My Precious

A service-based company and is another dream come true for value investors – it has a “strong economic moat” in terms of very sticky relationships with its clients, where multi-years deals were often inked in a regulated industry with “high barriers”, it has consistently high profit margins and the management has a “proven track record” with numerous awards. The company even had strong international institutional interest and backing, so value investors who have been following international investing gurus’ decisions have an extra reason to believe they found a gem.

Our approach, incidentally, respectfully disagree with the markets’ view. We were uncomfortable with how management decorated their track record of years of dubious related party transactions with flowery language meant to swoon the unaware investor.

We were uncomfortable because hidden within their recent announcements revealed minute details that management had the intention to “shift” most of their cash and cash equivalents to related parties via a series of front-light, rear-heavy deals, such that while the public announcements sounded trivial, the actual details were quietly significant.

In our view these deals were made legal by minority shareholders’ subsequent votes and agreement to allow management to go ahead. Whether minority shareholders understood what they signed up for is another matter altogether. Unfortunately, the minority shareholders unwittingly gave the management a standing ovation for “whisking” away most of the cash that legally belong to the minority shareholders too. Now, you don’t really expect Gollum to share his precious… do you?

Oh, by the way, some of the international investors have long sold off their positions. I wonder why?

Again, theoretically there are no upper limits on a stock’s share price. But really, all we want to do here is avoid businesses that like to surprise us in rude fashion and focus on businesses that help us sleep soundly at night, particularly when the going gets tough.

In any case, if you find yourself fretting whether you have this company in your portfolio, my humble suggestion is “why don’t we keep our focus on high-quality long-term winners? 🙂

Over several months after we first highlighted the issues, market participants seem to acknowledge the risks.

Question) What is the worth of a company whose management is bent on out-scheming investors in order to enrich themselves, where cash is there but "not really there"? How do you value such a company?