Brief China: Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp and more

In this briefing:

1. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp
2. As Trump Turns: Tottering Towards Dem Trap on Wall; Posturing on China So Talks Look Tough
3. Angang Steel: Headwinds Intensify
4. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech
5. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

1. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp

Last Week in Event SPACE …

• Something is up as Kosaido Co Ltd (7868 JP)‘s shares trade almost 40% through terms and back down – still 18% through terms.
• Descente Ltd (8114 JP)‘s management’s explanation why Itochu owning 40% would be bad is almost a paean to good governance, but the gloves are off.
• Panalpina Welttransport Holding (PWTN SW) is burdened with “social costs” in the near-term.
• Opportunistic yes, but Medco Energi Internasional T (MEDC IJ)‘s proposal for Ophir Energy (OPHR LN) is okay in a less-than-ideal situation.
• A possible last minute counter to Apollo’s disappointing offer for RPC Group PLC (RPC LN).
• The market is valuing Baidu Inc (ADR) (BIDU US) core ops as an “Old Economy” company with little to no growth prospect.
• Plus CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $176mn; Liquidity: $1.2mn)

When Bain announced its MBO for Kosaido at ¥610/share, Travis Lundy concluded (in his insight Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?) that it was a lowball bid and a virtual asset strip in progress. The kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like the renewal of a business. The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher.

• Travis’ inclination at Thursday’s price (¥775/share) is that at a 30% discount to book, there could be enough here to entice someone to split the company up at a slightly better level, but he doubts that it is worth 1x book. Given the headaches involved in making this company worth more than book, it would be worth less than book now. If the Info business can be rescued, then it is cheap. If it cannot, it is not.
• Because “management-friendly” shareholders currently hold at least 40% and probably more like 50+%, Travis thinks Murakami-san will find it really tough to mount, or get someone else to mount, a truly hostile action. 
• Perhaps Murakami-san’s goal here is to block the deal then get management to use debt to buy out other people and expand the funeral parlour business, then get a strategic to buy the whole thing out. It could be, but Travis doesn’t think chasing the market at 25-30% above where Murakami-san got in is a good risk.

Since Travis wrote, Murakami-san’s vehicles have added another 1.24% to reach 9.55% of shares out. The last set of shares was purchased at an average of ¥652/share.

(link to Travis’ insight: Kosaido: Activism Drives Price 30+% Through Terms)

Descente Ltd (8114 JP) (Mkt Cap: $1.8bn; Liquidity: $4.3mn)

This past Thursday 7 February, Descente announced a weak Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP) Tender Offer with a 28-page supporting powerpoint deck (also in Japanese). Descente appears to have no ability to defend itself, and its claim that a large shareholder like Itochu could damage corporate value by weakening governance is effectively a statement that others (like perhaps Wacoal) would too, so only a full takeover makes sense under that defense.

• Descente management’s explanation for why Itochu owning 40% would be bad is almost a paean to good governance. If the influence of suppliers and customers in the shareholder register is bad, it is bad – whether friendly to management or not. Conflict of interest can happen via entrenchment.
• The lack of a white knight proposed and effective “I got nothing, but please don’t tender” response is bearish for the shares. if management is right and Itochu’s presence at 40% will lower corporate value, the back end might be worth less than ¥1,871/share where it was trading pre-tender. That would mean the fair value of shares now would still be below here.
• If Itochu gets its 40% and ANTA votes with Itochu, it is highly possible that the two could effect dramatic change at the management and board level. That would be very hostile and corporate Japan would have something to say about that. Travis says “I am not sure Itochu would go that hostile immediately.”
• Michael Causton just wrote about Descente’s rejection of the Itochu tender saying “The Gloves Are Off”. He notes there is a perception of a cultural difference between Descente’s brand cultivation and Itochu Textile’s hands-off approach to brand management, but notes that the differences between Descente and Itochu need to be resolved quickly in order to optimally ramp up brand awareness and sales points ahead of the Rugby World Cup in Japan this year, the Olympics, next year, and the World Masters Games the year after. 

links to:
Travis’ insight: Descente’s Doleful Defense (Dicaeologia)
Michael’s insight: Itochu and Descente: Gloves Off

ND Software (3794 JP) (Mkt Cap: $212mn; Liquidity: $0.04mn)

ND Software (NDS) announced a MBO sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be ~7.2x trailing 12-month EV/EBITDA. The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this. Looks straightforward, but …

• Sometime activist Symphony Financial Partners (SFP) holds around 20% in NDS. If on board, this this deal is almost done because 31.26% is already pledged to tender, Symphony’s stake would make it 51.5%. Other presumably management-friendly shareholders own another 10%, and employees own about 7%. If Symphony is on board, that easily clears the 67% hurdle. If SFP are not on board, they own about 60% of what is necessary to block this deal.  And they could buy on market to raise their stake further. 
• Travis would not want to sell out his shares tomorrow at ¥1699/share. Or even ¥1701. He thinks there is a chance that the loose float is scooped up by shareholders or players who might want to increase their stake and see if this deal can be bumped. 

(link to Travis’ insight: ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.1bn; Liquidity: $20mn)

Palpina confirmed that the Ernst Göhner Foundation, Panalpina’s largest shareholder (46% of shares out) does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A. Panalpina’a stock tanked, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

• If management had said that they have a plan which is to grow themselves out of their current doldrums, and their largest shareholder supports that plan to stick with management and go slow, nothing will get done until the new chairman is installed in May at the AGM, and even then, given the Foundation’s position that they support management’s “independent growth strategy”, there is not much minority shareholders can do.
• This is an ongoing issue of governance. If the directors are effectively chosen by the Ernst Göhner Foundation, which supports the company’s independence, so they do too, minority shareholders serve no purpose other than to provide capital for the foundation to keep Panalpina listed.
• This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive offer. Travis expects this is eventually worth another go but he would want to reload lower and/or later, or when Panalpina is in a better position after the full IT package is deployed.

Since Travis wrote, DSV has released earnings and said it is still significantly engaged in the bid, and comments from the chairman of the Ernst Göhner Foundation has made comments suggesting it is not wedded to the idea, so it comes down to price – someone has to pay now to get the benefits expected from the full IT package.

Travis pointed out in the discussions that interestingly, when DSV released earnings it did not announce a buyback, which would have been normal, leading some to speculate the company is saving its cash for another go at it.

(link to Travis’ insight: Largest Panalpina Shareholder to Other Shareholders: Get Stuffed) 

Ophir Energy (OPHR LN) (Mkt Cap: $204mn; Liquidity: $3mn)

On its fourth attempt Medco Energi Internasional T (MEDC IJ) receives board approval for its £0.55/share (66% premium to the closing price) offer for Ophir. The deal is conditional on receiving 75% shareholder approval, approval from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

• There is an opportunistic element to Medco’s tilt after Ophir recently announced the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. This resulted in a $300mn non-cash impairment. Ophir had previously written down $310mn on the same project back in September.
• Shareholders such as Petrus (~2.8% stake) won’t support the offer having announced in mid-Jan that Medco’s earlier £0.485/share proposal “massively under-values” Ophir.
• Reg approvals are not expected to be an issue  – the stake in Tanzania is for a 20% non-controlling interest, a similar % approved in a prior sale to Pavilion in 2015. There is no approval/consent required from the Thai authorities – it is in there really to cover the unlikely situation that for some reason the Thai authorities raise an objection.

• Ophir’s shares are trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder (Sand Grove) may warrant such an outcome. A firm offer is on the table backed by the Ophir’s board. I’d look to get involved a spread or two below terms. 

(link to my insight: Medco’s “Okay” Offer For Ophir After Fortuna Setback)

RPC Group PLC (RPC LN) (Mkt Cap: $4.2bn; Liquidity: $43mn)

On January 23, after months of media speculation, RPC announced a final cash offer by a unit of Apollo Global Management for £7.82/share by way of a scheme. Two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, immediately expressed disappointment with the offer valuation.

• On January 31, Berry Global Group, a former Apollo  portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.
• The price being paid by Apollo is not very generous, though RPC’s sale process has been widely reported since September, 2018. Apollo’s ‘no increase’ declaration has made it easy for BERY to win this, provided no one else comes to the party. (I reached out to RPC who confirmed Apollo is restricted from countering a higher bid as it is bound by the language in the Offer announcement that the offer of £7.82 per share is final and will not be increased.) So there is limited upside from here unless you think someone else could join BERY as a late gatecrasher.
• Apollo’s offer provides an effective floor so there is limited downside from here, especially under strict UK rules which make it difficult for an acquirer to walk. John DeMasi recommend buying RPC on the possibility BERY comes out with a generous offer or another buyer shows up due to the undemanding valuation of Apollo’s offer.

(link to John’s insight: RPC Group PLC – It Ain’t Over ’til It’s Over)

Baidu Inc (ADR) (BIDU US) (Mkt Cap: $60.6bn; Liquidity: $490mn)

Johannes Salim, CFA tackled Baidu which he estimates is trading at a discount to NAV of 29% or ~2 SD below its 3-yr average NAV discount.

• It’s a weak-ish stub with 57%-owned video streaming subsidiary iQIYI Inc (IQ US) (which went public in 1Q18) and 19%-owned online travel agency, Ctrip.Com International (Adr) (CTRP US), together accounting  for 14% of NAV.
• BIDU’s core business (primarily online/mobile search services plus new initiatives such as Baidu Cloud and autonomous driving), accounts for 78% of NAV, with net cash a further 8% of NAV.
• Fundamentally, BIDU’s core business has grown healthily, with strong cash flows generation. Johannes estimates the market is unjustifiably valuing this business at US$49.3bn, or 8.7x 2019E EV/EBITDA or 11.2x 2019P, suggesting little to no growth prospect.

(link to Johannes’ insight: Baidu: Time to Swoop In, with NAV Discount Widening Substantially)

CJ Corp (001040 KS) (Mkt Cap: $3bn; Liquidity: $7.5mn)

Sanghyun Park recommends long Holdco and short the synthetic sub ((Cj Cheiljedang (097950 KS), CJ ENM (035760 KS), CJ CGV Co Ltd (079160 KS) and Cj Freshway (051500 KS) on a ratio of 50:40:7:3 ) at this point.

• By my calcs, CJ Corp is trading at a 52% discount to NAV compared to a 52-week average of 41%. CJ C and CJ ENM comprise 63% of NAV.
• Of note, the stub ops still account for 29% of NAV and primarily comprises the 55.13% stake in CJ Olive Networks and brand royalty, each accounting for ~13% of NAV.

(link to Sanghyun’s insight: CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach)

Toyota Industries (6201 JP)(Mkt Cap: $15.8bn; Liquidity: $24mn)

Curtis Lehnert recommends closing the Toyota set-up trade, which hasn’t exactly been a storming one (4% or 1.96% on the gross notional).

• Toyota announced earning recently which (slightly) beat expectations slightly and the stock rallied in response. This move brought the discount to NAV in line with its 6-month average and has eroded the statistical edge of staying in the trade.
• The fundamentals for Toyota are still attractive, therefore it could be argued to hold the stub beyond these levels. However, Curtis has opted for the tactical route in the current environment and take profits when a statistical edge disappears.

(link to Curtis’ insight: TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade)

Briefly …

• Sanghyun recommended a long 2PB and short 1P, after Hyundai Motor Co (005380 KS)‘s 1P/2PB price ratio touched 152% of σ on a 20D MA. This is the highest since late Nov last year. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
• Sanghyun also recommended go long Samsung Electronics (005930 KS)‘s1P and short Common, for a short term reversion as we enter the March shareholder meeting phase. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• Greencross Ltd (GXL AU) shareholders have approved the scheme of arrangement.

• MYOB Group Ltd (MYO AU) trades through terms after announcing Vinva is a new substantial holder.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. As Trump Turns: Tottering Towards Dem Trap on Wall; Posturing on China So Talks Look Tough

• Trump won’t walk away from the Wall – but Pelosi need not budge on funding.  If Trump invokes emergency powers, Democrats would rejoice.
• On Venezuela, the anti‑Cuba lobby in swing‑state Florida has transformed Trump from isolationist to hawk.

• Posturing for domestic effect, Trump wants China talks to look tough – lest he appear to cave too readily.

3. Angang Steel: Headwinds Intensify

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short Angang Steel Co Ltd (H) (347 HK) shares with a PT of HK$5.

4. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

No new IPO filings

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• PineBridge-backed Uniparts gets SEBI nod to float IPO
• Cal-Comp Philippines eyes IPO by third quarter
• JERA new president says IPO is an option
• Singapore’s Zalora explores listing to fuel expansion
• S. Korea’s Homeplus files for up to $1.5 bln REIT IPO
• Korean bio unicorn in the making, Voronoi, to join the Kosdaq this year

Smartkarma Community’s this week Analysis on Upcoming IPO

• Koolearn: Losses in Full View
• Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

List of pre-IPO Coverage on Smartkarma

5. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

• Movie World park is first stage in long term plan for 20 “movie theme” cities in China.
• Jack Ma’s investment in company has grown since 2015: Its film finance.
• Company sees licensing of intellectual property rather than brick and mortar as key to best asset deployment as they diversify.

The Walt Disney Company’s just released 1Q19 earnings report held an upside surprise of $1.84 a share beating consensus of $1.57. Revenues of US$15.5bn also beat analysts expectations of US$15.180bn. Filmed entertainment was down due to tough comps from last year’s blockbuster releases. Network TV was up. But what commands our attention in this insight is results from Disney theme parks: All units showed flat to modest growth in attendance, with revenue up primarily due to raised prices. Disney Shanghai was softer than last year attributed to the economic slowdown. Yet theme parks continue to lead the Disney business units year in and year out.

 Reviewing that result in the light of ongoing research I have been working at on Asia theme park prospects, I focused in on Huayi Brothers. Their movie themed park at Suzhou opened last July. While it is too early to make a long term call on the film company’s diversification into theme parks, their move to monetize their intellectual property in that space foretells more diversification ahead.

 The Disney business model appears to be proceeding.

 Huayi Brothers Media Corporation (SHE: 300027)

(All amounts shown in CNY except where otherwise noted).

 Since an ebullient IPO debut in 2009, when on October 23^rd, HB stock skyrocketed to 63.66yuan trading was halted, the stock price has since been both spiked and rocked by events. Most recently, it fell 21% last June when news of the details of a sketchy performance contract for one of HB’s top female stars made headlines. She appeared to have made an effort to disguise her salary. The scandal broke on television. It has triggered an investigation by Beijing officials. Promptly HB founder and Chairman Dennis Wang pledged US$16m to bolster confidence the shares amid continuing disputations between the parties to the scandal.

 On a positive note, during the last five year period, Alibaba’s (NYSE:BABA) Jack Ma announced he was investing US$103M over 5 years to finance the production of 10 HB films. On that news the shares had spiked 6.6%. There are also standing deals with real estate operator Evergrande Group (HK3333) and Tencent Holding(OTC) to deploy HB intellectual property names and brands into theme parks and online social gaming.

 Out of this mix of headwinds and tailwinds in the already volatile China entertainment/film sector, we arrive at a point where HB shares have taken a long, sustained beating. We are moved to believe that now rubbing up against a 5 year low, is the stock its worthy of attention for investors who have a risk profile. One needs to be comfortable with HB’s gyrating past trading patterns to see opportunity in its future as a “Disney in the making” in the words of a film executive friend from Hong Kong.

 Price at writing: 4.51 (52wk low 4.06)

5 year high: June 5 2015: 23.26

1 year high: (2018): 10.14

3 year high: May 23 2016: 14.30

3 year low: 4.70

 Market cap at writing: 12.61bn

P/E 15.11

EPS: 0.30

Revenue: 3.93bn

Revenue growth: 12.7%

EBITDA: 625m

LTD AT WRITING: 5.92bn

Equity: 10.5bn

Book value: 3.58bn

 To get a sense of how major institutional investors were responding to the roller coaster rides of the HB trade we note here that Vanguard International Stock Index Emerging Market Fund, one of HB’s biggest investors, is still holding its position at writing 2,727,202 shares of valued at 23,567,346bn cny.

 The Disney strategy

 The company began as a film production studio in 1994 and has since expanded its TV, internet, movie theaters, talent agencies and more recently, theme parks.

 It is its foray into the theme park space that is the clearest expression of its “Disneyesque” business model. Last July HB opened a 400,000 square meter theme park at Suzhou called “Movie World”. They announced it was the first in a series of 20 “film cities parks” they would create by providing intellectual property from their film hits partnered with realty developers.

 In a study of the China film industry from Deloite Global published in 2017, the researchers noted, “With Disney as its model, HB has launched a “de-cinematic” strategy that integrates the traditional film business, internet entertainment, location-based entertainment, expanding to upstream and downstream industry chains to alleviate dependence on the film industry.”

 Current estimates are that HB revenues continue heavily in film with over 85.% of its total sales from that sector, another 7.8% from internet entertainment, and 6.6.% from brand licensing. All others contribute 0.8%.

 However its going forward strategy is not to deploy hard capex on actually building theme parks but to partner with such realty operators like Evergrande as an intellectual property provider. This veers from a Disney formula since that company has financed and developed its theme parks internally from land acquisition to design, construction and operations. But it does comport with the core Disney strategy of monetizing intellectual property sprung from its films.

 The China film industry is notably dominated by the top 15 companies, among which is HB. The sector is at the same time without a dominant cluster of “major” studios as is the case in the US and other markets. The division of market share among the top players run from the biggest, China Film, at about 4.3% to HB which at 1.3% clusters in the same area between 1% and 2% with at least 8 other producers. This is rooted in the global nature of the film business today where a given year or given share is not necessarily a function of financial or asset deployment power. It reflects in China as everywhere else, the success or failure of individual films from the number of blockbusters to the number of flops it may release in a given year.

 As Disney’s 1Q19 results show, its filmed entertainment unit was down y/y 2% in operating income largely due to 2018 comps that included several blockbuster films. At the same time, its theme parks were up 13%—almost entirely due to a 7% increase in average visitor spend. And that increase we learn, came almost entirely from raised prices. So the key here is the price elasticity in the theme park business that filmed entertainment does not necessarily provide.

 In China there is also a wrinkle to the film business that links box office grosses to the trade in studio stocks. Over the years there has been considerable concern as to the accuracy of box office grosses reported by some studios. Our Hong Kong associate in that field outlined the problem. This quote is a translation.

 “You have instances where studios or theater operators buy up seats in off peak times and theaters that are fundamentally empty. You have ghost grosses. They then report a film has done much bigger business than it actually has because they know that reports of big grosses have a direct effect on the trade of movie stocks. And you get this bizarre situation where the move guys produce phantom grosses to pump up their stock”.

 “Much of this practice has been cleaned up, particularly among the top companies like HB. But in an economic environment where there are still observers in the financial sector that are not entirely comfortable that Beijing’s own economic GDP, trade and monetary numbers are all that accurate, anything is possible”. One of the priorities long expressed by Xi Jinping has been to end the lack of confidence in government numbers. Clearly such practices as ghost numbers can migrate to the private sector.

 In any event, estimated ticket sales in 2018 are believed to be relatively accurate rising to nearly US$9bn.

 Theme Parks forward look: Aging out and creating new

 Theme parks in China are currently showing a 13% rate of growth through 2017 totaling 190m admissions. According to a theme park engineers AECOM study, China will surpass the US as the globe’s biggest theme park market by 2020. Pipeline projects, of which HB projects it will participate with movie themes, continue to dominate in south and east China locations with 42% of all projects scheduled to open there covering a population base of 528m.

Over 27% of all current pipeline projects are themed to fantasy/cartoon/movie media intellectual property bases. Projected Capex total for the theme part pipeline from 2018 through 2025 is 280bn.

 Investors in the theme park space also need to understand the ongoing need to keep pop culture icons sprung out of film blockbusters as fresh as possible. The reason is the inevitable “aging out” of the biggest, most formidable themes. Disney characters such as Mickey Mouse made their first appearances in films in the 1920’s US and did not go global until the 1960s-70s. The company has reworked the theming several times.

 Yet its newest attractions are those like Star Wars Galaxy Edge due to go live at Disney Parks by Q3 this year. The first Star Wars movie debuted in 1977. In brief, children in the 8 to 16 year old demographic cohort back then are now in their fifties. A long list of sequels through last year have kept the imagery and characters refreshed through successive generations.

 What Disney has done well is to package and repackage its core intellectual property stars like Mickey Mouse, Donald Duck and Toy Story characters like the cowboy to keep younger generations eager to experience the live attractions. This is the core dilemma of investing in any sector heavily dependent on creativity.

 The takeaway: An investment theory even based on shifting sands can sometime produce powerful results. Facing a fading film business, Walt Disney literally went into deep debt to develop the first Disneyland in 1955. Linked to a television series, the park had a built in marketing engine. Yet by the early 1980s, the aging out of the company’s core characters and poor results from its efforts in non-cartoon films, the stock had taken a hit. The board brought in a new executive team that repurposed its intellectual property, reimagined its animation business and went on to acquire valuable properties from third parties.

 So our conclusion is that the heart of an entertainment company lies in the capacity to reinvent its character stable and repurpose its original form to a diverse downstream set of revenue producing units. That is what we see in HB.

 Even though they began business in 1994, as far as their diversification strategy goes, its early stages. If they succeed in their theme park initiatives and other related businesses beyond filmed entertainment, their valuation could surge given the starting point of an effective 5 year low.

 Part of the forward valuation consideration needs to be the partnerships thus far achieved with Jack Ma ,Tencent, and Evergrande. Do these sophisticated investors see a potential Disney model flourishing downstream?

So the question is this: Beyond standard investing metrics applied to HB, do investors need to consider a broader conception of how to value a company’s future. You can’t really measure a forward EBITDA number, or pluck a one year estimated PT out of what may spring from the imagination of the creative community where blockbuster ideas are generated.

 In the end, at its current low, HB may be a very cheap entry point if it can execute a “Disney-like strategy” over the next five to seven years as its theme park plans spread across the proposed 20 China cities.

 And the model is Disney. Every time the company appeared to run out of creative gas, it managed to find new inspired

properties within the minds of its key creative people.

So at its five year low we raise the question: Does the investment community see big rewards for HB exchanged for the risks implicit in the shifting sands of artists as opposed to projectable earnings metrics?