Weekend reading

There was a short report circulating on RexLot this week. I was fortunate enough never to pull the trigger upon more investigation into the background of the principals and some issues with the accounting as well (these contained my initial excitement). A few more items go on the checklist!

Related articles from the FT on China and North Korea:
North Korea and the secrets of Office 39 (FT)
China in Africa: how Sam Pa became a middleman (FT)
Somewhat related: This is what it's like to teach in North Korea (TED)

The usual China section in the weekend reading links:
Article by George Soros, on a partnership with China to avoid a world war (NY Books)
Aung San Suu Kyi goes to China (Chatham House)
New Yorker profile on Xi Jinping (New Yorker)
Thoughts on China (Minority Report)

Recent Wall Street Week episodes with Leon Cooperman and Ken Langone

Howard Marks, the uncomfortably idiosyncratic billionaire (Observer)

Few articles on Japanese activism: Japan opens up to outside directors (WSJ) and recent Sohn HK conference write up (Stockpucker). One more post from Undervalued Japan about the misconceptions of investing in Japan

Crispin Odey, of Odey Asset Management, profiled in Institutional Investor (Institutional Investor)

Recent Jim Rogers interview (Chris Martenson)

Loneliness of the short seller (NY Times)

Two talks from EconTalk: food, agriculture and Cargill, and Hollywood and the future of work

The art of profitability: a look at 23 profit models (Value Walk)

Weekend reading

Habits and High Fives: How Neuroscience Helps Us Understand Ultimate, Performance, and Depression (SKYD Magazine). Highly recommend the article.

"Korb’s recently-released book, The Upward Spiral: Using Neuroscience to Reverse the Course of Depression, One Small Change at a Time, breaks down the complex processes that cause depression and offers dozens of straightforward strategies to rewire the brain and live a happier, healthier life. Korb draws heavily on his own experiences both playing and coaching ultimate for examples of how athletic activity, social interaction, and positive habit building can literally reshape your brain. In the interview below, we discuss how his own depression and the tragic suicide of one of his players drew him towards research into depression, how neuroscience can improve your in-game habits, his approach to coaching, and the differences between men and women."

Asia’s Wide-Moat Restaurant Innovators (Beyond Proxy)

Third Avenue's Q2 Letters (Value Walk)

Mark Mobius on China’s SOE reform (Mobius)

Couple of articles on Japan's change in corporate governance and also some coverage from the Sohn HK conference: Economist, WSJ and Bloomberg

Part 1 in an FT series about InBev and the Brazilians behind it (FT)

Buy to let couple begin to sale of their property empire (FT)

The secret corporate takeover of trade agreements (Guardian)

Illuminating North Korea (NYTimes)

The following was written after Game 4 of the NBA finals, so a bit dated but very revealing. Why The Warriors Are So Tough To Beat (FiveThirtyEight)

Freeway Rick Ross (not the rapper) on James Altucher. Great title: “How to manage your employees when they are all carrying guns" (Altucher)

Mamma mia here I go again

Posting has been quite sporadic recently due to other commitments and will continue to be over the summer months due to a project I’ve codenamed “beach”.

This write-up is about a $300m market cap, Greece heavy, London listed luxury real estate developer so if you feel like you can stop reading right here. The company is called Dolphin Capital Investors and for me it’s the second time around with the stock. I was involved back in 2012 and since then have been a spectator.

To give you a brief background Dolphin is a luxury real estate developer focusing on emerging markets (and now Greece fortunately or unfortunately classifies as one). It’s essentially like a junior mining company that goes around prospecting on a piece of land in hope of finding whatever minerals they are after, however in this case the outcome is considerably more sexy. The company’s strategy since inception in 2005 has been to acquire coastal land and develop high-end hotels and resorts with world class partners. This meant that they have acquired a large amount of land in sight in many countries for which realistically speaking they didn’t have the money to develop and the company turned into a hodgepodge of assets. I could spend pages about the history of the business but I think to an extent it is not as relevant as what’s happening at Dolphin currently.

But before we get there just a brief overview of the business. The company owns and develops projects in 6 different countries and breaks their projects into two categories: core and major projects with the first being the more advanced ones. In terms of NAV, around 80% is in Greece and Cyprus with the rest in Croatia, Turkey, Panama and the Bahamas. Below are some slides from a recent corporate presentation.

Source: Company. Note the figures are as of June 2014. For more recent, though less colourful data refer to pages 16-17 of the Q4'14 report

Dolphin published their Q4’14 update just a few days ago. NAV is currently €557m or around £68p on a per share basis (both € and £ will be used here as the company reports in € but listed in London so the share price is in £). The share price is £21.5p and is getting closer to 2012 levels. This translates into a discount of around 70%. And you might think that’s great…but why on earth should I care, it’s been cheap for a very long time. And if you glance at the below 5 year chart you are absolutely correct. Investors have been reluctant to give full credit for Dolphin’s NAV due to questions on the underlying valuation (i.e. how much of a decline in Greece is captured in the figures) and risk of higher than expected cash burn (not unheard of for a property development company). It also didn't help that on top of the ListCo there is a privately held investment manager that charged 2% on the AUM (now you understand the asset hoarding).

Source: FT

This time is (likely, maybe, potentially…hopefully) different. Let me take you back a bit to 2012. In October that year Third Point took a stake in a company via an equity raise, participating in an aggregate €50m round at a price not too different from where we are today. The macro situation in Greece hasn’t been supportive, I think we can agree on that, and I’ve also heard the same stories that you probably heard about the management of the company so we can assume that Third Point must have been getting pretty frustrated with this position. But they are still hanging in there.

I’m going to conveniently skip a few years and fast-forward to February 2015. Dolphin put out a press release where they announced plans to do the following (i) change the board of directors and add directors who either have significant real estate background or represent key shareholders, (ii) review the business plan, with focus on developing the core assets coupled with disposals, (iii) review management/investment manager compensation and (iv) less onerous governance. So far so good.

To follow up on this the company announced the following a few days ago: (i) separation of assets into core and non-core buckets with divestments on the cards, (ii) lowering the investment management fee and (iii) €75m capital raise (inc. conversion of the 2016 converts). Let’s take these in turn.

The core projects are as follows: Greece - Amanzoe, Kilada Hills and the Kea Resort; Playa Grande Club & Reserve (Dominican Republic) and Pearl Island (Panama). The company aims to develop these into resorts but further capital allocation is controlled by the board. Regarding the non-core bucket (which is basically everything else) the company plans to sell these eventually and will continue developing them to an extent to increase value. Considering the company’s 49.8% stake in Aristo (Cypriot residential real estate developer) the plan is also to sell out.

For what it’s worth, the company sees total net cash flows from the development of core projects and asset sales of €320m during 2015-19 (majority in 2018-19). In addition, they estimate €384m residual value post 2020 and €101m NAV of the undeveloped land for a total value of €805m (pre-tax basis). The company also plans to reduce gross debt from €265m in 2015 to €42m by 2019. More details starting from page 50 of the attached. Returns from core projects and proceeds from asset sales will be distributed to shareholders via buyback or dividend.

The management fee, which is currently 2% of total equity (€681m as of June 2015 – annual fee of €13.6m) will we be cut to the lower of (i) €8.5m flat fee or (ii) 1.25% of GAV from 2017 onwards. All in the board sees around €23.5m savings over five years. The performance fee has also been reworked substantially both on the returns from core assets and sale from the non-core bucket. The investment manager has been granted options totalling 6% of shares outstanding with the target share prices ranging from £35-80p for a five-year period (subject to periodical vesting and hitting performance targets). Worth noting that three board members will also spend more time on Dolphin matters so they’ll receive annual fees ranging from £150-200k and options totalling 1.25% of shares outstanding (less strict target share prices ranging from £35-50p). This is quite generous.

And last, the €75m capital raise provides the “sources” for this new strategy. The company issued 219m shares at £21p (c. 7% discount to prior closing price). As part of the capital raise Fortress, the investment manager and another investor also agreed to convert $14m of the outstanding at a lower conversion price (the remaining c. $15m holders will stay put). The overall proceeds will be used for working capital, 2015/16 opex, investment manager fees, interest and repayment of the 2016 converts. On top of the €79m funding needs the company also requires about €27m to fund the core projects, which they plan on sourcing from asset sales, JV project financing or debt (you’ll find the details on page 9 of the following document. Third Point subscribed to the capital raise and maintain their 20% holding (approx. £11m additional investment). Combined with the other investors they’ll hold around 50% of the shares, while the investment manager will own 9.7% of the shares PF for the capital raise. All in, share count increased from 640m to 905m.

Assuming all of the above doesn’t work out the board will put the continuation of the company to a shareholder vote before December 2016. If the outcome of this is a vote of no confidence, the company could be wound up, liquidated, or restructured. Thus there is additional time pressure on the management to deliver.

Coinciding with the release of the strategic review Dolphin released the 2014 results, but honestly it was a bit of a non-event amongst all the changes announced. The company generated €22m in net income (first time ever!) though mostly helped by gains on real estate revaluation. This implies around 12x P/E on a fully diluted basis.

Per the Q4’14 numbers NAV is £68p and the current share price of £21.5p for a discount close to 70%. If you make the adjustments to take into account the recent capital raise the discount closes to around 60%. And while discounts can move, perhaps it is somewhat reassuring that historical project exits took place at a money multiple of around 1.7x to cost.

Despite the positive developments and announcements the share price has gone exactly nowhere in the last few days. Perhaps the capital raise spooked people, though not sure why as the business was in need of funding if they wanted to continue development. Of course there is a small matter of execution as well.

Not even sure where to begin with the risk factors: Greece, largely illiquid land investments, so-so track record, asset hoarding and really I could go on. However, with the changes around the board, governance, strategy, compensation etc there might be something here warranting a closer look. I see this idea essentially as a deep value, long-term option on the recovery of Greece and improvement in the company's strategy and execution.

If you prefer to see what these guys do there is a short documentary on YouTube. It’s worth a watch, some of their stuff is really sexy. Oh yes and in closing, the company posts broker reports on their website. Read those with a pinch of salt.

Coming to a cha chaan teng near you

If you happen to be in Hong Kong in the coming two weeks and want to talk about investing, business, politics or go practice for the upcoming Dragon Boat race feel free to reach out on beforelosingmysanity(at)gmail.com or on Twitter. Would be happy to meet up.

Weekend reading

What we are reading: China edition (Market Folly)

What Sell-Off? China’s Investors Open New Brokerage Accounts At Record Pace (Barron's). This is getting more out of control by the day:

"Last week, Chinese investors opened 4.4 million new brokerage accounts, setting a new record. China’s stock markets added 1.6 million new investors, a 83% rise from a year ago. Chinese investors used to be able to open only one brokerage account. Starting April 13, they are now allowed to have up to 20 accounts. Many retail investors open new brokerage accounts to boost their chance of getting IPO subscriptions."

The Rise of China and its Impact on the Future Global Order (LSE)

Foreign Hedge Funds Nudge Japan: Exit, Unwind And Form A YieldCo! (Barron's)

One long title but an insightful article: Making right Buffett’s biggest mistake in Asian wide-moat innovators (BeyondProxy)

Applicable to great many people in finance: Think you work hard? Bet you don't! (FT)

How data, not humans run this Danish football club (The Correspondent)

Great post on “value investing and the art of doing nothing" (Undervalued Japan)

On a related note: "doing something syndrome" (Farnam Street)

"The 19th Century American writer Henry David Thoreau said: ‘It is not enough to be busy; so are the ants. The question is: What are we busy about?’ Don’t confuse activity with results. There is no reason to do a good job with something you shouldn’t do in the first place.”

Charles Munger says, ‘We’ve got great flexibility and certain discipline in terms of not doing some foolish thing just to be active – discipline in avoiding just doing any damn thing just because you can’t stand inactivity.’

What do you want to accomplish? As Warren Buffett says, ‘There’s no use running if you’re on the wrong road.’"

Robert de Niro’s honest commencement speech at NYU: “You are all…” (he didn’t say the luckiest people on the planet) (Vanity Fair)

Neil Strauss, the author of the Game, interviewed on James Altucher's podcast

For the fellow jazz nuts out there: Jazz guitarist John Pizzarelli interviewed by Barry Ritholtz (Bloomberg)

Fortune on one of my pet peeves in an article titled “The war on big food” (Fortune)

Very interesting short video on the T Cell (Cambridge University)