Midland IC&I Ltd (459)

Write up on one of the major Hong Kong commercial/industrial property brokerages.

On the surface, this is an extremely attractively priced stock. Market cap of HK$630m, but with a net cash position of HK$572m. Cash burn rate is low, so you're effectively getting the business for HKD$60m (assuming the cash on the balance sheet is real).

And whats the business worth? The underlying business (industrial, commercial property brokerage) has not lost money on a cash basis since 1995. Since 07, its average FCF1-CAPEX has been HK$89m a year. Even using a P/FCF multiple of 5x, its not hard to see how this should be valued a lot higher- high ROE, no debt, positive recurring FCF, etc.

Unfortunately, it is also cheap for multiple reasons:

1) The hong kong property market has been hit by the introduction of three stamp duties. The commercial property market is not spared, and sales are expected to plummet. This will be Midland IC&I's first trough in the business cycle since 2008.

2) Crucially, even with its ballooning cash pile, Midland IC&I has not yet paid a cash dividend. Yes, management might do something stupid, like make silly acquisitions or favorable loans to related parties.

3) Some of you would have heard of the poor results and subsequent internal struggle over at parent company Midland Holdings which holds a 71% stake in Midland IC&I. A group of ex-lieutenants have risen against CEO Freddie Wong and his daughter Angela, and have attempted to acquire 10% of the shares of Midland Holdings. It is at present unclear how the situation would unravel (privatisation of Midland Holdings, a more fractured board, Freddie wong retains control) at Midland Holdings, but this distracts management from more pressing business concerns. Angela Wong sits on the board of Midland ICI, and CEO Daniel Wong worked in Midland Holdings since 1994 before his position in Midland ICI.

Catalysts include an improvement in HK property sales, a privatization offer, and/or the initiation of a dividend policy/special dividend.

(18-04-2014, 11:29 PM)kw2496 Wrote: Write up on one of the major Hong Kong commercial/industrial property brokerages.

On the surface, this is an extremely attractively priced stock. Market cap of HK$630m, but with a net cash position of HK$572m. Cash burn rate is low, so you're effectively getting the business for HKD$60m (assuming the cash on the balance sheet is real).

And whats the business worth? The underlying business (industrial, commercial property brokerage) has not lost money on a cash basis since 1995. Since 07, its average FCF1-CAPEX has been HK$89m a year. Even using a P/FCF multiple of 5x, its not hard to see how this should be valued a lot higher- high ROE, no debt, positive recurring FCF, etc.

Unfortunately, it is also cheap for multiple reasons:

1) The hong kong property market has been hit by the introduction of three stamp duties. The commercial property market is not spared, and sales are expected to plummet. This will be Midland IC&I's first trough in the business cycle since 2008.

2) Crucially, even with its ballooning cash pile, Midland IC&I has not yet paid a cash dividend. Yes, management might do something stupid, like make silly acquisitions or favorable loans to related parties.

3) Some of you would have heard of the poor results and subsequent internal struggle over at parent company Midland Holdings which holds a 71% stake in Midland IC&I. A group of ex-lieutenants have risen against CEO Freddie Wong and his daughter Angela, and have attempted to acquire 10% of the shares of Midland Holdings. It is at present unclear how the situation would unravel (privatisation of Midland Holdings, a more fractured board, Freddie wong retains control) at Midland Holdings, but this distracts management from more pressing business concerns. Angela Wong sits on the board of Midland ICI, and CEO Daniel Wong worked in Midland Holdings since 1994 before his position in Midland ICI.

Catalysts include an improvement in HK property sales, a privatization offer, and/or the initiation of a dividend policy/special dividend.

The last price on thursday ( 17th Apr) was $ 0.046 and NAV is $0.047 - so practically no discount or incentive for a new investor to buy the shares.

There has been NIL dividend payment since 2001 when the shares were split 5 for 1. The Parent company holds 71% stake and the minority public shareholders must be oppressed and they should sell out if the share price is near to NAV value. No sense in holding a share that never pays any dividend for over 10 years.

(19-04-2014, 08:58 PM)soros Wrote:

(18-04-2014, 11:29 PM)kw2496 Wrote: Write up on one of the major Hong Kong commercial/industrial property brokerages.

On the surface, this is an extremely attractively priced stock. Market cap of HK$630m, but with a net cash position of HK$572m. Cash burn rate is low, so you're effectively getting the business for HKD$60m (assuming the cash on the balance sheet is real).

And whats the business worth? The underlying business (industrial, commercial property brokerage) has not lost money on a cash basis since 1995. Since 07, its average FCF1-CAPEX has been HK$89m a year. Even using a P/FCF multiple of 5x, its not hard to see how this should be valued a lot higher- high ROE, no debt, positive recurring FCF, etc.

Unfortunately, it is also cheap for multiple reasons:

1) The hong kong property market has been hit by the introduction of three stamp duties. The commercial property market is not spared, and sales are expected to plummet. This will be Midland IC&I's first trough in the business cycle since 2008.

2) Crucially, even with its ballooning cash pile, Midland IC&I has not yet paid a cash dividend. Yes, management might do something stupid, like make silly acquisitions or favorable loans to related parties.

3) Some of you would have heard of the poor results and subsequent internal struggle over at parent company Midland Holdings which holds a 71% stake in Midland IC&I. A group of ex-lieutenants have risen against CEO Freddie Wong and his daughter Angela, and have attempted to acquire 10% of the shares of Midland Holdings. It is at present unclear how the situation would unravel (privatisation of Midland Holdings, a more fractured board, Freddie wong retains control) at Midland Holdings, but this distracts management from more pressing business concerns. Angela Wong sits on the board of Midland ICI, and CEO Daniel Wong worked in Midland Holdings since 1994 before his position in Midland ICI.

Catalysts include an improvement in HK property sales, a privatization offer, and/or the initiation of a dividend policy/special dividend.

The last price on thursday ( 17th Apr) was $ 0.046 and NAV is $0.047 - so practically no discount or incentive for a new investor to buy the shares.

There has been NIL dividend payment since 2001 when the shares were split 5 for 1. The Parent company holds 71% stake and the minority public shareholders must be oppressed and they should sell out if the share price is near to NAV value. No sense in holding a share that never pays any dividend for over 10 years.

Hi soros, thanks for sharing your thoughts. Any reason for using NAV to value the shares? It runs a property brokerage business (and an asset-light one at that) not a reit or developer; so it's revenue consists purely of commissions on sales/leases. IMHO an income approach would be more appropriate.

Another thing to note- and I apologize for not making that clear in the write-up, is that Midland IC&I was until 2007 embedded within Midland Holdings. In 2007, Midland holdings bought a shell company (EVI education), injected IC&I's business in there, and changed the name. So their dividend history is not from 2001, but 2007.

This is their net cash position from 2007: (HKD mln)
2007 2008 2009 2010 2011 2012 2013
143 180 230 316 407 488 572

I agree that their dividend history to date has been appalling. That said, they are a young listed company with ballooning cash pile and sooner or later, that cash has to be put to use somewhere. This could be used for acquisitions, loans, organic expansion, or (best case) a special dividend. I believe that a special dividend in present circumstances would make sense (parent and freddie wong are cash poor and could use cash from IC&I now). I might be wrong, but the risk/reward here is compelling enough for a deeper dive.

FYI, IC&I's business performance pre-2007 is in Midland Holding's annual segment breakdowns. Thanks for sharing your thoughts again.

I usually use NAV as a guide to value the shares especially when no dividend has been paid for many years.

If you hold the shares , you should write to all the independent non-exec directors asking for introduction of progessive dividend policy or they should resign if they are unable to support the public shareholders best interests.

In my opinion Midland IC&I is an excellent business at an extremely cheap price.

here is a very good writeup: http://www.valueinvestorsclub.com/value2...dea/103327

Please email me if you would like to discuss Midland IC&I. my email is mikekruger94@gmail.com

Best,
Mike

(19-04-2014, 08:58 PM)soros Wrote: The last price on thursday ( 17th Apr) was $ 0.046 and NAV is $0.047 -  so practically no discount or incentive  for a new investor to buy the shares.

There has been NIL  dividend payment since  2001  when the shares were split 5 for 1. The Parent company holds 71% stake and the minority public shareholders must be oppressed and they should sell out  if the share price is near to NAV value. No sense in holding a share that never pays any dividend for over 10 years.

There has been no updates to this thread for several years.

It is currently trading at 0.1x P/B and 4.x P/E* (aastocks)
*profit warning issued Dec 2019

Cash : 563m vs Borrowings(Non-Curr/Curr) + Convertible Notes** : 131m + 4m + 185m

**conversion price of HKD $0.46

Price on last Fri : HKD $0.109

http://www.midlandicicorp.com.hk/eng/inv...164530.pdf   [IR]

The property mkt has probably not been that great with the trade war, protests and then the current COVID-19 in recent years. However, once the dust settles, and the property mkt normalise, cld its fortune/valuations improve ? Only time can tell.

Midland announced that they will be distributing Midland IC&I shares to their shareholders.

https://www.scmp.com/business/companies/...mp-founder

In addition, the majority shareholder will be making a mandatory cash offer for the Shares which are not already owned at HK$0.09587.