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Boonipat July 18, 2010

S.P. Suzuki Was Worth More Dead than AliveA Point Brought to Bare by the Delisting Application
By: Thanapoom Boonipat, Sunday 18th, July, 2010. The Johns Hopkins University, Biomedical Engineering 2011. Observation of the irrationality of the market that causes instances where companies sell less than fair liquidating valueObjections to such an investment repudiate
Consolidated (in millions of Thai baht) Table I Cash Assets* Trade accounts receivable-net + Hire-purchase contract receivables-net # Inventories-net Other current assets Total current assets Non current assets^ Bank overdrafts Trade accounts payable Other liabilities Total liabilities Current assets excluding cash assets - Total liabilities Shareholders Equity Added:Equity in Thai Suzuki Motor not accounted for in balance sheet" Fair value Total Revenues # Net profit (loss) after taxes Cash Provided by Operating Activities Market Cap. (158m shares outstanding) market price per share 2496.4 15.8 31-Mar-10 31-Dec-09 31-Dec-08 31-Dec-07 31-Dec-06 31-Dec-05 1,312.70 148.85 9.48 207.44 47.50 1,725.96 561.20 6.70 192.25 36.95 235.90 1,468.74 216.73 19.01 244.09 65.61 2,014.19 563.83 2.16 446.13 59.71 507.99 1,438.32 253.23 130.47 312.74 66.36 2,201.11 675.46 10.99 534.85 67.87 613.70 795.34 310.94 492.16 187.44 62.63 1,848.51 649.51 65.82 103.20 60.15 229.17 331.11 523.47 652.21 587.25 46.63 2,140.66 322.98 209.75 230.45 81.45 521.64 893.55 900.56 770.03 588.43 106.00 3,258.58 323.06 56.56 1,188.24 119.37 1,364.17

177.36 2,038.38 545.28 2,583.66

37.45 2,559.42

149.09 2,202.50

824.00 2,248.82

1,287.91 1,935.97

1,000.86 2,210.83

(at 16.2, SPSU valued at 2559.6) 1,785.36 1,993.98 1,812.77 (123.52) (22.61) 30.45 38.13 687.71 594.54 3,256.52 3,961.40 (235.37) 59.26 (653.86) 1.44 932.2 5.90

(price on 16-7-10)

821.6 5.20

821.6 5.20

1074.4 6.80

*Cash and cash equivalents, current short term investments (promissory notes, fixed deposits, bill of exchange), collaterized deposit for credit line (85m for bank overdraft), long term bonds. # Discontinued motorcycles hire-purchase contract activities in 2007. + After allowance for bad debt of 112.6 and 327 in 05 and 06, respectively. Other years allowance are insignificant. ^From 2007 onward, Property, plant, and equipment, and investment in subsidiary stated at cost (40%), deferred tax assets (50%), other (10%). Before 2007, no deferred tax assets. "According to form 56-1 year 2008

On July 16, S.P. Suzuki Public Company Limited, the distributor of Suzuki motorcycles in Thailand, announced its intention to liquidate and cease business operation. In connection with its liquidation, one of the major shareholders, also controlled by the Phornprapha family, offered to buy out the minority interest at 16.2 baht per share, sensationally lifting the price threefold from the prevailing 5-6 baht per share it have been trading at for the past half decade. With normal takeover premium

Thanapoom Boonipat July 18, 2010

rarely exceeding 50%, how come the extraordinary threefold premium, the reader might ask. Let us delves a little deeper into the history of this old enterprise, and see if we can find a satisfactory answer. Established more than 30 years ago by the Phornprapha interests, S.P. Suzuki is the distributor of Suzuki motorcycles and spare parts in most of Thailand except the 14 southern provinces. It also conducted motorcycles hire-purchase contract leasing operation prior to 2007. Its business has been decreasing for the past few years, as can be clearly seen in the revenues and profit figures in Table I. With these decreasing earnings trends and devastating profit figures, it is no wonder the market valued the company only at slightly more than 1/3 of book value. But a casual look over the balance sheet figures shows a completely different situation. Over the same time period, cash assets shows substantial increases, while liabilities drastically contracted. At any time during the past three years, the alert investor can buy the company for less than its cash assets! On both December 31st of 2009, 2008, the market valued the company at only 821.6 million, while the cash balance alone exceed 1,400 million. Other current asset alone exceeded all liabilities. Thus, the investor can buy dollar for 60 cents, getting some current assets for free, to say nothing of the fixed assets. True, some of the assets such as inventory might be worth less than the stated valued, but the 500 million in fixed assets should make up for any impairment and satisfy total liabilities without disturbing the cash balance. Here the reader interjects sharply, But that chronicand largeoperating loss shown will, in a few years, erode all the cash balance. And how can I be sure that the controlling shareholder- management will not spent all the cashor even worst, embezzle it. Even if management is honest, there is no assurance that the unsatisfactory situation will be remedy within a reasonable amount of time. To the first objection a glance at the cash flow statement will suffice. For most of the reported loss can be accounted for by allowance for bad debt expense and decrease in inventory value. And the aggregate operating cash flow since 2005 is firmly positive. In addition, depreciation charges of around 20-30 million each year have far exceed spending on fixed assets. In addition, the shareholders equity during this period has remain at roughly the same figure, with no help from land revaluation or shares offerings. To the second objection, that the management might spend the cash on non-economical projects, we may ask, is not this risk common to all investment? Over the recent record, management has conservatively built up of cash and reduced debt. Why would there be any more grounds for suspecting unwise use of cash than in any normal enterprise? Finally, for the third objection, that the timing for policy change such as liquidation is uncertain, we may ask the reader the following questions. From the shareholders list, it is clear that management group holds large stakes in the company. Why would the management let the affairs of the company deteriorate to such extent that threatens the cash carefully built up? Would it not be in management interest to liquidate money losing enterprises to limit the loss, and pay out excess cash? Here the writer may venture a guess that within 3-5 years, some events is bound to happen. And during this period, if the investor select his companies carefully, in the case that the companys business decrease, the current assets will convert into cash, and the investor will be mostly protected by an increase in cash balance. If the business take a turn for the better, earning a respectable return on the asset employed, the investor will take his gain in the market price

Thanapoom Boonipat July 18, 2010

appreciation, will is bound to occur if business improves. Keep in mind that in operation of this type, a significant discount on fair value should a prerequisite, since this value cushion above the investors cost will protect the investor from capital loss in case of any shrinkage in value that might occur. Turning our attention closer to the S.P. Suzuki situation, the reader, casually glancing at the balance sheet, will note that investments in subsidiaries are stated at cost. Consulting the yearly 56- 1, the companys 18.8% stake in Thai Suzuki Motor is valued at 635.98 million, instead of 90 million on the consolidated balance sheet (since the stake is below consolidation threshold, the company only stated the cost of the investment on its balance sheet). Looking at the property account, land valued at 44 million has not been revalued for at least a decade (annual report before year 2001 was not provided on the corporate website). The price of the land, although not in Bangkok, will most certainly have increase in value. These two elements add considerable more margin of safety to the investment at 5.2 per share. In conclusion, at any time in the past 2-3 years, common stock of S.P. Suzuki can be brought with almost no chance of loss and real possibilities of significant gains. Even if the investor must wait 5 years for the tender offer to materialize, the investor will earn a highly satisfactory compounded return in excess of 25%. Even if the investment only doubled, the investor will earn 15%. Most importantly, the investment opportunity can be identify before the tender offer announced. The significant discount from fair value explains the large gap between prevailing price and the tender offer. A recent screening of the companies listed on the Stock Exchange of Thailand by the writer yields no less than five issues selling on very similar basis as S.P. Suzuki was before the tender offer. Arbitrage opportunity As of Friday, July 16th, 2010, the share is valued at 15.8 versus tender offer of 16.2. The company making the offer, SP International, is 100% owned by the Phornprapha family. The Phornprapha family holds, both directly and indirectly, nearly 70% of S.P. Suzuki. Therefore, the actual outlay to outside interest should not exceed 30%, or 768 million. As part of the liquidation, S.P. Suzukis 18.8% stake in Thai Suzuki Motor will be brought out by Suzuki Motor Corporation of Japan for total cash proceed of 804.77 million. This fact immediately imply proceed to the Phornprapha family of 1,011 million, since it holds, directly and through SP International, 23.6% stake in Thai Suzuki Motor. Therefore, the Phornprapha family will have enough money to buy the outside stockholder in S.P. Suzuki. The only risk that the offer will be called off will be from Suzuki Motor Corporation of Japan, an event that seems highly improbable given the huge resources of Suzuki Japan. Thus, the investor buying the common at 15.8 will realize 2.5% return on his investment, which must be invest for roughly 6 months (the company estimated the liquidation transactions will be complete at the end of October), working out to 5% per annum. To this nearly risk free return, the shareholder receives a chance that the offer might be revise upward. According to Stock Exchange rules, the company is required to engage an independent financial advisor to value both the liquidating transactions and the fair value of the tender price. At 16.2, the company is valued at 2,559 million, while if to the March 31 balance sheet book value is add the additional hidden equity of 714.7 (804.7-90), equity equals 2,753 million. In addition, land,

Thanapoom Boonipat July 18, 2010 stated at 44 million on the book, has not been revalued for a decade, therefore a possibility exist that the land might be worth more. On this equity basis, the shareholder will realize a 20% annualized return.

The example of UFM might prove instructive. In mid year 2008, a large shareholder of UFM offered to buy the minority interest at 12-3 per share. The stock traded at a slight discount, even though there were at least 12 baht of cash asset per share. Then, the financial advisory published their findings, stating that the stock, using all the valuation method, is worth at least 20. The delisting finally went through recently, at 80.3 baht per share.