I have been reducing my investment position in fine wines, particularly recent Bordeaux and Burgundy, which turned out to be my best investment in the first half of 08. Fine wine hardly qualifies a value investment and is made to be drunk and enjoyed. Its value is determined by the perceive pleasure, which varies dramatically among people. I have been enjoying fine wines for some years, but I jumped heavily into the market as an investment only after I sensed a self-reinforced upward trend in wine price couple years ago.
My theory was: A rapid wealth accumulation of high net worth class in emerging markets (China, India and some resource rich countries) and their desire of western lifestyle initially created new demand for high end wines (>$100/bottle). As those wines are produced from traditional region, where land designated to produce the wines is fixed, the rising demand drives up the price. In the second stage, as the premium of the marginal quality of the wine rises rapidly, wineries can afford more stringent grape selection to increase their quality to achieve higher pricing, which actually reduce the supply of their wines. Thus drives price even higher. As the demand of wine from emerging markets is based on perceived social status of drinking expensive wines, higher price and increased scarcity of the high end wines in fact attracted more demand. Thus a self-reinforcing cycle is established. The price of ultra premium wines,like Lafite, Latour, or Romanee Conti, went through the roof. The upward trend in price is propelled by another two forces. The ample liquidity in the financial market and rising wine price attracted investment money into the wine market. Several hedge funds specialized in fine wine investing were established during the past several years. This creates "false" demand in the market, because wines bought by the investment fund will eventually appear on the market as new supply. When viewed as an investment rather than consumable, the criteria valuing fine wines is dramatically changed. The price ceiling for the top wines disappeared. The newly released sought after Romanee Conti is priced at $14K or several hundred dollars for every sip. Secondly, not only the wineries that benefited from this trend, wine distributors and wine critics are also enjoying explosive demand for their service. Soon the "must have" "vintage of the century" appeared on every wine relative publication. Just like the hyped 1972 vintage that hit the market at the top of financial market peak, 2005 vintage in both Bordeaux and Burgundy are touted by every major wine critics. The price appreciation of my 2005 Bordeaux purchase is 100-150%. The smaller production burgundy wine is the extreme case of this wine mania. The price of various sought after wines purchased as future jumped several folds when the wine physically hit the market. Due to the asymmetry of information in the wine market, I was able to sell some of my 2005 Romanee Conti wines 2 or 3 times higher right after I made my purchase.
The market is cooling. The fist blow is that Robert Parker, the most influential wine critics, published his assessment of 2005 Bordeaux somewhat below market's inflated expectation. Financial market crisis leads to exit of some institutional players. Although pricing is still firm, as demand from Asia is still firm, the inventory starts to build up in the first and second quarter of 08. The quality of 2006 and 2007 vintages are not praised and the enthusiasm of wine buyers disappears. The self-reinforcing cycle is broken.
An interesting example of bubble and bust for educational purpose.
Wednesday, July 30, 2008
Tuesday, July 29, 2008
PYI Corp (0498.HK) deep value investment in growing Chinese Port Industry
Based in Hong Kong, PYI Corporation (0498.HK) Limited focuses on infrastructure investment in and operation of bulk cargo port and logistics facilities in the Yangtze River region in China. It also engages in land and property development in association with port facilities. PYI’s common stock represents an opportunity to invest in Chinese deep water port in the fast growing Yangtze River delta region at 55% discout to its book value, which does not yet fully mark to the market.
2006-2008 is the transition period for PYI. They sold out HK based asset and invested capital to build a portfolio of ports on the Yangtze River. It sold the majority of its real estate and other equity investment for about 922 million HKD (item 47 in their 07 AR) after its flagship, Paul Y center, was divested in 2005 for 780 million HKD (item 56 in 07AR). PYI’s is building a portfolio of ports along the Yangtze River. Yangtze River is largest River and accounts for 80% of the river transportation volume in China. Coal and other raw material are transported from the resource rich west to east and finished products are transported to west to feed western China’s explosive growth. Yangtze River is becoming increasingly important in Chinese transportation system. Chinese government pledged RMB 16 billion to dredge Yangtze River Course by 2020. PYI’s good connection with local Chinese authority allows them to find the favorable deal. The company bought 45% equity in Nantong Port for 435 million CHY at discount to its book value, when other public traded Chinese port assets are valued roughly at 3-6 times book value. It will soon make Nantong port is subsidiary after exercising its option to purchase 12.37% stake in Nantong Port later this year. Nantong port is 10th largest port in China by volume and growing at 30%. Nantong Port will benefit from China’s increasing demand for raw material, as the majority of the bulk goods it handles are coal, ion ore and fertilizer. Yangkou port, the crown of PYI’s portfolio, is also acquired at an extremely low price. After its initial 54% stake in Yangkou port, PYI bought 13.6% interest for 35M HKD in Feb. 2006 (value the whole project at merely 257.4M). Three month later it bought another 7% for 168M HKD, which set the price tag of Yangkou port at 2400M HKD. Yangkou port will become the only deep water seaport that has the capacity to serve trans-pacific ships. PYI is also signing investment agreement with several smaller ports in Suzhou, Chongqin and Yicang. PYI will and Yangkou Port is aiming to service LNG and other clean energy.
Before we break down the parts value of PYI, it worths pointing out that PYI’s excellent share holder friendly management team. The manage team, lead by Tom Lau, focuses on enhancing share holder value. When the company generates excess capital, it returns the capital to share holder in the form of special dividend. This is quite rare in Hong Kong market. It paid 70 cents (30% of its share price) in 2005 after the sale of Dower EDI and then paid 22.2 cents after the sale of China Strategy. Even after such generous pay out, PYI is still able to grown their asset at double digit pace.
In order to value the company, it is difficult to derive from its current consolidated financial reports, because PYI’s Chinese asset has not yet generated significant revenue yet (less than 3% of 2006 revenue). I will breakdown PYI’s major asset to reach a Sum-of-Parts (SOP) valuation for the company.
1. 65.2% stake in Paul Y Engineering (ticker 577 HK), a HK listed engineering services company with projects in HK and China.
2. 57.3% stake in NPG, the first major bulk cargo port along the Yangtze River Delta, and also the largest hub port for iron ore trans-shipment.
3. 75% stake in Yangkou Port, a massive green-field port project covering a land bank of 42 sq km. This is the jewel within PYI and has the biggest hidden intrinsic value. (details below).
4. 100% Mingshen Gas, a market leader in the infrastructure and logistics facilities for LPG, oil and liquid bulk chemicals market in Central China.
1. Paul Y Engineering (ticker 577 HK).
Paul Y Engineering is an engineering services company engaged in construction, project and facilities management. It has 60 years of track record. The company is listed on the HK stock exchange (ticker 577 HK) with a market cap of 661M HKD. implying a LTM P/E multiple of only 5.7x. As the company moves into Chinese infrastructure business, multiple expansion is a possibility. To be conservative, I ignore the premium for PYI’s controlling stake, hence the market value of its 65.2% stake is: 65.2%*661M=431M
2. Nantong Port Group (“NPG”)
Nantong, also known as “Northern Shanghai”, enjoys a unique geographical location. It is located on the northern bank of the Yangtze River near the river mouth, and is a vital river port bordering Yancheng to the north, Taizhou to the west, Suzhou to the south, and the East China Sea to the east. Nantong Port is a major port near the mouth of the Yangtze River and is the first major bulk cargo port along the Yangtze River Delta. Its direct hinterland includes seven provinces: Jiangsu, Anhui, Jiangxi, Hunan, Hubei, Sichuan, Quizhou, and two major cities: Shanghai and Chongqing.
Within this context, NPG is the dominant port group at Nantong Port and accounts for 50% of Nantong Port’s total throughput. It occupies 3,300m of shoreline along the Yangtze River, has 26 productive berths including two berths for vessels over 100k tonnage, and six berths for vessels over 50k tonnage. The main cargoes handled by NPG are iron ore, minerals, cement, steel, coal, fertilizers, grains and edible oil. As the Langshan Phase3 becomes fully operational this year, the capacity will increase 54% to 5000K tonnage. NPG made 54M in 2006 and 76M in 2007 and volume increase 32% in 2007. NPG is expected enjoy double digit top line growth due to its rapid expansion and solid Chinese economic growth. PYI will help to improve their management efficiency and bring NPG’s profitability close to its peers.
As PYI does not break down the cask flow and balance sheet for Nantong Port, it is difficult to use comparable multiples to value Nantong Port. My DCF model assuming 20% earning growth for 5 years and 5% perpetuity growth rate and 15% discount rate yield a 1367M CHY implying 18 PE and 1.2 times book valuee, which at the low end of publicly traded Chinese ports. I believe it will be proved to be a conservative valuation, considering its potential to reach return on asset similar to its peers. Therefore PYI’s 57.3% stake is valued at 783.3M HKD.
3. Yangkou Port
Yangkou Port is special because of its prime geographic location and the natural deep waters surrounding it so that vessels of 100,000 DWT can enter without the need for dredging. Yangkou is located in Jiangsu Province, which harbors a very large exporting industry. For a long time, Jiangsu has only one seaport, Lianyun Port, which does not have the deep water to serve trans-pacific routes. All the exporting goods that are shipped across Pacific Ocean need to be shipped to Shanghai Port or Ningbo Beilun Port, which is very expensive to do. Yangkou Port will have significant cost advantage over its neighbors and will likely to serve the exporting industry in Jiangsu Province, as soon as it develops the capacity.
Yangkou port is also one of few locations approved by the Chinese government for building LNG ports, hence it is likely to benefit from increase import of LNG. It is part of the central governments 11th Five Year plan as a level I seaport, which means strong support from government. In deed billions of fund is already invested by government in the infrastructure, such as rail roads and high ways, to support the port. PYI owns the right to reclaim 42 sq km of land and can lease or sell the land after reclamation. With the completion of a number of milestones, the recent securing of PetroChina’s 7.4 billion LNG project, Yangkou port is on track and land sales can be achieved in the near future.
Yangkou port is a classic low-risk and high profit investment for PYI. PYI put down little capital to acquire 75% interest. (I could not find an official number but it is likely to be little more than 1 billion HKD). This huge project does not require much capital injection from PYI, as it pledge land and sea use for bank loan to initiate the project After the initial development, which is expected to be finished in 2008, PYI will own 42 sq km land. 30 sq Km will be used for industrial purpose, and the rest 11.5 km2 will be developed into a hotel resort and golf course. In the recent filing PYI revalue a piece of 4.16 square km land at RMB 1 Billion, which put per square meter value at RMB ~240. Excluding the development cost at 91 CHY, land will be value at RMB 10.1 billion. PYI expects to sale roughly half of the land to generate cash to fund the port project. Petro China is going to purchase 2 sq km land for this nature gas utility project. Assuming 40% tax rate, it will generate 4 billion cash. Also PYI signed agreement with local government to lease its Yellow Sea Crossing and will sell 2 sq km land to Petro China for about RMB 600M to build a natural gas utility, which will provide a predictable future cash flow.
The only concern is the over-capacity of deep water port in the Yangtze delta region. Both Shanghai and Ningbo port are building 1,000 TEU deep water ports. However, Yangkou port will specialize in LNG and other energy/raw material transportation, which hopefully can differentiate them from competition. The local protectionism in Jiangsu Province will likely to direct the exporting volume generated in the province to Yangkou port.
At this point, it is hard to predict future cash follow of Yangkou port. According to the recent comment from PYI’s management, half of the land bank will be sold to fund the project. Recent industry land transaction in the neighborhood is ranging from RMB 200-850/sq. If we assume the first batch will be sold at lower end of the range, RMB 250/ sqm, and the rest will be further developed to enhance value (RMB 350/sqm\\the resort land is valued higher than industry land), the total project will have a book value around RMB11.35 Billion. I will take 20% discount on the valuation to account for the uncertainty. If we look at public traded Chinese port of similar size, most of them are valued north of 10 Billion (excluding land value) indicating a even higher valuation for a successfully developed Yangkou port.
4,Mingshen Gas
Mingshen Gas owns infrastructure and logistics facilities for LPG, oil and liquid bulk chemicals market in Central China. It also operates the largest LPG terminal and storage facilities, as well as a mature logistics network in the region. PYI acquired Mingshen for RMB 467M in 2006 at a slight discount to the book value, which generated 378M in revenue and 8M loss due to government’s price control on LNG. Profit is likely to turn black in the first half of fiscal 09 due to the recent price increase. Mingshen controls 40% of local market. As Chinese government is promote the use of LNG (targeting 10% of total energy consumption), Mingshen is positioned to benefit.
Again, there is no detailed breakdown for Mingshen Gas. As the asset it acquired before the asset bubble in 2007, I will take 30% off the original price paid by PYI (467*70%=327).
Sum-Of-Parts valuation (in million)
Paul Y Engineering 431
NGP 783
Yangkou Port 6800
Mingshen Gas 327
Sum of Parts Valuation 8341
Excess capital (net debt) (238)
Total Valuation (inc cash) 8103
Share count 1508
NAV per share 5.37
PYI is trading at 45% of its book value and 20% of my conservative valuation. Although PYI won’t generate any meaningful positive cash flow until Yangkou port becomes fully operational in 2-3 years, the current market failed to recognize its potential to become one of the major port operators in China.
2006-2008 is the transition period for PYI. They sold out HK based asset and invested capital to build a portfolio of ports on the Yangtze River. It sold the majority of its real estate and other equity investment for about 922 million HKD (item 47 in their 07 AR) after its flagship, Paul Y center, was divested in 2005 for 780 million HKD (item 56 in 07AR). PYI’s is building a portfolio of ports along the Yangtze River. Yangtze River is largest River and accounts for 80% of the river transportation volume in China. Coal and other raw material are transported from the resource rich west to east and finished products are transported to west to feed western China’s explosive growth. Yangtze River is becoming increasingly important in Chinese transportation system. Chinese government pledged RMB 16 billion to dredge Yangtze River Course by 2020. PYI’s good connection with local Chinese authority allows them to find the favorable deal. The company bought 45% equity in Nantong Port for 435 million CHY at discount to its book value, when other public traded Chinese port assets are valued roughly at 3-6 times book value. It will soon make Nantong port is subsidiary after exercising its option to purchase 12.37% stake in Nantong Port later this year. Nantong port is 10th largest port in China by volume and growing at 30%. Nantong Port will benefit from China’s increasing demand for raw material, as the majority of the bulk goods it handles are coal, ion ore and fertilizer. Yangkou port, the crown of PYI’s portfolio, is also acquired at an extremely low price. After its initial 54% stake in Yangkou port, PYI bought 13.6% interest for 35M HKD in Feb. 2006 (value the whole project at merely 257.4M). Three month later it bought another 7% for 168M HKD, which set the price tag of Yangkou port at 2400M HKD. Yangkou port will become the only deep water seaport that has the capacity to serve trans-pacific ships. PYI is also signing investment agreement with several smaller ports in Suzhou, Chongqin and Yicang. PYI will and Yangkou Port is aiming to service LNG and other clean energy.
Before we break down the parts value of PYI, it worths pointing out that PYI’s excellent share holder friendly management team. The manage team, lead by Tom Lau, focuses on enhancing share holder value. When the company generates excess capital, it returns the capital to share holder in the form of special dividend. This is quite rare in Hong Kong market. It paid 70 cents (30% of its share price) in 2005 after the sale of Dower EDI and then paid 22.2 cents after the sale of China Strategy. Even after such generous pay out, PYI is still able to grown their asset at double digit pace.
In order to value the company, it is difficult to derive from its current consolidated financial reports, because PYI’s Chinese asset has not yet generated significant revenue yet (less than 3% of 2006 revenue). I will breakdown PYI’s major asset to reach a Sum-of-Parts (SOP) valuation for the company.
1. 65.2% stake in Paul Y Engineering (ticker 577 HK), a HK listed engineering services company with projects in HK and China.
2. 57.3% stake in NPG, the first major bulk cargo port along the Yangtze River Delta, and also the largest hub port for iron ore trans-shipment.
3. 75% stake in Yangkou Port, a massive green-field port project covering a land bank of 42 sq km. This is the jewel within PYI and has the biggest hidden intrinsic value. (details below).
4. 100% Mingshen Gas, a market leader in the infrastructure and logistics facilities for LPG, oil and liquid bulk chemicals market in Central China.
1. Paul Y Engineering (ticker 577 HK).
Paul Y Engineering is an engineering services company engaged in construction, project and facilities management. It has 60 years of track record. The company is listed on the HK stock exchange (ticker 577 HK) with a market cap of 661M HKD. implying a LTM P/E multiple of only 5.7x. As the company moves into Chinese infrastructure business, multiple expansion is a possibility. To be conservative, I ignore the premium for PYI’s controlling stake, hence the market value of its 65.2% stake is: 65.2%*661M=431M
2. Nantong Port Group (“NPG”)
Nantong, also known as “Northern Shanghai”, enjoys a unique geographical location. It is located on the northern bank of the Yangtze River near the river mouth, and is a vital river port bordering Yancheng to the north, Taizhou to the west, Suzhou to the south, and the East China Sea to the east. Nantong Port is a major port near the mouth of the Yangtze River and is the first major bulk cargo port along the Yangtze River Delta. Its direct hinterland includes seven provinces: Jiangsu, Anhui, Jiangxi, Hunan, Hubei, Sichuan, Quizhou, and two major cities: Shanghai and Chongqing.
Within this context, NPG is the dominant port group at Nantong Port and accounts for 50% of Nantong Port’s total throughput. It occupies 3,300m of shoreline along the Yangtze River, has 26 productive berths including two berths for vessels over 100k tonnage, and six berths for vessels over 50k tonnage. The main cargoes handled by NPG are iron ore, minerals, cement, steel, coal, fertilizers, grains and edible oil. As the Langshan Phase3 becomes fully operational this year, the capacity will increase 54% to 5000K tonnage. NPG made 54M in 2006 and 76M in 2007 and volume increase 32% in 2007. NPG is expected enjoy double digit top line growth due to its rapid expansion and solid Chinese economic growth. PYI will help to improve their management efficiency and bring NPG’s profitability close to its peers.
As PYI does not break down the cask flow and balance sheet for Nantong Port, it is difficult to use comparable multiples to value Nantong Port. My DCF model assuming 20% earning growth for 5 years and 5% perpetuity growth rate and 15% discount rate yield a 1367M CHY implying 18 PE and 1.2 times book valuee, which at the low end of publicly traded Chinese ports. I believe it will be proved to be a conservative valuation, considering its potential to reach return on asset similar to its peers. Therefore PYI’s 57.3% stake is valued at 783.3M HKD.
3. Yangkou Port
Yangkou Port is special because of its prime geographic location and the natural deep waters surrounding it so that vessels of 100,000 DWT can enter without the need for dredging. Yangkou is located in Jiangsu Province, which harbors a very large exporting industry. For a long time, Jiangsu has only one seaport, Lianyun Port, which does not have the deep water to serve trans-pacific routes. All the exporting goods that are shipped across Pacific Ocean need to be shipped to Shanghai Port or Ningbo Beilun Port, which is very expensive to do. Yangkou Port will have significant cost advantage over its neighbors and will likely to serve the exporting industry in Jiangsu Province, as soon as it develops the capacity.
Yangkou port is also one of few locations approved by the Chinese government for building LNG ports, hence it is likely to benefit from increase import of LNG. It is part of the central governments 11th Five Year plan as a level I seaport, which means strong support from government. In deed billions of fund is already invested by government in the infrastructure, such as rail roads and high ways, to support the port. PYI owns the right to reclaim 42 sq km of land and can lease or sell the land after reclamation. With the completion of a number of milestones, the recent securing of PetroChina’s 7.4 billion LNG project, Yangkou port is on track and land sales can be achieved in the near future.
Yangkou port is a classic low-risk and high profit investment for PYI. PYI put down little capital to acquire 75% interest. (I could not find an official number but it is likely to be little more than 1 billion HKD). This huge project does not require much capital injection from PYI, as it pledge land and sea use for bank loan to initiate the project After the initial development, which is expected to be finished in 2008, PYI will own 42 sq km land. 30 sq Km will be used for industrial purpose, and the rest 11.5 km2 will be developed into a hotel resort and golf course. In the recent filing PYI revalue a piece of 4.16 square km land at RMB 1 Billion, which put per square meter value at RMB ~240. Excluding the development cost at 91 CHY, land will be value at RMB 10.1 billion. PYI expects to sale roughly half of the land to generate cash to fund the port project. Petro China is going to purchase 2 sq km land for this nature gas utility project. Assuming 40% tax rate, it will generate 4 billion cash. Also PYI signed agreement with local government to lease its Yellow Sea Crossing and will sell 2 sq km land to Petro China for about RMB 600M to build a natural gas utility, which will provide a predictable future cash flow.
The only concern is the over-capacity of deep water port in the Yangtze delta region. Both Shanghai and Ningbo port are building 1,000 TEU deep water ports. However, Yangkou port will specialize in LNG and other energy/raw material transportation, which hopefully can differentiate them from competition. The local protectionism in Jiangsu Province will likely to direct the exporting volume generated in the province to Yangkou port.
At this point, it is hard to predict future cash follow of Yangkou port. According to the recent comment from PYI’s management, half of the land bank will be sold to fund the project. Recent industry land transaction in the neighborhood is ranging from RMB 200-850/sq. If we assume the first batch will be sold at lower end of the range, RMB 250/ sqm, and the rest will be further developed to enhance value (RMB 350/sqm\\the resort land is valued higher than industry land), the total project will have a book value around RMB11.35 Billion. I will take 20% discount on the valuation to account for the uncertainty. If we look at public traded Chinese port of similar size, most of them are valued north of 10 Billion (excluding land value) indicating a even higher valuation for a successfully developed Yangkou port.
4,Mingshen Gas
Mingshen Gas owns infrastructure and logistics facilities for LPG, oil and liquid bulk chemicals market in Central China. It also operates the largest LPG terminal and storage facilities, as well as a mature logistics network in the region. PYI acquired Mingshen for RMB 467M in 2006 at a slight discount to the book value, which generated 378M in revenue and 8M loss due to government’s price control on LNG. Profit is likely to turn black in the first half of fiscal 09 due to the recent price increase. Mingshen controls 40% of local market. As Chinese government is promote the use of LNG (targeting 10% of total energy consumption), Mingshen is positioned to benefit.
Again, there is no detailed breakdown for Mingshen Gas. As the asset it acquired before the asset bubble in 2007, I will take 30% off the original price paid by PYI (467*70%=327).
Sum-Of-Parts valuation (in million)
Paul Y Engineering 431
NGP 783
Yangkou Port 6800
Mingshen Gas 327
Sum of Parts Valuation 8341
Excess capital (net debt) (238)
Total Valuation (inc cash) 8103
Share count 1508
NAV per share 5.37
PYI is trading at 45% of its book value and 20% of my conservative valuation. Although PYI won’t generate any meaningful positive cash flow until Yangkou port becomes fully operational in 2-3 years, the current market failed to recognize its potential to become one of the major port operators in China.
Subscribe to:
Posts (Atom)
Posts
