Follow-up 2.0 Kingboard Copper Foil Holdings Limited

Today the announcement from the supreme court of Bermuda was made public. If you want some background to this legal process and Kingboard as a company see my earlier published checklist analysis post and follow-up & special situation analysis.

The Board wishes to update the Shareholders that the Court of Appeal of Bermuda had allowed the appeal and found in favour of the majority shareholders that have filed the appeal (the “Appellants”). A written judgment in respect of the appeal had been issued on 24 March 2017 (the “Appeal Judgment”). The judge deciding the appeal found, among other determinations, that the entry into the license agreement by the Company’s wholly-owned subsidiary, Hong Kong Copper Foil Limited, and Harvest Resource Management Limited (the “License Agreement”) was not oppressive conduct and did not unfairly prejudice the minority shareholders of the Company. It was also decided that the costs of the appeal and the court proceedings below are awarded to the Appellants.

This outcome of the legal process is not what I had expected, I must admit I’m really surprised. But when you are wrong the only thing to do is to admit that you were wrong and then review the current situation and any new facts that have been presented. So what do I do now?

The tender offer 0,40 SGD per share is still active and the intention to take the company private hasn’t changed. This morning the shares traded between 0,40 – 0,41 SGD. So the interesting question that I had to answer was: is there any upside left or should I sell today?

There might be some upside left due to the fact that the independent financial adviser has not yet commented on the 0,40 SGD buyout offer. However, because of the outcome of the court case in favor of the majority shareholder I believe there is now a much smaller chance of that review resulting in an increased buyout offer than I had predicted before. Reason being that it could earlier be argumented that the valuation of the tender offer as a premium to historical share price was a really bad staring point of valuation since Kingboards shares had traded at depressed levels because of the ongoing legal process and unfairly prejudice of minority shareholders. While I still think that historical share prices are not a relevant staring point for any valuation the premium can now arguably be seen as more “fair” than before as a court case didn’t find that minority shareholders had been mistreated (i.e less reson for the financial advisors to come up with a different valuation).

Another factor that might result in potential upside relates to the problem for majority shareholders to acquire enough shares to take the company private. So there might be an increased share offer price in order to succeed with this intention. There might even be a legal shareholder fight regarding the current buyout price being to much of a low ball offer. But again, because of the outcome of the legal process I have a hard time making an argument for this as a likely and successful outcome for minority shareholders. We also have the time factor to take into account as this can easily result in a another drawn out legal process.

To summarize and conclude, the court case announcement was both surprising and unfortunately really negative in relation to my predictions made in the special situation analysis. My main argument then was that all shareholders would likely to be bought out at the same price as the minority shareholders (‘the Pope entities’) as a result of the Bermuda court case. As a result of todays announcement we now know that my assumption and analysis was wrong and that it is now less chance of an increased buyout price. Therefore I decided to sell my entire position in Kingboard this morning at 0,405 SGD. I could of course have waited and tender my shares at 0,40 SGD at not transaction cost, but at a price of 0,405 SGD the transaction cost are already “included”. Also, selling today equals better CAGR on the investment but probably the most important factor of all; it saves me all the potential headaches that could arise with a Singapore-tender-offer in combination with a low cost focused stockbroker.

After brokerage fees and currency effects the return in Kingboard for my initial net-net position amounted to +45,7 %.

After brokerage fees and currency effects the return in Kingboard for my later initiated special situation position amounted to – 5,5 %.

Disclosure: The author doesn’t own any shares of SGX:K14 when this analysis is published.

The Teachings of Don Juan: A Yaqui Way of Knowledge by Carlos Castaneda

donThe expression “take it with a grain of salt” is relevant for most of the content in the book
that I have collected todays worldly wisdoms from. ‘Mumbo Jumbo’ and pure fiction is how I would describe the book. However, this book also has a number of worldly wisdoms that in my opinion is truly fantastic and something you won’t find in your typical everyday book. The worldly wisdoms that I present today comes from the book The Teachings of Don Juan: A Yaqui Way of Knowledge that was published by the University of California Press in 1968 as a work of anthropology. It was written by Carlos Castaneda and submitted as his Master’s thesis in the school of Anthropology.

In short, the book is a collection of notes from events and conversations that took place during an apprenticeship with a self-proclaimed Yaqui Indian Sorcerer, Don Juan from Sonora, Mexico between 1960 and 1965. Whether these events and conversations actually took place or the book is pure fiction has continuously been debated. Nonetheless, when you read the worldly wisdoms I present below I think you will find them magnificent and applicable to both how you approach investing and your everyday life. At least I did.

Please comment if you have read the book and what you thought of it. Also, if you have found a worldly wisdom in the book that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Worldly wisdoms from the book


“There is nothing wrong with being afraid. When you fear, you see things in a different way.”



“A man goes to knowledge as he goes to war, wide-awake, with fear, with respect, and with absolute assurance. Going to knowledge or going to war in any other manner is a mistake, and whoever makes it will live to regret his steps.”

(p. 19)


The second worldly wisdom is a whole conversation, so bear with me, between the apprentice and Don Juan regarding ‘enemies’ of  a ‘man of knowledge’. 

“When a man starts to learn, he is never clear about his objectives. His purpose is faulty; his intent is vague. He hopes for rewards that will never materialize, for he knows nothing of the hardships of learning. He slowly begins to learn – bit by bit at first, then in big chunks. And his thoughts soon clash. What he learns is never what he pictured, or imagined, and so he begins to be afraid. Learning is never what one expects. Every step of learning is a new task, and the fear the man is experiencing begins to mount mercilessly, unyieldingly. His purpose becomes a battlefield. And thus he has tumbled upon the first of his natural enemies: Fear! A terrible enemy – treacherous, and difficult to overcome. It remains concealed at every turn of the way, prowling, waiting. And if the man, terrified in its presence, runs away, his enemy will have put an end to his quest.”

“What will happen to the man if he runs away in fear?”

“Nothing happens to him except that he will never learn. He will never become a man of knowledge. He will perhaps be a bully or a harmless, scared man; at any rate, he will be a defeated man. His first enemy will have put an end to his cravings.”

“And what can he do to overcome fear?”

“The answer is very simple. He must not run away. He must defy his fear, and in spite of it he must take the next step in learning, and the next, and the next. He must be fully afraid, and yet he must not stop. That is the rule! And a moment will come when his first enemy retreats. The man begins to feel sure of himself. His intent becomes stronger. Learning is no longer a terrifying task. When this joyful moment comes, the man can say without hesitation that he has defeated his first natural enemy.”

“Does it happen at once, don Juan, or little by little?”

“It happens little by little, and yet the fear is vanquished suddenly and fast.”

“But won’t the man be afraid again if something new happens to him?”

“No. Once a man has vanquished fear, he is free from it for the rest of his life because, instead of fear, he has acquired clarity – a clarity of mind which erases fear. By then a man knows his desires; he knows how to satisfy those desires. He can anticipate the new steps of learning, and a sharp clarity surrounds everything. The man feels that nothing is concealed. And thus he has encountered his second enemy: Clarity! That clarity of mind, which is so hard to obtain, dispels fear, but also blinds. It forces the man never to doubt himself. It gives him the assurance he can do anything he pleases, for he sees clearly into everything. And he is courageous because he is clear, and he stops at nothing because he is clear. But all that is a mistake; it is like something incomplete. If the man yields to this make-believe power, he has succumbed to his second enemy and will fumble with learning. He will rush when he should be patient, or he will be patient when he should rush. And he will fumble with learning until he winds up incapable of learning anything more.”

“What becomes of a man who is defeated in that way, don Juan? Does he die as a result?”

“No, he doesn’t die. His second enemy has just stopped him cold from trying to become a man of knowledge; instead, the man may turn into a buoyant warrior, or a clown. Yet the clarity for which he has paid so dearly will never change to darkness and fear again. He will be clear as long as he lives, but he will no longer learn, or yearn for anything.”

“But what does he have to do to avoid being defeated?”

“He must do what he did with fear: he must defy his clarity and use it only to see, and wait patiently and measure carefully before taking new steps; he must think, above all, that his clarity is almost a mistake. And a moment will come when he will understand that his clarity was only a point before his eyes. And thus he will have overcome his second enemy, and will arrive at a position where nothing can harm him any more. This will not be a mistake. It will not be only a point before his eyes. It will be true power. He will know at this point that the power he has been pursuing for so long is finally his. He can do with it whatever he pleases. His ally is at his command. His wish is the rule. He sees all that is around him. But he has also come across his third enemy: Power! Power is the strongest of all enemies. And naturally the easiest thing to do is to give in; after all, the man is truly invincible. He commands; he begins by taking calculated risks, and ends in making rules, because he is a master. A man at this stage hardly notices his third enemy closing in on him. And suddenly, without knowing, he will certainly have lost the battle. His enemy will have turned him into a cruel, capricious man.”

“Will he lose his power?”

“No, he will never lose his clarity or his power.”

“What then will distinguish him from a man of knowledge?”

“A man who is defeated by power dies without really knowing how to handle it. Power is only a burden upon his fate. Such a man has no command over himself, and cannot tell when or how to use his power.”

“Is the defeat by any of these enemies a final defeat?”

“Of course it is final. Once one of these enemies overpowers a man there is nothing he can do.”

“Is it possible, for instance, that the man who is defeated by power may see his error and mend his ways?”

“No. Once a man gives in he is through.”

“But what if he is temporarily blinded by power, and then refuses it?”

“That means his battle is still on. That means he is still trying to become a man of knowledge. A man is defeated only when he no longer tries, and abandons himself.”

“But then, don Juan, it is possible that a man may abandon himself to fear for years, but finally conquer it.”

“No, that is not true. If he gives in to fear he will never conquer it, because he will shy away from learning and never try again. But if he tries to learn for years in the midst of his fear, he will eventually conquer it because he will never have really abandoned himself to it.”

“How can he defeat his third enemy, don Juan?”

“He has to defy it, deliberately. He has to come to realize the power he has seemingly conquered is in reality never his. He must keep himself in line at all times, handling carefully and faithfully all that he has learned. If he can see that clarity and power, without his control over himself, are worse than mistakes, he will reach a point where everything is held in check. He will know then when and how to use his power. And thus he will have defeated his third enemy. The man will be, by then, at the end of his journey of learning, and almost without warning he will come upon the last of his enemies: Old age! This enemy is the cruelest of all, the one he won’t be able to defeat completely, but only fight away. This is the time when a man has no more fears, no more impatient clarity of mind – a time when all his power is in check, but also the time when he has an unyielding desire to rest. If he gives in totally to his desire to lie down and forget, if he soothes himself in tiredness, he will have lost his last round, and his enemy will cut him down into a feeble old creature. His desire to retreat will overrule all his clarity, his power, and his knowledge. But if the man sloughs off his tiredness, and lives his fate through, he can then be called a man of knowledge, if only for the brief moment when he succeeds in fighting off his last, invincible enemy. That moment of clarity, power, and knowledge is enough.”

(p. 35-37)


Anything is one of a million paths. Therefore you must always keep in mind that a path is only a path; if you feel you should not follow it, you must not stay with it under any conditions. To have such clarity you must lead a disciplined life. Only then will you know that any path is only a path, and there is no affront, to oneself or to others, in dropping it if that is what your heart tells you to do. But your decision to keep on the path or to leave it must be free of fear or ambition. I warn you. Look at every path closely and deliberately. Try it as many times as you think necessary. Then ask yourself, and yourself alone, one question. This question is one that only a very old man asks. […] I will tell you what it is: Does this path have a heart? All paths are the same: they lead nowhere. They are paths going through the bush, or into the bush. In my own life I could say I have traversed long, long paths, but I am not anywhere. Does this path have a heart? If it does, the path is good; if it doesn’t, it is of no use. Both paths lead nowhere; but one has a heart, the other doesn’t. One makes for a joyful journey; as long as you follow it, you are one with it. The other will make you curse your life. One makes you strong; the other weakens you.



The fourth worldly wisdom is a follow-up conversation between the apprentice and Don Juan regarding how to find a path with “heart”, presented in the third worldly wisdom.

“But how do you know when a path has no heart, don Juan?”

“Before you embark on it you ask the question: Does this path have a heart? If the answer is no, you will know it, and then you must choose another path.”

“But how will I know for sure whether a path has a heart or not?”

“Anybody would know that. The trouble is nobody asks the question; and when a man finally realizes that he has taken a path without a heart, the path is ready to kill him. At that point very few men can stop to deliberate, and leave the path.”

“How should I proceed to ask the question properly, don Juan?”

“Just ask it.”

“I mean, is there a proper method, so I would not lie to myself and believe the answer is yes when it really is no?”

“Why would you lie?”

“Perhaps because at the moment the path is pleasant and enjoyable.”

“That is nonsense. A path without a heart is never enjoyable. You have to work hard even to take it. On the other hand, a path with heart is easy; it does not make you work at liking it.”

(p. 71-72)

CosmoSteel Holdings Limited – Q1 2017

Q1 2017– 0,136 S$– SGX:B9S

1kr50öreCosmoSteel Holdings Limited is a Singapore-based investment holding company. The Company’s segment includes Energy, Marine, Trading and Others. Its Energy segment includes oil and gas; engineering and construction; petrochemical, and power. Its Marine segment includes shipbuilding and repair. Its Trading segment includes traders purchasing goods and on-sell to end user customers. Its Others segment includes other industries, such as the manufacturing and pharmaceutical sectors. It offers various products, such as Pipes, Flanges, Forged Fittings, Outlet Fittings, Buttwelding Fittings and Others. Its pipes product includes electric fusion welded and spiral welded. Its flange product includes socket weld and threaded. Its forged fittings product includes elbow and Tee (equal, reducing and cross). Its outlet fittings product includes Nipple Olet and Buttweld Olet. Its Others product includes Plates and I Beams. Its services include fabrication capabilities, and validation and testing. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 


  • P/NCAV < 1x
    • 0,46x 
    • MoS = 54 %

Assessment of margin of safety:

CosmoSteel makes it through the net-net checklist without any difficulties. Beyond that statement there are five additional facts that in my opinion makes CosmoSteel at the current share price a good addition to a diversified portfolio of net-nets

First, CosmoSteel is today selling at a large margin of safety to NCAV, 54 %. In addition, looking at recent reports that margin of safety seems to be quite solid since the NCAV burn rate for QoQ is positive (2,3 %) and YoY only slightly negative (-2,4%). Second, regarding historical profitability. Although the company has posted negative results for the last two years (mainly due to the historically low oil price) that has not been the case historically. During the period 2014-2007 the company had an average profit margin of 6,5%, with a high of 10,5 % (2007) and a low of 3,5 % (2014). Third, regarding valuation in relation to historical average operating profitability. Taking into account the two last year’s negative results, the valuation multiples still look quite appetizing. The company’s 5y and 10y average operating earnings in relation to the current enterprise value amount to 7x and 4x respectively. Fourth, regarding capital allocation. The company has during the last nine years continuously paid a dividend to shareholders and although there has been some historical dilution of shareholders there is currently an active share buyback mandate for 10 % of the shares outstanding. Fifth, regarding ownership structure. Insiders together own about 16,7 % of the shares outstanding. That ownership is mainly related to the two brothers Ong Tong Yang and Ong Tong Hai which serve as directors of the company. Their father is the founder of CosmoSteel and he still serve as the CEO of the company. The Ong family definitely have skin in the game since the current value of their total ownership amounts to 4,7x their total annual compensation.

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):


  • Debt/Equity < 25 %
    • 15 % 


  • Z-score ≥ 3
    • 2,4 X

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):


  • Positive retained earnings:
    • 43,8M S$ 


  • Positive aggregate operating income for the last ten years:
    •   89,3M S$ 

3. The company does not have a shareholder unfriendly capital allocation:

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 4,2 %
    • Net buyback yield TTM = 0 %
      • =  4,2 % 


Disclosure: The author is long SGX:B9S when this analysis is published. Also note that SGX:B9S is a micro-cap stock (28 M$ in market capitalization). The trading is illiquid.


Follow-up: CDI corp.

10-K 2016– 7,50 USD– NYSE:CDI

After my thirteen months follow-up on CDI I have sold my position. After brokerage fees and currency effects the return amounted to 67,4 %. From a qualitative standpoint I still like the case, mainly due to the recent activist activity in the company (more about that below), but due to a high NCAV-burn rate and an increased share price development the company is no longer a net-net, i.e. I’m forced to sell.

See original checklist analysis of CDI here (in Swedish).

1kr50öreCDI Corp. provides engineering, information technology and staffing solutions. The Company operates in three segments: Global Engineering and Technology Solutions (GETS), Professional Staffing Services (PSS) and Management Recruiters International (MRI). It provides staffing services through its MRINetwork of franchisees. The GETS segment provides engineering and information technology solutions that involve the production of deliverable work products or services performed at its facility or at a customer’s facility. The PSS segment provides technical and professional personnel for discrete periods of time to augment the customer’s workforce in times of project, seasonal, peak period or business cycle needs. The MRI segment is a global franchisor that does business as MRINetwork and provides the use of its trademarks, business systems and training and support services to its franchisees. It serves the oil, gas and chemicals, aerospace and industrial equipment, and hi-tech industries. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 


  • P/NCAV < 1x
    • 1,5x X
    • MoS = N/A

Assessment of NCAV margin of safety:

CDI is today selling for a premium to NCAV. The reason behinds development since I initiated my position at 0,57x NCAV is a combination of positive share price development of 62 % and a NCAV burn rate of -40 %. Since CDI is no longer a net-net I will therefore sell my position. However, for an investor that are not following strict rules when investing, CDI might still be an interesting case. This is mainly due to the fact that there is an ongoing activist activity within the company with the aim to sell or merger with the highest bidder. Also, the quality of the company is in fact quite good (checks all boxes below and they had a net buyback yield of 5 % for the TTM).

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):


  • Debt/Equity < 25 %
    • 0 % 


  • Z-score ≥ 3
    • 4,8 

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):


  • Positive retained earnings:
    • 179 M$ 


  • Positive aggregate operating income for the last ten years:
    •   155 M$ 

3. The company does not have a shareholder unfriendly capital allocation (i.e. not diluting shareholders):

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 0 %
    • Net buyback yield TTM = 5 %
      • =  5 % 


Disclosure: The author doesn’t own any shares of NYSE:CDI when this analysis is published.

Narrative and Numbers: The Value of Stories in Business by Aswath Damodaran

In today’s world of finance and business valuation there is one person at the absolute center of knowledge, theoretical and practical development. He is a professor of at the Stern School of Business at New York University, author of several highly regarded books and academic articles and the person behind the famous blog Musing on Markets. Yes of course, it’s Aswath Damodaran that I’m talking about!

What I really like about Aswath is his humble personality and bounteous attitude towards learning and sharing knowledge. Musing on Markets is one evidence of that statement, but then we have his webpage at Stern as well. There you can find material and webcasts to all his classes, links to his writings and all kinds of other useful data and tools (lots of excel spreadsheets). The best part is that all of his high quality material is available and free for everyone.

nbWhen I found out that Aswath was releasing a new book I was excited from that fact alone. But what got me really excited was the title and the description of his new book, ‘Narrative and Numbers’. This book is not a hardcore theoretical valuation bible that you might expect if you have read some of Aswath’s earlier work (if you are interested in that I recommend reading his book ‘Damodaran on Valuation’). I would say that Narrative and Numbers is mainly a book about understanding and connecting the two types of investor-species that the world/market consist of; the storytellers and the number crunchers, into an improved one. In other words, the books is about connecting the two endpoints of valuation; the qualitative and the quantitative factors and how to combine them in order to end up with a good business valuation. Also, Narrative and Numbers is about those on “the other side”, the founders and managers of companies, and how they use numbers and stories in different ways and with different purposes.

If you want more of Aswath I have one more final tip before I present the worldly wisdoms from his book Narrative and Numbers. Go listen to this episode of Masters in Business with him as a guest, it’s awesome!

Please comment if you have read the book and what you thought of it. Also, if you have found a worldly wisdom in the book that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Five worldly wisdoms from the book

Much as we love stories, though, most of us are also aware of their weaknesses. For the storytellers, it is easy to wander into fantasyland, where the line between good stories and fairy tales gets crossed. That may not be a problem if you are a novelist, but it can be a recipe for disaster if you are building a business. For those listening to stories, the danger is a different one. Since stories tend to appeal to the emotions rather than to reason, they also play on our irrationalities, leading us to do things that do not make sense but feel good, at least when we do them. In fact, as con men through the ages have discovered, nothings sells better than a good story. (p.2)

As a novice to storytelling, there are three thoughts that come to mind as I look at the long and well-researched history of storytelling. The first, and most humbling, is the realization that much of what is offered as good business storytelling practice has been known for centuries, perhaps going back to primitive times. The second is that good storytelling can make a huge difference in the success of a business, especially early in its life. To be a successful business, not only do you have to build a better mousetrap, but you have to tell a compelling story about why that mousetrap will conquer the business world to investors (to raise capital), to customers (to induce purchases), and to employees (to get them to work for you). The third is that storytelling in business come with more constraints than storytelling in novels, since you are measured not just on creativity but on being able to deliver on your promises. The real world is very much a part of your story, and much as you would like to control it, you cannot. (p.3)

So why are we drawn to numbers? In a world of uncertainty, numbers offer us a sense of precision and objectivity and provide a counterweight to storytelling. That precisions is often illusory, and there are uncountable ways in which bias can find its way into numbers. Notwithstanding those limitations, in investing and finance, as in many other disciplines, the number crunchers or “quants” have essentially used the power of numbers to both inform and intimidate. The crisis of 2008 was a cautionary note to those who would let common sense be overwhelmed by complex mathematical models” (p.4)

In The Little Prince, a children’s book, the Price visits an asteroid and meets a man who counts the stars, insisting that if he were able to count them all, he would own them. The children’s tale has resonance, since many people seem to feel that measuring something or putting a number on it will allow them to control it better. Thus, even though a thermometer can only tell you that you have a fever and a blood pressure monitor provides a reading of your blood pressure at the time you take it, both seem to give you a sense of control over your health(p.39)

If you invest primarily in mature companies, with established business models, this i perhaps the state of play for you, and your intrinsic value will follow the smooth path that value schools assume is a universal one. Is this good or bad for investors? While at first sight it seems like a blessing to have stable stories and values, there is a downside, at least from an investing standpoint. The market prices for these stocks will also reflect this stability in story line and will be less likely to wonder away from values. In the language of value and price, the gap between price and value will be smaller at these companies. Since investors make money from exploiting the gap, it stands to reason that you will find fewer and smaller market mistakes with stable companies than with younger and more unstable companies that are exposed to narrative breaks and changes. That is the reason why I prefer to spend my time and resources valuing companies on what I term the “dark side”, where there is significant uncertainty about how narratives will evolve in the future” (p.179-180)

Follow-up & special situations analysis on Kingboard Copper Foil Holdings Limited

Last Friday Kingboard Copper Foil Holdings Limited (SGX:K14) announced that Excel First Investment Limited had placed a cash tender offer at 0,40 SGD for the shares in K14. Excel First is an subsidiary to the parent company Kingboard Laminates Holdings Ltd. (listed on Hong Kong stock exchange) which is also the parent company of K14 (owns 66,01 % of K14). Before the cash tender offer was announced the shares of K14 traded at 0,34 SGD (+17,7% tender offer premium) and after the announcement the stock is trading at 0,415 SGD, I will come back to both of these facts later in the post. If you read my analysis of K14 that i published in mid January you will notice that this development was not a lightning strike from a clear blue sky. Although, I had anticipated an offer first after the result of an legal appeal in March 2017 and that company would directly make use of its then newly implemented 10 % buyback mandate. I will come back to both of these factors later in the post as well. According to the offer announcement the reason behind the offer is to delist K14 from the Singapore stock exchange. In other words, the intentions are to privatize the company (this is an important factor to take with you when reading this post).

Does K14 still pass my net-net checklist requirements?1kr50öre

Yes, I have concluded that K14 still passes my net-net checklist without any difficulties. To the contrary, since I analysed the company in January the company has published its FY report for 2016. As of this report the company is posting good revenue growth, it is still profitable on the bottom level and the company is still debt free. Also, the net current asset value (NCAV) per share has increased from 2,09 HKD to 3,02 HKD, an increase of 45% (notice that the reporting currency is HKD but the stock is traded in SGD). In relation to the share price development of 51 % since I bought my position at 0,275 SGD, the 45 % NCAV increase has translated into an P/NCAV-multiple that is almost unchanged (P/NCAV = 0,72 vs P/NCAV = 0,75x). In other words, the margin of safety in relation to NCAV is the same even though the share price has increased 51 % since I bought my position. From the checklist point of view I will therefore not be “required” to sell my position. On the other hand, I don’t want/allow myself to be an owner of a private Singapore company so lets review what options that I currently have at my disposal for closing the K14 position.

Options for closing the K14 position

The way I see it I have three options:

  1. I can tender my shares at the 0,40 SGD cash offer. With this option I won’t have any transaction costs for the sale of my position.
  2. I can sell my position at the market price of 0,415 SGD. With this option I will have transaction costs of about 1 % but I will also gain about 3,8 % above the 0,40 SGD offer.
  3. The third alternative requires me to sit tight and wait for the results of the Court of Appeal in Bermuda that takes place March 6 and 7 2017 (yesterday and today) which might result in an increased tender or buyout offer.

I believe the third option needs a more in depth explanation than option 1 and 2… Before presenting my facts and arguments for option 3 here is short sales pitch for that alternative:

In my opinon there exist a high probability that the result of the appeal will not be in favor of the holding company of K14 (the defendants/majority shareholders of K14) and that this in turn may require them to increase the cash tender offer to ~0,67 SGD if they want to take the company private. In other words, I would argue that there is a potential +61% return on the table to take advantage of. That’s not even the best part, if I’m wrong in my analysis I can still tender my shares at the 0,40 SGD cash offer (option 1) without any transaction costs and only incur a small loss of -3,8%. I think Mr Market is aware of this potential outcome and that is why the company today is selling above the cash tender offer (0,40 SGD) on the market. So obviously I have chosen option 3 (in potential combination with option 1).

Explanation for the sit-tight-and-wait-option (Nr. 3)

As I presented in the analysis in January there has been a legal process going on since 2011. I won’t go into the history of the legal process as this has in been explained in detail by the blog ThumbTackInvestor and also in the articles linked to in my earlier analysis. But in short terms the legal process i about:

Kingboard Copper Foil entered into a license agreement with Harvest Resource Management after the Petitioner (Annuity & Re Life Ltd) had vetoed the proposed general mandate for interested person transactions at the AGM of the Company on 29 April 2011.

which has resulted in that:

The Supreme Court of Bermuda found that, as the majority shareholders failed to promptly initiate negotiations with the minority shareholders with a view to resolving the impasse and take into account the interests of shareholders as a whole following the blocking of the IPT Mandate, the license agreement was a commercially prejudicial means of enabling the Company to circumvent the Petitioner’s legitimate exercise of its right to veto the IPT Mandate.

What is more important to know is that the petitioners of the legal process is the company Annuity & Life Reassurance LTD. This company is a subsidiary of Pope Investments II LLC under which another company, Pope Asset Management LLC, can also be found. The Petitioner’s holdings in K14 together with those of the two Pope entities amounted to 80,251,528 shares by July 18, 2011 according to this supreme court judgement. Its is this judgement and the findings therein that the defendants, mainly Kingboard Chemicals and Kingboard Laminates, are appealing against as I write this post (March 6 and 7). It is important to note that K14 is only a third party in this legal process, and will therefor not bear any litigation costs or liability.

In relation to the above linked supreme court judgement the consultancy firm Ernst and Young (EY) was appointed to conduct an independent review. The independent review was presented in October 2016 with the outcome that supported the supreme court judgment. This is one of the main reason why I in my earlier analysis of K14 stated that the appeal is not likely to result in favor of the defendants. What was then unknown was how the case would play out for the minority shareholders that were not appealing in court and those who hadn’t signed a form as of 7 April 2016 stating that they would like there shares to be redeemed under the same conditions as the petitioner (the Pope entities). With the current cash tender offer of 0,40 SGD  with the purpose of taking K14 private we now know a bit more. But now to the really interesting part of the whole situation.

In the cash tender offer announcement the following can be found:

Requirements for delisting:

Under Rule 1303(1) of the Listing Manual, if the Offeror succeeds in garnering acceptances exceeding 90% of the total number of Shares in issue excluding treasury Shares, thus causing the percentage of the total number of Shares in issue held in public hands to fall below 10%, the SGX-ST will suspend trading of the Shares on the SGX-ST at the close of the Offer.

In connection to this requirement for delisting we can read the same thing but from a compulsory acquisition point of view and the value of shares:

Compulsory acquisition:

  1. (a)  obtained acceptances from shareholders holding not less than 90% in value of the shares in a Bermuda-incorporated company (“Target”) whose transfer is involved (other than shares already held, at the date of the offer, by the offeror, the offeror’s subsidiaries, and nominees of the offeror or its subsidiaries)

Finally, there is the 95% ownership level which would enable them to not only take K14 private but also entitles and binds them to acquire the remaining 5 % at 0,40 SGD tender offer:

Under Section 103 of the Bermuda Companies Act, the holders of not less than 95% of the shares in a Bermuda-incorporated company (“Purchasers”) may give notice (“Section 103 Acquisition Notice”) to the remaining shareholders of the intention to acquire their shares on the terms set out in the Section 103 Acquisition Notice. When such Section 103 Acquisition Notice is given, the Purchasers will be entitled and bound to acquire the shares of the remaining shareholders on the terms set out in the Section 103 Acquisition Notice unless a remaining shareholder applies to the Court to have the Court appraise the value of such shares.

So to summarize and conclude so far, if the parent company of K14 don’t manage to acquire more than 90 % of K14 it will fail in its intentions to take the company private. This notion translates into two milliondollar questions:

  1. Can the parent company acquire more than 90 % of K14?
  2. If the parent company fails to acquire more than 90 % of K14, what will then happen?

Can the parent company acquire more than 90 % of K14?

According to the cash tender offer announcement the parent company has control, direct and indirect, over 66,01 % of K14 (se picture one below). Indirect they also have control over another 10 % if we take into account full use of the company’s buyback mandate. Finally, if the Pope entities have their 11,1 % holding redeemed, the parent company will have the control over 87,11 % of the shares in K14. In other words, the parent company is relying on the cash tender offer and that it brings in another 2,9 %. Thats is, if the parent company manage to make full use of the buyback mandate, otherwise the tender offer will have to be more successful than just 2,9%. As of the pre cash tender offer announcement there have been no signs of the buyback mandate put to use. If we make the bold assumption that the 12,618,000 shares traded yesterday (well above the average trading volume of 15,000,00 shares) were all acquired via the buyback mandate they would just have managed to vacuum up 1,7%. In other words, if we hold my bold hypothesis true for the coming days it will take at about two weeks for the company to make full use of the buyback mandate. It should be noted that I don’t think it is very likely or fair assumption but more importantly, the volume of shares traded will most likely to decrease in the following days (i.e. the portion of shares that the company can potentially acquire per day is well below 1,7%). This assumption was already obvious today when only ~1,700,000 shares have been traded (0,2 %).

So to summarize and conclude, YES the parent company can theoretically acquire more than 90 %. However, I find it not very likely given what we know today and it will most certainly not happen over a night. Instead, I would argue that the current cash tender offer (0,40 SGD) is to much of a low ball offer to give minority shareholders the incentive to sell their share at the market or to tender their shares (i.e. the company will have a hard time putting its 10 % buyback mandate to use but also in succeeding to acquire another 2,9 % via the cash tender offer). Also, the fact that the appeal and the valuation for the redemption of the Pope entities holding is not jet decided upon I believe that many minority shareholders, me included, will sit tight in the boat and wait for the outcome of the court appeal. Together this leads us into the question of; what will then happen?



Option Nr. 4 – The special situation case for K14

When I started to write this follow-up post I had not thought about the idea of acquiring more shares in K14 (this is the reason I postponed the post). However, I have come to realize that K14 has morphed into a very attractive special situation case. I have therefor increased my position in K14 under the special situations heading, not as an increased checklist net-net investment. As a result I therefor extend my earlier three options decision framework for closing the K14 position to include a fourth option. What I present below is options 4 – the special situations case for K14.

To start, I don’t believe it’s a coincidence that the cash tender offer at 0,40 SGD was announced last Friday. This belief is mainly related to the fact that the earlier mentioned appeal takes place March 6 and 7 and 2017 and that this will most likely, due to the EY report, result in favor of the petitioner (i.e the Pope entities). Also, as pointed out earlier there is still no announcement regarding the valuation at which the petitioners holding is to be redeemed at. This will most likely be announced in the connection of the appeal outcome. I would argue that the price the petitioner will be offered is well above 0,40 SGD. I would also argue that the minimum price is around 0,67 SGD since this represent the equity per share as of 31 December 2016 for K14. It might even be higher as a result of the company being profitable and debt free but also that the valuation will probably take into account loss of earnings as a result of the misconduct by the defendants.

Furthermore, one should note and be aware of that the defendants are charged under section 111. This translates into what is know as a “Class Remedy” for all shareholders. In plain English, the redemption of shares at a value jet unknown, but probably at the minimum of 0,67 SGD, is in theory not only applicable to the Pope entities and the shareholders that signed the 7 April 2016 form but in fact all minority shareholders. However, it is a bit unclear to me if the class remedy also holds true for investors that has become shareholders after the legal process started back in 2011 or not. What confuses me, as I’m not legal expert, are these two quotes that can be found in the supreme court judgment earlier referred to:

Statement from the court: “However, as I have already found above, the Petitioner is not entitled to seek relief in respect of shares in the Company purchased after the presentation of the Petition on August 3, 2011.” (p.85)

Statement from the respondents lawyer: “Mr Wong SC did not dispute the argument that section 111 is fundamentally a class remedy. In principle it seems to me that all minority shareholders must have a right to be heard at the relief stage of the present Petition.” (p.85)

However, lets say that the first quote is true and that is how the court is going to decided upon which shares get redeemed at the not jet disclosed valuation level. In that case, I would argue that this in fact doesn’t really matter for how the whole situation is going to play out for other minority shareholders like myself. I would argue that the 0,40 SGD is to much of an low ball offer to get minority shareholder exited and that the sneaky attempt by management to fool minority investors in order to attain the +90 % position needed to take the K14 private is not going to succeed, as discussed before. In other words, we may very well see an increased cash tender offer or an buyout offer at the same price as the redemption of shares for the Pope entities even though we might not legally be entitled to it. This in order for the parent company to succeed in acquiring the shares needed to delist the company and take it private, all according to its stated intentions.

Even if i’m drastically mistaken or wrong in my above probability guesstimates, reasoning and argumentation this is still an very favorable special situations bet. Reson being that at the current price of 0,415 SGD there is an estimated minimum upside of 61 % (0,67 SGD) at the same time as the downside is limited to -3,8 % (i.e. the 0,40 SGD price at which I can cash tender my shares). I think Mohnish Pabrai would would let me use the phrase “heads I win tails I don’t lose much” without to much complaints in this case.


Disclosure: The author is long SGX:K14 when this analysis is published. Also note that SGX:K14 is a micro-cap stock (173 M$ in market capitalization). The trading is illiquid.

The Aggressive Conservative Investor by Martin J. Whitman & Martin Shubik

The Aggressive Conservative Investor by Marty Whitman and Martin Shubik is a classic book in the value investing field. First published in 1979 the latest version is dated 2005. If you haven’t read it and you are a fan of the Intelligent Investor or Security Analysis you are going to like this one for sure. Whitman is in my opinion one of the most influential, successful and best adaptive investors to the classic asset focused value investing philosophy laid out by Benjamin Graham in the above mentioned books. If you don’t take my word for it here is a short video where Whitman tells you all about it:

The book is structured around four characteristics for outside investors and what makes an attractive equity investment. This is know as the financial-integrity approach:

  1. The company ought to have a strong financial position, something that is measured not so much by the presence of assets as by the absence of significant encumbrances.
  2. The company ought to be run by reasonably honest management and control groups.
  3. There ought to be available to the investor a reasonable amount of relevant information.
  4. The price at which the equity security can be bought ought to to be below the investor’s reasonable estimate of net asset value.

In addition to the four essential characteristics, the authors write about supplementary factors that can make an equity security attractive. These factors are structured under three subheadings—going-concern factors (e.g. increasing profitability or dividend), stock market factors (e.g. cooperative valuation and macroeconomic variables) and asset-conversion factors (e.g. refinancings, mergers and acquisitions, liquidations, changes in control and large-scale distributions to common stock holders).

Please comment if you have read the book and what you thought of it. Also, if you have found a worldly wisdom in the book that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Five worldly wisdom’s from the book

It has been our observation that the most successful activists have had much the same approach to investing that the most sophisticated creditors have had toward lending. Essentially, these people approach a transaction with two attitudes, the first having to do with their order of priorities. In looking at a transaction, the single most important question seems to be, What have I got to lose? Only when it seems that risks can be controlled or minimized does the second question come up: How much can I make? The second attitude has to do with a basic feeling that risk—how much one can lose—is essentially measured internally, not externally. The possibilities of unsatisfactory results from an investment or loan are to be found internally in the performance of the underlying business and the resources in the business, not externally in the market prices at which a company’s securities might trade. Successful activists and creditors, while not unmindful of the “value messages” that are delivered by markets, tend not to be overly influenced by such messages. Their attitude is, As far as my objectives are concerned, I know much more about the situations in which I invest or in which I lend than the stock market does. (p.17-18)

The wherewithal to weather a temporary setback is particularly important for the investor who believes, as we do, that he can know more about an issue than the market does. It is an important condition for investors following the financial-integrity approach. It is suicidal to ignore the general market unless you have the resources and inclination to sit tight, or can actively influence the business. Any approach that minimizes market factors can give only a margin of safety in terms of investment risk. We do not know how an outside investor can guard against stock-price fluctuations unless he has the resources to ignore them. (p.75-76)

Astute financial people do not measure potentials simply by reference to the risk–reward ratio. It is not sufficient to calculate that, say, there is five times as much chance that the investment will appreciate from one to twenty points as there is that it will depreciate from one to twenty points. Such a calculation reflects only odds. The astute person examines consequences as well as odds. For example, consider the situation where the odds are five to one that an investment will appreciate, but that if it fails to do so, the investor will become insolvent. He might well conclude that the consequences of disappointment are so dire that the particular investment is unattractive, notwithstanding the favorable odds. (p.76-77)

The standard of investment behavior for passivists as well as activists should be, Don’t worry about the investments you did not make. Rather, concentrate your worries on the ones you made, but which you should not have made. The only people who logically ought to worry about investments they did not make are total-return traders who are attempting to maximize or beat the market. This book is not directed to them. (p.166)

Most people who trade common stocks (as opposed to those who hold common stocks) seem to be more interested in the near-term outlook than in anything else. They will not purchase a security if the near-term outlook seems bad or uncertain, regardless of the price at which it is selling. An investor who is able to take positions based on other factors increases his chances of finding outstanding long-term bargains, since there is a relative lack of competition in the market in which he is buying. Given that market values will be determined by future earnings, and given also that most investors rely primarily on the past earnings record of a company in predicting future earnings, a good past earnings record will probably be reflected in a high market price. However, although they may also be an indicator of good future earnings, large high-quality asset values will probably not be reflected in a high market price for the stock. Thus, by placing primary weight on present asset value rather than on past earnings, an investor should be able to realize higher appreciation potential and lower risk of loss in the long term. (p. 202-203)