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.

Spackman Will Probably Make A Lot Of Money In Q4

Charles Spackman, CEO of Spackman Entertainment Group, Spackman Equities Group and several similar entities

This stock, or team of stocks was brought to my attention a couple of months ago. Charles Spackman must be an interesting character. I've never seen someone so into himself that he will develop a tangled web of corporate entities and name each of them after himself. Have a look at Spackman's corporate structure:




If it's a bit too small to read, I will summarize it:

At the top is Spackman Equities Group, trading on the TSX Venture under the symbol SQG.

Next is Spackman Entertainment Group, trading on the Singapore Catalist under the symbol 40E. It is 38.77% owned by SQG.

Next is Spackman Entertainment Group Hong Kong, which then owns the operating subsidiaries Zip Cinema and Opus Pictures, among others.

Spackman Media Group is 45.8% owned by 40E, which was recently spun out for a 27.4% ownership of the company after it lists on the Hong Kong Exchange.

Charles Spackman may be a narcissist who is collecting multiple pay checks from different self-made companies that he runs, but I'm not so concerned about that. What I care about is if this group of Spackman companies can make me money, and I think they can.

For the purpose of this discussion, I'll focus on SQG and 40E. The strategy and future direction section of the Management's Discussion and Analysis should provide enough of an investment thesis for this one.

At the end of November, 40E was trading at $0.16 SGD, which translates to a net asset value of $0.16 for SQG. 40E has dropped about 20% since then to $0.13 SGD, but that still translates to a NAV of $0.13. SQG trades at $0.04, a massive discount to what it's worth.

Not only is the discount huge, but the underlying, 40E, looks like it's going to have a big Q4. Spackman is a movie producer and entertainment company, and it just so happens that its movies' box office revenues are readily available from multiple sources online.

In 2014 and the beginning of 2015, the company bombed, part of the reason for 40E's drop from as high as $0.40 to as low as $0.04. Spackman lost $8 million on $16 million in revenue last year, as the four movies it produced and/or presented did not do all that well. $2 million of the loss can be attributed to IPO costs. All of Spackman's financials are reported in US Dollars, despite revenue received primarily in Koren Won and that the stock trades on the Catalist in Singaporean Dollars.


 The box office revenues and rank for three of the four films are shown on this site:

34Doo-geun-doo-geun Nae-in-saeng (My Brilliant Life)n/a$11,618,2409/3
48Big Matchn/a$7,880,68411/27
64For The Emperorn/a$4,581,0286/12

As producer (and sometimes distributor), Spackman is entitled to a portion of each movie's gross box office which varies depending on the role it plays. Opus Pictures produced and presented For The Emperor and appears to have captured over 80% of that movie's box office take. My Brilliant Life was produced by Zip Cinema and Spackman appears to have received 44% of that gross box office revenue. Big Match was merely presented by Opus and Spackman appears to have received only 10% of the revenue.

2014's performance was in stark contrast to 2013 which saw a profit of $2.7 million on $12 million in revenue:


























The profit and revenue figures in 2013 were largely driven by one movie, Cold Eyes, with Spackman achieving $10 million in revenue. This movie was a hit at the box office, with $35 million in box office sales, the 10th highest grossing movie in Korea in 2013.

10Gam-si-ja-deul (Cold Eyes)n/a$34,849,3577/4

So Spackman had a 30% investment share in this movie. Obviously knowing what Spackman's investment stake in every movie it produces or distributes is key in trying to estimate financial impact. Voyage Research released a report on Spackman around the time of its IPO. While the report will be dated, it's an important read for anyone looking for background on the company. I draw attention to this chart which outlines the box office revenues and production costs (in Korean Won) each movie that the two Spackman subsidiaries have produced (even prior to being purchased by Spackman).



At the time, Cold Eyes was one of the most successful movies, grossing 39.38 billion Won against 6.75 in costs, a 5.83 revenue to cost ratio. This is what leads me to believe that Spackman will have an excellent Q4. The Priests, produced and distributed by Spackman, grossed $36.4 million (over 40 billion Won) while it was in theaters in South Korea in November and December. It was the 13th highest grossing movie in the country for the year, and apparently set records for a November release, according to Spackman.

13The Priestsn/a$36,367,63711/5

According to this press release, The Priests had a production cost (inclusive of advertising) of $5.9 million US, making its revenue to cost ratio 6.16, aligned with the two best performing movies on the list, All About My Wife and The Man From Nowhere. It's second to only The Man From Nowhere, having made $30 million after production costs.

The question is how much of an investment stake does Spackman have in The Priests? If you see the company's news releases and their website http://www.spackmanentertainmentgroup.com/, everything is about The Priests. The company's news releases claim that its subsidiaries took a lead production and distribution role, so I am pretty confident that its stake is substantially higher than 30%, and probably more in line with 80% as in For The Emperor. But this is just an assumption made by me until I can get further information. Investors will need to come to their own conclusions.

The first nine months of 2015 were poor due to the company not releasing any movies during this time period. The bulk of its revenue came from talent management through its UAA Korea division. Spackman converted $2M US worth of notes to get a 51% stake in UAA at the start of 2015. Spackman just disposed of that division for $2.1M US, citing that it was unprofitable and that the company wishes to focus on its movie business. So the end result is well timed non-core revenue to hide the brutal start to the year that ended with a $100K gain on sale of the division, notwithstanding any operating loss that the company incurred while holding this stake.


I expect that Q4 will significantly add to the $9M in revenue for 2015 and get the company into profitable territory for the year. Last year the Q4 numbers came out on February 27th, with profit guidance commentary out on February 7th. For those interested, stay tuned as the first indication of how successful The Priests was should be out in three weeks if management follows the same schedule.

If I was forced to come up with a guess, I would say that 40E makes $3-5M US in profits for 2015, or about $4-7M translated to Singapore Dollars. 40E's market cap is about $50M SG, so a P/E of 10 for a growing movie company is pretty good.

The issue is can Spackman continue to build on The Priests' success? It has a dozen movies in its pipeline expected to be released in the next couple of years. The company wants to release a minimum of four a year. Its current movie, Chasing, is not doing so well. From January 7th through 13th it has only $327K in gross box office sales (source), a far cry from The Priests. It's probably going to land around $2M in gross box office sales once it's out of theaters. Spackman's subsidiary Del Media (part of the spin out on the HKSE) signed a $3.6M US deal to for a Chinese reality TV show to be aired in February. The timing of revenue being recognized will depend on production, though I can imagine that Spackman will be "conservative" and book everything in Q1 once it has aired rather than a mix of Q1 and Q4.

So I expect a very strong Q4 to be followed up by a mediocre Q1. But this should be enough to at least keep the stock in the low teens with the opportunity to push it higher if The Priests' numbers really work in Spackman's favour.

This comes back to SQG. It's trading at more than two-thirds of a discount, and its value is concentrated in a stock that's got some pretty good potential and a ton of liquidity. I think Spackman should do a stock buyback. Given that 40E trades millions of shares in a day, SQG can easily let go of a few million without negatively impacting the stock price. SQG will then have enough money to buy back a higher amount of its own shares. It'll own a lesser percentage of 40E, but take a higher amount of shares back into treasury, so its NAV actually increases.  Let's illustrate.

SQG owns 154.6 million shares in 40E, worth $19.5M when 40E is 12.6 cents. At the time of this writing, the Canadian Dollar has conveniently dropped to par against the Singaporean Dollar, so no currency translations are necessary. SQG has 148.9 million shares outstanding, leading to a NAV of 13.1 cents.

If SQG was to sell 10 million of its 40E shares for $1.25 million and use that cash to buy up 15 million of its own shares at an average price of 8.3 cents:

SQG now holds 144.6 million shares in 40E worth $18.2M. Its share total drops to 133.9 million so its NAV increases to 13.6 cents per share. SQG only has a few hundred thousand shares offered on the ask. So getting 15 million sharesat 8.3 cents is unlikely. This was just an example of how this could work.

Now obviously management might balk at the idea of SQG owning a lesser percentage in 40E, even if it results in a higher share price and higher NAV. Alternatively, management could use the bonanza of cash from The Priests and low Canadian dollar to get 40E to buy up shares in SQG. The two related parties could cancel each other's shares out so that both SQG and 40E's share totals decrease. 40E already has a share buyback plan enacted, so why not do it in this creative and efficient way?

This is where I get to the part that I don't like about the company. According to past press releases, Richard Lee is the IR contact at info@spackmanequities.com. I did not get a response from this address trying to make contact a few weeks back. Now perhaps the Spackman team has been busy with The Priests and the various corporate structure changes over the past few weeks, including the sale of UAA and the spin off of Spackman Media Group onto the HKSE. But that's still no excuse. I have tracked down Mr. Lee on his LinkedIn account, where he is described as the "Head of Business Development at Spackman Entertainment Group". He also has Spackman Equities Group as one of the companies he follows. Now in the unlikely event that there are two Richard Lees in top spots at Spackman, I could be after the wrong person. But I am willing to take that risk and I suggest that anyone who buys into Spackman on my advice contact Mr. Lee and tell him what they think about SQG's low stock price. Give him the idea for a buy back so he knows that Canadian investors aren't going to sit idly by and let a stock that is clearly 2-3x undervalued remain as such when the company is perfectly capable of rectifying the situation. In fact, it's in their own best interests.

The good news is that after doing some digging, I got into contact with Spackman Entertainment's IR representative, who recognizes Spackman Equities. I have sent them questions and suggestions, with some answers still pending. I'd still prefer to get into direct contact with management. Perhaps my writing on the company will spark their interest, as it shows there is some life in Canada and that someone cares about SQG.  

I'm rather new to the Spackman story and it's complicated by the fact that so much of the story is in South Korea and Singapore, two markets I am unfamiliar with. So there might be something I'm missing in my analysis and I encourage others to do their own research. I will continue to follow this story and update it as I learn more about the company. I own shares, purchased mostly in the 3.5 to 5 cent range.

Thursday, 7 January 2016

Peak's Answer To LongKey Questions

As promised, I asked Peak some follow up questions about LongKey after the conference call. Specifically:
  • How is LongKey doing now?
  • Is the automated process a done deal or still ongoing?
  • What's the upfront capital requirement now, if any?
  • Can they fund a partial roll-out based on existing cash flows?
  • I know LongKey management is on board with the focus on Banlan, but what about ICBC and the 5,000 manufacturers, how long can they wait? 


This is the answer I got back from Johnson.



So it looks like the IFS business is on hold for now, but LongKey is still active and working on a next generation solution. We should not expect any significant revenues out of LongKey until Peak confirms its focus back onto that business.