I bought IPCO on 23rd October 2007

Business Overview

IPCO is basically a holding company with 4 major investments in vastly different industries.

1. Excellent Empire Ltd (88.89%): Its subsidiaries hold exclusive 30 year natural gas supply concessions for 3 cities in Hubei province, PRC.
2. Asia Plan Ltd (70%): Its wholly owned subsidiary, Capri Investment L.L.C, is engaged in residential real estate developement near Seattle in the state of Washington, USA.
3. ESA Electronics Pte Ltd (62.5%): It acts as manufacturer, agent and distributor of semi-conductor back-end equipment, such as burn-in systems, vision inspection systems and test systems.
4. C.N.A. Venture Sdn. Bhd (40%): CNA is primarily engaged in the manufacture of polymer and passenger seats for the automotive industry in Malaysia.

Reasons for purchase

Ever since IPCO undertook restructuring in 2003 to consolidate its various business segments, its financial performance in terms of EPS had steadily bottomed out in 2004/2005. However, its share price had been fluctuating around 8 cents (which already was more than a hefty 50% discount from NAV of 18 cents*). Going foward, business performance in various segments should improve further and and lift up overall group earnings.

Valuation

With IPCO trading at severe discount* to NAV and having a meagre ROE of less than 3 (a great improvement of below ONE a few years ago), I classify it as a Cigar Butt. Bearing unforeseen changes to business developments, I will be glad to dispose it around NAV, achieveing more than 100% returns.


Risk

*On the surface, IPCO at 8 cents, is trading at a severe discount* to NAV of 18 cents. However, looking deeper, this actually comes at no surprise.

Firstly, with ROE below 3, it is well below any moderate cost of capital of 10% to cover the risk in equity investment. A discount to NAV is definitely justifiable.

Secondly, IPCO being a holding company, had acquired many business above their book value. This results in tremendous goodwill on the balance sheet. Together with distribution and licensing rights, IPCO actually carries about 139K of intangible assets.

The management carries out annual test on the various business units to determine whether there is a need (due to revision of recoverable amount of the business, essentially the income) to write down the goodwill. The distribution and licensing rights also need to be amortized.

Taken together, this means that under the worse case scenario where all intangibles are wept off the balance sheet, the NTA of IPCO is merely 5.8 cents.

NTA (without intangibles): 5.8 cents
NAV (with intangibles): 18 cents

Hence its either I'm buying IPCO at a great bargain or buying it at a premium.