Some Updates on PYI corp

Sorry, readers. I have not posted for last several weeks, as I have been busy applying for UC Berkeley’s HAAS MFE program. I just want to update PYI corp (0498.hk) regarding some recent development since my last post.

Since my last writing, the share of PYI corp has declined significantly from ~HKD 1.00 to ~0.75 a share. PYI issued final dividend in the form of stock warrants, a disappointment to many share holders. Although I think it is a prudent decision for PYI, undeniably the company is tightening its belt on cash. PYI has increased its financial leverage during the Fiscal 08. Debt/Equity ratio increased to 34% from 7%, while the quicken ratio dropped to 0.99 from 1.26. Cash is indeed one of my major concerns for PYI. Yangkou port project rely on land sale to generate cash for capex. A weak economy, particularly weak export industry in Jiangsu, will impair PYI’s ability to execute the plan. The purchase of 12.3% stake in Nantong Port will also burn a significant amount of cash on its balance sheet.

Trading at 30% of this book value, PYI is valued by Mr. Market as a toxic small real estate developer. I believe the market misconception gives a long term investor, like myself, a good entry point to buy a major port operator on Yangtze River at a discount to its book. PYI is not a real estate developer. PYI has very limited exposure to residential and commercial building market, which is in bubble-bursting mode. PYI’s major real estate exposure is its 42 sq km land bank at Yangkou Industry Park. The price of industrial land should not be hit hard, because there is simply no bubble to begin with. Unlike buying a residential or commercial property, one needs to be approved by local government to be eligible for buying industrial property. (Basically you need to have a company which generates tax payment.) It is a much more difficult market than residential property for real estate speculators. As a result, the price of industrial land is relatively stable during past several years I think the value of the land bank depends more on the success of the industrial park. The initial development is promising: Petro China’s 16 Billion LNG project is under construction and RGM international’s 11B project will soon begin construction. The key to watch is the initial land sale to Petro China, which is still under negotiation. The final price will set a bench mark for the value of PYI’s land bank at Yangkou. The industrial land at Suzhou, Yangkou’s neighbor city, is in the range of RMB 250-300/sqm. PYI’s management is hoping to sell their land at similar price, which is higher than my RMB 200-250 estimate. Furthermore, Yangkou port is expected to commence operation by the end of 2008 and Nantong port (discuss below) will be consolidated as a subsidiary. PYI’ share might benefit from the possible upgrade from “real estate developer” to “port operator”. Price to book ratio should be in line with other publically traded ports at 2-3 times.

The 12.32% stake in Nantong port is priced at RMB 191.46M, which values the whole company at RMB 1.55B. PYI paid RMB 430M in 2005 for its 45% stake, which worth 700M at current valuation (not accounting for controlling premium), 17.5% compound annual return on investment. If PYI is successful buying the stake, it will become the major share holder of the company, which will make Nantong port the first Chinese port ever controlled by “foreign” capital. There is unlikely to be another bidder for the stake. It is unclear at this point how PYI and Nantong Port Group (NPG) will split this stake. Most likely PYI will increase its stake to >50, which will allow it to consolidate Nantong port on this balance sheet.