Closing HOLI, PBR-A and 1669

Adding to YI

News came out today that Hollysys (HOLI) is being acquired by Ascendant for $26.5/share. So I sold my shares for $24.74 today. And closing this at $24.88. Only a 7% spread, and there could be some delays before this closes. Was a nice trade and a 43% gain since dedicating a full write-up to it in July this year. It hasn’t exactly played out as I thought though, as the winning bid didn’t really come from the CEO it seems. I'm starting to think he faked those rumours to manipulate someone else to buy it? Anyway I will be following this situation from the sidelines as this might not be over. 

I will also close Petrobras (PBR-A) here at just under $14. Stock has returned nearly 100% and when I was looking at some other oil stocks I noticed large expected production increases in the coming year. I think the easy money has been made here. 

When having another closer look at Global International Credit (HK:1669) I also decided to sell my shares. It seems a bit like a value trap, and I am not sure to what extent their short term loans can be paid back. 

Then I added more 111 inc (YI) as it cratered in the past week. I will probably add more as it keeps falling. Management has said in so many words in the call that Q4 will be quite good with an expected 4bn RMB in revenue with reduced costs. The main reason for weak results so far are people stocking medicine due to China’s zero-Covid policy (which is now behind us), the corruption crackdown and probably weak economic results. 

The stock now trades at a 95% discount to YSB. Pharmaceutical spending in China is only just over $100 billion vs $300 billion in Europe while having nearly triple the population. So I think this continues to be a growth industry in the medium to long run. Especially as more drug sales move from hospitals to pharmacies. And I think the corruption crackdown on the pharma industry is mostly short term noise. 

Insiders have very high credibility and are not your typical shady Chinese managers. This is an interesting interview with the CEO and founder. In the long term they are in a growth market trading at only 0.07x sales. Merely a 2% net profit margin on say $2.5bn revenue (LTM revenue is $2.1bn) would mean $50 million of net profit on a $140m market cap. Which I think is realistic for an online distribution business such as YI. Say a 3% margin on $3.5 billion 5 years from now and you get over $100m in profit. So the valuation here is quite silly and overly pessimistic. And I am starting to sound like a broken record here. 

That said, it is a bit of a strange situation. They basically have this massive $150 million liability which goes away if they get a STAR listing (which takes about 3-6 months and should not be difficult to get). About 70% of the minority investors have agreed to move the deadline to June 30 2024, and the company is in negotiations with the other ~30% to not redeem (so about $50 million vs $115 million of cash on hand). If I had to make a guess, the majority of the investors that have agreed to postpone are probably controlled by the CCP, and the deal was structured this way to incentivize this company to list in China. Why else not just redeem and then use the money to buy YI shares in the open market here?

Although holding and doubling down on YI has been somewhat nerve wracking, I continue to believe!

Readers of this post should do their own due diligence before buying or selling anything, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. And I may buy or sell the above mentioned stocks at any time.