China Uptown Group Company Limited
China Uptown (‘company’) is a property developer currently engaged with two residential and commercial properties in Maoming, Guangdong a fast-developing tier-3 city in China. (It is also profitably engaged in trading raw cane sugar, which ends in 2020, but this is not significant.)
The properties are:
a) 90% ownership of Zhanqian 7th Road, Yuehua East District –
Gross floor area of 245,000 sq.m (fully developed in 2018 and units are
currently being sold); and
b) 65% ownership of Jixiang-23, Jixiang District – Gross floor area of 118,000
sq.m (acquired in May)
This is a cash hungry company that constantly raises funds from banks,
directors, and shareholders to purchase and develop properties - and hasn’t
paid a dividend.
Most recently it consolidated its shares 10:1 and issued almost 40% of its pre-issue share capital to a minority shareholder in September raising $72m in the process. We have adjusted the share count and the cash receipt to the balance sheet published as at June 30th.
The properties are valued at cost at $1.1b. Net tangible asset value is
$692m and includes $80m in investment properties (at fair value) generating rental
income. The cash position (after the infusion), net of borrowings, is comfortable
at $94m.
Examining the track record of this company over the last decade
indicates it has earned an average of $30m/year on a much lower equity base.
The stock is selling at market for $163m ($0.64/share) or less than 25%
of tangible asset value. Even a conservative estimate of past earning power
yields 20% on the current market price.
The recent share issue was executed at $1/share. This means the prospective
public shareholder can enter this situation at a 36% discount to the large shareholder.
The filings indicate that the insiders are optimistic about the prospects of
Maoming.
There are also 64m employee share options outstanding with an exercise
price of $2.50/share. (Management can issue shares up to 30% of outstanding
shares – but recent grants in 2017 were at a premium to the market price.)
These facts indicate that the current share price would have to
appreciate significantly before the insiders profit.
The current price appears to bake in an entrenched position for the
entering shareholder with a margin of safety that seems sufficient to counter
adverse developments.
$ represents Hong Kong $