China Digital TV (STVVY) – Ex-dividend day – 70% potential return

Current Price –$1.4

Expected Price - $0.35 (if today is the ex-dividend day)

Upside – 70%

Expiration Date - May 26th, 2017

 

This is a quick message, as this is a timely situation and I did not have time to do a full write-up. Shares at current prices are either a good short (if today is ex-dividend) or a good long (if today is not ex-dividend), so if anyone manages to figure out which way it is, you stand to make a ton of risk free money.

China Digital TV (STVVY) is paying a large special dividend $1.5/share for the record holders on the 31st of May (as per SEC filling) and the stock is supposed to trade ex-dividend today. By my estimates the stub should trade at $0.35/share (remaining cash on the balance sheet with some discount). Interestingly ex-dividend date is not mentioned in the PR releases by the company itself, but counting T+3 from the record date, today should be the ex-dividend date.

From news coverage on the situation:

“The firm also recently declared a special dividend, which will be paid on Thursday, June 15th. Shareholders of record on Wednesday, May 31st will be issued a dividend of $1.50 per share. This is an increase from China Digital TV Holding Co.’s previous special dividend of $0.50. The ex-dividend date is Friday, May 26th.”

However, instead of a sharp share price drop this morning, the shares are declining gradually. So either I am misunderstanding the situation, or the market is wrong. I was not able to reach Investor Relations to clarify on this. Interactive Brokers also did not have today as the ex-dividend day or 31st of May as the record day in their systems (which would seem to suggest that today is not yet ex-dividend date).

There might be ambiguity as the dividend is not yet fully certain. From the press release:

So far, the Company’s offshore account has received a portion of the proceeds in US dollars equivalent to 100 million Renminbi. The remaining proceeds are still in the procedures of currency exchange from Renminbi to US dollars. If the Company is unable to pay the dividend due to the  foreign currency conversion, the Company commits to update the market with a new special dividend payment date as soon as possible.”

Thus a week ago company had only 15% of the required dividend amount converted to USD. At the same time STVVY still has till 15th of June (pay-out date) to finalize the conversion   So it is not clear if the dividend date will be postponed or not. Also not clear whether record date will be changed in case the dividend date is postponed.

Worth noting that STVVY has paid dividends before and current special dividend comes following the sale of the core business. Also insiders recently acquired stock from another shareholder at $1.8/share. So this whole dividend situation is not a scam and I believe it will be paid eventually.

This reminds a bit of BINDQ situation, where the stock continued trading at elevated prices even though shares were worthless (no liquidating distributions) after the cut-off date.

Those considering the long side, keep in mind that $1.5/share distribution might be taxed, especially if all of it is classified as ordinary dividend. Again I was not able to reach IR to clarify on the classification of distribution (dividend vs return of capital)

Thank you Jonathan for bringing this stock to my attention.

40 COMMENTS

  1. dt

    Just noticed that Google Finance also marked today as ex-dividend. Clearly the whole market is confused and trading volume is high. Will be interesting to see how this plays out eventually.

    1. dt

      Do you have any support for this? Then it is a good long at current prices as it trades below the special dividend level.

  2. Makarid

    Also if you look at the interactive brokers chart of the stock,it said that it is ex-divident today

    1. dt

      I spoke to IB this morning, i was told they are not aware of the ex date yet. So either they got new info, or the ex date on the chart is simply automatic indication.

      Market so far seems to suggest that today is not the ex date yet.

      1. Makarid

        I am sure the confusion is because of this:

        (1) In respect to cash dividends or distributions, or stock dividends, and the issuance or distribution of warrants, which are less than 25% of the value of the subject security, if the definitive information is received sufficiently in advance of the record date, the date designated as the “ex-dividend date” shall be the second business day preceding the record date if the record date falls on a business day, or the third business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date.

        (2) In respect to cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security, the ex-dividend date shall be the first business day following the payable date.

        (3) In respect to stock dividends and/or splits relating to American Depository Receipts (ADRs) and foreign securities, the ex-dividend or ex-warrants date shall be designated by the Committee.

  3. Nicole

    Seems to be priced right IF it’s not ex-div yet? (I think that’s the case bc for large distributions ex-date is typically after record date). Last price prior to announcement 1.75 implies valuation of 0.25 post distribution. So current valuation is 0.25 plus (1.50 – 20% tax) equals 1.45 which matches current price?

    1. dt

      Not sure i follow your calculations. Price of $1.75 was before the stock got delisted.
      Stub at $0.35/share plus special dividend $1.5/share results in $1.85. if you tax dividend at 20 percent, it still results in $1.55/share. Obviously stub price might end up lower (as the remainig business is cash burning), but with $0.5/share in cash, it should be close to my estimate.

  4. Demi Wang

    It looks like the ex-date is 06/16.

    “The second method, under subparagraph (b)(2) of Rule 11140, provides that for dividends or distributions that are 25 percent or greater of the value of the subject security, the ex-date shall be the first business day following the payable date. For example, if an issuer has announced August 10 as the record date and August 31 as the payable date, then the ex-date will be September 1, the first business day after the payable date. In this example, September 1 is the day on or after which a buyer would purchase the security without the dividend and, therefore, the day on which the price of the stock is adjusted downward. In this example, a seller of the security on August 15, even though the holder of record to receive the dividend, would have to relinquish the dividend to the buyer. Indeed, because the value of the security on August 15 has not yet been adjusted downward to reflect the dividend distribution, the seller in this example would be unjustly enriched by keeping the dividend. The seller would have received the value of the dividend twice: first, as fully reflected in the unadjusted price of the stock on August 15; and secondly, as subsequently paid by the company to record date holders.”

    http://www.finra.org/sites/default/files/NoticeDocument/p003997.pdf

  5. Eric S

    Record date is 5/31/17 which is unusual. Payable on 6/15/17.

  6. over2u

    Looked on bloomberg – 31.05 record date, while mid-June is ex-dividend date – complete mess.

  7. dt

    So if ex dividend will be after distribution, it suggests that stock will simply be trading including the dividend after the record date. And anyone who sells the stock after the record date, will sell it together with the right to receive special distribution.

  8. Fa

    Could the special dividend be cancelled? given the NYSE delisting, the company is facing probably legal issues….

    1. dt

      I do not think it will be cancelled. Delisting is happening only because of the dividend payout and management was fully aware of it. If i recall delisting was even noted in the annual report.

      However, if for some reason currency will not be converted, then dividend could be postponed or even cancelled. But i consider the risk of that to be small.

  9. greg lia

    regarding the 20% tax is the suggestion that an IRA would fully benefit from the 1.50 and others would owe 20%, or that somehow 20% is deducted prior to the amount being deposited in ANY type of account, tax deferred or otherwise?

    1. dt

      Greg, 20% was used just as an example. Eventual tax rate will depend on how this dividend will be classified and on every investor’s specific situation.

  10. Andrew Davis

    So even at the current price of $1.54, this is an okay deal? Get $1.50 back in a few weeks and be left holding something potentially worth $0.35 which cost you $0.04… Am I missing anything?

    1. dt

      It will depend on how much tax you will end up paying on the distribution. I hope to get some clarification from the company next week (if they pick up the phones or answer e-mails).

  11. Michael

    It’s currently trading at $1.53. Even if we assume a tax-free investor (e.g. retirement account), Chinese withholding tax is 10%, the actual payout would be $1.35. The investor would be $0.18 for a $0.35 of remaining cash, which is supposedly “burning”. Doesn’t seem to be a good value proposition to me.

    1. dt

      After distribution there should be $0.5/share in cash left on the balance sheet. Also at the time of the write-up this was at $1.4, which is already 10% better than $1.53.

  12. dt

    Some further bullet thoughts on STVVY:
    - If the $1.5 capital return will be classed as regular dividend (IB advised that currently this seems to be the situation), then after 10% China withholdings tax, the net amount received will be $1.35. On top of that investors might need to pay further taxes on dividends with their local tax authorities.
    - The remaining stub will have c $34m of net cash which translates into $0.56/share. Before the dividend announcement, STV traded at c. 35% discount to its cash balance. Applying the same discount for the stub results in $0.36/share.
    - The company now has two operating businesses. The growing cloud platform operations and the declining Head-end system integration and development.
    - The Head-end systems parts seems to be related to the sold business of card for TV set-up boxes and is likely to continue the downward path and be discontinued in the short term.
    - The growing Cyber Cloud part of business provides services that allow Chinese cable operators to offer gaming and other entertainment on television sets. Revenues have grown from $12k in 2014 to 412k in 2015 and then $2,091k in 2016 (400% increase). So growth here has been spectacular, however company does not provide quarterly breakdown of revenue, so it is not clear how is the trend holding up in the last two quarters, but it seems to have slowed down significantly (total revenues in Q1 2017 are only $675k).
    - Couple more references on valuation of Cyber Cloud. Back in Dec 2014 Beijing Gehua acquired 10% of Cyber Cloud at RMB14m. Then in Dec 2016 Shoutai JinXin Capital Management acquired 10% for RMB33m. So if these transaction are real, then STVVY’s 58% stake in Cyber Cloud should be valued at $28m or $0.46/share (that is on top of the remaining cash balance).
    - However, I was able to find only limited info on Shoutai JinXin Capital Management – almost all references are linked to their investment in Cyber Cloud (I was googling in English only). However, this link (http://www.finanznachrichten.de/nachrichten-2015-05/33882282-china-digital-tv-and-tongda-venture-capital-co-invest-in-fund-020.htm) would seem to suggest that Shoutai JinXin was general partner of the fund seeded by the same China Digital TV – so maybe the fund is now even owned by STVVY, which would make its investment in Cyber Cloud quite questionable for valuation purposes. I was also not able to find much info on Cyber Cloud (again maybe everything is in Chinese language)
    - During 2016 the loss from continued operations was $8.1m. It is hard to judge how much cash was burned by continuing operations, as cashflow statement includes discontinued operations. In Q1 2017 the company operated around break-even after including ‘other income’ (previously this PnL item related mostly to government subsidies). Operating loss was at $1.8m during Q1 2017. So the current cash balance would last for four years assuming no further benefits from ‘other income’.

    Overall with $0.56/share in cash and implied $0.46/share valuation of Cyber Cloud, the stub current value of $0.15/share ($1.50-$1.35 in net dividend) looks quite enticing. Even if one assumes large cash burn going forward the stub is likely to trade higher than $0.15/share. Due to language barrier and absence of info in English I remain cautious.

  13. Makarid

    So,if we buy this stock before 16 June we will take the dividend?

    1. dt

      That seems to be the case now. Still no info on how the dividend will be taxed.

  14. greg lia

    stock down 5% today to 148-150 good entry point based on facts presented thus far. Any updated info would be much appreciated. When is delisting scheduled and what market will stub likely trade in? thank you

    1. dt

      There seems to have been confusion again upon opening whether June 1st was the ex dividend day and shares traded as low as $1.33. I do not have any further updates besides my comment on the 30th of May. Delisting already happened (12th of May) and shares are trading OTC at the moment, I assume the stub will continue to trade OTC as well.

  15. greg lia

    Big blocks for sale today, (100K and 80K) at 1.47. I have not been able to find any additional info, and investor relations not responding. I suspect this could spike when/if dividend info and date are clarified

    1. dt

      Dividend date is kind of clear now – on the 16th of June STVVY will trade ex dividend.

  16. Matteo Galullo

    So can I start a short position today, taking advantage of this opportunity?

    1. dt

      If you take short position today, you will have to pay out special dividends out of your own pocket.

  17. dt

    Yesterday my STVVY position got closed out (had a limit sell at $1.63). This is fairly close to my base estimate of $1.7 for the valuation of the stub plus dividend less Chinese withholding taxes ($0.35 + $1.5 – $0.15 = $1.7).

    Overall this resulted in 12.5% gain in two weeks – I entered the position at $1.45 (instead of $1.4 in the write-up headline) after it was clarified that 26th of May is not the ex-dividend day.

    Will be very interesting to see where the stub trades on Friday.

  18. dt

    I have kept couple of shares to see what will be the treatment of dividend. And was quite surprised that a full $1.5/share was transferred to my account, without deducting any withholding taxes and IB support clarified that there will be no further deductions.

    Anyone have any insight on why there was no withholding tax on this distribution?

  19. dt

    It seems my estimates on where the stub will trade were approximately correct – shares closed at $0.32 and traded in the range of $0.3-$0.4 during the second half of the day. Kicking my self for not buying at $0.2 during the first half of the day – with cash at $0.56/share it was not likely that $0.2/price would prevail and in the morning it was depressed due to shareholders exiting position after the dividend. So a seemingly clear buying opportunity with obvious technical reasons why the market is undervaluing the stub.

  20. dt

    So in the end, for anyone who had enough patience to wait for dividend distribution this trade resulted in 27% over two weeks (assuming $1.45 purchase price).

  21. Joe Hill

    My activity page on Merrill Edge is showing that the dividend was paid on June 15. Is that what you guys are seeing too?

  22. Michael

    This worked out very well. Thanks… I had to pay an ADR mgmt. fee on the same date I received the distribution. Does that sound right?

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