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677 HK - Golden Resources Development


bchank
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This is a Hong Kong listed company with a market cap of HKD778m (US$100m), and a net cash (including short term financial assets) position of HKD688m (USD88m). This gives an enterprise value of the company of around HKD90m. They also have HKD76m of investment properties on their books which are held at fair value.

 

Their website is http://www.rice.com.hk/corporate/eng_faq.htm

 

The company has a dividend yield of 5.2% at current share price and has paid the same amount of dividends per share (HKD0.024 per share) for the last 15 years.

 

The company's core business is rice importer, wholesaler and distributor in Hong Kong where the company has a leading position in the retail market. It owns the Golden Elephant Brand - the number one seller in Hong Kong. From its 1H2014 interim report, its segmental results show that the core rice operations generated an EBIT of HKD59m for the half year. Compared to the implied enterprise value, looks very low on an EV/EBIT basis.

 

The company is also building a convenience store chain in Vietnam, where it has the Circle K master franchise and has been growing organically since they started in 2008. The company recently opened their 100th Circle K store in Vietnam and are among the top 3 chains in Vietnam (its 2 main competitors each have around 100 shops open). While still loss making and having only a small revenue (only HKD50m (US$7m) revenue for 1st half 2014), they look to be building an interesting business. Some articles from the website suggest that Circle K has strong brand equity in Vietnam.  Still early days, but could potentially become a valuable business, especially if Vietnam economy continues to grow as is often predicted. Some revelant readings below:

http://www.wordhanoi.com/opinion/the-perspectives/the-rise-of-the-convenience-store

http://www.amchamvietnam.com/30443067/vietnams-middle-class-set-to-double-by-2020-bcg/

 

What do you guys think?

 

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I owned a starter position in this one for a while, believe it or not. When I started looking at a few older annual reports I found out they diluted shareholders in February 2009 by placing convertible notes. The conversion price was HK$0.26 per share. They did all this at the worst possible time during the financial crisis while they had plenty of cash on the balance sheet. I read the placing document for the notes and the reasons offered for the placing made no sense to me at all.

 

More info can be found in note 23 of the 2010 annual report. The placing document for the convertible notes can be found by searching on: http://www.hkexnews.hk/listedco/listconews/advancedsearch/search_active_main.aspx

 

After Googling a little I found an article from 2000 where a minority shareholder complained about a dilutive stock offering: http://webcache.googleusercontent.com/search?q=cache:adU1KQpT3O8J:www.scmp.com/article/312572/investor-flays-golden-resources&hl=nl&strip=1

 

Needless to say I no longer own shares.

 

I agree that the company looks very cheap, but these placements are a huge red flag in my opinion.

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Thanks for pointing this out.

 

The 2009 CB placement was used largely to redeem an earlier CB placed in 2007 (3 year tenure at 4% coupon and conversion price of HKD0.90/sh). The justification was a lower coupon of 2% but accepting a much lower conversion price at HKD0.26 (though still at premium to the share price during the GFC period).

 

Agree that the dilution accepted by management in this case was excessive, but balance sheet at that time (2009) was not that strong: cash of HKD 330m vs debt (the CB) of HKD71m, and co was facing losses in 2009 from the GFC. Plus supposedly the CBs were placed to independent 3rd parties according to the announcement, but I guess you never know. Thanks for highlighting the red flags.

 

The announcement for the placements can be found at http://www.grdil.com.hk/financial/announce/history/ePLACE.pdf and http://www.grdil.com.hk/financial/announce/history/ePlac_con07.pdf

 

 

 

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Looks like a pretty strong balance sheet to me. While it is true that the company showed a loss in 2009, much of that was due to investment losses and that is to be expected in a market meltdown. No valid reason to do the placement, but it could have provided a good excuse for management. Their core rice business did well and has been a pretty stable and cash generative business.

 

I don't know why they did the placement or who the "independent third parties" were, but I do know minority shareholders were screwed here and that this was apparently not the first time.

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From the footnotes:

 

Ownership:

1. Yuen Loong International Limited (“Yuen Loong”) 548,052,026 32.48%

(Note 2)

2. Chelsey Developments Ltd. (“Chelsey”) 252,240,000 14.95%

(Note 2)

 

Notes:

1. These shares represent long positions.

 

2. Mr. Alvin Leslie LAM Kwing Wai, a Director of the Company, is a beneficiary of a discretionary trust which is interested in approximately 24% of the issued share capital of each of Yuen Loong and Chelsey.

 

Mr. Laurent LAM Kwing Chee, a Director of the Company, is interested in approximately 15% of the issued share capital of each of Yuen Loong and Chelsey.

 

Madam LAM Kit Woo, a Director of the Company, is interested in approximately 10% of the issued share capital of each of Yuen Loong and Chelsey.

 

Mr. Anthony LAM Sai Ho, a Director of the Company, is interested in 40% of the issued share capital of Marvel City Holdings Limited which in turn is interested in approximately 24% of the issued share capital of each of Yuen Loong and Chelsey.

 

I haven't studied the company in great detail... but the business interests of most of the Directors look to be aligned with shareholders with them owning a significant amount of the shares.

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I like what the potential value the Circle K business in Vietnam can offer. When I was there a few months ago, of the 3 main convenience chains locals, expats and tourists all seemed to prefer Circle K or Family Mart. With what growth Vietnam has to offer, I think they have something good going on there establishing a solid brand early.

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It is not that cheap based on FCF. FCF seems to lag behind earnings. And it trades on like 9x earnings. Unless they start investing that cash in something sensible, or return it, it will stay at a discount.

 

Also why hoard those assets? And why issue shares in a crisis with a solid balance sheet? There are other HK securities that are cheaper and actually more or just as shareholder friendly (and less stupid). Keck seng, Asia standard, Future bright come to mind. Seem cheaper on discount to assets and earnings basis.

 

I supose the Circle K business is interesting to keep an eye on.

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This is a Hong Kong listed company with a market cap of HKD778m (US$100m), and a net cash (including short term financial assets) position of HKD688m (USD88m). This gives an enterprise value of the company of around HKD90m. They also have HKD76m of investment properties on their books which are held at fair value.

 

Their website is http://www.rice.com.hk/corporate/eng_faq.htm

 

The company has a dividend yield of 5.2% at current share price and has paid the same amount of dividends per share (HKD0.024 per share) for the last 15 years.

 

The company's core business is rice importer, wholesaler and distributor in Hong Kong where the company has a leading position in the retail market. It owns the Golden Elephant Brand - the number one seller in Hong Kong. From its 1H2014 interim report, its segmental results show that the core rice operations generated an EBIT of HKD59m for the half year. Compared to the implied enterprise value, looks very low on an EV/EBIT basis.

 

The company is also building a convenience store chain in Vietnam, where it has the Circle K master franchise and has been growing organically since they started in 2008. The company recently opened their 100th Circle K store in Vietnam and are among the top 3 chains in Vietnam (its 2 main competitors each have around 100 shops open). While still loss making and having only a small revenue (only HKD50m (US$7m) revenue for 1st half 2014), they look to be building an interesting business. Some articles from the website suggest that Circle K has strong brand equity in Vietnam.  Still early days, but could potentially become a valuable business, especially if Vietnam economy continues to grow as is often predicted. Some revelant readings below:

http://www.wordhanoi.com/opinion/the-perspectives/the-rise-of-the-convenience-store

http://www.amchamvietnam.com/30443067/vietnams-middle-class-set-to-double-by-2020-bcg/

 

What do you guys think?

 

where are you getting the store count numbers from ? does the store economics breaks down anywhere? what the company has is just the right to build stores and not a master royalty rights ? The company still have to pay dividend to the the parent royalties for operating the stores.

 

Cheers

Jason

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