Quick Ideas #4

Update and 2 new ideas

Three months ago I made a sizable bet that there would be a definitive agreement signed by the CEO buyer group of Hollysys (HOLI). The stock was trading at about $17 at the time. Then nothing much happened and I decided to reduce my position. But increased it again right away as new rumours came out. Which were followed by a renewed $25 bid by the Recco Control buyers group of $25. Then yesterday the CEO group finally made their offer. A disappointing matching $25 bid without a definitive agreement. And no mention of financing. Which was followed by a statement from Recco group questioning the intention of the CEO led group to really take HOLI private.

I have decided to significantly reduce my HOLI position again as a result of this. Currently at about 5% (it was 17% at its peak). I will wait to see if Recco makes further attempts and will then probably sell the rest. I am both sceptical now that the CEO really wants (or is able) to get the financing to take this private. And my fear is that the CEO will block Recco from taking it private if he cannot do so at this time. So the 25-30% spread does not look that juicy anymore. Thesis drift is dangerous in these kinds of situations.

111 inc (YI) which is my other big Chinese merger bet still has no definitive agreement. The stock now trades at 4% of YSB’s market cap on the Hang Seng while generating a very similar amount of revenue. I think YI is probably somewhat inferior to YSB though, but not 20x inferior. Combined with the credibility of insiders, the large liability YI has to pay to its minority investors if no relisting happens and new regulations that will push a large amount of drug sales from hospitals to pharmacies, I still really like this stock. And have been adding on the way down. This is now by far my largest position. Something’s gotta give right? 

I also increased my stake in Toya (TOA) again to about 5%. They had rather good results last Q increasing their margins and showing stabilised revenue. The working capital problem has resolved itself for the most part and I have high hopes that a dividend might be reinstated next year. And there is still a possibility of a buyout, given the small public float and the chronic cheap valuation. The stock trades at about 6.5-7x NTM earnings, so it looks like a decent bet here. I managed to actually get back into this stock at the same value I sold (low 6’s) after getting confirmation that there will likely be no further margin compression. So I am quite happy with that.

Then I initiated a position in Emeren (SOL). This is a solar company that gets most of its revenue from building and selling solar farms. It used to be a Chinese company, but they got rid of most of their Chinese assets and the vast majority of revenue will come from the US and Europe going forward after Shah Capital has effectively taken control (taking the CFO role). And has been buying shares on a regular basis over the past year.

Stock trades at 0.4x net tangible book value and a 4-5x PE. They have a late stage project pipeline of 3100 MW (Q2 call):

“Meanwhile, the early-stage project encompasses projects for which we have determined a reasonable probability of success. At end of 2023, we anticipate an advanced-stage solar product pipeline of at least 3 gigawatts, of which we now anticipate monetizing approximately 400 megawatts of projects in 2023. Beyond 2023, we are targeting to monetize 500 to 600 megawatts a year. In addition, we expect an advanced-stage storage pipeline of 6 gigawatt hours by the end of 2023.”

So that means 5 years worth of revenue is largely secured already. Their late stage pipeline has exploded from 400 MW in 2019 and seems to be growing. Company also has a buyback authorization of $15 million (on a $123 million market cap) which it has mostly exhausted by the looks of it. And no net debt. I took a modest sized position in this stock. If they hit their targets (which insiders seem quite confident about judging by the constant buying of Shah Capital) the stock will be very cheap. I can see $30m of net income next year if they hit their 5-600MW with 27-30% margins target.

I have yet to make complete sense of this company (especially their receivables), but my gut told me to start by buying a modest sized position. I think it potentially gets unfair hate of being a Chinese company (which it isn’t). And solar energy is still in its early innings. Any feedback welcome from people who know more about this company/industry. 

Then I also bought a small position in Chinese Biotech, I-mab (IMAB). What piqued my interest is the cheap valuation and the new CEO, Raj Kannan, who joined the company in June this year. Kannan was previously CEO of Chiasma (appointed June 2019) which was sold in the middle of 2021. Then he joined Aerie pharmaceuticals in December 2021 which was sold in late 2022. Maybe this pattern will continue with IMAB?

This stock is suffering from a triple negative, it is a pre revenue Chinese biotech that just had its agreement with Abvie terminated on their CD 47 antibody drug in 2022. 

It trades at a large discount to its net cash value of $250-350m (depending on how you measure net cash) and is currently burning approx $160m a year with a market cap of $100m. They have multiple drugs in development that could be worth multiples of the current market cap, of which the main ones are: 

• Eftansomatropin alfa, which is a growth hormone drug in late phase 3. Its main competitor is Novo Nordisk's Norditropin. It only needs to be injected once a week (vs daily for competition) while being non-inferior in every other way. IMAB only has the rights in China and there are a total of $277m USD of potential milestone payments (related to approval and revenue targets) that IMAB can receive. Plus a double digit royalty income stream on revenue and 50% of profits made by Jumpcan. The Chinese human growth hormone market is $600m large. 

• Uliledlimab which is a CD73 antibody drug. This is an anti cancer drug in phase 2 and its main competitor is AstraZeneca’s oleclumab. Uliledlimab seems to show promise from doing a bit of Googling and reading IMAB’s 20-F. It also seems quite differentiated from AstraZeneca’s drug. So someday this could be a blockbuster drug, given that it could be used against a wide range of tumours. But it's hard to figure out what the odds of that are. 

• Givastomig is another one of IMAB’s antibody drugs. This drug is still in Phase 1 and looks somewhat promising. 

Then the company has several other drugs in development that are at even earlier stages. 

Obviously there is a lot of risk here, but as Buffett says, you don’t need to know a man's exact weight to see if he is fat. Given the CEO’s track record of selling companies quickly after joining and the fact that Hillhouse capital invested $400m in 2020 at $33/share gives some confidence that shares here are probably worth more than $1.2 and that something will happen to unlock that value. They clearly cannot raise more funds at this valuation, so at some point when cash is starting to run out the co will be forced into a partial/full sale. My guess is that this will happen somewhere in 2024/early 2025. In the mean time, positive announcements relating to their current 3 main drugs in development could also significantly lift the stock.

Obviously a highly speculative bet, so I am keeping it small. Everyone reading 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.