crown jewel, LAP will basically transform into a net cash co. engaging in a range of diversified business activities from limestone processing, scrap metal collection and electronic distribution. Life after the divestment is nothing exciting and mediocre at best. In fact, scrap metal collection and limestone processing are secondary business activities serving Tan Sri William Cheng’ myriad of steel mills spread across the Malay Peninsula. The only bright spark will be achieving upstream integration through procurement of a limestone quarry that will help secure margin expansion in the current commodity boom.


Conclusion

Mr cheng owns 67% of LAP shareholding, diminishing the possibility of a hostile takeover by corporate vultures. The new LAP, blessed with minimal borrowings and a windfall gain will likely distribute part of its gains, just like the divestment of Zhejiang Motors in 2007.

Meanwhile, patriarch Tan Sri William Cheng busy with his restructuring of Lion Corp and sister companies will probably put LAP on the backburner. Given his style, it is unlikely a privatization will be in the pipeline as LAP will continue to be a feeder company supporting his primary steel mills. I reckoned the acquisition of a limestone quarry with the excess funds to be highly probable.

An entry into LAP at $0.27 is extremely attractive with the existence of a huge margin of safety cushioned by its cash net of total liabilities of $0.33 and NAV of $0.51. LAP’s target price of $0.33 can be effortlessly achieved once the divestment is completed, representing a potential return of at least 18% within a year.