New holding PAX Global, Selling Tianneng, BBI Buyout finalized

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.

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BBI Life Sciences (1035 HK) – Buyout Opportunity

The last month I spent quite a lot of time researching a couple of small/micro cap Pharma/Biotech companies listed in Hong Kong (I still have one more interesting candidate to perhaps reveal later). The most interesting candidate which I had planned to introduce here on this blog was BBI Life Sciences. As it happened the stock had a nice run upwards just before I was going to post about buying into a new holding and after that the stock was halted, pending a M&A announcement. The announcement was released yesterday, revealing a Leveraged Buy Out by the majority owner family, offering 3.5 HKD per share for all outstanding shares. The largest investors outside of the family group has also agreed to the offer of 3.5 HKD per share. In my view this was really a shame, since the company is active in a very attractive niche, with fantastic growth in revenue and profits, but still trading at a very reasonable multiple. I won’t go into all the company details anymore, because that is not the main story of this investment case. Just a very brief company overview:

BBI Life Science

The company offers science research products, more specifically:

  1. DNA synthesis products covering oligonucleotides and genes synthesis.
  2. Experimental materials (biochemical reagents and research kits) and consumable parts (labware) that are used by researchers in experiments.
  3. Genetic engineering services covering DNA sequencing, next-generation sequencing method, and molecular biology services.

About 70% of Sales is in China and 30% in USA/Europa/rest of Asia.

You have this saying that the one that got really rich during the gold-rush was not the gold miners, but the guys selling the shovels and all the other equipment needed to pan for gold. Maybe the analogy is exaggerating this somewhat, but here is a company providing the basic materials for another gold rush wish is taking off, the biotechnology rush, enabled by powerful computers, genome sequencing equipment and new technologies like CRISPR etc that I wrote about a long time ago: Let’s Talk DNA.

The company fundamentals are very attractive, strong growth and even after the run-up after the offer for all shares, the company is trading at a 2020 P/E of around 15. Not a stretched valuation at all, given annual growth rate of some 25%.

If this was a full analysis I would go more into details of competition worries, governance etc, to mention a few lines. The business is actually similar to Modern Dental’s China business. BBI has a large center outside of Shanghai where they produce much of this DNA synthesis material. This is a fairly labor intensive process as I have learned, meaning cost advantages with cheap(er) labor. My guess is that BBI Life Sciences is able to have so high margins right now, due to limited competition currently in China and lower labor costs than Western companies that produce these materials out of Europe/USA. So a qualified guess would be that margins would come down over the years, but with the growth currently seen, this would still be an attractive investment. And if anything, given how China is focusing on these areas of Biotechnology research, I would expect this area to even keep growing through a downturn in the general economy, making the business even more resilient.

A western competitor in this niche seemed to have been an attractive target to acquire: Brooks Automation Moves Further into Life Sciences with $450 Million Deal for Genewiz Group

The investment case now

Unfortunately the investment case has moved from this very exciting provider of the base materials for many of new types of Biotechnology research, to just being a play on harvesting the small free return the market is giving us, since the stock is trading at 3.32 at close, versus 3.5 HKD in the offer price. This is some 5.4% upside, not very attractive, but better than the 0% I have on my cash. The thing here is that I actually get a bit caught in my methodology of always buying my shares at close prices. I have actually put on this position intra-day today, at 3.26, which gives a 7.3% return. But I won’t cry over this and I will accept the closing price as my entry point. So one of the main reasons why the market is giving some doubt to if we will really get the 3.5 HKD offered is that it’s required that more than 75% of the shareholders need to vote yes for this bid, or that less than 10% vote against this. In both cases all shareholders will by automatically forced to sell their shares at 3.5 HKD. Given that they have not secured these levels of votes, means there is fair likelihood that the offer won’t go through. So this is the reason why I gave a short update on the actual company, because I don’t see it as necessarily a bad thing if the offer does not go through. I think the company long term is worth much more than the 3.5 HKD per share. The majority owner which is the founder and his two daughters who today run the business I think also know that, hence the bid. This has been a typical HK value trap stock, which for some reason never revalued upwards, although fundamentals just kept getting better and better. It really beats me why it did not revalue, but here we are. Either a get a 5.4% return over the coming 3-4 months, or the deal doesn’t go through and this will be a new long term holding for me. I have total 7.1% cash position and I allocate a 6% position to BBI Life Science as an Opportunistic holding.

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