Buying Oriental Watch despite short term uncertainty

Since my last post regarding Oriental Watch I wanted to buy some shares, but never did so because …

Very high trading fees prevented me from buying Hong Kong shares. I placed some orders with Consorsbank at the Berlin, Germany exchange but trading volume is basically non existent, so my orders were never filled. Consors’ fees for buying (and selling) shares at Hong Kong Stock Exchange are so exorbitantly high that I never placed an order. But now I set up a trading account at CapTrader. Time to revisit Oriental Watch — again! … (you can find all my Oriental Watch posts here)

I am very pleased with TradeRepublik, a so called neo broker I use besides Consorsbank, but functionality is very limited so far. If you want to use TradeRepublic please use my personal referral link (you and I receive € 15 after your first trade).

Former fair value estimates indicate continued undervaluation. In my last post in July my DDM resulted in a fair value estimate of HK$ 3.62 and my DCF in more than HK$ 4, respectively. An SOTP valuation indicated strong undervaluation as well. Today, most SOTP scenarios continue to do so with shares currently trading at HK$ 2.30.

What happened since July?

The annual general meeting or AGM took place on August 27th, and the AGM results were published. All resolutions were approved, inclusing the below resultions 5 A, B and C (last to columns: votes for and against).

extraction of the AGM results

Trading in shares were halted and announced on August 31st, due to the pending release of price sensitive information (i.e. mergers, share buy backs).

A conditional cash offer was released on September 14th and shares resumed trading. I will analyse the offer carefully below.

The appointment of independent financial advisers was released on Sept 17th with reference to the prior released conditional cash offer.

The offer

The basic terms of the conditional cash offer (the offer) are summarized in the below bullets. Specific details deemed important are discussed further below.

  • by Merdeka (financial adviser to the company)
  • on behalf of Oriental Watch Holdings Limited (the company)
  • to buy back up to 83m shares (~14.55% of the ~570m issued shares)
  • for cancellation (subject to the fulfilment of the conditions)
  • at HK$ 3 per share (current price ~ 2.30).

Whitewash waver

Key persons and related parties (Dr Yeung, Mr Lam) will not accept the offer nor exercise any share options during the offer period.

The aggregate interests of Yeung Concert Group may increase from 30.85% to a
level of approx. 36.10%. Accordingly, Yeung Concert Group would be required to make a mandatory offer for all shares unless the Whitewash Waiver is granted.

The Offer is subject to all of the Conditions being fulfilled in full. If the Whitewash Waiver is not granted by the Executive, or if the resolutions to approve the Offer and the Whitewash Waiver are not passed by the Independent Shareholders, the Offer will not proceed and will immediately lapse.” In this case, a negative price reaction is to be expected.

Conditions

The offer is conditional upon fulfillment of all of the following conditions:

  1. the approval by more than 50% of the votes cast by the Independent Shareholders in attendance either in person or by proxy by way of a poll having been obtained at the SGM in respect of the Offer;
  2. the approval by at least 75% of the votes cast by the Independent Shareholders in attendance either in person or by proxy by way of a poll having been obtained at the SGM in respect of the Whitewash Waiver; and
  3. the Executive granting the Whitewash Waiver and the satisfaction of any conditions attached to the Whitewash Waiver and the Whitewash Waiver not having been revoked or withdrawn.

Overseas shareholders

There might (have to) be differnet treatments for oversea shareholders.

Evaluation

I believe, the offer is a strong indication that insiders believe the company is undervalued and is probably worth (significantly) more than HK$ 3 per share (in accordance with my above valuation estimates).

  • If so, the buy back would be value accretive for shareholders. And if share prices act accordingly, issued employee share options will become more valuable.

It could further indicate, that insiders and key persons want to take the company private in the longer term.

Update: If the offer goes through, it could happen that more than the max. of 83m shares are tendered. As a result it could happen, that not all your tendered shares are accepted.

Scenarios

The offer provides an upside of 30% in a (presumably) rather short time frame, assuming you buy shares at current prices of HK$ ~2.30.

Holding onto shares longer term provides potentially much more upside (but also introduces more risks). The upside is smaller compared to buying shares at lower prices some months ago, but my conviction in future profits is also higher, based on the offer.

A higher relative ownership of insiders or key persons, hightens the chance (risk) that some parties try to take the company private longer term. In this case, there could be a realization of high upside (cahnce), but depending on several factors, it also brings the risk that future value will not accrue to me as a shareholder but to other parteis. I.e. prices would come down a lot (again), they would probably stage a complete takeover at depressed prices.

Conclusion

Based on the above, I want to buy a small position in Oriental Watch. Currently, I am not eligible for trading Hong Shares and I dearly hope to get the approval from Captrader soon.

I hope you enjoyed this post. What is your opinion on Oriental Watch and the offer? Do you see something differently?

Sept 25, 2020 update: I bought a first small position in Oriental Watch (398 HK) for HKD 2.33 per share. I used my new CapTrader account for the transaction (for the above reasons) and learned that total transaction costs of HKD 35.58 (€ ~4) were indeed quite low, especially compared to the above alternatives. Learnings: I first had to get allowance to trade shares in foreign markets and exchange EUR in HKD to buy the shares (here costs were higher). The shares are only traded in tranches of 2,000 shares. The user interface / layouts are well below average, rather slow and well below my expectations.

Oct 27, update: I placed another limit order which was filled today. I bought a bigger second tranche at HKD 2.42 per share. Florida SBA and CalSTRS both voted for the share buy back and for the white wash waiver. Selling at HKD 3 would proive an upside of 24% (not bad for perceived low risk).

Best, s4v

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