David Webb goes activist on Ming Fai

When Ming Fai announced that they had sold their investment property a few months back I wrote that, while that was a welcome development, I didn’t expect that a lot of capital would be returned to shareholders anytime soon. Unfortunate, since Ming Fai’s history of investing outside their core-business is less than perfect. Luckily I’m not the only one who has been thinking that and today, David Webb, a well-known activist investor in Hong Kong, published a letter to the company urging it to return the whole sale proceeds as a HK$0.352/share special dividend (the stock is currently trading at HK$1.11/share after jumping 5.7% today). This would still leave the company massively overcapitalized, and Webb, who owns almost 10% of the company, calls it the minimum that should be distributed. I totally agree with him, and hope management will be cooperative on this. A small quote from the letter:

As I explain below, hoarding cash is not an “improvement” in the cash position – our company is already overcapitalised, bloated with net cash far in excess of what is needed for the core business. Having too much equity drags down the rate of return on equity (profits divided by equity) and depresses the share price as it traps idle cash.

Ming Fai logoThe risk of burning the cash on unsuccessful new businesses beyond your area of expertise and excellence also depresses the share price, particularly given that Ming Fai has a proven track record of losing money in new non-core businesses. In over 25 years in the HK market, I have seen so many successful entrepreneurs list their business on the Stock Exchange and then make the mistake of assuming that they must be good at everything. Expertise in one field is not expertise in another. I hope you have learned from these mistakes, as that is what makes us all stronger.

If you return surplus capital to the market, then the market will repay that trust. Just look at some of my other investees and you will see how this works. For example, Alco Holdings Ltd (0328), of which I own more than 9%, sold its former premises in Zung Fu Building on 29-Dec-2015 and has since then distributed a total of $0.90 per share in dividends. The stock has returned 68.2% since 29-Dec-2015 (the day of the announcement) when it was trading at $2.30, and closed yesterday at $2.90.


Author is long Ming Fai

5 thoughts on “David Webb goes activist on Ming Fai

  1. juan

    Good letter. I hope management cooperates too, but I doubt they will. Were they open to the special dividend idea, it would have been silly of them not to acquiesce to it after receiving Webb’s two private letters, which likely included the same threats as this public one.

    1. Alpha Vulture Post author

      True, if they would be really open to that idea we would not even be in this spot in the first place. But some management teams need a bit more convincing than others. Hopefully going through the whole process of a proxy fight won’t be necessary.

  2. brrrp

    The other one he mentions in his letter, Alco holdings, looks pretty interesting as well. 1b in net cash, 1.7b market cap and about 270m in earnings in 2015. And apparently a willingness to pay out excess cash.

  3. pietje

    So, annual results are out. My view:

    Good things: number of retail cosmetics outlets is down to 387 (dec 2015: 543, dec 2014: 805). Core business is still doing great. Sold excess retail estate and paid out special dividend.

    Bad things: retail cosmetics is still bleeding money. Share count has risen by another 3% or something. They continue to hoard cash.

    Curious to see your new valuation. I arrive at roughly $1.50.


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