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[Case Study] AV Concept – Our first loss of 21% from a Voluntary Offer

Alvin Chow
Alvin Chow

AV Concept was a deep value stock (super cheap, priced way below the book value of the company) when we invested in end 2017. It was listed on HKEX and were in the business of distributing Samsung electronics components ((i) CMOS image sensors (ii) multi-layer packaged
chips, and (iii) ARM processors) to Chinese mobile phone manufacturers.

On 30 Dec 2019, the management halted the trading of AV Concept shares pending an announcement.

We were excited and guessed a delisting offer might be on the table.

But we were disappointed. The next announcement came on the same day, 30 Dec 2019, about the under-declared shareholdings of the insiders. There were some bonus issues and purchases from the open market that have not been accounted.

Previously the insiders owned 30.98%, but it should be 40.68% and the announcement was to reflect the new ownership figures.

We thought that was it but the trading of the stock remained halted.

It was not until 8 Jan 2020 that indeed, an Offer was made by the insiders to acquire more shares in AV Concept.

We were utterly disappointed when the Offer price came up to HK$0.35 per share because we bought in at an average of HK$0.468. This was the first time whereby the Offer was below our buy price. We have always made money in past offers by other companies.

They were really lowballers! (It is usual for insiders to offer to buy back the shares when the share prices are low).

Of course, they would justify the Offer Price by saying things like this:

“…a premium of approximately 27.27% over the average closing price of approximately
HK$0.275 per Share quoted on the Stock Exchange for the 30 consecutive trading days
immediately prior to and including the Last Trading Day”

AV Concept Offer Document

BUT…

They are buying at a huge discount, or about 72% below the Book Value of HK$1.247!

Unfair as it is, we are minority shareholders who are price takers and the insiders are the price setters.

We can only accept or reject the price.

Once we received the Offer document on 20 Feb 2020, I put out our game plan to our course graduates:

Basically, it means that we are rejecting the price but we are also wary of the insiders getting more shares such that the stock may be suspended due to the lack of float (HKEX stocks must maintain at least 25% of the shares to be held by public).

So we have to monitor the level of acceptances and sell if they were close to the 75% ownership level.

The next time we heard from the management was on 2 Mar 2020 where the insiders have acquired an additional 9.9% and their revised stake was 50.72%.

Still far from the 75% and we have some time so we held out.

Little did we know that the stock market would tank on 9 Mar 2020, initiated by the 31% crash in oil price.

Such cases would work in favour of the Offeror as shareholders are more willing to sell now. Hence, it is very unlikely that the insiders will need to offer higher prices in order to buy more shares. The poor market sentiment will do the job for them.

The consequences were that if they acquire beyond 75%, the stock will be suspended. And we would be stuck with the shares.

If they do not hit 75% and the stock resume trading, we expect the share price to go down. So either way it is going to be worse for us than the Offer price. We decided to sell it.

We have to sell the stock in the open market as we have passed the deadline set by our brokers. You have to note that the deadline set by the Offeror is different from the deadline set by your broker. Your broker will always push it forward to have some lead time to submit to the Offeror on behalf of her clients. Take note of the deadline given by your broker!

We realised a 21% loss on AV Concept. The Offer was way too low compared to the previous offers we have received. Previously we had a 44% gain from Hopewell’s offer, 35% gain from San Teh, 31% from Sing Tao (an indirect offer), and more. Well, this is part and parcel of value investing.

On 16 Mar 2020, the management announced that the insiders owned 61.25% of AV Concept, raising the stake by 20.44% through this Offer exercise.

The company continues to satisfy the minimum public float requirement of 25% and hence it will stay listed.

True be told, the share price tanked after the Offer expired. I’m not sure if we should be glad. But yeah, just count whatever blessing we can get during this market turmoil.

Hope that by sharing this experience we can give you an idea how value stocks are like. Sometimes you win and sometimes you lose. Most importantly, we must make sure our wins are much bigger than our losses overtime.

Even if you are not into value stocks, this article would be useful to you because you might receive an offer and you should have a better understanding how to deal with it when it comes.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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