4/20/2018 Value Investors Club / Treasure ASA (TRE ASA)

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Treasure ASA TRE ASA W

October 12, 2016 - 6:06pm EST by punchcardtrader (/member/punchcardtrader/74183)
2016 2017
Price: 17.00 EPS 0 0
Shares Out. (in M): 220 P/E 8 0
Market Cap (in $M): 457 P/FCF 5 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 457 TEV/EBIT 6 0

Description
In an environment with few bargains available (is this the perfect intro to a lousy write-up?), why not write about a low
correla on diversifica on into a Korean toll collec on business with cap ve blue-chip client? Only by owning it
indirectly through a recent Oslo spinoff is where the situa on becomes skewed in our advantage and we gain an event-
driven exposure up to 55% excess return rela ve to direct ownership.

Treasure ASA “TRE” is a simple Norwegian one-asset holding company, holding a 12% stake in publicly-traded Hyundai
Glovis, and trades at a 35% NAV discount*. Glovis is a toll collec ng company with stable fundamentals. Driven by
poli cal reform that takes a tougher stance against current chaebol prac ces, there is poten al for a liquidity event for
either all Glovis shareholders, or TRE alone. By holding TRE we expose ourselves not only to a possible takeover
premium, as we side with most of Hyundai heir’s worth in Glovis stock, but interes ngly a windfall if TRE would
liquidate a er it converts into a 100% cash vehicle.

While the Glovis price (086280 KS) might be discoun ng a HM restructuring probability, the Norwegian spinoff’s
discount has not moved on recent news of poten al restructuring.

*This post was wri en when the NAV discount was at 35%. Currently NAV stands at 36%.

Thesis

Background on TRE

TRE was spun off in June from the roll-on/roll-off shipping company Wilh Wilhelmsen ASA “WWASA” to “highlight the
value of both”. It holds a remaining 12% stake in public company Glovis as its only asset. Last month, a merger between
WWASA and peer Wallenius lines was announced. This sheds new light on the spin off, i.e. it could have been a
necessary precursor for the merger of the opco’s.

Parent holding Wilh. Wilhelmsen Holding “WWI” holds 73% of TRE post-spinoff. There has been selling pressure in the
first months as seen in the historical chart I compiled (see links for doc with pictures). The Glovis stake made up roughly
one third of WWASA’s value pre spinoff.

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WWI has been a strategic investor in Glovis since 2004: Glovis’ only compe tor for HM cars, EUKOR, has the inverted
balance of ownership Scandinavians/Koreans:

WWASA and Wallenius together hold 80% of Glovis’ peer EUKOR. The Scandinavians bought this stake from
Hyundai Merchant Marine in the Asian crisis a ermath
HM owns a remaining 20% of EUKOR
WWASA later bought a 25% stake in Glovis in ‘04, which got diluted to 20% a er its IPO
WWASA sold down 5% in 2008 and 3% in 2012. Both buying and selling by WWASA looks well- med in
retrospect

End of 2016, the SHA between Chung and TRE is to be renego ated (see page 57 of TRE’s prospectus) This SHA contains
a two-way first right of refusal and gives TRE two seats on the Glovis board (out of 9).

Glovis background

Glovis primarily ships Hyundai and KIA cars worldwide through roll-on/roll-off “roro” carriers. This is a small shipping
niche and rela vely stable as compared with other shipping segments, earning decent normalized returns.

Glovis was founded in ‘01 with most equity funding from the HM heir (Chung Eui-sun). Glovis secured lucra ve
contracts with HM (in which the heir retains control through a complex web of cross-shareholdings). Inflated related
party transac ons with Glovis were a means for the Chung family to bypass the high 50% inheritance tax in Korea, and
conveniently steal from minority shareholders, as the heir holds 23% of Glovis, but only 2.3% of HM. Glovis shares are
the heir’s single biggest asset.

The Korean government has taken a tougher stance towards Chaebol and passed a large legisla on package called the
one-shot rule (see links for images) to facilitate restructuring Chaebol (e.g. limit cross holdings and affiliated party
dealings). One example from this package is a tax on inflated related-party contracts in which legacy shareholders hold
more than 30% of the company. The Chung family was quick to sell down its stake in Glovis to just below this level.

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Glovis valua on

Glovis holds long-term cost-plus contracts to ship Hyundai/Kia cars. Contract includes fuel cost pass-through and
opera ng margins are stable. There is absolute volume risk as the contract only guarantees the percentage of total cars
exported. Cars are cyclical, affordability mi gates this a li le. HM comprises 60% of Glovis revenue. In 2015, Glovis
acquired an inland distribu on player in Europe as part of its strategy to become a more integrated supply-chain
partner.

Debt is cheap in shipping, and given that D/E is reasonable at 1.4 it makes sense to look at P/E & ROE’s.

  MUSD
Mkt cap 6
Cash & ST Investments 1
ST Debt 0,8
Current LT debt 0,2
Long term debt 0,8
EV 6,7
 
FY 16
Glovis (forecast) dec/15 dec/14 dec/13 dec/12 dec/11 dec/10
ROE 17% 13% 21% 23% 29% 27% 28%
         
         
FY16 (forecast) Glovis Glovis through TRE
P/E 11,8 7,7
EV/EBITDA 7,9 5,1
EV/EBIT 9,7 6,3
 
TRE rela ve to Glovis

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Last month Glovis gained 10% on media reports that Korea may amend the Fair trade law (which regulates Chaebol
cross holding structures) to force the unwinding of cross holdings within three years. As this unwinding would entail
much less family control over HM, it adds to incen ves to

1. do an -dilu ve transac ons:

merging with Glovis (main asset of Chung junior, holding 30% together with Chung senior)
injec ng the heir’s stake of Glovis into HM’ capital. This would be more accre ve for Chung, but also less
lucra ve (i.e. more difficult to defend an acquisi on premium for only his personal stake)
2. buying out other major shareholders

There’s a wide range of possibili es and intricacies however. We recommend reading the Merrill Lynch report (see
links) which lay out probable scenarios. The likely new holding company for the restructured HM Group is either Mobis
or Glovis. If cross holdings need to disappear, the HM heir will need to defend exis ng control and merging with Glovis
is only one op on. Buying out major shareholders is another and we think TRE is a main suspect, especially if Glovis
became the new holdco of HM (note that dividend payout at Glovis has doubled last 2 years).

We will now lay out scenarios and calculate a probability weighted IRR for TRE in excess of holding Glovis. The
probability of the bull case will be parameterized later, and we assume the remaining probability resides 50/50 in
baseline and bear case.

Bull case: cash offer

Although the probability that HM will do a transac on with Glovis in the upcoming year or two is high (my gues mate
is a probability weighted wai ng me of 2 years), it’s important to note that the probability of a TRE cash offer is
anything but sure. We allow another 6 months for TRE to liquidate in that case.

Assump ons on a cash offer:

1. p-weighted wai ng me Hyundai + Glovis restructuring = 2 years

2. probability of cash offer, condi onal on HM - Glovis restructuring event = 30 %
3. condi onal on cash offer, extra wai ng me for TRE to liquidate = 0.5 years

Bull excess IRR of 18.8% (54% total excess return in 2.5 years).

Baseline: no cash offer, fair discount

In the case a Hyundai restructuring never materializes in cash, mul ple scenarios can play out.

To start, Glovis shareholders could end up in the capital of a large Hyundai holding company. I suspect TRE’s plan in that
case would be to sell off those shares, as the transport arm is a strategic holding for the Wilhelmsen family as opposed
to the Hyundai Motors Group.

Another interes ng catalyst is the poten al scrapping of the Norwegian wealth tax. Currently, the Wilhelmsen’s have
tax incen ves to keep WWI’s and its subsidiaries’ share prices low. This tax is at 0.85% of assets and the ruling majority
has stated they want to scrap this tax. Addi onally, the spin off and merger at WWASA level might indicate star ng
efforts to maximize value. Therefore, even without M&A ac vity at Glovis’ side, the endgame for TRE might be
liquida on, share buybacks or a special dividend. We are an investor in the parent WWI as well, which trades at around
30 – 40% of (long dura on) asset value.

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In short, there is certainly poten al outside of the bull scenario. We argue that the NAV discount should narrow to 20%.
We believe 20% is a fair trade-off between low liquidity and poten al for other liquida on/value enhancing scenarios.
Fric on costs (see prospectus) play a minor role at a capitalized 0.5% warranted discount.

Upside in case of a 20% NAV discount should therefore be 23% (0.8/0.65 – 1).
assume this is reached in 2.5 years as well

Baseline excess IRR of 8.6%.

Bear case

Status quo of current discount: no excess return other than posi ve dividend carry discussed below.

Posi ve carry from dividend (all scenarios)

Assuming TRE returns only half of the 1.64% Glovis div. yield to shareholders via buybacks/dividends while we wait, we
are ge ng 0.44% excess returns per annum. However, there has been a Korean ruling that TRE needs to pay div. taxes
in Korea (i.e. double dividend taxa on for TRE holders), we therefore subtract the Korean div tax of 15% * 1.64% =
0.24%.

We add the net amount of posi ve carry 0.2% to the IRR of all scenarios.

Note that the dividend payout amount has doubled from ’14 to ‘16. This payout could rise even further as the HM heir
is perhaps raising cash for an upcoming event. Glovis growth poten al is also limited as EUKOR keeps on serving a small
but stable part of HM cars.

Probability weighted excess IRR over holding Glovis

Conclusion

Merits:

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excess IRR is quite high in many scenarios, especially rela ve to the risk of holding a low vola lity & low
correla on Korean cost-plus company
in a scenario of 30% cash offer probability and 2.5 year wai ng me for liquida on, one gets a P-weighted
excess IRR of 9% over holding Glovis
alignment with Hyundai’s heir poten ally engineering a takeout premium for Glovis

Risks

1. volume risk in the number of Hyundai/Kia cars exported

2. low liquidity of TRE

Trading recommenda on: if Glovis should move up fast (poten ally because of takeover specula on), Treasure should
rise faster (and vice versa)

h ps://en.wikipedia.org/wiki/Wealth_tax (https://en.wikipedia.org/wiki/Wealth_tax) (see Norway)

EUKOR deal: h p://www.joc.com/a er-eukor-deal_20030209.html (http://www.joc.com/after-eukor-

deal_20030209.html)

h ps://www. .com/content/a1a9df4c-d6c0-11e5-829b-8564e7528e54
(https://www.ft.com/content/a1a9df4c-d6c0-11e5-829b-8564e7528e54) (highly recommended)

http://ir.glovis.net/Common/FileDownload.aspx?
mc=122&dr=&fn=17June2015_Glovis%20Initiation%20BUY%20W300k.pdf&gb=E
(http://ir.glovis.net/Common/FileDownload.aspx?
mc=122&dr=&fn=17June2015_Glovis%20Initiation%20BUY%20W300k.pdf&gb=E) (highly
recommended)

h p://ir.glovis.net/Eng/IR/AnalystReports.aspx?page=1&sw (http://ir.glovis.net/Eng/IR/AnalystReports.aspx?
page=1&sw)=

h p://www.cornero erkshireandfairfax.ca/forum/investment-ideas/tre-treasure-asa/

h p://blogs.barrons.com/asiastocks/2016/08/25/hyundai-glovis-a-chaebol-restructuring-play/

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst
Liquidity event for Glovis shareholders in general

Liquidity event for TRE in par cular

Scrapping of Norwegian wealth tax

 
Restructuring at other Chaebol
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Messages
Subject question
Entry 10/13/2016 08:42 AM
Member lordbeaverbrook
this must be a PFIC... right?  if you are a US investor, how do you get around this... thanks.

Subject question
Entry 10/13/2016 12:50 PM
Member punchcardtrader
I reside in a EU country that doesn't have cap gains yet but will soon introduce them + similar rules concerning PFIC's so it
was interesting to read up on this..

FWIW, what I found is that

 - one can elect "Quali ed electing fund", i.e. agreeing to be taxed on current income and current cap gains as if this PFIC is
a US mutual fund. You'd be exempt of paying ordinary income tax on excess gains at the end of the ride. If I understand it
will & if feasible, I'd opt for this as most cap gain in a blue sky scenario would probably derive from TRE and not from
Glovis. However the PFIC should comply with IRS reporting rules to be able to elect this option.

 - you can sell TRE at the end of the tax year to bypass PFIC regulations (with its own disadvantages)

https://www.irs.gov/instructions/i8621/ch01.html#d0e216 (https://www.irs.gov/instructions/i8621/ch01.html#d0e216)

The QEF election allows a PFIC to be treated the same as a U.S. based mutual fund. Income or gains increase the
stock basis and are included in income. Any income is treated as ordinary income and a capital gain is treated as a long-
term capital gain. However, this also means the non-U.S. based company must comply with IRS reporting requirements.
This necessitates there being a large enough percentage of U.S. shareholders to convince the fund managers to fulfill
the IRS’s requirements.

https://moskowitzllp.com/Qualified-Electing-Fund-(QEF)/

Subject Re: question

Entry 10/19/2016 08:13 AM
Member coyote
Thnk you for the interesting idea. Just curious to know where you reside: Romania, Belgium, Poland, Croatia, Italy or
Germany? 

All the best

Subject Re: Re: question

Entry 10/19/2016 08:25 AM
Member punchcardtrader
Two hints: a country with many public holding companies (a handful similar to TRE which own only one security) & I looked
at Precia around the time you posted the idea ;) If you still don't know, I share this country with vanbr707 (judging from his
posts)

Subject Re: Re: Re: question

Entry 10/19/2016 12:08 PM
Member coyote

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Only the Netherlands comes to my mind (i.e. Apollo Alternative Assets owns only Athene, and I know some others). In
addition, vanbr707 might stand for Hans Van Breukelen, a legendary Dutch goalkeeper in the 1980s. :-) 

Additonal question: I guess Treasure does not own the ships and just charges for the tolls and rents the ships, is it?
Otherwise how could it have so high ROEs. 

Best

Subject ROE
Entry 10/19/2016 04:24 PM
Member punchcardtrader
Vanbr707 stands for a VIC username as well. The right answer has been upvoted, congrats. Although you are correct that
the Netherlands have a tax on a ctional capital gain of 4% which means it is not a real cap gains tax but a wealth tax. 

On ROE, 50% is chartered & 50% owned. The ro-ro sector has only a handful of players and long-term contracts are used.
Cheap asset-backed debt is another pillar intrinsic for shipping. This is why I use ROE instead of ROIC.

What I conveniently forgot to mention on this value forum - and at the risk of splurging out delusions - is that my long-term
macro view is unfavourable.

The following thoughts are along the lines of Charles Gave's book "Too Different for Comfort"
(http://gavekal.com/CRM/attachment.cfm?src=BOK&id=22), which I thought had very original ideas.

Convergence of manufacturing costs between continents-> raison d'etre of shipping? 

 - cheap labour will become less important as production becomes relatively more capital intensive ~ robotics/3D printing

 - capital costs ~ rule of law. I also see a convergence between emerging & developed on this front

 - energy costs will keep playing an important factor for car manufacturing but I think they will converge between continents
(similar to broadband overcapacity after tech bubble, in the latest oil boom a lot of energy infrastructure was built, including
LNG terminals, see the book The Energy World is at by Diego Parilla. I found this guy via Real Vision, turns out we are
alumni from the same energy school)

Mitigator demand for affordable Hyundai/Kia cars might still be booming in emerging countries for years, this is maybe
something we in the west might forget about when talking about the sharing economy (or will the ownership model be
skipped altogether?)

Subject Update Q4
Entry 02/11/2017 11:21 AM
Member punchcardtrader

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The board proposed

 - a dividend of 0.3 (1.72% yield @last price)

 - a buyback authorization of up to 10% of outstanding shares (note: the ceiling represents ~40% of free oat)

Assuming they buy back only 2%* of stock, this amounts to a total of 3.72% return of capital. At the current discount this
provides the Treasure ASA stockholders with an excess return of 1.6% p.a. over Hyundai Glovis to wait. 

*assuming they use all cash on hand, after deducting for the proposed dividend.

Wilhelmsen holding (WWI) cannot buy any Treasure ASA shares without triggering a mandatory offer, as it holds more than
50% of shares (73.5%). The only way they can raise their stake in Glovis without triggering a mandatory offer is through
share buybacks (as stipulated in Norwegian takeover code). In the unlikely event that TRE would exhaust its 10% share
buyback mandate it would get pretty close (83.5%) to the 90% threshold. I don't see any strategic advantages to a
privatization of TRE for WWI as it already has absolute control of its 10% stake in Glovis through TRE.

Glovis: the Korean opposition party is proposing a law that would pressure the family holder to sell down its stake from
29,9% to 19,9%. This is probably bad on balance as the family would be less aligned in a corporate restructuring event. On
the positive side this might be a carrot & stick for a quicker restructuring.

Subject Hyundai restructuring in the making?

Entry 03/21/2017 03:05 PM
Member punchcardtrader
As laid out in previous post, Hyundai Glovis has come down because of worries that the Chung family might have to sell
more shares & be less aligned in the future (opposition party proposal). The upside for Glovis, and esp. TRE, is added
pressure on the timeline of restructuring.

See below from yesterday.

Note that a merger like mentioned below would be a positive for TRE monetization, as the Wilhelmsen family is probably
interested to exit.

http://blogs.barrons.com/asiastocks/2017/03/20/hyundai-motor-restructuring-in-the-works/
(http://blogs.barrons.com/asiastocks/2017/03/20/hyundai-motor-restructuring-in-the-works/)

The catalyst was a new royalty payment deal. On March 17, Hyundai Motor (005380.Korea) said it would start collecting
brand royalty payments from affiliates Hyundai Glovis (086280.Korea) and Hyundai Steel (004020.Korea). The royalty
payments – 5 billion won from Hyundai Glovis and 8.95 billion won from Hyundai Steel – are tiny compared to Hyundai
Motor’s earnings, but this deal has “set the stage for royalty payments if the carmaker transforms into a holding company,”
wrote Samsung Securities‘ Esther Yim.

Hyundai Motor Group is facing increasing pressure to overhaul its

corporate governance and business structure due to poor performances at
most of its subsidiaries over the past four years, a shifting paradigm in the
auto industry, and rising pressure for economic democratization targeting
conglomerates. Thus, we expect HMC to restructure by splitting each of
HMC, Kia Motors, and Hyundai Mobis into holding and operating entities
and then merging the three holding companies. In this scenario, we
believe HMC and Hyundai Mobis have the most upside in that order,
considering rallies by those two firms should boost the value of the Chung
family’s stake in the final holding company.

 
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