A Net-Net Opportunity in South China Resources, Inc. (PSE: SOC)

South China Resources, Inc. (PSE: SOC, the “Company”) is primarily engaged in the real estate industry through their property development wholly owned subsidiary, SOC Land Development Corporation (SOC Land). SOC Land is developing a 2.4 ha property called Anuva Residences located in Muntinlupa City, Metro Manila. The land was registered under the names of the major stockholders, Edgardo Reyes, Wilfrido Reyes and Belen Castro.

What is a net-net opportunity?

A net-net opportunity is a company that trades below the value of current assets (cash, accounts receivable, inventory) less total liabilities (short term and long term liabilities). Current assets are assets that are easy to dispose of. Receivable is easy to claim and inventories are easily sold but properties and equipment are very hard to find willing buyers.

The logic of investing in net-net is that should the company sell all the current assets but were not able to sell its properties, the company still has enough proceeds to pay all its debts and there is still something left for the shareholders to be able to distribute as cash dividends. Also, no company owner will sell his business at net-net. A company owner in his sane mind would surely include the costs of properties if he/she should sell it to another party. Thus a company selling at net-net should be very cheap.

SOC is a net-net opportunity. Below is my computation:SOC1

Astute readers may ask why I classify AFS as current assets when the Company classified it as non-current assets. The reason is because AFS consists of financial securities that are easy to sell. Below is the composition of AFS as of September 2013:

SOC2 SOC3 SOC4

The Company managed to be at its current cash-rich state when it sold their investments in Bell Telecommunication Philippines, Inc. (Belltel) for 1.2 billion in December 2009. Other notable sales of the Company are AG&P where the Company profited P184 million after holding for 13 months and the sale of Premiere Bank shares for a profit of P32.2 million, all made in 2012.

What’s there to watch in SOC?

In reality, net-nets are rarely liquidated but may present an attractive takeover target. Another thing to watch for SOC is the improvement of utilization of its cash which they are currently not doing with their losing wholly owned subsidiary, SOC Land:

SOC5

Also, the Company has expressed their intention to foray into renewable energy production and agro-industrial development. Lastly, SOC had announced a 24-mo P120 million buy-back program last December 26, 2011 which suggests that the Company values their own shares at P1.20. The buy-back program will end in December 22, 2013 and only P3.7 million was spent for the buy-back.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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One thought on “A Net-Net Opportunity in South China Resources, Inc. (PSE: SOC)

  1. Pingback: PAX: Another Net-Net Opportunity (PSE: PAX) | Fundamental Enthusiast

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