What are we going to do about the proposed privatisation of Yorkey (2788)?

Raising the Yorkey bar
21 October 2021

A number of readers have asked what we think about the privatisation proposal for Yorkey Optical International (Cayman) Ltd (Yorkey, 2788), by Asia Optical International Ltd, which has opened the bidding at HK$0.88 per share, and wisely has not ruled out an increase. The announcement correctly states that the audited net asset value at 31-Dec-2020 was about HK$0.828 per share (US$87.26m in total, see annual report). However, that is not the whole picture, because Yorkey has significant property interests which form a large part of its true value but are held in the books at depreciated cost, rather than market value.

Note 13 of the accounts shows leasehold land and buildings of only US$0.540m at depreciated cost. Note 12 of the accounts shows investment properties at US$5.313m, again at depreciated cost, not market value. So the total book value for all properties is only US$5.85m. As far as we know from public filings, Yorkey has 3 properties, of which one is its main factory on the North side of Dezheng Middle Road, Changan, Dongguan, PRC, pictured in the Baidu Street View screenshot below (see the logo on the signage):

Yorkey factory

According to the CBRE valuation report in the 2006 prospectus, this site has a land area of 16,647 sq.m. and a building area of 40,138 sq.m.. A keen observer will notice that on the other side of the street is an enormous new development. The whole district is in the process of redevelopment - here's what it looked like on Google Earth on 9-Jan-2009:

Dezheng Middle Road 9-Jan-2009

And here's the same view nearly 12 years later, on 24-Nov-2020, with many of the factories already gone:

Dezheng Middle Road 24-Nov-2020

You'll see two red boxes with the approximate outlines of Yorkey's site (on the right), and on the left, a site now owned by Chuang's China Investments Ltd (CCI, 0298). CCI bought Dongguan Midas Printing Co Ltd, the company that owns that site, from CCI's subsidiary, then known as Midas International Holdings Ltd (1172) in 2015. The CCI transaction circular dated 13-May-2015 has an aerial photo on page 10 and the valuation report discloses a land area of 18,990 sq.m. and a building area of 39,081 sq.m.., very similar to Yorkey's site.

At the time, the printing factory had been closed, but CCI has since let it out on a short-term lease while it ponders the right time to convert it into residential usage, so no land premium has been paid yet. Even so, page 20 of the CCI annual report at 31-Mar-2021 discloses a market value in its current state of CNY223.4m. Assuming the same value per square metre of land, Yorkey's site would be worth about CNY195.8m (US$30.61m).

On top of that, in the 2006 prospectus you will also find units in Goldfield Industrial Centre, Sha Tin, with a gross floor area of 788.28 sq.m., plus a car space and a lorry space. Part of this is still the group's head office. According to data from the HKSAR Ratings and Valuation Department, "flatted factories" in the New Territories had a 2021 Q2 average price of HK$63,777 per sq.m., which would value Yorkey's units at about HK$50.3m (US$6.45m) plus the parking spaces.

The third property we know of, acquired on 21-Jul-2016 for HK$42.8m, is workshops on the 26/F of CRE Centre, 889 Cheung Sha Wan Road, Kowloon, plus the flat roof above. These are currently rented out. This is another industrial property with a gross floor area of 8,854 sq. ft. or about  822.56 sq.m.. The purchase price was HK$52,032 per sq.m.. As this was relatively recent, we can look at the RVD Quarterly Price index for flatted factories. In Q3 of 2016 (the purchase time), this index was 681.9, and in Q2 of 2021, it was 878.5, an increase of 28.8% in just over 5 years. So we estimate the value of this property to be 42.8*1.288 = HK$55.1m (about US$7.07m).

So we estimate the total value of the 3 properties at US$44.13m (about HK$0.421 per share), or about US$38.28m more than book value. That increases NAV per share by about HK$0.365 per share, taking the total to HK$1.193 per share at 31-Dec-2020. Of course, professional valuers may have different opinions, but we won't be far apart. Since then, Yorkey produced interim results showing a sharp rebound from 2020 which was depressed by COVID. Bank balances at 30-Jun-2021 were a corpulent US$81.85m (about HK$0.781 per share), before payment of a $0.035 dividend. There are no borrowings. So the current offer is only about HK$0.13 above net cash.

The Offeror has left room to increase the bid after Yorkey has obtained the expected valuation reports, before the offer document is posted. Webb-site Founder David Webb currently holds more than 10% of the independent shares, sufficient to block the privatisation, so let's hope that does not become necessary and the Yorkey bar is substantially raised for a happy ending.

Yorkie Bar

© Webb-site.com, 2021

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