Owl Creek’s top five holdings for its Asian fund, followed by full letter letter below in scribd:

China provinces shandong

The Portfolio
Our five largest holdings2 as of September 30, 2011 are, alphabetically:
China Shanshui Cement Group
Jupiter Telecommunications
Kweichow Moutai
Nufarm
Sun Art Retail Group
China Shanshui Cement Group
China Shanshui Cement is a name we have written about previously and is the largest producer of
cement in Shandong. The impact from continued liquidity tightening and restrictive policies on
property purchases in China continues to dampen sentiment on the entire cement sector. However,
we believe that Shanshui’s key market, Shandong, should be more resilient in a weakening demand
environment as it has the highest concentration among the top two players. As evidence, in
November cement pricing in Shandong increased when other regions in China saw flat pricing or a
slight price decline.
The cement sector is still down over 50% from the highs and though the sector recovered 10?20%
from the lows in October, we think the market is still pricing in a fairly draconian scenario; that a
slowdown in demand will disrupt the supplier discipline and collapse the price of cement, cutting
profits in half next year. At current prices, we believe the market is pricing in an almost 100%
probability of the bear thesis, based on applying the halved profit level and using 2008 trough
EBITDA multiples. Not only do we see the risk reward on this investment being asymmetric, but we
remain convinced that the bear thesis is incorrect and margins will not collapse. We believe the near
term catalyst will simply be the market’s realization that pricing and margins are not falling and if
that is the case, trading at 4x 2012 P/E, we believe Shanshui could have over 100% upside from
current levels.
Jupiter Telecommunications
Jupiter Telecommunications (JCOM) remains a top holding for the Fund. Japan’s largest cable
company with over 40% market share continues to perform well fundamentally. While some sell
side analysts cite concerns regarding ARPU trends, we believe these fears are misplaced as the
company continues to gain incremental subscribers at high contribution margins. The third quarter
illustrated this with organic top line growth of approximately 3%. EBITDA margins remain strong at
42% with free cash flow increasing at a faster rate than earnings as the upfront cost of digital
migration (namely set top boxes) is behind them. We continue to wait for KDDI, which bought over
37% of JCOM in February 2010, to take the next step and buy control of the company. The
combination makes strategic sense given the synergies between JCOM and JCN (the #2 cable
company in Japan and owned by KDDI) as well as the value that JCOM’s network infrastructure
brings to KDDI’s fixed line and mobile businesses. Furthermore, JCOM is very cheap at 4.3x EBITDA
and over 10% free cash flow yield with debt under one turn of EBITDA. Given that KDDI paid
Y139,500 for their stake and Sumitomo paid the same price to raise their ownership over 40%, we
believe that it is only a matter of time until the remaining shares are bought in at that level or
better.
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Kweichow Moutai
Kweichow Moutai is an A?share listed liquor company with a market cap of approximately $30 billion
and is the premium brand in the Chinese white liquor industry with 40% market share in the ultra
premium segment. The Chinese white liquor industry is a 6.5 billion bottle a year business with the
ultra premium segment’s volume equal to 80?90 million bottles. While most of the Chinese liquor
volume is sold at a retail price RMB20?30 ($3?5) per bottle, Moutai’s retail price is about RMB1,700
($260) per bottle. There are only 2 other players in the ultra premium segment and each player has
capacity constraints since for each the aging process for ultra premium white liquor is 5 years. The
result is that demand for Moutai’s products is out stripping supply by a ratio of 4:1, leading to
increases in Moutai’s ex?factory price of 300% over the past 10 years and its retail price of 500%
during the same period.
What we are excited about is Moutai’s movement toward direct sales to capture more margin than
their current ex?factory distribution model. Mouitai’s key product sells at about RMB620/bottle exfactory
to distributors and these products retail at 1,700/bottle. To put that in perspective, exfactory/
retail was 620/1300 in the beginning of 2011 and 178/265 in 2001. In 2011, Moutai started
to sell direct to large corporate customers at about 770 per bottle which accounts for about 15?20%
of the group’s total volume. In 3Q11, Moutai opened about 30 retail specialty stores dedicated in
selling Moutai products at about 1,100/bottle with the long term goal of 800 stores nationwide.
Given the incremental expenses are minimum, increases in Moutai’s realized price drops mostly to
profits driving above consensus earning growth.
Moutai is trading at a PE of 23x 2012 consensuses with earning growth of 27%. We think the
company should be able to generate 35?40% CAGR over the next 2?3 years with strong visibility and
sustainability to maintain the current forward multiple a?year from now.
Nufarm
Nufarm is an Australia?based off?patent agriculture chemical manufacturer, which we have written
about in the past. We own Nufarm’s perpetual preferred stock, which in September announced a
step up of its coupon by 200bps, and which returns a cash yield of 10.5% at current prices. In
September, Nufarm announced better than expected June 2011 fiscal year end results and in
November, the company signed a A$625 million three?year term loan to refinance its bank facility,
which should remove a large overhang on the name.
Nufarm’s net debt position has improved dramatically this past year and leverage ahead of the
preferreds has declined from 2.5x EBITDA down to 1.8x. Through the preferreds, leverage is 2.7x,
and there remains substantial equity value of 4.8x EBITDA behind the preferreds which should
provide value cushion behind our position. Beyond the current yield, the preferreds also have a
change of control at par vs. current price at around 80, and we believe there is a good chance a
takeout is in the cards. In December 2009, Sumitomo Chemical agreed to purchase 20% of Nufarm
stock at a price of A$14.00 per share (current stock price is around A$4.50) and recently increased
its ownership to 23%, including buying 1.7% from the CEO at A$5.20 per share. We believe there is
strategic value in Nufarm’s global distribution network as is evidenced by its competitor,
Makhteshim?Agan, being acquired by ChemChina.
Sun Art Retail Group
Sun Art is a large hypermarket chain in China that went public in July 2011. We participated as a
cornerstone investor in this IPO which provided the Fund with a large guaranteed allocation but also
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locked?up the investment for 6 months. Sun Art is the best operator in the Chinese hypermarket
landscape. It generates an average sales per store of over RMB300 million per year while its key
competitors, Carrefour and Wal?Mart, generate 200 million and 100 million per store, respectively.
The company’s key competitive advantage is its ability to consistently drive higher traffic volume in
its stores across the country, due in large part to better execution on the grocery side of the
business which is primary traffic driver in China. As a result, Sun Art is able to generate higher
operating margins than its competitors while also charging lower prices. We expect Sun Art to
continue to press its price and margin advantage against its competitors. As of the time of IPO, Sun
Art had about 200 stores in China, and we estimate that China can accommodate about 2,000?3,000
Sun Art

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