Description

SiS International is a Hong Kong-listed company in transition that can be viewed as a collection of valuable assets run by a savvy family owner/manager.  Those assets include: 

1) proforma net cash worth 104% of its market cap from a richly priced sale of its core business to Jardine Matheson in late 2010,

2) guaranteed cash "goodbye fees" from Jardine Matheson worth 3-8% of its market cap.

3) prime Hong Kong office property in CBD areas Central/Admiralty worth 74% of its market cap, and

4) a controlling stake in pubicly listed SiS Distribution Thailand (SIS TB), the top IT distributor in Thailand with 51% market share in fast-growing smart phone sales and possibly almost 20% market share of the entire country's IT hardware sales worth 50% of its market cap. 

The market value of the above asset pile is worth more than double the HK$900 million market cap of SiS International -- HK$2.1 billion to be exact, or HK$1.9 billion if we take a 20% haircut on the property and shares in SiS Thailand, and could be worth more over time. 

There are some plausible long-term "catalysts" for SiS - including an eventual sale of SiS Thailand to Jardine Matheson, which has currently no IT distribution presence in that country - but I frankly don't know when or if this value will materialize.  In the mean time I'm happy to wait, collect dividends (and special dividends), and see what happens.

1)      The net cash pile: HK$933 million

SiS is one of the older IT distribution companies in Asia (think Ingram Micro for a US comparable) and eventually became the largest in Hong Kong.  The basic business model was a mixture of logistics and finance: large foreign IT vendors like HP who need to sell product (systems, software, peripherals, and networking) in Asia sell through distributors like SiS, who turnaround and sell/deliver the products to IT retailers/wholesalers and mom/pop outfits.  So SiS would essentially take on the inventory and accounts receivables risk from a mind-boggling amount of products/customers (literally thousands of products and tens of thousands of customers) in return for a small profit margin.  Not sexy, but a necessary business model that's tough to build from scratch with growth potential, especially in countries with low PC penetration and less modern retail (as they are finding out in Thailand, see below).

After a couple decades of profits/dividends from doing this primarily in Hong Kong (where they were the leader) and Singapore (where they were smaller but profitable), SIS agreed to sell this business to rival Jardine One Solutions, a subsidiary of Jardine Matheson, for US$130 million cash in late 2010 (for settlement in 1H2011), or 18x P/E and 2.1x P/B.  The disposal circular with proformas is online http://www.hkexnews.hk/listedco/listconews/sehk/20101213/LTN20101213035.pdf, but the key point is that SiS will continue to manage the business for Jardine for a cut of the PBIT until December 2012.  This PBIT cut (what I refer to as the "goodbye fee" above) will be no less than US$1.5 million and no more than US$4.5 million - small but nice guaranteed cash from which they could pay dividends. 

2)      Prime office property: HK$558-656 million

Anyone in Hong Kong will tell you that grade A office supply is tight in Central/Admiralty, the two most desirable CBD areas that account for nearly 40% of the city's total office stock.  Grade A office vacancy in Central/Admiralty dropped from 4.6% to 3.0% from 1Q10 to 1Q11 (city-wide vacancy went from 6.0% to 4.3% over the same period) according to Colliers.  According to Jones Lang Lasalle, Central and Admiralty vacancies were at 3.7% and 3.2% respectively at June-end (citywide grade A vacancy: 4.8%).  If you don't believe me you can read the broker research below, but the key point is that Central/Admiralty office space is extremely precious - and SiS owns 3 floors in 3 great buildings worth a lot of money.

http://www.colliersinternational.com/Content/Repositories/Base/Markets/HongKong/English/Market_Report/PDFs/GC-Report-2Q-2011.pdf

http://www.colliersinternational.com/Content/Repositories/Base/Markets/HongKong/English/Market_Report/PDFs/CIHK-Research-1Q-11.pdf

http://www.joneslanglasalle.com.hk/ResearchLevel1/Research-pulse-monitor-hk-2011-07.pdf

http://www.joneslanglasalle.com.hk/ResearchLevel1/Research-pulse-monitor-hk-2011-06.pdf

http://www.joneslanglasalle.com.hk/ResearchLevel1/Research-pulse-monitor-hk-2011-05.pdf

http://www.joneslanglasalle.com.hk/ResearchLevel1/TheOfficeRentalIndex-May2011.pdf

http://www.cbre.com.hk/hongkong/eng/document/MarketReports/OfficeMarketView.pdf

Office #1: 8^th Fl. of 9 Queen's Road Central (GFA: 13,721 sq ft, value: $280 million)

Located between the HSBC headquarters and Landmark Mandarin Oriental (this is almost as prime as it gets in Hong Kong), 9 Queen's Road was bought by SiS in October 2009 for HK$203 million (HK$14,794 per sq ft).  In the acquisition circular CBRE valued the asset at HK$208 millionhttp://www.hkexnews.hk/listedco/listconews/sehk/20091113/LTN20091113193.pdf.

Now it's probably worth at least HK$20,000 per sq ft.  The asset was tenant-less when SiS acquired it in 2009 so we don't know how much rent it was actually achieving then, but we do know what neighboring buildings of similar quality can achieve.  The Henley Building at 5 Queen's Road Central, for example, rents for HK$90/sq ft/month accoring to Landscope Real Estate (http://alturl.com/35ini). 

Assuming a cap rate of 5% and a HK$85/sq ft/month rent (a $5/sq ft/month discount to Henley) the 8/F of 9 Queen's Road is conceivably worth HK$280 million.

Office #2: 23^rd Fl. of United Centre, 95 Queensway (GFA: 20,489 sq ft, value: HK$234 million)

Located in Admiralty next to high-end office/mall Pacific Place, the 23^rd floor of United Centre was bought by SiS in June 2010 for HK$183 million (HK$8,931 per sq ft) in a sale/leaseback deal in which the seller - Sumitomo Corporation, one of the largest Japanese trading companies - agreed leaseback 90% of the property for HK$568,230/month or HK$30/sq ft/month for 2 years, after which the rent will revert to market rates.  In the acquisition circular DTZ valued the asset at HK$184 million.  http://www.hkexnews.hk/listedco/listconews/sehk/20091113/LTN20091113193.pdf.

According to Midland IC&I, a leading local broker, recent transacted rents range from HK$35-60/sq ft/month.  The most recent transacted sales in April and February 2011 were for HK$39,000 sq ft (nosebleed territory) and HK$14,000 per sq ft (more reasonable), respectively (http://alturl.com/jb5yx).  If we take the middle of the rent range HK$47.5 and apply a 5% cap rate to it then the 23^rd floor of the United Centre could be worth HK$234 million or HK$11,400 per sq ft (still a discount to actual transacted prices).  

Office #3: 8/F, Far East Finance Centre, 16 Harcourt Rd (GFA: 10,800 sq ft, value: HK$143 million)

Based on market transactions reported by Midland IC&I (http://alturl.com/trahh) the market rent/sq ft/month should be in the HK$55-80 range.  The most recent sales in this building have been at nosebleed prices of HK$28,000-30,000 per sq ft.  If we take the low end of the rent range and apply a 5% cap rate to it, we can arrive at a value of HK$143 million or HK$13,200 per sq ft (a large discount to recent transacted prices).

Note: SiS actually owns 11 other properties in addition to the above 3 (see the last 2 pages of the annual reporthttp://www.hkexnews.hk/listedco/listconews/sehk/20110419/LTN20110419389.pdf) located in Hong Kong, Singapore, and mainland China - but let's be conservative and ignore them since they're smaller and not as prime as the above 3 offices.  Nevertheless, they're probably not worth zero!

3)      SiS Thailand: HK$450 million

SiS Thailand, seeded by SiS International in the 1990s (today SiS Int'l maintains a 47% stake), is the largest IT distributor (notable clients: HP, Microsoft, HTC, RIM) in Thailand, a country of 68 million people and just 30% PC penetration.  The company was already growing briskly over the last 10 years, but really accelerated last year when the smart phone craze hit Thailand in earnest. 

SiS Thailand is currently the only distributor of Blackberry in Thailand, where Blackberry has a little over 1/3 of the market.  SiS Thailand also has 50% market share of Android platform smart phones, a platform which accounts for slightly less than 1/3 of the smart phone market.  Iphones, which aren't sold through distributors like SiS Thailand, occupy the other ~1/3 of the market.  In total this gives SiS Thailand some 45% of the market for smart phones, and it's been a boon to their revenue/profits.  According to their CEO, the gap between the "separate" and "consolidated" financials represents the growth of the smart phone segment.

SiS Thailand is run by Somchai Sittichaisrichart, a dynamic manager who personally owns 15% of the equity and has taken the company from just USD 64 million in revenues in 2000 to USD 519 million in revenues in 2010.  Operating income over the same period increased from USD 0.6 million to USD 12 million.  Dividends paid have increased from USD 0.4 million in 2004 to USD 2.6 million in 2010.  Market capitalization has increased from USD 16 million in December 2004 to USD 121 million today.

The basic opportunity for SiS Thailand is straightforward: as long as PC penetration remains this low and chain store IT retailers remain as small as they are (the largest publicly listed one is IT City, which has just USD 195 million in revenue), then the only way for global IT brands to satisfy demand in Thailand is to go through large, entrenched distributors like SiS Thailand.  

If SiS International just holds onto its non-consolidated, controlling stake (collecting dividends along the way), there's a good chance SiS Thailand could become much bigger over time.  Given that Jardine One Solutions does not yet have a presence in Thailand, it makes sense that they would try to buy their way in by acquiring SiS Thailand.  If we applied the 18x historical P/E ratio Jardine One Solutions paid to buy SiS Intl's Hong Kong / Singapore business to SiS Thailand, then the market value of SiS Thailand would be 50% greater than it is today.

Note: SiS Thailand has some of the best disclosure in Thailand - the annuals and quarterly presentations are worth reading

http://sis.listedcompany.com/misc/ar/ar2010/ar2010_en.pdf, http://sis.listedcompany.com/misc/Oppday_1q2011.pdf, http://sis.listedcompany.com/misc/agm/2011/SIS_AGM2011.pdf.

Final word on diworsification risk: this can be a problem when a family-owned business comes into a large chunk of cash, but based on the track record of the CEO, KH Lim (who I've spoken/met with several times since 2006) I don't think they'll do anything crazy.  If anything, the family could be looking to liquidate a little bit more - Lim's father the patriarch passed away recently, not long after which SiS Int'l announced their first ever special dividend. Only tme will tell. 

Catalyst