Value Investing

Origo Prefs Deep Value Thesis

By Deep Value Investments

Just bought a reasonable chunk (c6% portfolio weight) in Origo Prefs and a similar- c6% weight in the ordinaries.

Origo is a Chinese private equity investment trust. As you might imagine when you hear the words ‘AIM listed Chinese private equity trust’ performance has been disasterous. c500p in mid 2011 has become c1.5p now.  Putting a lighter to your money would probably have given you a better return.

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In theory the ordinary has a NAV of 9p a share (June results) vs a market price of 1.5p –  so a decent return from here.

I am going for the prefs – trading at 0.30c vs hopefully a redemption at $1.00 – or a 3x return as well as the ordinaries.

This is an AIM listed China stock – lots of rumours of fraud / actual frauds.  Shareprofits think its a ‘bargepole stock’.  I encourage you to read their views here.

They are audited by BDO – so reputable – and NOMAD is Smith & Williamson – so again, reasonably reputable.

Their aim it to have everything liquidated by November 2018.  It won’t happen.

Still some progress has been made in June 2017 they had $880k in the bank.

In July they received $4.5m from two disposals.  They then sold another stake worth $3m in February.

This gives $8.3m – they have liabilities / debts of c$7m (ish- actually a bit more), add on  $1.36m worth of likely consulting fees / other costs so are likely to have a small net debt at year end 2017.

They have preference shares to pay – $50m worth.  These are more like equity than debt.  Even on a winding up  they get paid 80% of first $15m then 44% of anything above this.  I have checked my understanding of this with the company but still possible I am wrong / have been misadvised.  This isn’t something I have seen before, usually pref’s get paid before ordinaries but this doesn’t seem to be the case here.  The balance sheet indicates they are still debt so it’s all rather confusing – probably why this is priced the way it is.  Company articles to explain this are here.

My estimation of their NAV+Prefs is probably c$60-$75m – so if all goes well everyone gets their money back.

Prefs will likely get $31-$36m in this scenario – so vs a market capitalisation of $17m (at 0.30c a share) this gives you a 80-110% return.  What I like about the prefs is that they get paid first – so you have a very high probability of getting your $17m back from first payments of any liquidation, followed by a chunk of whatever’s left.  You can then choose to invest back in prefs or something else.

If Nav is $60-70m ordinaries c$28-$34m.  As the ordinaries have market cap of c $7.6m it takes longer for you to get your money back.  For the more visually inclied – chart illustrating repayment is below.

Opp Chart

So on to underlying assets:

Of particular interest is $15m of China rice, an equity stake of 32.1% coupled with a convertible loan valued at $16m this may give them a majority stake if the loan is not repaid..

Last comment – in 2016 full year published June

Discussions with a group of well-capitalised Chinese state-owned enterprises in respect of a strategic partnership and a potential merger with the operating subsidiary of China Rice Ltd (“China Rice”) began in 2016 and remain ongoing (31 December 2016 carrying value: US$31.4 million). While no immediate deal is expected, due to ongoing government reform of the sector, we continue to believe that the formation of this new venture is likely to proceed and offer Origo an opportunity to realise its investment in the business within the time-frame of the Company’s investing policy.

This doesn’t mean we will neccessarily get cash but there is reason to be hopeful.

Niutech is worth c $4.5m and is being slowly disposed of at close to what it is in the books for….

Unipower battery makes batteries for electric buses – big in China – 16.5% stake worth $6.2m plus a convertible loan due this year for $9m.

So between China Rice, Unipower and Niutech we get $50m.  After that it gets into small mining companies – maybe $10m, maybe more.  So if we get $60m out after fees both prefs and ordinaries should get a decent return.  Remember total assets are likely $85-90m.

We only need a payment of $30m to get money back on prefs and ordinaries – after that its all profit – only one and a bit investments needs to go right.

Concerns with this are – general slowdown, particularly in China could really hurt this.  Progress on sales so far has been slow.  I am hoping it will increase, but I could be wrong and this could well be a several year wait. The Chinese business world is cutthroat, and full of dishonesty.  This is far from risk free.

I am also concerned about the adequacy of my research at the portfolio level.  Detailed info on the underlying companies is not available to me, so to some extent I am trusting management (who I actually don’t trust) and the auditors.  They seem to have received NAV (ish) for most recent transactions and there is already a 20-30% liquidity discount on most holdings…

The shareholder list is OK.  The prefs are held by Brooks Macdonald who have taken legal action more than once to make sure they get paid.  Ords are held by a collection of the usual suspects – biggest being Pacific Alliance Investment Mgt at 25.6%

Take care dealing – ords are reasonably easy to buy but very hard to sell.  Prefs also very illiquid.  I may sell a few (particularly ords) if price spikes due to illiquidity.

Hopefully I have understood this one right – I am still a bit concerned prefs get paid first for some obscure reason I have missed – either way I should be OK – as I hold prefs as well.

As ever comments, positive and negative are welcome.

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