Monday, 25 February 2019

Chinese Stock Set to Double After Deal

Chinese stocks were hot again on Monday, led by China Internet Nationwide Financial Services Inc. (CIFS), which was up 119%. Our pick China Recycling Energy Corporation (CREG), which we highlighted in our article "Funds are Buying Up CREG in Expectation of a Run" last month, rose 36%. A new Chinese pick came onto our radar today as Phoenix New Media Limited (FENG) rose 32% to $4.75 on 2 million volume after announcing a Letter of Intent for Sale of Investment in Yidian. We think that FENG should double from here based on this transaction. We are up to 810 followers despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can follow our blog by clicking the follow button on the top of the left hand panel. You can also follow us on Twitter @StockTradePicks. We have over 3,600 followers on Twitter as well.

FENG is a pretty well known internet content provider in China and most of its business comes from ad revenue. Its market cap is around $345 million so it is larger than our usual picks but has a fairly small float of 28.75 million shares (of 72.71 million total outstanding) because insiders and institutions own most of it. So it has potential to move wildly like a smaller stock. Changing rules in the country in 2018 led to a difficult year financially for FENG. Revenues were down and the company went from net profits to net losses. This is also reflected in the stock price which has dropped from over $10 in 2014 to where it is today. However, this sale of Yidian represents a significant milestone for the company that has been talked about for a while and it should head back close to $10 on this excellent news.

From FENG's press release:

BEIJING, Feb. 25, 2019 /PRNewswire/ -- Phoenix New Media Limited ("Phoenix New Media", "ifeng" or the "Company") (FENG), a leading new media company in China, today announced that it has entered into a binding letter of intent ("LOI") with a proposed investor (the "Proposed Investor") for the sale of 32% of the total outstanding shares of Particle Inc. ("Particle"). Particle owns Yidian Zixun ("Yidian"), a rapidly-growing personalized news and lifestyle information application in China that allows users to efficiently define and explore individualized content over mobile devices. The Company currently owns approximately 37.63% of the total outstanding shares of Particle on an as-if converted basis and is expected to own approximately 5.63% if the transactions contemplated by the LOI are completed.
Under the terms of the LOI, the Company will commit to sell and transfer 32% of the total outstanding shares of Particle to the Proposed Investor and its designated entities (the "Proposed Buyers") for a total consideration of US$448 million in cash, reflecting a preliminary valuation of Particle at US$1.4 billion. The Company, the Proposed Buyers, Particle and other parties as applicable are expected to execute definitive agreements for the proposed transactions (the "Definitive Agreements") on or before March 22, 2019 or other deadline agreed by the Company and the Proposed Buyers. Completion of the proposed transactions will be subject to certain closing conditions (the "Closing Conditions"), such as approvals by the board and shareholders (if applicable) of the Proposed Buyers, Particle, the Company and the Company's parent, Phoenix Media Investment (Holdings) Limited, related approval of The Stock Exchange of Hong Kong Limited, and the delivery of valuation result of an independent valuation firm. There is no assurance that any Definitive Agreement will ever be entered into or that the proposed transactions will ever be closed.
Pursuant to the LOI, the Company has already received a cash deposit of RMB100 million (the "RMB Deposit") from the Proposed Buyers. According to the LOI, the Proposed Buyers shall pay the Company another cash deposit of US$100 million (the "USD Deposit") in two installments with the first installment of not less than US$50 million due on February 28, 2019 and the second installment for the remaining amount due on March 5, 2019. The Company will refund the RMB Deposit to the Proposed Buyers within one business day after the receipt of the first installment of the USD Deposit, but will be entitled to terminate the LOI and keep the RMB Deposit or the first installment of the USD Deposit as applicable if the first or second installment of the USD Deposit is not paid on time.
If the Company unilaterally decides to terminate the proposed transactions after receipt of the USD Deposit, the Company will refund the USD Deposit to the Proposed Buyers and pay liquidated damages to the Proposed Buyers. If (i) the Definitive Agreements are not entered into on or before March 22, 2019 or other deadline agreed by the Company and the Proposed Buyers due to reasons not attributable to the Proposed Buyers, or (ii) the proposed transactions fail to close because any of the Closing Conditions is not satisfied before the mutually agreed deadline, the Company will refund the USD Deposit to the Proposed Buyers together with interests. Except as described above, the deposit will not be refundable, and the deposit together with accrued interest will be applied towards the purchase price to be paid by the Proposed Buyers upon closing of the proposed transactions.
The Company agrees to delegate all of its rights as a shareholder of Particle (excluding economic interests) to the Proposed Buyers and cause its representatives on Particle's board of directors to delegate all of their rights to the Proposed Buyers after the execution of the Definitive Agreements. Upon the payment of the full purchase price, the Proposed Buyers will be entitled to appoint two directors of Particle to replace the two directors appointed by the Company.
"With the Letter of Intent now reached, we are proud to announce that an important milestone has been achieved," said Mr. Shuang Liu, Chief Executive Officer of iFeng. "Yidian has attained tremendous user base and forged remarkably close relationship with leading Chinese handset manufacturers. We are confident that Yidian will generate a handsome return on our investments. We also expect that our remaining interests in Particle will allow us to share in any further growth of Yidian. The significant cash infusion from the proposed transaction will help fuel our own growth engine and expand both our product line and content through strategic investment opportunities."
This deal is still in the LOI stage, but it is expected to close within a month. So there will be a constant dialog of news around it representing positive catalysts as the closing date nears. FENG will be getting its first $50 million USD installment by February 28th and second installment by March 5th. The deal could end up being cancelled by FENG but in the unlikely event that it does that, it will likely be due to a superior offer. Based on the quick timing and good valuation for this deal, we think there is a high chance that it will close in the specified time frame.

FENG has been waiting to conduct this transaction for a while, and now that it has, it becomes significantly undervalued, even after the move up today. FENG will be getting $448 million for a 32% stake in Yidian and still own a 5.63% stake.

The value in the company once this deal is completed is broken down as follows:

  • $448 million in cash, or $6.16 per share based on 72.71 million shares for the 32% stake in Yidian.
  • The remaining 5.63% stake in Yidian is worth $78.9 million based on a $1.4 billion valuation, or $1.08 per share.
  • FENG's balance sheet as of September 30, 2018 held the USD equivalent of $290 million in current assets and $137 million in liabilities for working capital of $153 million. This works out to $2.10 per share. 

The total value of these three components is $9.34, or about double of FENG's $4.75 closing price on Monday. Even if you don't think that FENG is worth over $9.00 because it has lost money in 2019, it should be worth at least the cash it will receive in the deal of over $6.00. We have purchased shares and anticipate a steady rise during March as the initial deposit is received and the deal closes.

Disclosure: We are long FENG

2019 got off to a reasonable start in January for microcap stocks as the market in general was bullish for the month. There were a lot of stocks that spiked 100-500% in a matter of one or a few days. As we look towards the rest of 2019, we have to figure out what's next for microcap stocks? TradeMiner identifies seasonal trends and market cycles, the Penny Stock Prophet and Microcap Millionaires finds the next big small cap plays in various industries while Addicted to Profits makes trades from a Canadian perspective.

There are also some good books available on microcap stocks and day trading such as:

Mastering Microcaps: Strategies, Trends, and Stock Selection (Bloomberg Professional Library)

The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks

Microcap Magic: Why The Biggest Returns Are In Stocks You've Never Heard Of

How to Day Trade for a Living: A Beginner’s Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology

How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology

A Beginner's Guide to Day Trading Online (2nd edition)

Stock Investing for Beginners: Marijuana Stocks


Here are some other good stock market resources. This includes technical analysis and day trading, dividend stock investing, gold and commodities, sector rotation, options trading and microcap trading strategies:

The dividend stock report from dividendstocksonline.com

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