Thursday, 4 August 2016

Mobio Gets a New CEO: Mike Edwards Comments

There was some big news on one of my old plays, Mobio Technologies. Mike Edwards has stepped down as CEO, to be replaced by Laurie Baggio. While I still hold the stock at a substantial loss, PKK has more than made up for it so I consider it to be a sunk cost lottery ticket.

I asked Mike some questions regarding this deal, and got a fairly quick response back. I asked:

"Will the new CEO be continuing with Strutta? Resurrecting Mobio Insider? Or going in a totally different direction? Maybe more than one of those options?"

His response:

Mike Edwards made some pretty bold statements given how MBO has performed, speaking of building for retirement and parking some alpha in this stock. I appreciate his frankness about this being a LONG term play. It will probably take 5-7 years for MBO to see its split-adjusted high again, and that is assuming execution as planned. Laurie Baggio appears to be the right person to try to grow Strutta. The major issue is that there is substantial dilution associated with this deal. However, I think this will be like what has happened with Keek, where the new investors/management team will take control of a majority stake in the company. And good things appear to be happening with KEK with an app launch today. Mike Edwards is down a lot on this investment, as much as anyone else, and I think he is stubborn enough to participate in the private placement along with Baggio and any of his business associates.

MBO went up a bit today so this news has been received positively. However, with such a small float and thin trading, it likely doesn't mean too much until they lay out a new plan. Calling this a long-term play shouldn't excuse the company from communicating with shareholders. I continue to hold MBO. At such a low price there's nothing much to lose while the CEO change could be the turning point for the company.


Wednesday, 2 March 2016

Spackman Update: Contact Made With VP

As promised, I have followed up and finally made contact with someone representing Spackman Equities Group (SQG). He is John Pennal, Director & Vice President. You can contact Mr. Pennal at the contact information linked here. I encourage shareholders to get into contact with him personally, but I will share what he said during our email conversation over the past couple of days.

I asked:

"I am an investor in Spackman Equities Group. I estimate that SQG trades at over 75% discount to its NAV when considering the market price of Spackman Entertainment Group (40E.SI) of 13 cents SGD.  While I have seen some funds get discounted up to 50% from their NAV due to holding illiquid securities, 40E.SI trades tens of millions of shares a day. I see no reason why there should be such a steep discount considering the company has some options at its disposal such as initiating a stock repurchase plan funded by using liquid capital.

I appreciate the hard work that the Spackman team has undertaken to get 40E lively again over the past few months. But as a Canadian I feel left out from participating in this success. Since you appear to be the lead Canadian contact I was wondering if you have had any recent discussion with Charles Spackman for plans surrounding SQG above and beyond the focus on Spackman Entertainment. SQG played a significant role in 40E's successful IPO. The TSX Venture has been a disaster and I suspect that has played the major role in SQG being overlooked but I believe a focus back on this stock will lead to to substantial price improvement.

Please reply with your comments at earliest convenience.

This was his response:

I followed this up with:

"Another question, up until the Q2 report, SQG reported earnings through a press release, including up to date NAV. At the time 40E was dropping so the NAV looked bad and it played a role in the dropping stock price. The NAV at the end of November, as reported on the Q3 MD&A was 16 cents, but there was no press release. Why was that? Do you plan on issuing press releases for earnings going forward? With 40E year-end stock price being 14 cents and remaining steady in that area and aided by the tanking Canadian dollar vs the SGD, both NAV and Q4 financials should look pretty good, worthy of a press release in my opinion."

Overall I am pleased with his responses. It shows that Spackman's management team is working behind the scenes and have not forgotten about Canadian shareholders despite the current appearance. Let's hope whatever transaction they have for SQG gets completed. SQG trades at such a heavy discount that I think whatever they end up doing will be beneficial for those who have purchased shares recently such as myself.

Sunday, 24 January 2016

My Thoughts On Meeting With Bruce Rowlands, CEO Of Eurocontrol Technics

Last week, I had a phone conversation with the CEO of Eurocontrol Technics (EUO), Bruce Rowlands for the first time. I had contacted him through email several months before, asking for some clarification on the company's recently completed deal to sell its GFI subsidiary to SICPA. The phone conversation lasted well beyond what I had expected. I was on the phone with him for about 70 minutes, and I would estimate over 60 of those minutes was him talking.

I left the convsersation feeling that Mr. Rowlands is a man who is:

  • Very proud of his company's accomplishments, particularly in the past year and with the struggles on the TSXV
  • Very knowledgeable of the Petromarking industry and further potential applications for EUO
  • Very confident of EUO's ability to compete, particularly with the new deal with SICPA and after SICPA did an outstanding amount of due diligence on GFI's technology
  • Very well connected
I am in the preliminary stages of my research on EUO, so I'm not ready to disclose a target on the stock just yet. But the stock is trading at less than its cash value and has a relationship with SICPA, so let's just say I think it is a buy.

I plan to release an article on EUO in the next month. Expect it to be of similar quality as my articles on PKK. I own shares in EUO.

Thursday, 21 January 2016

The Math Behind Mr. Jiang Wang's Desire To List With Peak

A question that I got on more than one occasion from people is why would Mr. Jiang Wang be so willing to give up half of his business to list with Peak? Now there are a bunch of soft cushy answers I could give behind managing the stock symbol and getting listed on the NASDAQ, but I am going to focus purely on the math behind this deal so people can understand that this deal makes good sense from his perspective under most circumstances.

Recall that he gets 199 million shares at a price of 2 cents and 199 million warrants at a strike of 5 cents. Assuming the warrants get exercised, he will own 398 million shares at a total cost of $13.93 million. If the stock price was to hit $1, the total value of his holding would be $398 million and he would have made $384.07 million on this investment. With the stock price at 7 cents, he has made $10 million on paper just on the share component of the deal and he hasn't even transferred over anything yet, so early indications are very positive for him.

What does he have to give up to get a stock price of $1? Now let's ignore all growth initiatives that Peak is planning with the "Plastic Bank" (which we know will eventually be a platform for much more than just plastic) and any international expansion. Let's assume that the $1 stock price will only come through the transfer of existing business. Also for the sake of simplicity, let's ignore LongKey.

To justify a $1 stock price, and assuming a fully diluted share count of 700 million, a 10 Price-Earnings ratio and a 15% growth rate, Mr. Wang would have to give up business worth $70 million in net income. Keep in mind this is only a mathematical example being used to demonstrate his motivation. Recall that Peak has disclosed that it will receive business worth about $100 million in revenue during the year, with no disclosure on net profits as of yet.

If he were to give up a $70M net income business that grows at 15% per year, this would be the net income profile in the next 5 years:

           $70.00         $80.50            $92.58         $106.46         $122.43

Using a 10% discount rate, that would lead to an NPV of $348.45 million. Using the same 10% discount on the $384.07 million in investment gains to bring it forward one year (assuming PKK hits $1 in one year's time after the transfer in this example)  would lead to a marginally better NPV of $349.15 million. Capital gains are generally taxed at lower rates than personal net income, but I don't know enough about the existing corporate structure of his conglomerate nor about Chinese tax law to make a definitive statement that he will win on taxes. I also make the very simplistic assumption that he would be willing and able to sell his shares at any time (though this is dubious considering his long-term vision).

One could argue that I should be using a perpetual growth model instead of a 5-year NPV, but my response to that would be that this business can reasonably be expected to be worth well more than $1 per share beyond 2020 if its successfully executed and properly valued. So the two ever-growing impacts would offset each other as time went on. 

Now we know from my previous articles that Peak management and Mr. Wang are optimistic that PKK can reach $1, possibly within a year. And probably not with as much as $70 million in net income needing to be transferred over to the subsidiary considering that the current plan is for Peak to take over about $100 million in revenue which I'm sure is not at a 70% margin. So if Mr. Wang transfers considerably less than $70 million in net income and PKK can achieve $1, then he is a big winner. If on the other hand Mr. Wang transfers $70 million in net income and PKK fails to reach $1 within a year, then he ends up losing.

Much of this business plan is hinged upon Peak management getting the word out and ensuring a favourable valuation. If they do a really great job and the plastic bank idea is seen as a comparable to Alibaba and gets a 20 P/E or greater valuation attached to it, then everybody wins substantially - shareholders, Mr. Wang and PKK management. If PKK does just okay and achieves a 10 P/E valuation, Mr Wang is about breakeven and will very likely continue forward in hopes the business gets more respect as it develops. 

However, if the idea struggles to gain traction and stock is valued more like Chinese industrials at a 5 P/E or less, then even a 10 cent EPS will lead to only a 50 cent share price. Shareholders still win, at least the ones who are in at today's price but Mr. Wang does not. He may take this as a temporary headwind and push forward, or may give up on the idea. Only he knows how much his tolerance is for potential short term losses in order to see out his vision.

So the conclusion is that under normal circumstances and even fairly conservative circumstances, Mr. Wang can win on this deal. However, in very bad circumstances where the valuation is low, he can lose. That's why it is important for Peak to manage the investor relations side of the business carefully and why Mr. Wang has such an incentive to come to Canada to meet with investors and get them excited about his vision. He is taking a calculated risk that will very likely be profitable for him, but not 100% assured. In the worst case scenario the business he gives up will be worth more than the value of his Peak shares. I believe everyone will work hard to ensure that does not happen.


Thursday, 14 January 2016

Peak: Preparing for Chinese Investors

Referring to my previous article on Mr. Jiang Wang's interview regarding his investment into Peak Positioning Technologies. Upon review of the article, Johnson Joseph, CEO of Peak had few suggested changes. So I was proud of myself that I managed to get everything just about correct when scrambling to write notes during the hour long interview.

One thing that changed significantly though, was the title. I was going to go with the mundane "An Interview With the Investor Behind The Peak Transaction". It was actually upon his and Golden Qiu's advice that I changed it to the title you see.

Why? Because they expect that this article will make its way back to China. They want his name in the title to attract interest as Mr. Wang is a highly respected business man there.

I didn't discuss this with them, but I can only assume one thing. It doesn't take a genius to figure this out either. They expect significant Chinese investor interest. I don't know if they intend to promote there or if they will just passively let Mr. Wang's name behind it do all the talking.

I don't know how easily PKK.C can trade internationally. So I would watch for a spike in volume on PKKFF.

An Interview With Mr. Jiang Wang, The Investor Behind The Zhonghai Wanyue Empire And Peak’s Chinese Partnership

Hopefully everyone who is reading this article is familiar with the investment opportunity of Peak Positioning Technologies Inc. (PKKFF) (PKK.C). If not, please have a look at my article "To Be Valued Beyond A Penny Stock, A Company Must Behave Like A Large Cap" for an introduction.

This interview involved four people:

1. Myself, the financial reporter.
2. Johnson Joseph, CEO of Peak, acting as the moderator to the call.
3. Liang "Golden" Qiu, CTO of LongKey (but there on his own behalf, not as part of LongKey), acting as the translator.
4. Jiang Wang, pictured above, Owner of ZHWY Enterprises and the strategic investor behind the "Banlan" deal, who was the subject of the interview.

The purpose of this interview was to introduce Mr. Wang to the North American investment community. It will help to clarify Mr. Wang's vision to Peak investors. Peak has previously reported that this deal was involving Banlan, however, it has morphed into something much greater than that (as such, going forward, Peak will disassociate the investment and the "plastic bank" initiative from the Banlan name). I have a 20-cent target on PKK and will keep that target until the stock reaches that price and at that time I will re-evaluate. However, the other three participants in the call all believe the stock price will be much higher than that in a year's time, and have provided substantial evidence and a grand vision to support that belief.

This interview was held over Skype starting at 9am Eastern Standard Time on January 13th, which means it was held at 10pm local time for Mr. Qiu and Mr. Wang. The video conferencing lasted only the first few minutes before connectivity issues made us migrate to a voice-only Skype call, but I was able to see employees in the office on standby to take pictures of the two while in the office. This should be an indication of how important this deal is to Mr. Wang. He stayed in the office along with several other employees and invited Mr. Qiu until 11pm just to conduct an interview with me during North American business hours so that Canadian (and U.S.) investors got to know him. This is not some one-off "fun money" speculative investment by some overseas billionaire. This is an investment made by a man who is actively and seriously trying to grow his business internationally and has decided to use Peak as a method to achieve his goals. This will be the prime focus of his time going forward.

This will be a "paraphrased" interview as Mr. Qiu had to translate everything Mr. Wang said into English. Although it's not reported on a word-for-word basis, I can confirm that Mr Qiu, Mr. Wang and Mr. Joseph have reviewed the content of this article before publishing and they can reassure you that the spirit of what I have written is accurate.

I asked 15 questions which can be broadly divided into four sections. About Mr. Wang, his vision for his business, his views around Peak and the partnership and ways to reassure North American investors about this venture. I will occasionally add my own comments in, prefaced with an E.

About Mr. Wang

Q. What is your background (where you grew up, your educational and professional background)?

A. Mr. Wang graduated from the Central University of Finance and Economics [CUFE], and as the name implies, it's an institution that specializes in finance and economics. He has been employed by various banks and worked his way up to becoming a Vice-President. Fifteen years ago he started his own investments in finance, at a time when the economic and political atmosphere in China was very lucrative to do so. A couple of years ago he decided to group his investments, including Banlan, into ZHWY (Zhonghai Wanyue) Enterprises, of which he is a near-100% owner. It is a conglomerate that focuses on financing and investing in the logistics of bulk goods like plastic and steel, eCommerce, new energy and environmental initiatives.

Pictured: The reception area of Zhonghai Wanyue Group

Q. How have you built yourself into the successful businessman you are today?

A. While working in the banking industry, he made many valuable contacts. China was booming economically at the turn of the century, but the notion of private investment was fairly new. The existing model at the time for a government-run project was one where it bought the equipment and outsourced the labour. Mr. Wang was a proponent of the EEPC Business Model, a process chain whereby he offered project managers turnkey solutions. His company would help the owner raise financing, lead the project's design and operate it. This model proved to be a huge success in China and Mr. Wang was able to procure a lot of business.

Q. We know about you because of your investment in Banlan. But we now understand that you have many other companies and projects. Can you give us a summary of them?

A. ZHWY is a conglomerate of 29 different companies. In addition, Mr. Wang has an investment in eight other businesses. His companies focus on his areas of expertise - offering financing and supply chain solutions - for a variety of industries. He is an 85% owner in JP Syndicate Ltd., a company which operates nearly all the environment-related projects in Shanghai. For instance, it procured the waste water processing center contract for the city from the government. The company is in charge of the design, financing and operations of the project. He has also recently partnered with German interests to develop an electric car company called Dedian Electric Auto Ltd.

Q. How have your companies fared recently as China is going through a rough patch economically?

A. Challenges and opportunities exist in all sorts of economic climates. For instance, the price of oil dropping has led to substantial cost savings for Banlan. But the trading of bulk goods is tighter. Companies always have financial service needs, during good and bad economic times.  He believes that modernizing the process by which he is able to provide financial services to companies will be an outstanding growth business in boom times and bust.

Q. What would you say is the estimated combined value of all of your businesses?

A. In 2015, ZHWY was worth an estimated 50 billion RMB. (E. this converts to over $10 billion Canadian)

About Mr. Wang's Vision

Q. What specific opportunities do you see for the plastic bank?

A. The plastic bank is a trial run for a much larger initiative. In China, the movement of bulk products through the supply chain is done entirely offline. This ranges from plastic raw materials like and steel to food like rice and corn. Mr. Wang's vision is to use the internet and his specific expertise in financial and supply chain management to modernize these transactions across a broad range of industries. (E. I envision that this business would be like the Alibaba for bulk goods)

Q. You've been very successful as a business man in China, what is your motivation for desiring to list in North America with Peak? Do you intend to expand your businesses internationally?

A. Mr. Wang intends to use offline assets such as factories, buildings and inventory to create a foundation for his business plan. These assets will be used to build the online platform and expand the financial services of the target industries. He eventually wants to settle on one platform in the future (E. reminds me of Alibaba again) that evolves into a few verticals and includes international trade. He stressed that getting international and younger people (E. I assume as employees, management and investors) with an interest in eCommerce involved in the business was a key part of this vision.

Mr. Wang specifically partnered with Peak because it is an investment holding company. He called Peak a "mini-me" that has a deep understanding of the business model that he has with ZHWY Enterprises and wishes to expand upon with his vision. He stressed that Peak management is a very important ally for him to go international.

Q. Where do you hope to see Peak, specifically Peak's stock price next year? In five years?

A. By 2017, Mr. Wang expects to move a substantial amount of existing business from "offline" to "online" through the subsidiary set up under Peak. While prefacing that his vision is focused on the long-term success of the business over the short term stock price movements, he expects that in 2017 the stock will be listed on the TSX big board and trade in the $2-$3 range. (E. The goal is without a reverse split, so think in terms of a market cap in the hundreds of millions and up to two billion dollars). 2020 is much further out so it's difficult for him to guess on a stock price, but he expects that the stock will be listed on the NASDAQ or NYSE. There will be numerous businesses housed under the Peak subsidiary. The growth and international exposure of the business will allow him to achieve his goal of gaining access to new projects worldwide which will also be a part of Peak.

About the Partnership with Peak

Q. What do you believe Peak management bring to this business relationship that will help you reach your goals?

A. Just like Peak management had to do their due diligence on Banlan (which eventually led straight to Banlan's owner), Mr. Wang did his due diligence on Peak. Mr. Qiu was the key intermediary here as he has known Mr. Joseph and other members of Peak's management team for many years. Mr. Wang reiterated that after the initial deal (as described in the December 1, 2015 press release) is closed, the plan is to put more resources into Peak and to hire more people to help run the international aspect of the business plan.

Q. When do you expect to be able to send the $4M investment to Peak to make the partnership official?

A. The transfer of funds for the remaining $3.9 million will be completed by the end of January as agreed with Peak. The reason behind the transfer not being completed sooner is that is takes a few days to complete the required paperwork before funds transfer process can be completed (some of which will be outflows to Canada and outflows to Canadian dollars) per Chinese government regulations.

(E. So this has nothing to do with Mr. Wang's ability to do, and excitement over, this deal with Peak - both of which I feel are very high. It has to do with flow of funds out of China. Investors have brought this up before and I think this is a really good primer on what we can expect. Getting funds out of China is tricky, but not impossible. It's a thing to think about, but it shouldn't be a deal-breaker for avoiding investment. This is an example where the money can come out, it just takes a little longer. I believe if Mr. Wang's vision of international expansion comes to fruition, this issue will dissipate with time. By the time Peak starts to pay dividends, revenue may be substantially international in nature anyways.)

Q. When do you expect the plastic bank to begin to operate and when can investors start to see revenues come from its operations?
A. The platform will be online by the end of Q1 and revenues will start to flow in Q2. The development of the plastic bank platform actually started in June 2015.

Q. Other than the plastic bank project and the distribution of plastic raw materials, are you planning on having some of your other projects and companies run through Peak to increase Peak's revenues in the future?

A. Already touched upon earlier, but yes, the intent is to have other bulk goods like rice and steel running through the platform in addition to plastic.

Q. Peak's management has plans to see the stock listed on the TSX big board by the end of 2017 and eventually listed on the NASDAQ by the end of 2018. Do you share that vision?

A. Yes, again touched on before (E. apologies for not having the improvisation skills to change my pre-set questions on the fly while taking notes). When Mr. Joseph came to meet Jiatao Luo, the chairman of Banlan, he originally believed the deal was solely for the plastic bank. Since then, Mr. Wang has pushed the vision of moving the transactions of many bulk products from offline to online, not just plastic. Mr. Joseph is obviously on board and thrilled with this expanded vision. Mr. Wang reiterated that revenue flowing through the subsidiary will not be a problem. It will just be a matter of how fast the transactions can be moved from offline to online and therefore into the subsidiary.

Reassuring North American Investors

Q. North American investors have lost money in the past by investing in Chinese-North American partnerships. So it's very important to let these investors know that this Peak partnership is with a reputable and respected businessman. What would you say about yourself and the partnership with Peak to reassure investors that this will be a very successful partnership?

A. This transaction will occur within Chinese and Canadian laws. The operations and financial statements will be audited both on the Chinese and Canadian ends of the company through Grant Thornton LLP. Mr. Wang reiterated that he has been in business for 20 years and that his reputation is very valuable to him and his business. He will do what it takes to achieve his goals and deliver on his promises. He also finds the value in a steady flow of news releases, communication and transparency between Peak and its investors.

Q. I'm sure some of Peak's investors would like to have the opportunity to meet you. Are you planning to travel to Canada in the future to visit Peak and possibly meet some of Peak's investors?

A. Yes, Mr. Wang plans to travel to Canada in March or April.

That concluded the interview. The call ended with Mr. Joseph confirming that he will make another trip to China in two weeks. I left it feeling extremely good about Peak, even more than before. The three things that struck me the most were:

1. His vision of an international online bulk trading platform which sounded to me like the Alibaba of the industry.

2. His estimation that the stock price will be $2 to $3 next year. Like I said, this implies that Peak will be up to $2 billion in market cap assuming a fully diluted share count of 700 million inclusive of all warrants being exercised. That's an unbelievable run under any set of circumstances and investors should be cognizant of the difficulty of such an achievement before letting their heads go into the clouds. However, ZHWY Enterprises is worth an estimated 50 billion RMB. Mr. Wang certainly has the firepower to make it happen.

I think of a story like Martin Shkreli. The mere mention of him investing in KaloBios Pharmaceuticals, Inc. (KBIO) caused the stock to go from $2 to $45 in days before it crashed again after his arrest on charges of security fraud. If the mere investment from a man like him causes a stock to run 2,000% before he even does anything with it, why shouldn't an investment from a man with high integrity like Jiang Wang, someone with even greater wealth and a very specific plan, do the same for Peak in a reasonable time frame like a year?

3. Mr. Wang calling Peak a "mini-me" was particularly striking to me. Above and beyond the important business contact made possible through Mr. Qiu, this Peak deal makes a lot more sense. Mr. Wang likes Peak because he sees in the company a smaller version of his business. Mr. Wang calling Peak a mini-me means he thinks the management team has the same mindset as him. I cannot overstate how important it is that Peak and Mr. Wang are on the same page, and it sounds like they are.

I reiterate that I will not change my 20 cent price target on PKK until it reaches that price level and I can revise it upwards at that time. It's always better to be conservative than too aggressive. I always thought that Mr. Joseph's $1 target was a "dream big" type of goal. However, I must admit after conducting this interview, I can see a very clear path that would justify a $1 or greater stock price. I would just prefer to reach that conclusion in stages. Investors are free to come to their own conclusions, but I would not sell a substantial portion (greater than 10%) of my shares at 20 cents if it were to hit that target tomorrow.