Posted by: donmihaihai | September 15, 2008

Letter to SP Chemicals board of directors (Revised)

Dear Sirs and Madam,

I am writing in response to the announcement for “Proposed Voluntary Delisting of SP Chemicals LTD”. First I would like to point out my feeling — I am disappointed. I am disappointed that an outstanding petrochemical company, SP Chemicals ran by world class, level 5 management had decided that Singapore Exchange is not a good enough home to house their continuous state of art work. I am further disappointed that a voluntary delisting with a lowly price of $0.73 come in the time of global depressed stock market price. For the second, while I held great regard to board of directors and owner management, this is an assault to minority shareholders for possibility of giving up SP Chemicals at such a lowly price by preying on investor’s emotion.

While I cannot ask directors who have no interests in SP Chemicals to give an opinion of “It is not the interests of shareholder to accept the offer.” I certainly hope that directors, especially Chairman Mr Ng Tat Oun and Independent Director Mr Quek Cher Teck with over 50 years of working experiences in financial industry to lend a listening ear to a disappointed shareholder. Before that I would like stress that this is not a “lecturing” because I am not in any position to lecture.

Having read quite a few circulars on delisting, I come to the understanding that while it may be thick, it usually contains little meat. And the recommendation on accepting or rejecting the offer is not the result of careful analysis of the company future prospect, competitive position, management quality which in this case SP Chemicals and the offer price but rather being relative to recent M&As, recent share price of SP Chemicals and the market.

With years of experience, it will not escape your careful analysis and regard these calculations of the acceptable offer price as fuzzy. The valuation of any security is the expected cashflow from now to the D day and discount backward. While DCF calculation is subjective to any individual as the grow rate, number of year use and discount factor various, there are alternatives. With an intelligent use of Return on Equity, P/B and earning yields can be a good substitute.

Before I proceed further, I would like to present to the board of directors my analysis of SP Chemicals.

1) SP Chemicals listed in Aug 2003 and raised RMB 70 million (S$14 million X 5) ending FY2003 with shareholder equity of RMB 430 million (S$86 million). From FY2003 to Jun 2008, shareholder equity grow at a CAGR of 22.9% to reach RMB 1,338 million while the number of outstanding shares remain unchanged.

2) Return on shareholder equity from 2003 to 2007 was 15.76%, 24.37%, 26.56%, 28.68% and 19.7%. These were outstanding and there is no reason that SP Chemicals is unable to generate at least $0.15 for every $1.00 of retained earnings in the future.

3) With an offer price of $0.73, the earning yield base on FY2007 reported Net profit after tax is 13%, base on FY2007 cashflow from operation is 16.6%. The earning yields is very high base on the offer price of $0.73 and I would like to point out that due to huge capital layout in the chemical industry and conservative accounting where Plants and equipments are depreciate between 3 to 10 years, I would use 16.6% as the earning yields.

Further on the depreciation period of plants and equipments, while there is a revision of useful life for chemical plants from 10 to 15 years and Co-generation plant from 10 to 20 years, it is not aggressive. May I ask if the 1st chemical plant being built by SP Chemicals > 10 years ago still being operate cost effectively? And it is known that a well maintained co-generation plant can last way beyond 20 years. All these are sign of conservative accounting which is another sign of management prudence.

Mr Ng, Nr Quek and Ms Eng, I bet it will not escape your eyes that during the last 5 years on SP Chemicals management quality and its growing competitive position in China, especially in CFCITP, their successful implementation of MTSBP 1. With the proven management and the coming MTSBP 2, may I ask how you rate SP Chemicals on future prospects, competitive position and management quality? If you think SP Chemicals does not have what I had written, I will accept the offer. But if your unbiased reply is, ” SP Chemicals is an outstanding petrochemical company ran by world class, level 5 management”, I hope that being an elected director by All Shareholders to protect the interests of all shareholders, you would make the right move to let all shareholder know that it is unwise to accept the offer by SPCHL at $0.73(by filing an announcement or even write an article to the press) even if it subject you to the discomfort position of taking a stand on the valuation of SP Chemicals.

Now I would like to proceed further on “Rationale for Delisting” given from the voluntary delisting announcement.

On low trading liquidityI have low regard on trading liquidity and I would like to quote Warren Buffett on Berkshire Hathaway low trading liquidity: “Our goal is to attract long-term owners who, at the time of purchase, have no timetable or price target for sale but plan instead to stay with us indefinitely. We don’t understand the CEO who wants lots of stock activity, for that can be achieved only if many of his owners are constantly exiting. At what other organisation — school, club, church, etc, — do leaders cheer when members leave?”

 Irony, despite low trading liquidity, the returned of Berkshire Hathaway with Warren Buffett at the helm compound at >20% since 1960s.

On share valuation and perhaps “fair value”

I would like to quote Mr Wira Tjendana, CFO, executive director of SP Chemicals from annual report 2007.

 

“In the meantime, we should not be overly concerned with the recent volatility of our stock prices. We subscribe to the often quoted passage from Graham and Dodd’s Security Analysis that “the market is a voting machine.” In the long haul, we think that the market is a “weighting machine.” Just as SPCHL think that the share price does not reflect the intrinsic value of SP Chemicals, making a offer at 1.63X of the latest reported NBV, majority shareholders are taking away the opportunity for minority shareholders to let the market “weight” SP Chemicals in the long haul by making a concentrated efforts to delist SP chemicals.

Lastly, I would like to urge Executive Director Mr Chan Hian Siang and Mr Wira Tjendana, Non-Executive Director Mr Hendrik Sasmito which held two roles which are Director of SP Chemicals LTD and acquirer from SPCHL in this situation to think and act as a director and shareholder of SP Chemicals. I have 3 questions.

1) Would you sell away your interests in SP Chemicals with ROE excess of >15% and ROA excess of 9% for past 5 years at the offer price which represented 1.63X NBV, 8.5 X FY2007 NPAT and 6.7 X FY2007 cashflow?

2) I would push even further by asking even by doubling the offering price to $1.46 and value SP Chemicals at 3.26 X NBV, 17 X FY2007 NPAT and 13.4 X FY2007 cashflow, would you sell after considering the future potential of SP Chemicals in CFCITP, China, Asia and in the petrochemical industry without involving personal emotional?

3) Lastly, SP Chemicals is a prize asset for both private equity and competitors. Has you together with non- interests members of the board of directors seek for competitive bids which in a way maximise shareholder value for ALL SHAREHOLDERS?

If your answers for all 3 questions are NO, I wonder why minority shareholders are being treated differently.

Before I end, I would like to invite board of directors to my blog as there are 3 more writings that I had written over the past years on SP Chemicals that present my views.

The 3 posts are “The silent shareholder value grower”, “Another big fat ass” and “SP Chems aims high and far”.

Yours faithfully,

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Responses

  1. Hi donmihaihai,

    I understand your disappointment. In fact, I had been through a few of these delisting/takeover offers that forced me to exit a stock prematurely. Despite the fact that I had set out to be a long term shareholder in these companies, I have no other choice since the majority decides to exit and there is nothing I can do to block the deal.

    I hope that fellow minority shareholders will vote against the delisting offer. But it will be a big ask to upset the odds, considering that they only need 75% for this one to go through and the current weak market conditions.

  2. ghchua,

    You know that we work differently. I would only voice up if the offer price is too low against the expected prices when there is M&A for any security that I hold.

    Despite our differences, I would vote against this offer too. And I hope that the 90% point for compulsory acquisition is not trigger. Being a shareholder of SP Chemicals that listed in Singapore Exchange or other recognised stock exchange or unlisted is not a problem with me.

    Just look at the shareholders of SPCHL, they need an exit. Perhaps in the near future.

    While I do not like huge traffic in my blog, I hope you can direct any SP Chemicals shareholder to my blog..

    Rgds
    donmihaihai

  3. Hi Donmihaihai,
    I agreed with your points. I’ve been a shareholder since the early 2003 and I’m rather disappointed with the delisting.

  4. Hi mitchell,

    I am sorry to say that I am no longer holding on to SP Chems. Sold it last Oct/ Nov period as bargins were everywhere. Bargins are still everywhere.

    My wish is for SP Chems to be listed here so I can buy it back later.

  5. i think the share price is worth at least 2 times of the proposed delist offer.

    end of story!

    p.s. i did make some good returns from it in the past; thus i shouldnt be greedier. but again, how often can we spot a good company like sp chem???

    p.p.s. i just realized it was suspended last week. i thought it was only because no shareholders willing to let go at $0.725. lol


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