Current Price: HK$0.82
Offer Price: HK$0.88 (expected to be increased)
Expected Close: TBD
This idea was shared by Lukas.
On the 15th of October, Chinese optical components manufacturing company Yorkey Optical International (ref. Yorkey) received an acquisition offer from Asia Optical, its largest shareholder (28%) and major client, at HK$0.88/share or HK$700m in total. Together with concert parties, management and employees’ trust, the buyer controls 42% of shares. The transaction is subject to Yorkey shareholder approval and cannot be opposed by more than 10% of disinterested shareholders – the blocking stake is 5.8%.
A few days after the offer announcement, activist David Webb increased his ownership to 6% allowing him to singlehandedly block the transaction. Mr. Webb argues that the current offer substantially undervalues the company and won’t support the merger unless the price is increased. The company is getting acquired slightly above cash on the balance sheet (HK$0.74/share) with hardly any value to real estate assets (assessed at HK$0.42/share) or the operating business. Webb seems to indicate that he would be supportive of the offer at current cash + RE NAV of HK$1.16 as a proper valuation (30% above the current proposal).
The situation offers a 7.5% spread to the current offer with a decent chance of a price bump.
The main risk is that the buyer will refuse to raise the offer – downside to pre-announcement price (HK$0.57/share) stands at 30%. However, the buyer is a strategic bidder and the merger should be highly synergistic. Asia Optical already controls Yorkey’s board and is one of the top business clients. Mr. Lai I-Jen, Asia Optica’s chair is also a chair of Yorkey’s. Likely both companies are closely interconnected and Asia Optical is opportunistically trying to buy out Yorkey’s minority shareholders at low valuation. Hence, there is a decent chance that the offer price will be increased to persuade the activist.
The scheme document is expected to be posted by the end of January’22.
Yorkey Optical International
Yorkey is engaged in the manufacture and sale of plastic and metallic parts and components of optical and optoelectronic products in China. A wide product line includes various processed metal and plastic components of cameras, camera cases, and other accessories. Customers include OEM’s, such as Canon, Nikon, Samsung, Olympus, etc.
The company has seen declining revenues since 2017, however, it continued to operate profitably (except for covid period) and was paying sizeable dividends every year (mostly return of excess cash on the balance sheet).
Since the end of 2019 the company started trading at a negative EV and share price has not recovered post covid
The Activist and Undervaluation
David Webb is a well-known Hong Kong activist and private investor with an estimated net worth of US$170m. He has a colorful background in both financial and political activism. Webb has been deputy chairman of Hong Kong’s Takeovers and Mergers Panel and the Takeovers Appeal Committee since 2001. Webb has been vocal on both government and corporate transparency issues on his Webb-site.com. In a 2018 speech, David reportedly calculated that he had beaten the market by an average of 12 percentage points a year since 1995. Some notable examples of his track record include his 20-month long recommendation to avoid 75 of the HKEX traded companies, several of which subsequently became targets of the largest raid ever by Hong Kong’s securities regulator.
As disclosed on his site Yorkey’s position is the 12th largest out of the 23 positions (3% of the disclosed holdings). He has been a shareholder of Yorkey since at least 2014 having made these reported purchases (here and here).
Yorkey Optical International (Cayman) Ltd (Yorkey, 2788) is a company suffering from corporate obesity – it is stuffed with cash, and has been since it listed in 2006, having consistently failed to execute its IPO investment plan or otherwise deploy the capital into its business.
From the 2015 post:
Not much has changed since 2013, except that Yorkey has become even fatter.
As noted shown in the financials table above the company started paying out substantial annual dividends from its cash pile, potentially due to pressure from Webb.
David’s recent writing (October’21), released a few days after the merger announcement argues the offer is too low. The main argument is that the current offer attaches no value Yorkey’s real estate assets, which are marked at US$5.9m on Yorkey’s audited book value as of Dec’20.
Based on David Webb’s comments, a breakdown of these 3 properties is provided below.
- The main factory is located on the North side of Dezheng Middle Road, Changan, Dongguan, PRC. Overall, the surrounding district is in the redevelopment process with many of the factories now gone and replaced with residential construction. Two screenshots are provided below, one from 2009 and another from 2020 clearly mark this transition. There are also two red boxes: the right box marks the approx. outline of Yorkey’s site (the 2006 property valuation document states 16,647 sq.m. and a building area of 40,138 sq.m.) and the left box marks a very similar property to Yorkey’s (land area of 18,990 sq.m. and a building area of 39,081 sq.m.) The left property is now owned by Chuang’s China Investments (CCI) and has a closed printing factory, which is now leased while CCI waits for the right opportunity to convert the property to residential use. CCI’s annual report (ends 31 Mar’21) discloses a market value of 223m CNY. Assuming the same value per square meter of land for Yorkey, its property would be worth around CNY196m or US$31m.
- Another asset is property units in Goldfield Industrial Centre, Sha Tin, Hong Kong, with a gross floor area of 788 sq.m., plus a car and lorry parking spaces. Part of this is still used as company’s head office. According to HKSAR Ratings and valuation Department, the average price for similar properties is HK$63,777 per sq. m, so Webb values these properties at around HK$50m or US$6.5m excluding parking spaces.
- The third asset is a 823 sq.m. industrial property, acquired in July of 2016 for HK$43m. The property consists of workshops on the 26/F of CRE Centre, 889 Cheung Sha Wan Road, Kowloon (plus the flat roof above) and all of these workshops are currently rented out. As these were recently purchased, the price can be adjusted by a 28.8% increase in RVD Quarterly Price index for flatted factories. So the total estimated market value of this property is around HK$55m or US$7m.
The combined value of these properties comes to US$44m (~7x above the reported book value), or HK$0.42/share. Adding the adjusted property values to net cash balance of HK$0.78/share results in a total NAV of HK$1.2/share as of 31 Dec’20 (Webb is using audited annual figures rather than most recent financials). Webb is using this figure as a proper offer price indication.
Adjusting for the recent dividend payout and figures in H1’21 report, results in cash+RE NAV of HK$1.16/share.
Webb’s arguments seem to make sense and Asia Optical is clearly trying to buy this on the cheap. However, it is also important here to note that historically the company has almost always traded close to its cash balance. So clearly, there are several solid reasons for such cheapness – Chinese nano-cap company with low liquidity and cash burn, shareholder unfriendly management, which refused to return cash despite previous Webb’s activist, continuous revenue downfall, etc.
Asia Optical specializes in diversified optical-related operations and is a significantly larger company (US$1bn market cap) compared to Yorkey. Asia Optical’s operations include manufacturing and sale of cameras, riflescopes, photocopier lens, scanner lens, and optical components. Both companies share similar technologies, for example, plastic injection molding, precision metal stamping.
Asia Optical acquired its first Yorkey shares in 2006 IPO by subscribing for 40m shares at HK$1.6/share. Ownership was increased from 5% to 27% in November of 2012 when the company acquired shares from Yorkey’s previous CEO at HK$0.77/share.