Nam Tai Electronics: Compelling Land Lease Trade

| About: Nam Tai (NTP)
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Nam Tai Electronics (NTE) was buried in April of 2013 after a quarterly report brought news that the company had halted production of flexible printed circuits and may stop producing liquid crystal display monitors (NYSE:LCM), the company's core product. These issues seem to be tied to customer order cancellations and changes, which is specifically scary for investors because Nam Tai relies on a small customer base for the majority of their orders.

It seems that Nam Tai's core business, is actually a floundering business. The key customers seem to be in the process of migrating to other, lower-cost, options. More specifically, NTE's liquid crystal smartphone display is really all that is left, and it is precariously perched. During the second quarter in 2013, the company shuttered one of its LCM facilities to preserve cash. The positive in all of this is that the director's of the company have kept a tight rein on their finances. Unprofitable segments have been quickly shuttered, and management has been upfront about their struggles.

Assuming that NTE's electronics business is worthless (which in my opinion is overly bearish), we can ask whether there is anything else of value in NTE's coffers. There is. They have a whole lot of cash--$238 million dollars--and no debt. They also have long-term land leases with the People's Republic of China that could be valuable in a sale/lease capacity. The total holdings: 3,288,308 square feet of space (1,746,713 square feet of which are raw land that NTE plans to develop).

NTE Customers

Tomorrow, if NTE decides to shutter its electronics operations and rent out all of the facilities it owns for the duration of the land leases (29 years for closest dated leases--2043). How much rent would they have to take in to justify their current share price of $7.18? The company has $5.27 of cash per share. So $1.91 per share would have to come from the real estate, or $86,465,700 today. Using a 3% discount rate, this would require approximately $4,500,000/year of inflows for 29 years, with no outflows. I think that is a very conservative figure given the size of their lease holdings. It represents a rent of approximately $2.85 per square foot, per year. I know, these are "back of the napkin" type figures, but they give us a foundation to build on.

Shuttering operations is not the plan. The plan is to use the cash on hand to develop the raw land that they have leased. Two separate feasibility studies have concluded that this would generate a return that justifies development (ranging from 9.2% to 33.21%).

I don't think the feasibility studies are incredibly important, though. NTE's success will come down to whether the director's can turn one dollar into more than one dollar, and historically they have been able to do that, with consistently positive return on equity.

NTE's real estate and cash mix represent a compelling long opportunity for patient investors. To me, the current downside is represented by the cash on hand (approximately $5.27/share). I calculated a price target of $11.80 using a $10/square foot/year number from renting existing property for the entirety of the company's land lease, and assumed that the electronics business would not lose money. If you do get long the stock, realize that NTE reports on January 27th. Consider selling calls against your position-the February 7.5 calls were last $0.30 bid, offering just over a 4% cushion (~50% annualized).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NTE, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.