Nam Tai Property: Complicated Plots

Nam Tai Property (NTP) has generated a 10 year return of about zero despite consistently bullish online commentary

I resisted buying NTP due to flaws in the bullish arguments, but took a fresh look due to recent involvement of an activist shareholder, ISZO Capital. Here’s a brief recap of some underappreciated aspects of the story and reasons why I still don’t own shares.

BACKGROUND

In 2014 Nam Tai decided to wind down its electronic components manufacturing business and redevelop the land under its Shenzhen factories (LINK). Shenzhen real estate prices have greatly appreciated since Nam Tai acquired these sites between 1993-2007, but the company faced significant challenges in realizing their value:

• Location – Nam Tai’s industrial sites are far from Shenzhen’s central business district and bullish commentary about Nam Tai exaggerated their value.
• Zoning – Nam Tai’s industrial sites are zoned for Industrial use. Upgrading the zoning requires government approval, large one-time payments, and imposes restrictions on permitted usage of the sites that limits their potential value
• Experience – real estate development is a capital intensive and highly competitive business. Nam Tai had no experience in any aspect of it.

In 2017 Nam Tai’s Chairman sold his 18% stake in the company to Kaisa Group, a leading Shenzhen-based real estate developer, which subsequently raised its holding to 24% through open market purchases. Kaisa’s 2019 Annual Report showed:

• 176 active development projects in 47 Chinese cities
• FY19 contract sales of 88Bn RMB (about US$13Bn)
• Total assets of 271Bn RMB (about US$39Bn)
• 15,300 employees

Kaisa’s large market presence should provide the expertise necessary to successfully advance Nam Tai’s real estate projects.

CAPITAL MARKET VALUATION DILEMMA

Nam Tai shares are likely to trade far below the value of the company’s assets:

• US listing – US-based investors are far from Nam Tai’s place of business and will not see information about Shenzhen real estate and other factors impacting Nam Tai’s value without special effort that few will make. The only other US-listed China real estate company is the beleaguered Xinyuan which trades far below asset value.
• Sector valuations – China/HK commercial real estate investment companies with much higher quality assets, current profits and dividends, and strong track records are trading at deeply discounted valuations. SOHO China’s share price of HK$2.23 is just 27% of 6/30/20 HKFRS Net Asset Value. HongKong Land’s share price of US$3.83 is just 25% of 6/30/20 IFRS Net Asset Value.

Nam Tai is an orphaned microcap with non-prime assets, no earnings, no yield, and external control. Without is a clear catalyst for appreciation Nam Tai’s assets could be worth over $20 and it would still not be surprising for shares to trade under $5.

ISZO CAPITAL SEEKS TO “FIX” NAM TAI

ISZO Capital, owner of 9.8% of Nam Tai shares, has issued a series of letters since May 2020 which use inflammatory language to complain about the decline in Nam Tai’s share price and promote ISZO’s demand for a Special Meeting of Shareholders to replace most of the Board of Directors. Several aspects raise concerns:

• Expertise – ISZO claims that its six nominees have “extensive experience operating in China” but its supporting information only mentions China work experience for a single nominee, Louis Leung. The remaining five nominees may be fine individuals, but in aggregate the proposed board appears to be severely deficient in expertise directly relevant to Nam Tai’s assets. Does ISZO think such knowledge is unnecessary? Or was ISZO unable to find any potential nominees with knowledge of Shenzhen real estate who agreed with its plan?
• Valuation – ISZO does not seem to know what Nam Tai is worth. ISZO refers repeatedly to property valuation reports prepared several years ago for Nam Tai’s previous management team. In May ISZO claimed these reports showed Nam Tai’s assets were worth “between $15 and $23 per share“. In September ISZO claimed these reports showed Nam Tai’s assets are worth “up to $40/share”. ISZO has mentioned without any evidence that “based on raw land valuations alone, the stock should be trading higher than $20 per share“. The purported land valuation may rely on an often repeated but erroneous comparison to Logan Property’s Acesite Park development.
• Continuity – ISZO’s goal of replacing Nam Tai’s current management team carries the obvious risk of disruption to existing zoning, financing, construction, and marketing activities that leads to genuine value destruction rather than just share price decline. Unfortunately this disruption may have already begun.
• Reliance on Foreign Sources – ISZO’s statements about Nam Tai and the information on its FIXNTP website are almost entirely from English language sources outside mainland China. This gives the impression that ISZO made its investment in Nam Tai and proposed extensive changes at the company without the benefit of any local market knowledge.

ISZO’s request for a Special Meeting received support from holders of more than 40% of the company’s outstanding shares. On 9/11/20 Peter Kellogg, a Nam Tai Director since 2000 and the controller of 19.1% of the shares indicated that he had supported the request but had not committed to supporting ISZO’s nominees (LINK)

Peter Kellogg has been involved with Nam Tai for over 20 years and at age 77 he may be looking for a way to realize the value of his investment.

Nam Tai responded to ISZO with several press releases (6/3, 8/5, 9/23) and a presentation. Nam Tai also arranged a $170mm share placement to Kaisa and a friendly party (LINK). The placement would raise Kaisa’s stake to 43.9%, large enough to block any measures it opposed at a shareholder meeting. The $9.15/share placement price was in line with the market, but dilutive to the per share fair value of Nam Tai’s assets. Nam Tai claimed the placement was necessary to alleviate the risk that the company would lose access to debt financing if a Special Meeting led to a “change of control”. ISZO filed suit in the British Virgin Islands to block the issuance and Nam Tai disclosed that the timeline for consideration of the case would run to March 2021.

It a messy situation. A legal ruling on the share issuance and Special Meeting could be six months away and resolution could be further delayed by an appeal. During that time NTP shares are likely to remain weak because investors won’t even know how many are outstanding and who will be in charge of the company. During that time the value of the company could erode if the uncertainty causes delays in financing, permitting, and marketing.

CAN NAM TAI BE FIXED?

There’s no apparent purpose for Nam Tai to continue as an independent public company. Its assets have value, but Nam Tai has no value as an entity. It has no brand, no expertise, and no competitive advantage in the real estate market or the capital market. Its shares are likely to remain persistently undervalued.

I believe the best outcome would be if the Board of Directors were to initiate a review of strategic alternatives including sale or liquidation. The realizable value in such a process is likely to be less than the company’s asset value due to:

• Corporate Income Tax and Land Appreciation Tax payable on gains realized from sale of any real estate developments in China.
• Zoning restrictions on any sale or transfer of Nam Tai assets. For example, the zoning for Nam Tai Inno Park prohibits any transfer of the land use rights. Nam Tai has been marketing residential units at the site under very long-term leases that are functionally equivalent to sales, but those contracts may not be legal.
• Withholding tax on transfer of any funds out of China
• Kaisa’s ownership and involvement may inhibit other bidding interest for Nam Tai’s assets or for the company.

I agree with Peter Kellogg that shareholders deserve the opportunity to vote at a Special Meeting, but if I were a shareholder I would not support ISZO’s nominees unless ISZO demonstrates insight into the Shenzhen real estate market and Nam Tai’s assets and presents a factually detailed plan rather than just promises.

Nam Tai would be a more attractive investment for independent investors if ISZO, Kaisa, and Kellogg were able to work together for common benefit.

Disclosures

At the time of publication the author held no position in Nam Tai Property. This could change at any time without any updated disclosure. The author may never make any further public comment about Nam Tai. Investors are encouraged to check all of the key facts cited here from SEC filings and other sources prior to making any investment decisions.

The author is unaware of any family relation to Brian Sheehy, founder and managing partner of ISZO Capital.

Nam Tai (南太) means South Pacific