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.