NVC International

Special situation with several 100% upside

Since my last order filled today, here is my write-up on a special situation in Hong Kong. Stock is NVC International holdings (NVC ticker HKG:2222). A Hong Kong nano cap stock. And it is quite illiquid, so beware. 

I first learned of it through a Tweet from Writser. I thought it was somewhat interesting after looking at it briefly, put it on my watch list and forgot about it. Then recently when looking for new ideas I noticed it again as it had fallen in price, and I had a closer look at it. Currently the shares trade at about 8-9 cents/share. With potential for a 40+ cents special dividend within a year or two.

NVC sold 70% of their Chinese NVC branded lighting business to KKR in 2019 and paid a HK$0.9 special dividend from the proceeds. What remains is a:

• 30% interest in NVC China valued at almost HK$0.4/share assuming the same 2019 valuation as the 70% stake sold to KKR.

• 100% interest in international NVC and non branded lighting business. Earning about 1-2 cents/share until becoming loss making by the same amount in 2022.

• 20 cent/share net cash position. 

So potentially about HK$0.6-7 of value here. Which is actually a conservative estimate, but more on that later.

The domestic branded lighting business appears to have been the crown jewel as their other businesses are now loss making after a fall in revenue and a rise in costs in 2022. The Chinese NVC business generated HK$4.4bn in revenue and HK$470m profit in 2022 according to note 24 of the 2022 annual report. And is marked at nearly a billion HK$ on their balance sheet. Here is an interesting case study of what KKR has done with it since taking over management. It is a 3 page PDF from KKR’s website and worth reading. There were apparently quite a few levers to make it more profitable.

I kept this a tiny position, since these Hong Kong companies can trade at huge discounts to NAV forever. But what piqued my interest was the recent large share issuance of 845 million shares. 20% of the current share capital, at 8.3 cents to 30 year old executive director Keven Dun Wang who is the son of Donglei Wang, the chairman and former CEO of the company. The reason given was that the company needs capital to expand, and that a share issuance is the cheapest option. Which is of course bullshit as this is neither cheap capital, as the shares are issued at a huge discount to NAV and the company does not need capital with 20 cents/share in net cash. To me this looked like an insider wanting to build a large position, but was unable to do this in the open market due to the poor liquidity of the shares.

Then merely days later (a pure coincidence I am sure), news came out that KKR is planning to initiate a sale process for their 70% stake in NVC lighting for about a billion US$ in late 2023. If NVC’s 30% stake is sold together with KKR’s stake at this valuation, this would amount to about HK$0.66/share in proceeds for NVC (assuming 5 billion shares outstanding). 

The perfect way for this to play out is that somewhere in 2024 NVC’s 30% stake in NVC China is sold along with KKR’s stake for somewhere between HK$0.4-6/share. And a special dividend is paid out. The stub will likely trade for about 8-10 cents/share, and you get a 5-700% return here. Insiders should have an incentive to make this happen. This would imply a valuation of NVC China of about 24x 2022 earnings. 

This is not a given however, KKR might opt to hold off on selling for another year or two, the proceeds might be lower if the business is sold, or NVC might simply hoard the cash on their balance sheet. Or possibly the worst outcome would be that NVC overpays for some money losing venture to satisfy possible empire building ambitions of insiders. 

Another likely outcome is that NVC China is IPOed on a Chinese exchange by KKR, and is simply held on the books by NVC International. I think this was the original intention for keeping on to the 30% stake as implied by this statement released in late november 2021. But from the more recent statement linked above, I get the impression that KKR is looking for an outright sale. 

Obviously an outcome where Shanghai traded shares are held onto by NVC is not desirable. If their other businesses keep losing money it will cancel out any dividend income they get from NVC China. And NVC shares will likely languish at a large discount.

But despite that risk, downside seems limited here, and potential upside is huge with a very solid catalyst in the form of a special dividend. Say there is only a 25% chance NVC holders will get a HK$0.5 dividend and the stub trades at around 8 cents/share. And a 75% chance nothing interesting happens and the shares trade back down to HK$0.065/share at more than a 90% discount to NAV, that is still an expected value of HK$0.16/share, double the current share price. You would think the odds of a special dividend are significantly higher, given insider incentives, but Hong Kong insiders move in mysterious ways so I am careful with my optimism. 

For the above reasons I am long NVC International (HKG:2222) at an average price of 8 cents per share.

Disclaimer: Readers of this blog should do their own due diligence before buying or selling any of the mentioned stocks, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. I may buy or sell the above mentioned stocks at any time. Past success is no guarantee for future success. Some of the stocks mentioned might have poor liquidity, so make sure to check average daily trading volume before buying or selling anything. I am not your financial advisor.