Blog

SPAC Analytics views on the overall SPAC market and interesting developments with pre and post SPAC companies.

07-17-2010

Buy ahead of 1H 2010 financial results to be released in mid August

We continue to view EDS as a high quality China listed equity that is being improperly valued with a low tier China mid single digit PE multiple. Key investment points:

New CFO a significant coup: The hiring of Terence Wong on May 1, 2010, who previously was the CFO of EDS’s much larger competitor China Dongxiang (3818 HK) is significant validation that EDS is a high quality business with a bright future. Mr. Wong is excited about EDS’ high quality stores and merchandise and its strong position in 2^nd and 3^rd tier cities with a good opportunity to expand gross margins. EDS’s highly discounted 5.6x 2010 f.d. PE multiple should expand to be in line with the multiple of its public sports retailer peers in Hong Kong once Mr. Wong starts to market aggressively to the investors he knows well from his three year tenure at 3818 HK.

Issues driving share price weakness should be resolved: The weakness in EDS share price is due to a lack of communication with the investment community and the bear market for perceived “lower” quality China listed equities in the US. EDS will have more active marketing after the release of its 1^st H 2010 results and we expect investor perception of EDS to improve during this period. Furthermore, the release of EDS’s year end 2009 results caused some concern regarding its cash conversion cycle metrics. The issue was a timing difference that should be resolved going forward. Moreover, Mr. Wong drove 3818 HK’s cash conversion metrics to be among the best of the peer group and we expect he will do the same at EDS.

EDS in the sweet spot of China’s continued focus on building domestic consumption: EDS has no export business and it serves the high growth 2^nd and 3^rd tier Chinese cities that will likely benefit the most from the new five year economic plan that is expected to focus on growing domestic consumption.

Valuation

Our short term target of $14.50 is 10.1x 2011 f.d. PE which is in line with EDS’s Hong Kong listed peer current multiples. The target represents a 113% return from the current trading price.

Bottom line

EDS should trade higher in the next few months given its high quality CFO, cheap valuation and several catalysts in the 2^nd half of 2010. In mid August, active investor marketing should commence with the release of its 1^st half 2010 results. In November, 3^rd quarter results, will be released and by the end of this year we expect EDS to gain tier one analyst coverage via Mr. Wong’s relationships. Thus, at $6.78 EDS is a compelling buy ahead of these catalysts. We also recommend an alternative trade of shorting a basket of EDS’s peers (1361 HK, 1368 HK, 1968 HK, 2331 HK, 3818 HK, 2020 HK) against a long EDS position given their higher valuations.

07-01-2010

Returns on equity that make private equity envious

· Robust cash flow: Free cash flow yield of 19% with return on investment in excess of 54% per annum. AERL’s capex is negligible and its operating expenses are low unlike casino operators that have significant capital expenditures and high fixed operating costs.

· Cash from warrants accretive to EPS: EPS increases by $0.12 for each $10 mn of cash raised from the exercise of existing warrants ($55 mn). Capital is the primary constraint for the growth of the VIP business. AERL warrants are not the typical overhang but rather an enabler of continued accretive growth and expansion for AERL.

· Investor friendly management: Monthly reporting of rolling chip turnover provides an excellent indicator of future financial performance. US management has a good track record of capital market success.

Valuation

Our 12 month target is $14.00 which is 11.0x 2011 f.d. P/E and 9.6x 2011 EV/EBITDA. Our 12 month target is supported by our highly conservative DCF model that generates a $15.02 valuation and the Macau casino peer group multiple of 9.9x 2011 EV/EBITDA.

Bottom line

In a US equity market that is currently flooded with cheap esoteric Chinese companies, AERL differentiates itself with a high quality management team in a high growth position in an industry that is attractive to investors. Expected catalysts are continued reporting of strong monthly rolling chip turnover statistics and expansion into new top tier casino VIP rooms.

11-12-2009

GSMEF IPO analysis

GSME Acquisition Partners units (OTC BB: GSMEF) should initially trade between $10.06 and $9.88 which is in line with its $10.00 IPO price.

The common should initially trade between $9.86 and $9.68 assuming an annualized yield of 2.82% to 4.05%. The current SPAC universe trades at 2.82% annualized return which is a historically high 250+ basis points above the short term rates. SPACs listed on the OTC and with foreign domiciles have tended to trade at a higher yield by about 1.00% over the average as some investors are not able to leverage OTC stocks and some prefer to avoid foreign domiciles. We expect the common to be well bid and thus should not trade more than 4.05% given the lack of new SPAC supply and substantial capital available from the recent completed SPAC transactions

The warrants should trade in the $0.20 area given how other SPAC warrants are trading and the expectation that this SPAC team will announce a transaction relatively quickly.

The investment proposition works well. In a worse case, investors will earn a 1.90% annualized return holding short term treasuries over the next 19 months. In a likely case of a transaction being consummated, investors will earn 6.05% over the next 19 months. In the case where the warrants are sold quickly for $0.20 the locked annualized return is 3.16%. There is further upside if a transaction is consumated sooner or if they deliver a "winner". This gain / gain ratio is unique and is why we like the SPAC product.

Bottom line

The math works in this low yield environment with no SPAC supply. Thus, this IPO should get done and we would expect several more SPAC IPO’s of similar structure to follow.

Proxy highlights:

Conversion rights:

Pursuant to our memorandum and articles of association, public shareholders voting against a proposed business combination will be entitled to convert their stock for $10.00 per share. In addition, any public shareholder will have the right to vote for the proposed business combination and demand that such shareholder’s shares be converted into a pro rata share of the trust account (which amount, when aggregated with the right to receive an additional $0.30 per eligible share pursuant to the letter of credit, is initially anticipated to be approximately $10.30 per share). Our initial business combination will not be completed if 81% or more of the public shareholders seek conversion of their ordinary shares, regardless of whether they are voting for or against the proposed business combination.

Liquidation if no business combination:

We anticipate we would distribute to our public shareholders the amount in our trust account (including any accrued interest) plus any remaining net assets (subject to our provision for creditors) shortly following expiration of the 21 day period as part of our plan of dissolution and distribution.

Proxy link:

http://www.sec.gov/Archives/edgar/data/1433309/000114420409053352/v161012_f1.htm