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  • Newcastle, Is 10-15% Dividend Good Enough For You?

    Newcastle Investments

    Newcastle , NCT, is a unique company with unique financial constructions.

    Originally, NCT invested in loans backed by real estate, and refinanced these loans.

    Example: Company A asks for a 100 dollar loan, guaranteed by an office building. NCT would give them the 100 dollar and would refinance this with a 100 loan from bank B. The deal with the bank is that they only have recourse to this specific loan of company A. So in the extreme case that company A would go bankrupt and all money would be lost, then NCT would not lose money, bank B would need to write off their loan.

    So, at time of lending, NCT would have in their balance sheet

    Loan to company A at 8 % interest 100 debit

    Loan from bank B at 7% interest 100 credit.

    NCT will gain money on the difference in interest between the two loans being 1%. If company A would cease to exist, then NCT would eliminate the two loans, no impact on the result.

    However, US accounting rules did impact the results: by USGAAP, NCT need to write down the loan to company A if the value of the real estate decreases below the loan value but can not write down the loan from bank B.

    So, if the real estate is only worth 50, then NCT need to write down 50 from the loan. This sounds unfair because NCT would never lose on those deals. Anyway, these write downs created a lot of losses for NCT in the past. Somehow these losses will be reversed when loans get paid back to bank B or if the real estate increase in value again. In any case, those paper losses do not impact the cash flow.

    In the meantime, NCT will keep generating cash flow for the difference between interest percentages.

    And, as NCT is a REIT for tax purposes, NCT need to pay at least 90% of this cash back to their shareholder. This positive cash flow makes that NCT now pays more than 11% dividend to their shareholders. And this cashflow is solid for the future as the loan portfolio is stable.

    NCT recently entered a new business:MSR, mortgage service rights. If in the USA you take a mortgage, the bank owning the mortgage pays a percentage of the interest to a company to ``service`` the mortgage.

    Servicing includes collecting interest, handling inquiries etc. Previously, the big banks would handle this service and earned a lot of money with it. Now banks are restricted by laws and regulations, making many banks wanting to sell these MSR. So, many banks offering these MSR against attractive gains, up to 25%. So, companies like NCT can pay the bank 100 dollar to buy the servicing loans, and NCT would earn 25 dollar per annum.

    The dividend is now 80 cents per share of 7.07 dollar. The expectation is that the dividend will increase to 1 dollar per year. After this increase your dividend would be close to 15%, or more likely, the share price will increase. In either case you win.

    A shareprice increase until 10 dollar per share, an almost 50% increase, would give a future dividend of 10%, not unrealistic. Since October 2011, the share increased from 3.50 to 7.07, a 100% increase. A further increase to 10 dollar seems reasonable given the dividend prospect. Where else can you find a 10% dividend?

    So, buying a share of NCT for 7.07 could give you a dividend of 15% per annum or could make your share increase to 10 dollar and 10% dividend. In either case you win.

    Sounds like a good deal??

    Disclosure: I am long NCT.

    May 01 9:33 AM | Link | Comment!
  • Cheers, On The Good Health Of BORN

    There are different angles to analyse a stock:

    -fundamentally: how is the profit, the balance sheet, the market, the outlook

    -technically: how is the share price behaving.

    Lets have a look at BORN, a producer of alcohol for human consumption. BORN is one China`s biggest producers after their recent capacity expansion.

    What makes BORN an attractive investment from a fundamental perspective?

    1. BORN is the market leader and the cost leader in their segment. They are one of the biggest producers of alcohol for human consumption.
    2. You can buy shares in this company for a franction of what investors paid before the scare for Chinese stock: More than 80% below the past stock price.
      This decline in stock price is mainly due to false rumors and the bad reputation of Chinese companies in general.
      Another reason for the big decline is the sale of shares by one of the bigger shareholders after an dispute with the company/management. This sale has been finalized in the past months, eliminating that downward pressure on the price.
    3. The stock trades currently at such a low price that within 2 years the profit ``pays`` for the purchase price, a PE below 2.
    4. BORN has audited financial statements for 2011 and before. A reputable audit firm (BDO) signed off on the financials.
    5. 80% of he production capacity has been PRESOLD for 2012.
    6. A substantial part of the raw material (corn) has been purchased for 2012 as to reduce dependency on cornprices.
    7. The Chinese government stopped issuing of new permits for alcohol production.

    There is a risk regarding the sales prices.This industry produces a commodity and the sales prices are set on the day of distribution, based on market prices at that time. As one of the most efficient producers of alcohol, the risk is limited because the bottom price for the market will be set by the least efficient producers. Those producers will stop the productions (and limit the supply,so increase the price) once they make losses.

    From a technical perspective we can see the stock price seeking its bottom for the past months.

    Early 2012 the price sharply increased after the announcement of the booking of 80% of 2012 capacity. Selling pressure (see before) made the price slide back to the 3 dollar area.

    Since mid March 2012 you can see a gradual increase of the stockprice, adding 20% or so.

    With a good quality stock, and selling pressure gone, there seems to be a great opportunity for BORN to double or triple in value. A stock like this should easily be valued at a PE of 6, tripling in value.

    A 10.000 dollar investment could grow to 30.000 dollar. Do I have your interest now??

    Cheers, a toast on the good health of BORN.

    Disclosure: I am long BORN.

    Tags: BORN, china
    Apr 27 4:37 PM | Link | Comment!
  • China Ceramics, Hard as stone

    Below the history and my assessment of Chine Ceramics, CCCL. I am an investor of China Ceramics and have a substantial position in this stock: I am planning to further increase my position in CCCL.

    The history

    During 2007-2009, China Ceramics, CCCL was formed out of 2 producers of ceramic tiles in China:
    Hengda, owned by Huan Jia Dong, the current CEO of CCCL
    Hengdali, owned by Wong Kunf Tok., the current biggest shareholder in CCCL

    Together with a group of US investors, incl Paul Kelly and David Knott, the production facilities from Hengda and Hendali were combined into China Ceramics. The previous owners were mainly paid in shares in the new entity.
    The joined company got a capital injection from, mostly US, investors and used the proceedings to upgrade the production capacity
    from 38mlj m2 of tiles in 2009
    to 86mlj m2 in 2013. an 126% increase in capacity.

    Currently they are producing approx 52mlj m2 of tiles at almost full capacity.
    The main product is wall tiles for the construction industry.
    Their customers are for more than 80'% in the tier 2/3 cities in China. Those cities are still expanding and not much effected by the Chinese construction boom/bust. The Chinese government has promised 36mlj new houses/units in the coming years. CCCL is focusing on that market segment.
    The 37% increased production capacity per the end of 2011 was almost fully utilized, despite the construction crisis in the tier 1 city.


    So one would expect that this stock has a fair valuation. All signs point that way:
    -Heavy involvement of US investors in the setup, strategy and growth of this Chinese operation
    -126% growth in 3 years
    .very profitable business
    -all accounts (incl 2011) signed off by Grant Thorton
    -predominantly US based directors. A former partner of PWC is heading the audit committee. Paul Kelly, a US investor, is chairman of the board.

    -A growth company with diluted earnings of $2.37/share over 2011 and forecast over $3 /share for 2012/2013.
    -equity per share of over 9 dollar
    -A stockprice of almost 8 dollar at the end of 2010
    -A management incentive plan, granting options at $7.65/share. A lot of incentive to get the price over the $7.65.
    -US investors have 2.740.000 warrants with an exercise price of $7.65
    -A very conservative forward PE if 6 for this type of growth would value the company at almost $18/share

    So, different forms of valuation would price this stock at $7.65, $9 and $18/share.

    And what can you buy this stock for? Below 4 dollar per share. This price at the end of March 2012 indicates a discount between 47% and 78%.

    Who are the current investors?





    CCCL investors per
    dec 31, 2011
     shares x1000
    Wong Kung TokHendali founder and Chinese investor4083
    Directors and officers 2050
    David KnottUS investor1259
    James DunningUS investor1101
    Alan HassenfeldUS investor1101
    Gregory SmithUS investor1101
    Clean Harbor Asset mngUS investor1089
    Surmound InvestmentUS investor1074
    Paul KellyUS investor728
    Huang Jia DongHengda fouder and ceo of CCCL450
    Hen Man Edmundcfo358
    Su Wei Fenglegal counsel200
    Chen Yan DavisUS investor and director110
    Su Pei Zhisales director100
    William StulginskyUS investor and director65
    Ding Wei Dongdirector40
    Shares outstanding per Jan 2, 2012 20430
    Options for staff and directors, exercise price of $7.651130
    Total 21560
    Not included  
    warrants to purchase shares for 7.65 before Oct 2012.2774

    Why is the stock so cheap?

    The shares were originally issued for $10/share. Since the end of 2010 the price gradually decreased from 9 dollar until approx 3 dollar. This decline was driven by the bad reputation of Chinese stock as well as legal disputes between some of the major owners regarding board seats.
    Meantime, the lawsuits from the group of US investors has been withdrawn and short attackers have not found any reason for damage the reputation of the company.
    Since January 2012, the stockprice has begun its gradual increase from $2.76 to over $4.00. And after this increase, you still buy a stock with a bookvalue over 9 dollar/share and a forward PE of below 1.50 for below $4/share
    I personally assume that $18/share, a forward PE of only 6, is a fair price, Under that assumption there is an upside of 350%. So an investment of 10.000 dollar can potentially increase to 45.000 dollar.

    The risks?

    I invite all readers to read the 2011 accounts of CCCL as filed at the SEC. You will find all above facts and a fair listing of risks related to this stock.

    A limitation for investors is the low market cap of $70mlj and an avg daily turnover of $164.000. This makes it complicated to create or sell bigger positions without effecting the share price. Approx 67% of the current shares are owned by above listed long term investors. The comfort is that these investors are committed to this project since 2009.

    The writer has a position in CCCL and expresses his personal opinion regarding this stock. The writer does not encourage the readers to buy this stock but explain his reasoning for him taking a position in this stock. We recommend you to your own research and counsel your investment adviser.

    Disclosure: I am long CCCL.

    Apr 25 6:23 PM | Link | Comment!
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