Tianneng Power (819 HK) – Sell full holding (2.3% weight)
As you probably have understood if you read my previous post, the short thesis released was for Tianneng Power (819 HK). I did my best trying to take the material they had written seriously, but like I already implied in my previous post it did not feel like a quality report. The market has so far neither taken the report to heart and the stock is up significantly since the short report was released. I have followed this company since I started this blog, on the back of my EV theme and owning small cap competitor Coslight Technology. Before I invested I scratched my head a lot about the extremely low valuation, I too asked myself could it be a fraud of some sorts? One has to be skeptical why the market puts such a low multiple on the company. But from all research I was able to do, I did not believe it was a fraud. That said its clear its not a company which is run with shareholders best interest at heart (Chinese companies seldom are) at all times. The cash hoarding for example has been extreme. My conclusion for the low valuation at the time is the shift to Lithium Ion batteries, where Tianneng is not competitive. The short report brings this up and I think its a very valid point. My opportunistic investment case though is that the market has misunderstood the timing of how quickly Lithium Ion batteries will be price competitive and challenge Tianneng’s lead battery sales. That was basically my whole investment case – it will still take some years before that happens.
It is a fact that the company is a market leader in lead acid batteries where the big market driver has been for cheap electric scooters sold mostly in China and rest of South East Asia. I initiated a position in the stock at the beginning of the year, as an opportunistic trade, on extremely low valuation which would re-rate thanks to a IPO spin-off. I think this short report brought up some doubts I already had. The stock has now has re-rated (although it’s still not an expensive stock by a mile) and I’m willing to let it go. Reviewing how the holding fared unfortunately looks so so, thanks to poor timing in reducing my holding. The Corona market crash got me to sell at the same day the market bottomed – 23rd of March. I reduced this holding to add more into other holdings. Some of the holdings I added has done OK, but none of them has generated such a performance as if I would have held on to this holding. I bought 9000 shares for 5.93 HKD and sold off 6000 shares at 4.45 at market bottom and now I sell my remaining 3000 shares for 10.46 HKD + a dividend of 0.39 HKD per share. It nets me a 10% return on my initial investment but almost a 100% return on my remaining 3000 shares.
Read my post about Tianneng here: Tianneng Power posts
BBI Life Science – Buyout finalized – 5.4% return in 4 months
I was so exited about this company which I had researched and was ready to pull the trigger on, then the founding family released a LBO offer. I believe with Corona happening this could have been a multi-bagger if it was not bought out. Instead I bought into this just when the buy-out offer was announced and I netted a small 5.4% return, my first actual buy-out risk arb trade since the blog started. The stock market has since I put on the trade in January been on a proper rollercoaster ride, but MSCI World is actually down -7% in this time period, whereas this trade as stated netted 5.4%, so I’m very happy. This then also releases some significant amounts of cash for me – 6.1% to be more exact. Together with the Tianneng sales and some dividends that have dropped in over the past months I have in total almost 8% cash to deploy. And 4% of that is going to PAX Global.
PAX Global – New holding with 4% weight
This company is one of the world leaders is selling the equipment we come across every day when we pay something with our credit card. Back in the days I used to swipe my card, later I put my chip into a reader and now I tap my card on top of the machine. All these machines are produced by a few companies, where PAX is one of the large players.
This company first appeared to me, through a Hong Kong market screen I did a few years back. After doing quite a lot of research I was very close to pulling the trigger and investing in the company. In the end I found some issues with management, where an analyst was thrown out from the AGM for asking “uncomfortable” questions. Also the majority shareholder in PAX is another listed entity which seems to be even less well run than PAX. So even though fundamentals looked good, it felt like management had zero interest in unlocking the value of the company to shareholders, so I passed on it. With the help of some twitter friends I have from their information understood that maybe I shouldn’t have made this into a deal breaker. Anyhow, a few years has passed, the stock price has actually done nothing since then and is actually down a bit. Meanwhile the company has continued to deliver good solid results and Mr Market has not as often is the case on the Hong Kong exchange not rewarded the company at all. What also has changed is that management has to a degree changed it’s attitude towards the market. The hired an IR and are now holding investor calls – a good start! On top of that they raised dividends significantly (although the company is still hoarding cash). But what really got me to pull the trigger and invest was this fantastically well written investment thesis on PAX by Gabriel Castro and Neeraj Mohandas (who can be found on twitter). I have been allowed to link to their investment thesis and I again thank theme here for sharing such a deep analysis for free with all of us. I highly recommend you to read it: PAX Global Investment thesis
So with my own research, following this company for a few years and the excellent analysis linked above I feel confident to initiate a position with a 4% weight as of today. The holding goes into the opportunistic bucket to begin with, it will still take me some time to see that the management are continuing on the track of doing the right things before I move this over to something I want to own long term. Currently I think the company is in an industry with a strong tailwind (card payments) and the valuation is like in Tianneng’s case (before its revaluation) ridiculously low. So risk/reward is very skewed upwards and well worth taking a position here.
10 thoughts to “New holding PAX Global, Selling Tianneng, BBI Buyout finalized”
I was gung ho on PAX, but a few things made me close my position. Those were:
1. Convoluted structure with a large number of subsidiaries and cross holdings.
2. Turning the sale of a business into a recurring revenue stream, Pax listed with related party purchase/commercial agreements for card readers and magnetic strips (there is only the mention of total contract value). Does not make any other logical reasoning about price/product fit/technological capability. The lack of disclosure on such large sums of cash alone makes me think that minority shareholders are not important and cash removed from the business
3. Non current assets have grown 8034% in 6 years. Taking into consideration the accounting changes to financial leases and rights of use assets, the figure is still almost 6000% whilst sales growth was 280% in those 6 years and PBIT about the same. Proportion of expenses capitalised vs PBIT is 36% and growing.
4. Based on DDM at a growth rate of 5% and a discount rate of 10% (holding structure should make this even higher) still you get a fair value of $3.4. And this is a bull case.
This adds to the list of other doubts others have raised. A bit too many red flags for a VC cultured business. (referring to Hi-Sun, who have clearly proven that they dont intend to share earnings with minority shareholders).
Always good to get other views on holdings to challenge your conviction. Wanted to respond to the points:
1. I dont agree here, they have a subsidiary in some countries where they sell machines with very tiny capital injected. Rather its a quite clean structure. What are the cross holdings you refer to, I cant find anything on that?
2. The company has done a number of investments and tried out different things in the Mainland market which didnt work out. Now most of those activities are almost gone, why is this an issue for you for what the company is today? Do you mean you can track something in the past where cash was transferred out of PAX on wrong terms? Please explain further what you found then, this point Im very interested to hear if I missed out on something.
3. This I can’t see how you could possible make this into a warning flag of anything? What is your point except using a large percentage value as somehow being worrisome. The percentage figure is so high because your starting point had almost zero Non-current Assets. Basically PAX did not have its own factories to produce its machines 6 years ago, so PPE was close to zero and thus Non-current Assets was zero. PPE has now grown to a still tiny value of 420m HKD, add some long term investment, tiny amount of Goodwill and some deferred taxes and we get your huge percentage value. A bit disappointed with this comment how could it have any bearing for you to sell PAX?
4. Why would you use a Dividend model on current dividend rates to value the company, you have to look at the cash flow and profits a company generates. Did you value Amazon when they didnt pay a dividend?
I can agree that Hi-Sun is a more tricky investment..
Thanks for that detailed reply.
1. Just dont like it. I hold more complex ‘global’ businesses with cleaner structures and more disclosure in the AR report.
2. What’s your take on this? From a business strategy point of view alone it is limiting. They should have more disclosure on this.
3. Fair enough. Though having inventory write downs and impairments are just a proxy for bad management. Maybe not a game changer to many but I have a choice at other companies that don’t have such occurrences.
4. Perhaps amateur of me. Would it be fair to look at the last 5 years then? In that case non current grew more than 10 times while revenue (not even earnings) didn’t even double. Am I missing something? Lately a lot of capitalization, a lot of PPE (that too work in progress). Not much information about what factory where? Sure they started low, but they were a spin off? I wouldn’t imagine it to be that low (to what it is today)
4. This is what I get in hand. This is what I will value, especially if I have to go long
Cheers. Just a beginner so apologies if my comments discards your very well written analysis.
With worldwide COVID, won’t there by problems with AR from distributors esp in places like Brazil?
Short term there could be problems for sure, at the same time covid is a strong push for contactless payment. Cash is pretty dirty..
Pax Global smells fishy. Why don’t they pay a higher dividend with this much cash? And why have they issued over HK$ 100m in shares after their IPO with a massive net cash position on their books?
Smells fishy. My philosophy with HK stocks now is ‘if there is doubt, there is no doubt’. Have seen too many legit looking companies (save for maybe 1 or 2 small red flags) turn out to be frauds.
Higher risk I agree, but higher reward also. I think the actual sales of machines is very well documented. I pay on a PAX machine on daily basis
Yeah not saying this is a phantom product, maybe profits are overstated? Either a fraud or run by complete idiots. I actually thought it was an SOE when I first looked at it.
There are plenty of quality companies that have much higher dividend yields on HK exchange trading at similar PE multiples.
Great to see your new updates. The shift to Lithium Ion batteries looks real. I heard some self-taught technician are retrofitting the used lithium ion batteries from cars and fitting them for resale to motorcyclists and/or e-bikers. There’s security concern for it but I think you’re right for this trend.
For PAX, did you notice that there’s almost no credit card usage for daily interactions/transactions in cities of mainland China? I might use credit card for some high/medium end hotel booking, or big bulk money payments, otherwise I never bring my credit card/cash. But this is also anecdotal.
PAX investment case is fully built on sales outside of China. I expect China sales to continue to contract towards low single digit percent.