Abaci's Common Sense Investing

Have you ever wondered what's going on in a privatization? For example, who's really doing whom a favor?

Followings are the common reasons you are told:
(i) share price has been in a slump so why don't I help take you out of misery.
(ii) there's hardly any trade so...ditto.
(iii) this one is tricky, well...the prospect of the company isn't that good, otherwise the share price wouldn't have been so bad, so...ditto.
(iv) to simplify corporate structure, which incidentally is often the same reason for spinoff.

Followings are possible reasons you aren't told:
(i) share price is cheap so I'm gonna buy you out and make a killing.
(ii) there's hardly any trade other than me and my friends buying so...ditto.
(ii) finally businesses are turning around after these drought years so...ditto.
(iii) this is definitely not about simplifying, nor corporate structure at all.

Wong's Kong King Int'l (532), under Senta Wong, has been trading PCB manufacturing equipment througout Asia since 1975 (according to the company's press). I know it once was directly involved in manufacturing PCBs as well with plants in Hong Kong and Shenzhen, before selling it to a hedge fund to become a trader again. I guess Wong's probably is a Value Added Supplier which does extensive pre and post sales consulting to its customers, especially those local Chinese ones with abundant land and capital but little knowledge about running a PBC plant. Otherwise I'll have trouble understanding how a trading operation could generate a high operating margin before tax of 9.6% in 2006 interim and 8.6% in 2005 interim.

PCB is a critical component of all electronics, which China is exporting more and more every second as we speak. But PCB manufacturing is as not a lucrative business because everybody's in it and so competition is fierce, save for the high tech ones like High Density PCBs or Flexible PCBs which are designed for use in smaller gadgets or more advanced applications (pardon my lack of technical knowledge here). In this sense Wong's being an upstream supplier serving the industry is shielded from this competition and actully benefit when more players go into PCB manufacturing. This is with the assumption Wong's itself doesn't face a lot of competition at its level. The numbers seem to be supporting this so far.

Wong's also runs a EMS business, a generous term you can use for almost any manufacturing nowadays. I don't quite grasp why the company is still in this crowded and low margin business. Maybe Wong's has too much funds to deploy or maybe somehow this business has the same customer base as its trading division and hence comes the need to serve. I have no idea but am not gonna be worried as long as it's in the black.

The privatization was narrowly turned down by the minority shareholders, of which only 23 of them or 35% in holding participated. Most others didn't even know or care about the voting, which was a big mistake. The Chairman nearly mustered enought votes to get through the motions. The offer price was only HK$1.38, i.e. ~5.3x 2005 p/e and 1.1x p/b at 2006 interim. Bear in mind recurring operating income increased by 86% in 2004, 25% in 2005 and 62% further in 2006 interim! The 2006 recurring p/e is gonna be even lower by next April when the final results are out. Gearing was 45%, acceptable for a trading company.

Wong's at this offer price looks everything like a buy to me, not a sell. So lucky us we can wait another day to sell! If you believe there's profit motive behind every privatization, then I assure you Chairmans do not go through a major corporate exercise to make peanuts profit. In Wong's case, if HK$1.38 was tempting enough for Senta Wong to make his move, it's now even more tempting with share price at only HK$1.12!

p.s. financial performance of a small cap is by definition less predictable and reliable, so one should always diversify and vary his bet accordingly.

DISCLOSURE: I hold 532 at time of writing.