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18-02-2012, 02:23 PM
On 31 Dec 2011, NAV per share was RMB 1.66. At current SGD/RMB exchange rates of 5:1, NAV is SGD 0.332 per share.
Put yourself in the shoes of Su Qingyuan:
1. You own 65% of a business that earned RMB 276m in the last financial year ended June 2011.
2. The latest results suggest everything is going smoothly.
3. The business holds RMB 438m of cash and carries no debt.
4. Free cash flow has been positive the last 4 years so the cash is available for distribution.
Let's assume you want more cash than what you currently get from salary and dividends.
Here are some of your choices:
1. Increase your salary
You are currently paid RMB 960k/yr plus profit sharing of 1.5-2.5% of pretax profits above RMB 300m.
You own 65% of the company, so you can make the pay increase happen for sure. But to avoid too much scrutiny you can't increase your salary too much, maybe at most by 50-100%.
Windfall: RMB 1-2m per year.
2. Pay a big dividend
You own 65% of the company so you can get RMB285m, whether eventually or immediately. RMB 226m of the RMB438m came from the IPO i.e. it wasn't money you earned anyway. Assuming all non-IPO money is "your money" that's RMB 212m (RMB 438m less RMB226m).
Windfall is (RMB 285m less RMB 212m) = RMB 73m.
3. Sell a piece of the company.
The implied valuation of the company at SGD 0.17 per share translates to RMB 0.85 per share, or about half its book value.
(Given the earning power of the business, book value appears to understate the intrinsic value of the business.)
The cash on the balance sheet amounts to RMB 0.64 per share.
So, you are selling the business on an ex-cash basis for RMB 0.21 per share.
Earnings in FY2011 were RMB 0.41 per share.
Earnings in the first 6 months of FY2012 were RMB 0.25 per share.
In other words, net of the cash acquired, the buyer is getting better than a 6-month payback period on their purchase.
===
Looking at the 3 choices, we can see that #3 is clearly the dumbest choice of all. #1 would be simple to do but would have limited effect. #2 would be simple and effective but Su Qingyuan took the opposite route - he took scrip instead of cash! And of course we know he also did #3, selling 114m shares for $0.16-$0.17, raising RMB 97m.
#3 is an amazing deal for the buyer. It is a horrible deal for the seller. It is clearly win-lose.
The simplest, though not necessarily the correct, conclusion is that Su Qingyuan is stupid, crooked, or both. I await a logical answer that resolves the situation above while also exonerating Mr Su.
Put yourself in the shoes of Su Qingyuan:
1. You own 65% of a business that earned RMB 276m in the last financial year ended June 2011.
2. The latest results suggest everything is going smoothly.
3. The business holds RMB 438m of cash and carries no debt.
4. Free cash flow has been positive the last 4 years so the cash is available for distribution.
Let's assume you want more cash than what you currently get from salary and dividends.
Here are some of your choices:
1. Increase your salary
You are currently paid RMB 960k/yr plus profit sharing of 1.5-2.5% of pretax profits above RMB 300m.
You own 65% of the company, so you can make the pay increase happen for sure. But to avoid too much scrutiny you can't increase your salary too much, maybe at most by 50-100%.
Windfall: RMB 1-2m per year.
2. Pay a big dividend
You own 65% of the company so you can get RMB285m, whether eventually or immediately. RMB 226m of the RMB438m came from the IPO i.e. it wasn't money you earned anyway. Assuming all non-IPO money is "your money" that's RMB 212m (RMB 438m less RMB226m).
Windfall is (RMB 285m less RMB 212m) = RMB 73m.
3. Sell a piece of the company.
The implied valuation of the company at SGD 0.17 per share translates to RMB 0.85 per share, or about half its book value.
(Given the earning power of the business, book value appears to understate the intrinsic value of the business.)
The cash on the balance sheet amounts to RMB 0.64 per share.
So, you are selling the business on an ex-cash basis for RMB 0.21 per share.
Earnings in FY2011 were RMB 0.41 per share.
Earnings in the first 6 months of FY2012 were RMB 0.25 per share.
In other words, net of the cash acquired, the buyer is getting better than a 6-month payback period on their purchase.
===
Looking at the 3 choices, we can see that #3 is clearly the dumbest choice of all. #1 would be simple to do but would have limited effect. #2 would be simple and effective but Su Qingyuan took the opposite route - he took scrip instead of cash! And of course we know he also did #3, selling 114m shares for $0.16-$0.17, raising RMB 97m.
#3 is an amazing deal for the buyer. It is a horrible deal for the seller. It is clearly win-lose.
The simplest, though not necessarily the correct, conclusion is that Su Qingyuan is stupid, crooked, or both. I await a logical answer that resolves the situation above while also exonerating Mr Su.
