Out of Luks
22 November 1999
Luks Industrial (Luks) must be feeling a little sad. While they are happy to see their remaining 7.5% holding in TCL International Holdings worth $315m, we'll tell you how much they could have prospered if they had not sold down their original stake in order to repay debts. We'll also cast a spotlight on a mysterious investor who has made a 337.5% book profit on one of the deals involved.
Background
Luks Industrial started 1998 as the owner of 38.8% of TCL Holdings (BVI) Ltd (TCL BVI), the forerunner of today's TCL International Holdings Ltd (TCL). As part of a normal pre-float reorganisation, every share in TCL BVI was exchanged for 72,000 shares in TCL, so percentages in the two companies translate on a one-to-one basis prior to the flotation.
In this week's flotation, 600m shares (25% of the enlarged company) are being issued at HK$1.75 each, raising $1.050bn before expenses, and valuing TCL at $4.2bn.
First Sale
On 9-Mar-98 Luks agreed to sell 3.8% of TCL BVI (950 shares) to a company called Capital China Limited (Capital China), described as an "independent third party". Without disclosing a figure, the TCL prospectus coyly states that "The consideration for the acquisition of the interest was determined by reference to the net asset value of TCL BVI at that time."
According to a Luks announcement dated 14-Sep-98, the consideration was $27.36m. That just happens to work out at HK$28,800 per TCL BVI share. In Cantonese, 288 is a lucky number. Very lucky, in this case, for Capital China, because that translates to exactly $0.40 per TCL share, compared with the flotation price of $1.75.
After the flotation, Capital China will own 2.85% of TCL worth $119.7m at the offer price. That's a gain of $92.34m, or 337.5% in just 20 months. The owner of Capital China has never been disclosed.
The profit after tax of TCL BVI for the year ended 31-Dec-97 was $200.3m, or about HK$8,013 per TCL BVI share. So the exit p/e was just 3.6x historic earnings.
Second sale
On 14-Sep-98 Luks sold a further 25% stake in TCL BVI to the current parent, TCL Holdings Corporation, which is 79.22% owned by the Huizhou municipal government. Huizhou is a city in Guangdong province where TCL has a major factory and distribution headquarters. The sale cut Luks holding from 35% to 10%.
The TCL prospectus makes no mention of the price on the deal, but a Luks announcement on 14-Sep-98 does. This time the price was HK$175m, of which $30m was payable by 30-Sep-98 and the rest in instalments up to 31-Mar-99, including a final instalment of $50m. The price translates to $28,000 per TCL BVI share (slightly less than paid by Capital China) or about $0.389 per current TCL share.
At the offer price, that stake, diluted to 18.75% by the offer, is now worth $787.5m, a gain of $612.5m or 350% in just 14 months, or 8 months if you count from the last installment date. Let's just call it a year on average.
At around the time of the sales, Luks was well aware of the possibility of a flotation of TCL. In the Luks' Chairman's statement dated 22-May-98, Luk King Tin wrote:
"In order to match with the rapid growth and financial need of TCL joint ventures, the group and TCL Electronics Corporation have been carrying out preliminary study in the feasibility of the listing of the TCL Joint Ventures on the stock exchanges in Hong Kong or other places."
So poor old out-of-luck Luks. Struggling with debts and an unhappy experience from a Vietnamese cement plant and properties in Ho Chi Minh City and Wuhan, the company sold a golden goose, which is now laying its golden egg. Their remaining 10% stake, diluted to 7.5% by the float, is worth $315m at the offer price, but they missed out on $704.84m of gains by cutting their stake to pay debts arising from their other ventures.
The moral of the story is this: stick to what you are good at (or as management consultants would say, your "core competencies"). Luks started life as a competent TV manufacturer. And they could have made it big. TCL is now worth $4.2bn, about 10 times the size of Luks, and it was founded by taking Luks' original Shenzhen colour TV factory in June 1996 into a 60:40 JV with the Huizhou government.
The stock market is littered with small companies that made their fortunes (and went public) by being good at one thing, and then wrongly inferred that they could be good at everything.
© Webb-site.com, 1999
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