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Jan F. Moermann
Havard Chi
www.quarzcapital.com
This presentation is a research report and is for informational purposes only. Opinions expressed are solely those of Quarz
Capital Management, Ltd. and this is not a recommendation to purchase securities discussed herein. This presentation is
confidential and may not be reproduced or distributed without the expressed consent of Quarz Capital Management, Ltd.
Please refer to the next slide for additional disclosures.
Quarz Capital Management
LEGAL DISCLAIMER
DISCLAIMER
As of the publication date of this report, Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"), others that contributed research to this report and
others that we have shared our research with (collectively, the Authors) have long positions in and own options on the stock of the company covered herein (HG
Metal Manufacturing Limited) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may
transact in the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information
herein from sources they believe to be accurate and reliable. However, such information is presented as is, without warranty of any kind whether express or
implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the
results obtained from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report
or any information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information
are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected
public market data and reflects prevailing conditions and the Authors views as of this date, all of which are accordingly subject to change. The Authors opinions
and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This
reports estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as,
or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of
the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in
which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors abilities and beliefs, all information contained
herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company
discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors are long shares of HG Metal
Manufacturing Limited and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market
valuation of the companys common equity is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to
inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other
companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the
overall profitability of the Authors operations and their affiliates. The compensation structure for the Authors analysts is generally a derivative of their effectiveness
in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict
of interest in the statements and opinions in the Authors documents.
The information contained in this document may include, or incorporate by reference, forward- looking statements, which would include any statements that are not
statements of historical fact. Any or all of the Authors forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out
to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of
which are beyond the Authors control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on
all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any
investment decision.
2
Quarz Capital Management
Content
In Summary:
We believe that HG Metals substantial undervaluation costs shareholders >40% of equity value
HG has persistently traded at sharp discounts of 20% and 35% to SGX listed peers in the steel trading and
manufacturing businesses1
HGs intrinsic book value (comprising mostly liquid assets) at SGD 0.867/share is 150% higher than its current
share price of SGD 0.350 (~60% discount to NAV)
Investors 1.) lack confidence in the long term profit sustainability of HGs Trading Division, and 2.) clarity on the
allocation of the substantial net cash of SGD 29m and the stake in BRC Asia valued in excess of SGD 30m (vs. Mkt
Cap of SGD 45m)
We believe that the board can and should do more to increase shareholder value
HGs share price has slumped by ~60% in parallel with falling steel price
Steel Price Benchmark (China Hot Coiled Steel Price/tonne) in
ORANGE indexed to HG Metals Share Price of SGD 0.77
Sharp
divergence in
the
performance
Flame Gold of HGs share
(controlled by Foo and steel
Sey Liang and Tee Ching exited HG prices
Wee Sian) became through the complete Discount to
HGs biggest sale of his stake in close?
shareholder by Flame Gold to Foo
purchasing a 26%
stake from Oriental HG announced that it will invest USD 30m for a
Castle at SGD controlling stake in a 40:60 JV with U Yang Ho to
0.95/share. Ching construct a steel manufacturing and fabrication plant in
took up a majority Myanmar. U Yang Ho will invest SGD 10m @ SGD
stake in Flame Gold 0.42/share in HG (stake of 16.5%) and USD 42m in the
in early Apr 2014 JV
90
Upside of EXCESS CAPITAL Current Mkt Cap
Net cash and stake
~150% in listed BRC Asia
80
to Mkt valued at ~SGD
60m (~130% of Value of Operating NAV
Cap Mkt Cap)
70
SGD 29m (Inventories + Working Capital + PPE)
SGD million
60
In addition, Investors receive:
50
SGD 14m
EXCESS CAPITAL
40
Value of 1. SGD 29m of net cash
Operating
Share
30 NAV 2. Strategic 22.6% stake in BRC Asia with
Price @ ~ SGD 52m SGD 25m
SGD Mkt Cap
(115% of estimated value of SGD 30m
20 0.350 SGD 45m
Mkt Cap)
10
SGD 13m
0
Total NAV >250% of HGs Current
Current Mkt Cap HG's NAV Market Cap
PPE Receivables - Payables Inventories Net Cash Stake in BRC Asia
0.70
+110%
0.65
catalysts / normalised
0.40
scenario
HG Metal
Manufacturing Limited
(Listco on SGX
Mainboard)
HG Metals
Oriental Metal Jin Heng Li PT HG Metal
Investments POS-SEA Pte. Ltd.
Pte Ltd Hardware Sdn Bhd 32.5%
Distribution Indo
100%
Pte. Ltd. 79.4% 100%
100%
HG Metal
HG Construction Niho (Singapore) HG Yangon
Manufacturing HG Metal Pte. Ltd.
Steel Pte. Ltd. Pte. Ltd. 100%
Company Ltd
100%
Sdn Bhd 100% 100%
100%
HG Metal
BRC Asia Ltd
Distribution Sdn
(SGX Listed)
Bhd 22.6%
100%
Trades at attractive P/B and P/E of 0.65x and 12.0x with dividend yield of 3.4%. 20
Source: Quarz Capital Management, HG Metal Manufacturing Limited, BRC Asia Limited
10
Quarz Capital Management
Announcement by BRC Asia on 30 May 2017
Clear interest in
the BRC Asia stake
from investors
HG Metal
shareholders need
to understand
stance of company
on this stake
Lingco Marine / Holding is the biggest shareholder of BRC. Lingco was Shareholding Level
previously a major shareholder of HG Metal where it removed the latters board
in a boardroom tussle in 2009. Lingco purchased its BRC shares from HG
Metal when HG went into financial difficulties subsequently. Lingco
Mr. Sia Ling Sing (aged 72), the majority shareholder of Lingco is the current Free Float Marine/Holding
non-executive Chairman of BRC Asia.
29.2% 26.8%
HG Metal owned >70% of BRC Asia in 2008 due to a tender offer. It had to
reduce its stake in BRC to lower its leverage. The company is represented on
BRC Asias board by Mr. Foo Sey Liang
Lim Siak Meng (age 66) has been the CEO of BRC Asia since 1992. 6.3%
Siem Seng Hing is a building material supplier. It is not represented on the Lim Siak Meng Sin Teck Guan
board of BRC.
6.7% 8.5%
Division should emphasize on adding products and services which can -0.5
leverage on the governments emphasize on improving construction
productivity -1.0
2011 2012 2013 2014 2015 2016
Items / Comments:
Manufacturing Division
Lack of understanding on managements strategy for the division
-4.0
80 55%
-6.0 60%
61%
-8.0 Lack of consistency 60
in profitability
-10.0 mainly due to the
trading division
40
-12.0
-14.0
20
-16.0
-18.0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Curr
End Yr Mkt Cap NAV
while shareholders endured SGD 16.8/5.6m of losses in 2014/15 and a 60% slump in
the value of HG shares
Items / Comments
Stake in BRC Asia
Company should indicate willingness to divest and consider bids for its strategic stake in BRC Asia (but
non-core to HG Metal) at the appropriate price.
Part of sales proceeds (total estimated at >SGD 30m, ~66% of Mkt Cap) can be returned to shareholders
Trading Division
Scale back on the trading of low margin steel products
Focus on products which can be cross sold with products from the Manufacturing Division
Provide clear ROE target for this division with risk adjustment factored in for distribution in countries with
different risk profiles
Strategy Excess capital released (SGD 10-15m) to be reinvested in expanding Manufacturing Division
Manufacturing Division
Establish this segment as the core business of HG Metal
Invest SGD 20m (SGD 10-15m from trading division) to further strengthen the capabilities of this division
Evaluate and grow in niche areas which are leveraged to improving construction productivity
SGD 0.1815
Divestment of non-core stake in
NAV of SGD0.867/share (~49% short to mid BRC Asia,
(>250% Mkt Cap) term upside) Increased profitability of
0.300
mainly comprised of Manufacturing segment
liquid assets to protect
Future release of excess capital
downside
through the implementation of
0.250
clear capital pay-out strategy
Current Share Price Extraordinary Lower Discount to Total Upside
Dividend NAV
Chye Hin
Chye Hin Hardware is structural and mild steel supplier in Singapore. Hardware, Yap
The company is 33.3% and 25% owned by Yap Xi Ming and Tan King and Tan
Aung Tin Htut
Seng respectively. Both also holds direct stakes in HG Metal. Chye Hin 7.5%
Hardware is not represented on HGs board of directors 6.3%