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December 9, 2011 Performance Since Inception1
HSIK MXCN TPX MXAP Owl Creek Asia I, LP* Gros s 29.06% ‐46.38% 56.51% 8.55% 1.79% ‐0.46% 1.11% 0.99% 0.64% ‐4.75% 0.19% ‐8.24% ‐13.77% 12.94% ‐9.23% ‐19.40% ‐5.24% 36.30% ‐50.74% 62.45% 5.06% ‐0.24% ‐1.89% 5.18% 1.50% 0.47% ‐3.62% ‐0.65% ‐9.37% ‐16.80% 14.86% ‐8.28% ‐20.15% ‐8.50% ‐16.42% ‐40.70% 7.68% 0.75% 1.26% 4.56% ‐7.62% ‐2.01% ‐1.56% 1.32% ‐0.92% ‐8.38% ‐0.37% 0.38% ‐4.65% ‐17.26% ‐55.51% 4.37% ‐41.57% 37.86% 17.30% ‐0.77% 0.81% ‐0.79% 2.84% ‐2.03% ‐0.69% 1.54% ‐8.29% ‐8.91% 7.67% ‐6.52% ‐15.21% ‐16.40% Jul ‐ Dec 2007* 2008 2009 2010 Ja n‐11 Feb‐11 Ma r‐11 Apr‐11 Ma y‐11 Jun‐11 Jul ‐11 Aug‐11 Sep‐11 Oct‐11 Es ti ma ted Nov‐11 Estimated YTD thru Nov‐11 Estimated ITD thru Nov‐11 22.32% ‐21.64% 23.64% 5.80% ‐0.32% 1.36% 0.40% 5.51% 0.88% 0.48% 5.00% ‐6.74% ‐12.62% 6.29% ‐0.3% ‐1.6% 23.4% Net 17.86% ‐21.64% 23.64% 5.16% ‐0.32% 1.15% 0.32% 4.42% 0.71% 0.36% 4.06% ‐5.53% ‐11.56% 6.29% ‐0.3% ‐1.6% 18.1% Owl Creek Asia II, LP* Gros s 23.36% ‐20.98% 25.47% 7.69% ‐0.32% 1.41% 0.55% 5.64% 1.34% 0.54% 5.08% ‐7.06% ‐12.79% 6.50% ‐0.4% ‐1.1% 30.2% Net 18.69% ‐20.98% 25.47% 6.21% ‐0.32% 1.19% 0.44% 4.53% 1.08% 0.42% 4.14% ‐5.80% ‐11.64% 6.50% ‐0.4% ‐1.1% 23.6% Owl Creek Asia Fund, Ltd* Gros s 26.28% ‐20.54% 34.12% 8.04% ‐0.33% 1.44% 0.55% 5.71% 1.43% 0.53% 5.07% ‐7.09% ‐12.90% 6.79% ‐0.5% ‐1.0% 44.0% Net 21.02% ‐20.54% 32.28% 6.46% ‐0.33% 1.22% 0.44% 4.58% 1.16% 0.41% 4.13% ‐5.83% ‐11.73% 6.79% ‐0.5% ‐1.0% 34.1%
* Inception Date was July 2, 2007.
Dear Friends and Investors: For the third quarter of 2011, the Owl Creek Asia Fund, Ltd. (the “Fund”) was down 15.0% gross and 13.4% net bringing our performance for the year to ‐6.8% gross and ‐6.8% net, compared to MSCI China down 24.2% and TOPIX down 13.5% through September. In October and November, the Fund was up an estimated 6.3% gross and net bringing our performance for the year to an estimated ‐1.0% gross and net versus MSCI China down 20.2% and the TOPIX down 17.3%.
2007. which was the reason for the Fund’s drawdown in August and September. Exposure includes the notional exposure of total return swaps and futures contracts. On the positive side. We did not have single names that performed disproportionately worse than their beta‐exposure would suggest nor did we have an issue with our gross exposures. our performance will be more representative of our strengths and that we will also be able to manage through the volatility of the markets more effectively. We remain long‐biased and do want some market exposure.
Inception Date was July 2. But by having such a large net equity exposure. While we have gotten the bottoms‐up mostly right. We’ve had a fairly high hit ratio on our single name longs and shorts which has produced the Fund’s flattish performance despite having average net equity exposure of 50‐60% for the year. We feel that by having a smaller net exposure. the micro… the alpha. our top down view has clearly been wrong this year. We’ve always believed our strengths are in the bottoms up. Ltd's portfolio at each month end. We were simply too net long going into a severe downturn in the equity markets. So. we were making implicit bets on the macro… on the beta… that we’ve had less conviction in. construction machinery. Aiful. In particular. outperforming the markets on a relative basis. The composition of the portfolio will vary daily. we expect to run with
. The graph above reflects the composition of Owl Creek Asia Master Fund. the Fund has managed through the volatile markets so far this year to deliver essentially flat performance. and protecting capital which sets up the Fund with a portfolio that has significant upside potential in 2012. we think it is prudent to run with smaller nets going forward.
As we have written about in our previous letters. Brilliance. and the heavy duty truck segment in China have worked out well. Taiwanese airlines. we believed this exposure was justified because of the compelling and event‐driven nature of the bottoms‐up opportunities we found and our top down view that the markets would do okay. What we have gotten wrong is our large net exposure to the equity markets. the Fund has been able to generate alpha on both the long and short side this year. and on the short side. but given how uncertain we expect the macro environment to remain for the foreseeable future (years.Net‐net. not months). and QR National have been large contributors on the long side. Sun Art.
Over the last three months. was down 16. Property sales continue to slow and housing inventories rise with the home purchase restriction being the primary limiting factor. We remain convinced that a hard landing in China is not in the cards. China announced a cut in its reserve rate requirement by 50 bps which in isolation is not that impactful. Lee …and the rest of the Owl Creek Team. We continue to like the micro stories behind our names. adding to high conviction names such as China Shanshui.a narrower range of net equity exposure going forward. please do not hesitate to contact us with whatever questions you may have and call or email Kim Smith (kims@owlcreeklp. We’d like to thank you for your continued support in our team and our process. Visteon. Far East Horizon. We expect the next internal catalyst for the Chinese market to be easing in some form of reserve rate requirement cuts.5% net in the third quarter and is down an estimated 13. a loosening in housing. China’s position contrasts starkly with both Europe and the US. At the end of November. on both the long and short side. and Hui Xian REIT while also trimming our winners such as PICC and Brilliance. As always. While the very early stages of easing are starting.
. consumer. While the external environment (Europe and US) continues to drive liquidity and the markets in Asia. Altman Jeffrey F. Sincerely.5% in July. but we believe this signals the official beginning of easing. and fiscal stimulus.1 billion as of December 1. in the 0‐50% range versus our historical range of about 0‐80%. Owl Creek Flagship Funds Owl Creek Overseas Fund. which makes both monetary and fiscal stimulus exceedingly difficult. a slowing Chinese economy and lower inflation. and feel that the market is pricing in a much higher likelihood of a China hard landing than we believe is warranted.0% YTD net through November compared to 1. our net equity exposure was approximately 35%. as the slowdown is primarily self‐inflicted through the tightening which leaves the government room to ease. liquidity conditions remain tight in China. and telecom sectors to replace the index hedges we put on over the last few months. Ltd. Single name shorts currently represent about 85% of our short book. In Conclusion The Asia funds have assets of $325 million as of December 1.1% for the S&P 500. and we expect it to be around 4% by the beginning of 2012. We’ve added a number of single name shorts across the construction machinery.
Jeffrey A. The flagship funds have assets of $5. CPI in October was 5. down from the peak of 6. who have zero bound interest rates and huge budget deficits. we have visited about half of our portfolio companies and have spoken with all of them and feel strongly that our investment theses are largely unchanged. China remains very much in flux as the year long tightening by the central government has had its desired effect.5%.com) if you have any questions about investing in the funds. On November 30. We have used the recent volatility in these markets to adjust our portfolio.
EBITDA margins remain strong at 42% with free cash flow increasing at a faster rate than earnings as the upfront cost of digital migration (namely set top boxes) is behind them. 2011 are. Given that KDDI paid Y139. that a slowdown in demand will disrupt the supplier discipline and collapse the price of cement. cutting profits in half next year. we believe that it is only a matter of time until the remaining shares are bought in at that level or better. Shandong. The combination makes strategic sense given the synergies between JCOM and JCN (the #2 cable company in Japan and owned by KDDI) as well as the value that JCOM’s network infrastructure brings to KDDI’s fixed line and mobile businesses. trading at 4x 2012 P/E. we believe Shanshui could have over 100% upside from current levels. in November cement pricing in Shandong increased when other regions in China saw flat pricing or a slight price decline. to take the next step and buy control of the company. we believe that Shanshui’s key market. JCOM is very cheap at 4. Not only do we see the risk reward on this investment being asymmetric. we believe the market is pricing in an almost 100% probability of the bear thesis. However. While some sell side analysts cite concerns regarding ARPU trends. Jupiter Telecommunications Jupiter Telecommunications (JCOM) remains a top holding for the Fund.500 for their stake and Sumitomo paid the same price to raise their ownership over 40%.EXHIBITS The Portfolio Our five largest holdings2 as of September 30. we think the market is still pricing in a fairly draconian scenario. Furthermore.
. We continue to wait for KDDI. We believe the near term catalyst will simply be the market’s realization that pricing and margins are not falling and if that is the case. but we remain convinced that the bear thesis is incorrect and margins will not collapse. Japan’s largest cable company with over 40% market share continues to perform well fundamentally. based on applying the halved profit level and using 2008 trough EBITDA multiples. The third quarter illustrated this with organic top line growth of approximately 3%. The cement sector is still down over 50% from the highs and though the sector recovered 10‐20% from the lows in October. which bought over 37% of JCOM in February 2010. we believe these fears are misplaced as the company continues to gain incremental subscribers at high contribution margins.3x EBITDA and over 10% free cash flow yield with debt under one turn of EBITDA. The impact from continued liquidity tightening and restrictive policies on property purchases in China continues to dampen sentiment on the entire cement sector. At current prices. As evidence. should be more resilient in a weakening demand environment as it has the highest concentration among the top two players. alphabetically: China Shanshui Cement Group Jupiter Telecommunications Kweichow Moutai Nufarm Sun Art Retail Group China Shanshui Cement Group China Shanshui Cement is a name we have written about previously and is the largest producer of cement in Shandong.
In 3Q11.5x EBITDA down to 1. We own Nufarm’s perpetual preferred stock. In September. We participated as a cornerstone investor in this IPO which provided the Fund with a large guaranteed allocation but also
.700 ($260) per bottle. The Chinese white liquor industry is a 6. Moutai opened about 30 retail specialty stores dedicated in selling Moutai products at about 1.700/bottle.8x.20 per share. In December 2009. leverage is 2. which in September announced a step up of its coupon by 200bps.5 billion bottle a year business with the ultra premium segment’s volume equal to 80‐90 million bottles.7x. Nufarm's net debt position has improved dramatically this past year and leverage ahead of the preferreds has declined from 2. Nufarm Nufarm is an Australia‐based off‐patent agriculture chemical manufacturer. the preferreds also have a change of control at par vs. increases in Moutai’s realized price drops mostly to profits driving above consensus earning growth. The result is that demand for Moutai’s products is out stripping supply by a ratio of 4:1. Sumitomo Chemical agreed to purchase 20% of Nufarm stock at a price of A$14. which should remove a large overhang on the name. and which returns a cash yield of 10.5% at current prices. In 2011. Through the preferreds. and we believe there is a good chance a takeout is in the cards. including buying 1. While most of the Chinese liquor volume is sold at a retail price RMB20‐30 ($3‐5) per bottle.100/bottle with the long term goal of 800 stores nationwide. ex‐ factory/retail was 620/1300 in the beginning of 2011 and 178/265 in 2001. leading to increases in Moutai’s ex‐factory price of 300% over the past 10 years and its retail price of 500% during the same period. Moutai started to sell direct to large corporate customers at about 770 per bottle which accounts for about 15‐20% of the group’s total volume.50) and recently increased its ownership to 23%. We believe there is strategic value in Nufarm’s global distribution network as is evidenced by its competitor. which we have written about in the past. Beyond the current yield. and there remains substantial equity value of 4.7% from the CEO at A$5. To put that in perspective.Kweichow Moutai Kweichow Moutai is an A‐share listed liquor company with a market cap of approximately $30 billion and is the premium brand in the Chinese white liquor industry with 40% market share in the ultra premium segment. Sun Art Retail Group Sun Art is a large hypermarket chain in China that went public in July 2011. Nufarm announced better than expected June 2011 fiscal year end results and in November. current price at around 80. being acquired by ChemChina. There are only 2 other players in the ultra premium segment and each player has capacity constraints since for each the aging process for ultra premium white liquor is 5 years.8x EBITDA behind the preferreds which should provide value cushion behind our position. the company signed a A$625 million three‐year term loan to refinance its bank facility. What we are excited about is Moutai’s movement toward direct sales to capture more margin than their current ex‐factory distribution model. Moutai’s retail price is about RMB1.00 per share (current stock price is around A$4. Given the incremental expenses are minimum. Moutai is trading at a PE of 23x 2012 consensuses with earning growth of 27%. Mouitai’s key product sells at about RMB620/bottle ex‐ factory to distributors and these products retail at 1. Makhteshim‐Agan. We think the company should be able to generate 35‐40% CAGR over the next 2‐3 years with strong visibility and sustainability to maintain the current forward multiple a‐year from now.
Versus the IPO price of $7. generate 200 million and 100 million per store. The biggest headwind during the IPO was its perceived high headline 2012E PE multiple of 24. Sun Art is the best operator in the Chinese hypermarket landscape. due in large part to better execution on the grocery side of the business which is primary traffic driver in China. it generates free cash flow of about 2. 2007. Portfolio by Asset Class 3
Total * 2007 % of Average Cap by Sec Type: Long Equity 105% Short Equity ‐63% Net Equity 42% Long Credit Short Credit Net Credit Total Long Total Short Net Exposure Gross Equity Gross Credit Gross Exposure 0% 1% 1% 105% ‐62% 43% 168% 1% 169%
1st Qtr 2011
2nd Qtr 2011
3rd Qtr 2011
75% ‐46% 29% ‐1% 2% 1% 74% ‐44% 30% 121% 3% 124%
57% ‐29% 28% 12% 2% 14% 69% ‐27% 42% 86% 18% 104%
86% ‐33% 53% 19% 0% 19% 105% ‐33% 72% 119% 19% 138%
117% ‐33% 84% 22% 0% 22% 139% ‐33% 106% 150% 22% 172%
111% ‐32% 79% 21% 0% 21% 132% ‐32% 100% 143% 21% 164%
86% ‐23% 63% 20% 1% 21% 106% ‐22% 84% 109% 21% 130%
105% ‐29% 76% 21% 0% 21% 126% ‐29% 97% 134% 21% 155%
82% ‐38% 44% 10% 1% 11% 92% ‐37% 55% 120% 13% 133%
* Inception Date was July 2.
. As a result.5‐3.locked‐up the investment for 6 months. respectively. because of Sun Art’s favorable working capital cycle.000 Sun Art stores over the long run. It generates an average sales per store of over RMB300 million per year while its key competitors. We expect Sun Art to continue to press its price and margin advantage against its competitors. We think the PE multiple is very misleading as they own one third of their store base and have a conservative depreciation policy.20.5x earnings. The company’s key competitive advantage is its ability to consistently drive higher traffic volume in its stores across the country.000‐3. our valuation cases for Sun Art suggest a value of $13‐16 per share if you assume the company can grow its store base for the next 5‐8 years. As of the time of IPO.0x its reported net profit. Carrefour and Wal‐Mart. Sun Art is able to generate higher operating margins than its competitors while also charging lower prices. In addition. Sun Art had about 200 stores in China. and we estimate that China can accommodate about 2.
Portfolio by Industry Type 4.0% 6.1% 5. & Li fe Sci ences Reta i l i ng Hea l th Ca re Equi pment & Servi ces Technol ogy Ha rdwa re & Equi pment Cons umer Dura bl es & Appa rel Ba nks Energy Cons umer Servi ces Tota l
11.0% 1.3% 7.5% ‐2.0% 0.8% 4.0% 2.0% 3.2% ‐0.3% ‐0.6% 1.8% 7.7% ‐2.0% 0.0% 0.8% ‐0.9% 8.9% ‐1. Bi otech.1% 9.8% 2.0% ‐0..4%
11.1% 8.5% 0.8% 0.8% 0.5% 6.0% ‐5.1% 6.6% ‐0.9% ‐32.9% 1.6% ‐0.6% ‐1.9% ‐1.3% 0.9% 0.5% ‐0.4%
Chi na /Hong Kong Ja pa n Aus tra l i a USA Other Europe Korea Si nga pore Tota l
‐0.8% 13.2% ‐0.0% 7.4% 0.1% 7.0% 2. 5
Long Exposure Short Exposure Net Exposure
Industry Exposure as of 9/30/11 Sectors Ma teri a l s Medi a Food.6% ‐0.0% 0.6% ‐0.1% ‐2.4% ‐1.0% 0.9% ‐0.8% 3.9% ‐32.6% 10.3% ‐1.0%
Short Exposure ‐15.0% 2.8% 7. Bevera ge & Toba cco Di vers i fi ed Fi na nci a l s Tra ns porta ti on Hous ehol d & Pers ona l Products Food & Sta pl es Reta i l i ng Automobi l es & Components Rea l Es ta te Li qui da ti on Tel ecommuni ca ti on Servi ces Ins ura nce Ca pi ta l Goods Softwa re & Servi ces Other Uti l i ti es Pha rma .2% 19.6%
.0% 0.3% 0.7% ‐2.0% ‐1.6% 90.4% ‐5.3% 0.5% 6.5% 2.2% 3.6% 1.0% 5.1% ‐2.5% ‐0.0% 90.8% 1.6% ‐0.3% ‐0.9% 57.8% 8.9% 0.7% 5.6%
Portfolio by Region 6
Region Exposure as of 9/30/11
Long Exposure 53.6% ‐7.1% ‐4.2% ‐2.3% 57.0% 0.2% 0.5% ‐1.8% 0.9% 1.4% ‐0.2% ‐1.2% ‐1.6% ‐1.4% ‐2.6% ‐5.6% 4.
. Gross credit figures may not foot with Long and Short credit figures because of CDS positions which may result in negative longs and positive shorts. The five largest holdings consist of a minority of issuers in Owl Creek Asia Master Fund Ltd’s portfolio. assumes that unrealized gains (if applicable) on special investments would first be offset by any loss recovery account (LRA) and. Ltd. Exposure includes the notional exposure of total return swaps and futures contracts. L. L. 2011. 4. 2) “Other” ‐ includes forward foreign currency exchange contracts and any GICS industry groups where the long and short exposure is less than 0. The Hang Seng Index (the "HSI") is a selection of 45 companies from the Stock Exchange of Hong Kong.P. short sales and leverage. and Owl Creek Asia Fund. The composition of the portfolio will vary daily. Ltd. assumes that unrealized gains (if applicable) on special investments would not be offset by any LRA prior to accruing for incentive. The table reflects the composition of the Owl Creek Asia Master Fund Ltd’s portfolio as of a single point in time. the performance of the funds managed by Owl Creek and the HSI. does not include incentive allocation fee. Finance. for the offshore funds. Owl Creek Overseas Fund. Investors who invest with the funds in the middle of a particular year (after the establishment of a special investment) or who do not participate in new issues will have different monthly and yearly performance numbers and the difference may be substantial. Performance is based on the assumption that an investor was invested in the funds since inception with no subsequent subscriptions or redemptions and was eligible to invest in new issues.Disclosure The information in this letter is intended only for the person to whom it has been delivered. it has determined that GICS classification is either not reflective of the underlying exposure or if GICS does not provide a classification. Exposure includes the notional exposure of total return swaps and futures contracts. 2011 audits. Annual and Inception to Date performance numbers are calculated by geometrically linking monthly performance for the relevant period.P. 2. in its own judgment.P. Performance Disclosures: Net performance: Net of all fees including management fee and incentive allocation/fee. The composition of the portfolio will vary daily. 3. advisory fees or similar expenses that are associated with their performance. This letter is not an offer or solicitation with respect to the purchase or sale of any security.. This letter is not intended to constitute legal. mainly composed of Commerce and Industry. TPX.. 5. The investment program of the funds include trading and investments in debt securities. The MSCI AC Asia Pacific Index (the “MXAP”) is a capitalization weighted index that monitors the performance of a selection of stocks from the Asia Pacific Region. MXAP. For onshore funds. or accounting advice or investment recommendations. Exposure includes the notional exposure of total return swaps and futures contracts. and it should not be assumed that these holdings were or will be profitable. 6. The following non‐GICS buckets are included in the industry exposure: 1) “Liquidation”‐ Equities and credits of a company that is anticipated to be in liquidation proceedings in the near future or is currently in liquidation proceedings. The table above reflects the composition of the Owl Creek Asia Master Fund Ltd’s portfolio as of a single point in time. Ltd. Portfolio numbers are calculated by taking average exposure of month end exposures.. These indices are unmanaged and therefore do not have any transaction costs. and Properties.5% of NAV.P. One cannot invest in these indices. L. For the foregoing and other reasons. may not be as diversified as the indices and may experience differing degrees of volatility. L. The table above reflects the composition of the Owl Creek Asia Master Fund Ltd’s portfolio as of a single point in time. Owl Creek Asia II. The Tokyo Stock Price Index (the “TPX”) is a capitalization weighted index of all 1663 companies listed on the First Section of the Tokyo Stock Exchange and supplemented by the subindices of the 33 industry sectors. the funds’ portfolios may contain options and other derivative securities. This includes the appreciation/depreciation of the fair value of any special investment and income/loss from new issues. Owl Creek Asia I. Owl Creek breaks down industry based on GICS’ industry groups. Past performance should not be viewed as indicative of future results. Additional performance information is available upon request.
. Utilities. should be made based on the information contained in the Confidential Memorandum for the applicable Fund which will be made available upon request. Information for YTD 2011 is subject to revision pending completion of December 31. In addition. and MXCN may not be comparable. Owl Creek has made adjustments to these classifications when. The MSCI China Free Index (the “MXCN”) is a capitalization weighted index that monitors the performance of a selection of stocks from China. as well as other securities and instruments of troubled companies.. This letter is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person under any circumstances. Footnotes: 1. Starting on April 30. Any investment decision in connection with Owl Creek I. tax. Owl Creek II. The investment program of the funds managed by Owl Creek is not restricted to the securities comprising these indices. Indices have been broken out into the corresponding exposures of the underlying holdings of each index. Owl Creek Socially Responsible Investment Fund. Gross Performance: Net of management fee. The composition of the portfolio will vary daily..