- Nam Tai is currently a small market cap company in engineering manufacturing services [EMS].
- It is currently trading under Net Current Asset Value.
- In 2014, it is expected to transform its core business from manufacturing into property development and management in China.
In his brilliant and delightful book, Influence: The Psychology of Persuasion, Robert Cialdini writes about how American prisoners in Chinese prisons during the Korean War were asked to write political essays for a contest. They were slightly nudged to reason why America was not perfect. To the prisoners this was reasonable - after all, what country is perfect? For the essay contest, small prizes like cigarettes were handed out. It was important to keep the prizes small because, had they been big, the prisoners could rationalize their essays "for the prize." Once the prisoners "voluntarily" admitted that America was not so great, through their own writings, they were far more likely to deeply believe it than if they were force fed the beliefs through lectures.
Many wise investors choose not to publicly discuss their reasoning for buying certain stocks. This is not to be secretive, but to avoid becoming inappropriately married to one's own ideas. Like the prisoners, they want to avoid becoming committed to their own investment thesis. On the positive side, sometimes defending my thesis has forced me to dig more deeply into companies and, at times, realize that they do not make such good investments after all. I hope that I or my fellow Seeking Alpha contributors do not become overly committed to our own ideas after writing about them.
Nam Tai (NTE) was founded by M.K. Koo in 1975 as a calculator trading company in Hong Kong. Nam Tai moved its manufacturing facilities to China in 1980 to take advantage of China's lower overhead costs, lower material costs and competitive labor rates. Since its early days, the company has branched out into manufacturing various electronic components (i.e., LCD modules for smartphones, digital cameras). Their main customers are original equipment manufacturers (OEMs). The company's main real estate assets, which I will discuss later, are in China. It is incorporated in the British Virgin Islands. The stock trades in the NYSE. Over the years, many of its top executives have been from Japan due to their experience with efficient Japanese manufacturing.
Throughout its history, Nam Tai's sales, profits and shareholder cash distributions have been volatile. However, a conservative balance sheet and Mr. Koo's involvement have been a constant in the almost three decades since it went public. Currently the company pays a dividend of 2 cents per quarter. The company is planning a dramatic change this year which has led to great uncertainty about its future.
According to the company's latest 20-F filing, by April 2014 the company plans to cease its core manufacturing, sell all its machinery and production lines and focus its efforts into property development. Analyzing and predicting the company's future cash flows from engineering manufacturing services [EMS] is thus irrelevant. Investors need to focus on the company's liquid assets and the real estate that it plans to develop into high end commercial properties. The company will then morph from a manufacturer of electronic components to property development and management. Management predicts the development to take about four years from July of 2014 when the Board is scheduled to approve the plan. All expenses and dividends to shareholders will be funded through the company's cash on hand, which I will examine below.
Below is a copy of Nam Tai's balance sheet from its latest 20-F filing.
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
Cash and cash equivalents
Fixed deposits maturing over three months
Accounts receivable, less allowance for doubtful accounts of nil and $2,119 at December 31, 2012 and 2013, respectively
Derivative financial instrument
Prepaid expenses and other receivables
Finance lease receivable -current
Deferred tax assets-current
Income tax recoverable
Assets held for sale
Current assets of discontinued operations
Total current assets
Property, plant and equipment, net
Finance lease receivable -non current
Land use rights
Deferred tax assets-non current
LIABILITIES AND EQUITY
Accrued expenses and other payables
Income tax payable
Current liabilities of discontinued operations
Total current liabilities
Deferred tax liabilities-non current
Common shares ($0.01 par value-authorized 200,000,000 shares, issued and outstanding 44,803,735 and 45,272,735 shares as at December 31, 2012 and 2013, respectively)
Additional paid-in capital
Accumulated other comprehensive loss
Total Nam Tai shareholders' equity
Total liabilities and equity
A quick calculation, as seen below, reveals that the company's Net Current Asset Value is $298 million. This is equal to about $6.58 per share.
Net Current Assets Value = Total Current Assets - Total Liabilities = $429 - $131 = $298 => $298/45 = $6.58
One share of the stock will buy you $6.58 worth of relatively liquid assets and all the Chinese properties as shown in the table below:
Principal or Presently Contemplated Use
Owned or lease
Principal manufacturing facilities
Wuxi, Jiangsu Province, China
FPC boards and FPC subassemblies, LCD modules and other products
Guangming, Shenzhen, China
Wuxi, Jiangsu Province, China
In China, only the government or peasant collectives may own land; therefore, all of the above properties in China are under lease agreements to be expired as noted. The two properties listed at the bottom of the table are raw land. As you can see above, the company's properties are substantial, many of which have built-in infrastructure. Shenzhen is located merely 30 miles from Hong Kong, which has some of the most expensive real estate in the world. For example, comparable hotel rooms in Hong Kong are more expensive than New York City, London or Tokyo.
A look at management is imperative before investing in a company, no matter how enticing it appears. As noted above Koo Ming Kown, the current CFO and executive chairman (Wang Lu Ping is the current CEO) has been with the company since the 1970s. He is currently 69. Throughout the company's history, Mr. Koo has prioritized profits and efficiency over scale. This is reflected by generous dividend distributions throughout its history and the company's relatively small market capitalization. He is rationally discontinuing the manufacturing business because of narrowing margins due to cost pressures. The customers are not willing to pay adequately, so he has chosen to exit the business.
Many CEOs would rather incur losses than to lose market share or sales. Mr. Koo, on the other hand, has decided to transform the company. Investors can also gain insight into the company's great attention to costs from a recent lawsuit. A class action lawsuit was filed in May of 2013 against Nam Tai and two of its executives after the stock price dropped by about 50%. The complaint alleged that Nam Tai made misleading and false statements. These frivolous lawsuits unfortunately do little for shareholders and enrich the lawyers. Many companies reward the lawyers by settling these claims. I was impressed that Nam Tai fought the suit which was eventually dismissed in January of 2014 without any payment by Nam Tai. This demonstrates management's great attention to controlling costs.
The table below shows the percent ownership of major holders of the stock.
Peter R. Kellogg
I.A.T. Reinsurance Syndicate Ltd.
Koo Ming Kown
Kahn Brothers LLC
Peter Kellogg is a billionaire controlling shareholder of I.A.T. Reinsurance and has served on Nam Tai's Board of Directors since June of 2000. Kahn Brothers Group invests in mainly undervalued securities. Its chairman, 108 year old Irving Kahn, was a disciple of the legendary value investor, Benjamin Graham. This may serve as confirmation for many Warren Buffett and Graham followers, but investors must always do their own due diligence and not follow great investors. This company is transforming dramatically, but the main insiders (Koo and Kellogg) are not selling their shares and remain major shareholders.
Risks versus Rewards
I had a number of questions regarding Nam Tai's properties in China. For example, can the leases be transferred to another company? Can the company terminate the leases early? I contacted Nam Tai's investor relations via e-mail and was hoping to clarify these issues for myself and readers. I was impressed that I got a prompt response in less than 24 hours. Unfortunately, the company is not disclosing this information, which adds further to the uncertainty surrounding this company.
Mr. Koo has been involved with Nam Tai for almost four decades, yet he and the management have little or no experience in property development. The future success of their property development venture is highly uncertain. Per the 20-F filing:
We do not currently have strong brand recognition or relationships in the real estate development and management business as we enjoy in the EMS business...
Our experience and expertise gained from EMS business may not be highly relevant or applicable to real estate development and management business.
However, with the stock price so depressed, investing in the company presents little risk. The stock is currently trading under $6. As we saw above, the liquid assets minus total liabilities are worth more. Throw in prime Chinese real estate and shareholder friendly management, and you have yourself a unique opportunity to capitalize on the market's fear. The potential downside of investing in Nam Tai is minimal based on the analysis above, but if the company reasonably succeeds in its quest, the gains upon completion of the development in 2018 could be very large. The exact number is impossible to determine given the uncertainties, but it will likely outperform most other investments. Great investors have made large returns in times of great uncertainty.
Nam Tai's closing stock price on March 20, 2014: $5.91