Nam Tai Property: I Bought A Ticket To This Circus

Dissident shareholders led by ISZO Capital recently replaced the board of Nam Tai Property (NTP) which had been controlled by Chinese property developer Kaisa Group. Significant recent news:

• ISZO Capital’s campaign to replace a majority of the Board of Directors was successful at a shareholder meeting held on 11/30/21 (LINK)
• Kaisa’s 24% stake was seized by Deutsche Bank to whom it had been pledged as collateral for borrowing (LINK). Kaisa has no remaining equity interest in Nam Tai.
• Nam Tai appointed a new CEO and CFO who appear extremely well qualified
• Nam Tai’s board alleged that the prior CEO was refusing to leave his position and hand over corporate seals and access to certain bank accounts. (LINK)

Key issues:

• Who will control Nam Tai’s assets? While Nam Tai’s 1/11/22 news release left investors uneasy, I believe the risk that the parent company loses the onshore assets is low.
• What is Nam Tai worth? I provide details of a $17.95 NAV/share valuation.
• Will Nam Tai Deliver Value to Shareholders? I believe that none of Nam Tai’s three largest shareholders want to be long-term investors in Shenzhen property. I believe they hope to realize the full value of its assets as soon as possible.

This article relies on inference and opinion to a greater extent than most of what is published on Koneko Research. I am sharing the information because I did the work and there seems to be high investor interest in the company. Some additional background is available in a prior Koneko article.

WHO WILL CONTROL NAM TAI’S ASSETS?

Nam Tai’s largest shareholders are:

• 23.4% Deutsche Bank (13D filing) acquired 9.2mm shares that Kaisa pledged as collateral for a $120mm credit facility. If Deutsche Bank received no other collateral from Kaisa then its basis is $13.06/share. DB would probably be happy to get back the value of its loan as soon as possible.
• 18.8% Peter Kellogg (latest 13D filing) has been a director of Nam Tai for over 20 years. He is 78 years old and may wish to realize the value of this investment.
• 16.7% ISZO Capital (latest 13D filing) led the proxy fight to replace the Kaisa-selected Board of Directors. ISZO disclosed that the average cost of its shares is $11.12. NTP represented 60% of the value of the positions disclosed in ISZO’s 9/30/21 13F filing. None of the directors nominated by ISZO are based in mainland China and ISZO’s public comments have not demonstrated any detailed understanding of Nam Tai’s assets. ISZO explained that its nominated directors “would likely seek to return capital to long-suffering shareholders in the form of buy-backs or dividends“.

I am not aware of any public comment or regulatory filing by Kaisa in response to the change of Directors at the annual meeting, the subsequent replacement of Kaisa-connected senior executives, and the seizure of Kaisa’s NTP shares by Deutsche Bank. Kaisa has not amended its 13D filing from March 2021 and has not made any HKEX disclosure (symbol 1638) to its own investors. Nam Tai’s Kaisa-connected executives have issued a couple of announcements on the Nam Tai website (1/14 and 1/20) explaining that they are doing a really good job and should not be replaced. They claim to have filed a lawsuit, but do not explain the basis, and there does not appear to be any. Nam Tai has direct 100% ownership of its Chinese subsidiaries; there are no VIE contracts that might complicate exercise of control by the parent company.

Since the NTP proxy battle began Kaisa has fallen victim to the broader distress in the Chinese property sector, defaulted on debt obligations, and hired financial restructuring advisors. Rather than a formal bankruptcy process, it is engaged with different onshore and offshore creditors to extend payment dates for obligations while promising to raise funds from asset sales. Implications, risks, and inferences of the impact on Kaisa’s problems on NTP:

• Kaisa needs to recover the $147mm it advanced for the failed NTP private placement in 2020. It is shown as “amount due to a shareholder” on NTP’s 3Q21 balance sheet. A BVI court ruling earlier this year required that the funds be placed in escrow until 7 days after NTP’s shareholder meeting. The meeting took place on 11/30 so the funds may now be payable to Kaisa, but I don’t know whether that obligation has been delayed by appeals of the BVI court rulings.
• Unfortunately the escrow funds were deposited in Credit Suisse funds connected to Greensill Capital that went into default early in 2021. As of 9/30/21 NTP had recovered $84mm (included in “restricted cash” on the 9/30/21 balance sheet) and showed a balance of $51mm as a short-term investment which was expected to be recovered in installments.
• Nam Tai’s new management explained on 1/11/22 that “We are working towards obtaining access to various accounts in the near-term, including a Hong Kong bank account with more than $80 million that we may have access to in the next several weeks“. That sounds like the escrowed private placement money.
• Having lost its entire equity investment in NTP, Kaisa would receive no benefit from continuing to manage the company. I believe that obstructing the transfer of management is an attempt to maintain leverage towards ensuring the return of the $147mm.

The limited Chinese media coverage of recent developments has been neutral in tone (example and example). The articles highlight two issues:

• Nam Tai arranged a debt financing at high rates from ISZO and Peter Kellogg’s insurance company . Without access to bank accounts it’s not surprising that NTP needs offshore working capital, however the optics of the transaction are poor. ISZO claimed that Kaisa engaged in self-dealing and received excessive compensation for services from Nam Tai. A similar accusation can now be made against ISZO.
• Kaisa hasn’t gotten back the $147mm deposit made for the private placement.

Public opinion might swing in Kaisa’s favor if Nam Tai delays return of the $147mm and then Kaisa might have a basis for filing claims against Nam Tai’s assets in China. Kaisa’s weak financial condition and need for the funds provides Nam Tai’s new team with significant leverage. Hopefully an agreement can be worked out under which Kaisa gets the $147mm in stages as Credit Suisse liquidates the funds and Kaisa facilitates a smooth transition for NTP’s China activities.

The new executives appointed by Nam Tai’s board appear highly qualified to stabilize the situation once they are in place. CEO Huang Zhichang worked at Nam Tai from 1998-2021 and served as Chief Operating Officer, Director, and Labor Union Chairman. He should be extremely familiar to Nam Tai employees and stakeholders. CFO Steven Parker has lengthy experience in Asia in regulatory compliance and forensic accounting. He will probably move quickly to review whether there have been any inappropriate transactions between Nam Tai and Kaisa.

ISZO’s slate of Directors was elected with a Strategic Vision that essentially promised to develop a plan after they were elected. ISZO described Nam Tai’s March 2020 $101mm purchase of a land parcel for development in Dongguan as an “egregious strategic misstep” and argued the funds could have been used for shareholder dividends. In hindsight there was certainly no harm from the land purchase which occurred at a market low during COVID lockdown. Nam Tai expects to complete the project by the end of 2022 and should recover its capital with a satisfactory profit. Given ISZO’s hostility towards this investment, I assume ISZO would rather sell Nam Tai’s assets than see it spend over $500mm that would be required to complete construction of Nam Tai’s projects. The Strategic Vision stated:

WHAT IS NAM TAI WORTH?

In order to understand the value of Nam Tai’s assets it’s essential to understand their location. Shenzhen has grown tremendously since Nam Tai acquired its land in the city between 1993-2007, however the city’s most valuable land is far from Nam Tai’s properties.

Inno Park is in Guangming district which is one of the least developed in the city. It’s a 1 hour drive to downtown. The Shenzhen government has been promoting Guangming development through extension of subway lines and building a station on the high speed rail line to Guangzhou. There’s a lot of development in the district, but Nam Tai does not have the best location and does not have any unique institutional partnerships to attract tenants to its property. Space at Inno Park is currently offered at a rent of 46RMB per sqm/month with substantial initial concessions (see also additional listings with some quotes in price/day and others in price/month).

Inno Valley and Tech Center are in Baoan district which is suburban. Nam Tai’s land is southeast of the airport and north of the Qianhai free trade zone. It’s not prime CBD, but it’s not bad. Driving time to the airport is about 20 minutes and to downtown is about 40 minutes. Tech Center is still under construction so space is not yet listed for rental. Nearby properties are offered at prices around 80 RMB per sqm/month.

CBRE’s most recent Shenzhen Office Investment Report estimates cap rates of 4.0-4.5% for core areas and 4.25-4.75% for non-core areas, but mentions that businesses acquiring for their own use may pay rates of 2.5-3.0%. The report explained that land classified as M0 (New Industries Land), which includes Nam Tai’s developments, is valued about 20% lower due to restrictions on property transfer. Cushman & Wakefield’s most recent Shenzhen Office Marketbeat estimates an office vacancy rate of 19.3% in the Central Business Districts. Vacancy is undoubtedly higher around Nam Tai’s properties.

Last year Nam Tai commissioned valuation reports from Savills and JLL which assessed the value of its assets in their current condition. Completion of the projects currently under construction and planning should lead to higher future valuations, but that will require several years and considerable capital investment. I prepared my own estimates to assess whether the valuation reports seem reasonable in the context of current market conditions:

Details of my estimates for the major assets:

• My net valuation (after capex) of Nam Tai Tech Center is below the Savills and JLL estimates which seem to imply a rental rate of 105 RMB/month. If the company ends up achieving that rate for Tech Center and Inno Valley then my Net Asset Value would rise by $5.38/share.
• My net valuation (after capex) of Nam Tai Inno Valley is above the Savills and JLL estimates which considered only the existing building on the site and attributed no value to the pending change in zoning and development potential. I assumed the zoning will be approved for a development identical to Tech Center. The zoning change for Tech Center required payment of $71mm which is included in the total capex budget.
• Parking spaces in top residential developments can sell for 1mm RMB, but none of Nam Tai’s properties is a top residential development. My estimated value of 100,000 RMB/space is a guess.
• A reduction in the cap rate from 5.0% to 4.5% would raise NAV/share by $3.80.
• The Nam Tai Longxi residential land in Dongguan was acquired for 705mm RMB (8352RMB per buildable sqm) and apartments are currently being offered for presale at a price of 23000 RMB/sqm. Construction costs are probably 4000-6000 RMB/sqm. I conservatively assume the company will earn a net profit margin of 10% on the project, but it could easily be higher.
• My property valuation capitalized the estimated rents at Nam Tai’s developments. In addition to rent, tenants pay a separate monthly property management fee which should cover all property operating costs.
• My valuation did not discount valuations for time and uncertainty. Inno Park has not achieved stabilized occupancy. Tech Center has not finished construction. Inno Valley has not received planning approval.

ISZO Capital has claimed that Nam Tai is worth “at least $40/share“. It’s hard to get to that number. Anybody who believes that must assume that Nam Tai will achieve much higher rents and/or much lower cap rates than shown above.

INVESTMENT CONSIDERATIONS

Clown Risk – Nam Tai almost certainly worth more than its current share price, however it attracted investors with very limited understanding of its value. I have never seen an NTP analysis based on locations, rents, and cap rates such as presented above. Investors with no idea what a company is worth may eagerly pay any price to buy and then accept any price when they sell.

China Property Risk – Commercial property market conditions are summarized in recent research reports from CBRE and Cushman & Wakefield. Distress among some Chinese property developers has led them to offer nearly everything they own for sale. It’s a favorable market for buyers. Nam Tai does not intend to be a buyer and could have difficulty selling assets for their spreadsheet fair value.

Impact of Uncertainty – Failure to resolve control over Nam Tai’s operations could soon damage the value of its assets as homebuyers and potential commercial tenants and purchasers would avoid dealing with the company. Nam Tai’s financial stress last year, possibly engineered by Kaisa to justify its share placement, appears to have resulted in delayed project development. The company planned $138mm of capex for 2021, but only spent $35mm through 9/30. A protracted legal fight cold further delay progress.

Lack of a Strategic Plan – The new board and management have not articulated any plan for how to manage the company’s assets. Given my assessment of the goals of the 3 largest shareholders, I believe they will be focused on delivering value in the near-term.

Executives – the appointments of Huang Zhicheng and Steven Parker significantly affected my willingness to invest in NTP. ISZO described direct China work experience for only one of its director nominees and none currently live in mainland China. The qualifications of these new executives significantly reduce the risk that the new team may have no idea what they are doing.

DISCLOSURES & NOTES

At the time of publication the author was a shareholder of Nam Tai Property.  The author does not make any recommendation regarding any investment in 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. Feel free to comment if you believe a fact mentioned in the article has no supporting source or an estimate seems unreasonable.

I’ve seen people pushing this idea for ten years and I wanted to figure out whether it made sense. My position is small and could change at any time without public comment. I was short NTP from the high 20s and covered in the high 10s.

A link to this article was sent to Nam Tai’s investor relations representatives at Longacre Square Partners. If the company, or anybody else, can identify factual errors in this article using information public at 01/25/22 then corrections will be made as promptly as possible.