JSM Indochina Ltd. ("JSM") is an attractive liquidation with an estimated gross return of 31-45% and because most liquidation proceeds will be returned in <12 months the IRR is >50%.  Importantly, we believe there is no reasonable scenario in which proceeds are below the current price of $0.31/sh.  Our trip to visit all of JSM's properties, discussions with local real estate brokers & lawyers, calls with management, and the June 30, 2010 valuations by Cushman & Wakefield and Jones Land LaSalle gives us comfort that our downside estimate of $0.34/sh, 11% above the current price, is reasonable.

This liquidation is the result of a December 2009 Extraordinary General Meeting ("EGM") that resulted in Passport Capital LLC ("Passport") taking control of the Board.  Therefore, the company is solely focused on maximizing proceeds to shareholders - there is no risk that management decides to stop the liquidation or retain proceeds for new projects as Passport owns 13%. 

JSM's pro forma Net Asset Value ("NAV") of $0.49 consists of $0.18 of cash and $0.31 of real estate in 7 properties in Vietnam and Cambodia.  Our estimate of realized proceeds of $0.40-$0.45/sh includes wind-down costs and write downs to real estate values, but is still 31-45% above the current price. 

Having visited JSM's properties and met with real estate brokers and lawyers in Cambodia and Vietnam, we know there is a fair bit of interest in the properties.  Our best guess is that the current book value of real estate will be realized through the sale process CB Richard Ellis ("CBRE") began approximately one month ago.  There is further detail on each property in the appendix, but it's important to note that:

(i)                         there is no debt on any of the 7 properties, which eliminates the risk that a slight change in property value has a magnified impact on liquidation proceeds;

(ii)                        the properties are mostly raw land, which is preferred by most buyers to developed properties, but more difficult to precisely value.  Offsetting this, the properties are prime locations (e.g., ~3 acres directly across from the U.S. embassy); and

(iii)                      while global commercial real estate activity is weak, meetings with local brokers revealed multiple bidders for most properties because similar properties do not exist.

The company is committed to quickly returning sale proceeds - we've been told to anticipate a distribution upon each property sale.  Thus far, all dividends have been treated as a return of capital and not taxed - the company anticipates this will be the case for future dividends.  JSM returned 25c in April 2010, 15c in September 2010, and we anticipate an additional 5c (or more) before year-end from a sale closed on Oct 11^th.

The liquidation is led by Chairman Scott Verges ("Verges").  We've spoken with Verges numerous times and he's well suited to manage this liquidation - he has 30+ years of real estate experience, has previously liquidated a $2b real estate portfolio realizing proceeds 20% above book value, and as an appointment of Passport (he is a friend of Passport's General Counsel) is solely focused on maximizing proceeds.  Further, while Verges has made it clear that JSM is not a forced seller, he noted that JSM's large shareholders are "IRR focused" and therefore he is working to complete the liquidation as quick as possible.

JSM's market cap is $71mm making this a personal account trade for most VIC members.  The 3 month average daily value traded is just $56k, but we found it fairly easy to buy stock by displaying a bid.  Also, Lehman Brothers International EU ("Lehman") owns 31.7mm shares - we're a small fund and we bought our position in the open market without contacting Lehman, but they may want to sell.  In the U.S. commissions are generally a fixed amount per share, however, our commission expense has been 50bps of the value of stock purchased, which includes a U.K. stamp tax.

Background

                JSM went public in London raising $207mm in July 2007 (stock is listed on the AIM and trades in US$).  At the time of the IPO, 6 properties were transferred from CEO/Investment Manager Craig Jones ("Jones") to JSM in return for ~18% of JSM's stock, worth $38mm, and Jones outlined plans to invest the remaining cash within one year.  However, two years after the IPO, only 3 additional properties had been purchased and JSM's cash balance was $169mm.  This was likely because Jones was annually paid 2% of NAV and was therefore compensated to sit on cash.  Moreover, departures of key personnel raised the ire of Passport, an investor since June 2008, which installed a new Board in December 2009.

After a comprehensive review of the investment strategy, the reconstituted board terminated the management agreement with Jones and replaced it with a consultancy agreement (detailed later).  Another EGM was held in April 2010 and an orderly realization of the company's portfolio was unanimously approved.  Further, a dividend of $0.25/sh was declared.

In late September, JSM released 1H 2010 results and announced another dividend of $0.15.  Later in September, the company appointed CBRE to sell the real estate portfolio. 

Following the October 11^th sale of JSM's interest in Hieu Duc Joint Stock Company ("Hieu Duc"), which owned 2 properties, for 98% of book value there are 7 remaining properties:

(i)                         3 standalone Cambodia properties currently being marketed by CBRE (Embassy Centre, Siem Reap, and Ounalom);

(ii)                        2 adjacent Cambodia properties will be marketed by CBRE before year-end upon the completion of construction (Colonial Mansion I & Colonial Mansion II); and

(iii)                      2 Vietnam properties secured by cash pledges are unlikely to be marketed until early 2011 as the company is working with the banks to either extract the cash pledges or sell the underlying properties (Prince and Peninsula).

Valuation

Our estimate of liquidation proceeds builds from the 6/30/10 balance sheet, the midpoint of proceeds from the sale of Hieu Duc ($10.3mm was received on 10/11/10 and as much as $2.0mm will be received when a tax matter is resolved, which is expected in the "coming weeks" per the press release), $3.6mm of remaining construction expenditures on Colonial Mansion II (this completes all construction), and no taxes on property sales (consistent with conversations with management and JSM filings, including the 2007 Admission Document).  Our 3 scenarios are:

(i)                        Best Guess - assumes $10mm of wind-down expenses and that the current book value of real estate is realized.  We have discussed our expectations of wind-down expenses with the company and been told that $10mm is "in the ballpark."  Verges and the other directors of JSM have spent significant time speaking with investment bankers, brokers, and preparing data rooms for JSM's properties and they believe that the current book value of real estate is a reasonable estimate of the proceeds that will be realized from the wind-down.  Following a 5 day trip to Cambodia and Vietnam to  visit every property and meet real estate brokers and lawyers, we also believe that the current book value of real estate will be realized.  We believe that it's possible that the current book value of real estate is exceeded as the 6/30/10 interim report notes "the fair value of the Group's investment properties at 30 June 2010 has been arrived at by the Directors on the basis of the lower of the valuations carried out at that date by Cushman & Wakefield (Vietnam), Ltd. ("C&W") and Jones Lang LaSalle Ltd ("JLL") who are independent valuers that are not related to the Group." 

(ii)                      Conservative - Wind-down expenses of $12.5mm are 25% above "Best Guess" and a 10% haircut is applied to the current book value of real estate. 

(iii)                     Downside - Wind-down expenses of $15.0mm are 50% above "Best Guess" and a 25% haircut is applied to the current book value of real estate.   

Cash, cash equivalents, and time deposits

There is minimal FX risk as 96.3% of cash was denominated in U.S. dollars at 12/31/09 (6/30/10 U.S. dollars not reported, but we were told it has not materially changed).

Wind-down expenses

This includes remaining professional fees of $2.0mm, director fees of $2.0mm, and $1.0mm of staff costs.  The company will pay Jones ~$4.8mm (consultancy agreement of $222k/mth for 15mths = $3.3mm; expense reimbursement of ~$100k/mth for 15 mths = $1.5mm).  Minor items, such as bank charges, bring total wind-down expenses to ~$10.0mm.  Given the low current interest rate environment, we give no credit for interest income on the cash balance. 

Jones is eligible for a $1.0mm bonus payment, which is at the complete discretion of the board.  In talks with Verges, it has been made clear that unless Jones creates significant value for shareholders he will not receive this bonus - specifically, we were told, "Craig needs to bring offers to the table well above NAV to receive this bonus."  Therefore, we do not include it in our estimate of wind-down expenses.

Estimated timing of dividends

As JSM is currently attempting to sell each property, management does not provide individual property values.  In order to estimate an IRR, we have included our individual property value estimates, which total to the current book value of real estate. 

The above reflects the current book value of real estate.  Using the value estimates in our conservative scenario, the IRR is 41%.  Using the value estimates in our downside scenario, the IRR is 15%.  We assume that the final distribution is made 2 years after the liquidation was begun - we're cautiously optimistic that this will be beat.

Risks

1.       Timing - Cambodia/Vietnam real estate markets are less liquid than U.S. markets.  We believe we've accounted for this as we assume sales are closed 6-15 months from the time that CBRE was hired.

2.       Prince - JSM does not currently own either Prince or Peninsula.  Rather, through cash pledges JSM has the right to acquire Prince and/or Peninsula.  JSM owns 80% of New Vision, an entity created to acquire property and build residential apartments.  As part of the arrangement through which the right to acquire Prince was obtained, JSM pledged $12mm to Navibank to secure New Vision's right to acquire the property.  Because of the need to work with its minority partner and Navibank, the manner that Prince will be liquidated is unclear.  Currently JSM is in discussions with its minority partner and Navibank to determine next steps for Prince.  While the company hasn't stated their goal for these discussions, JSM is liquidating so it seems likely that JSM does not want to proceed with the land acquisition and would like its $12mm pledge refunded.  The 6/30/10 interim report includes further details, but it's worth noting that JSM may not be able to come to an agreement with New Vision and Navibank.  We've been given the impression that JSM is attempting to come to an agreement that all parties find acceptable, but because of its 80% ownership, JSM is able to legally exclude its minority partner and work directly with Navibank - if push comes to shove, JSM will do what is in shareholders best interest.  Of the $12mm pledged to Navibank, JSM's maximum exposure is $7.5mm - therefore at least $4.5mm will be refunded to JSM.  While not publicly disclosed, we estimated that JSM is currently holding its investment in Prince at $7.6mm, so a further $3.1mm loss could occur (JSM has written down the value of Prince and Peninsula from $33.0mm to $20.9mm so we assume a 37% write down occurred on both properties). 

3.       Contingent liabilities - Archetype, a provider of architectural designs, construction management services, and other developer related services, has claimed an amount of $1.0mm against JSM who has responded with a counter suit.  The company has noted that they may hold a small reserve due to this liability and indicated that they do not expect to pay. 

4.       Country risk - The economies of both Cambodia and Vietnam are rebounding nicely from the economic downturn, but are highly dependent on the health of the global economy (as are most investments).

Appendix

Following approval of the liquidation in late April, JSM engaged lawyers and consultants to create data rooms for all properties.  As a result of this, the company has confirmed that it has clear title to all properties. 

Embassy Centre - Phnom Penh, Cambodia

Est NAV: $24.4mm; $0.11/sh

Est distribution date: 3/30/2011

Location/quality:

1.       Directly across from the US Embassy

2.       Central Business District ("CBD")

3.       1 block north of "Bank Street" and 1 block east of Canadia & Vattanac towers

4.       4 blocks northeast of the new Prime Minister's offices

Notes from trip:

1.       A local broker noted that there were at least two parties interested in purchasing this asset in June 2010, before the property was put on the market

Prince/Peninsula - Ho Chi Minh City, Vietnam

Est NAV: $20.9mm; $0.09/sh

Est distribution date: 6/30/2011

Location/quality:

1.       Thao Dien district - neighborhood of wealthy locals and expatriates

2.       One block from the riverfront - positive given that there are height restrictions on properties located on the riverfront

3.       The British International School and The American School are located less than 10 minutes away allowing for expatriates to raise a family

Notes from trip:

1.       A local broker noted that there were multiple buyers interested in purchasing these assets in June 2010, before the property was put on the market

Colonial Mansion I & II - Phnom Penh, Cambodia

Est NAV: $13.6mm; $0.06/sh

Distribution Date: 9/30/2011

Location/quality:

1.       Located 1 block away from the US Embassy

2.       Central Business District ("CBD")

3.       2 blocks north of "Bank Street" and 1 block east of Canadia & Vattanac towers (large bank towers)

4.       Less than one mile Northeast of the new Prime Minister's offices

5.       Amenities: (i) CCTV, (ii) 24/7 security guard, (iii) pool, (iv) gym,  (v) enclosed garage, (vi) French restaurant

Notes from trip:

1.       Local rumor is that CBRE is working on a contract with the U.S. Embassy

2.       Advantage over similar buildings given a lower price point and proximity to U.S. Embassy

3.       Lycee Francais and The International School are located within 1 block allowing for expatriates to raise a family

Ounalom - Phnom Penh, Cambodia

Est NAV: $5.3mm; $0.02/sh

Distribution Date: 12/31/2011

Location/quality:

1.       Along Tonle Sap riverfront

2.       5 minute drive to the only casino in Phnom Penh

3.       Café/restaurants located directly to the north/south - area where tourists/expatriates/wealthy locals congregate

4.       Adjacent to Wat Ounalom Buddhist temple

Notes from trip:

1.       Prime real estate located in the "nightlife" area of the city

2.       A local broker estimated this property could take up to a year to sell

Siem Reap - Siem Reap, Cambodia

Est NAV: $11.7mm; $0.05/sh

Distribution Date: 12/31/2011

Location/quality:

1.       15-20 minutes away from Angkor Wat - a world renown tourist attraction

2.       Walking distance to the local marketplace, bar, and restaurant area

3.       Located near: (i) Raffles Hotel, (ii) Royal Palace & gardens, (iii) Amansara, and (iv) FCC (high-end restaurant)

Notes from trip:

1.       3.1 hectares (7.7 acres) of prime real estate centrally located in the tourist district of Siem Reap

2.       A local broker estimated this property could take up to a year to sell

Resources

Outside IR - Andrew Potts of Panmure Gordon: [email protected] or 44 20 7614 8390.

Company contact - Chairman Scott Verges: [email protected] or 415 400 2461.

The 6/30/2010 interim report provides detail on each property.