@Collusion aka @Censorship aka @Anti_***,

Sorry to hear that your posts keep disappearing. You've implied someone exercising the i3 system administrator power to silence you.

That's your words. Readers like me have no way to tell whether it's true. I don't have such power nor connection. Whatever "collusion" that you may have imagined on my part can all be read in my prior comments. They are open for all to read!

Frequent i3 users also know how a post that has been deleted by system administrator looks like. The post does not disappear out of the thin air, just like when it's deleted by the user himself. Instead only the content is removed by the system administrator, marked with the message "Post removed." I don't see such sign in earlier comments. Check out other part of this forum you'll know what I mean.

Alternatively, it's possible that websites may have created safeguard measures that prevent newly created user accounts like yours from posting long messages right after account creation. I know certain websites have such control in place to prevent spamming. I suggest you write to the website support people to clarify.

Anyway, instead of getting distracted by your comments being removed, I look forward to your opinion and analysis in support of Scientex's offer.

@cbkia4896, yes, I just checked the transaction volume. 1,262,500 shares changed hands at RM2.71 or even RM2.72, bought by parties other than Scientex given that Scientex is barred from bidding above its own offer price of RM2.70. Today transaction volume is larger than the past three days combined. Scientex acquired zero share today.

Not sure if any of the substantial shareholders were involved. If they did they would have to disclose their position soon. There could be other funds or deep pocketed parties.

However, this may or may not be the sign that Scientex will update its offer price anytime soon. It could be just speculative buying as other market participants see that this privatization exercise is failing.

Even though I myself have topped up since the first day of the offer period (I've disclosed that in my comment earlier), my opinion is anyone without sufficient understanding and conviction on Daibochi's long term prospect may want to stay at the sideline. Who know how long the process could take and whether Scientex may announce no revision in offer price, at least for time being, so as to encourage short term holders to sell out.

Just now I read a comment from from yet another newly registered new user Censorship, claiming that his earlier user account anti_*** has been deleted. He accused manipulation of to suppress pro-Scientex view.
https://klse.i3investor.com/servlets/cube/post/censorship.jsp

Just when I got the time to reply, he has deleted his own comment.

This is my opinion. The arguments from both sides, whether in favor of the offeror (Scientex) or the aggrieved minority shareholders, should be most welcome as long as no abusive language is used. But there is no need to keep creating new user accounts for that purpose (Otherwise accounts could have been blocked for that reason, if they are indeed blocked).

Just disclose your interest for the benefits of all. Argue for all you can with numbers and reasons. Perhaps even come up with a valuation exercise to show that the offeror's price is fair. The healthy debate will benefit all, including myself.

No one should be paranoid about comments in this little forum could move the market! The market is more rational than a small group of retail investors. Even many of these so called billis are capable to think for themselves!

Wow. Another newly registered i3 forum user joining the discussion. Daibochi is getting popular. Welcome!

Note a big part of Daibochi's growth has come from the acquisition of Mega in 2019. Mega's earnings were immediately accreted to Daibochi's. This was the one off jump in revenue and earnings that was largely responsible for the recent growth story. Growth has mostly plateaued in the past 8 or 9 quarters since Mega's acquisition (partly due to the pandemic situation).

Still my compliment to the management and board then for the right acquisition decision and subsequent integration efforts. They have also embarked on major capacity expansion that should pay off in the next few years.

However, as in any major acquisition and expansion, it involves operational and financial risks. So the point is, after getting minority shareholders to share the risks, and now as the integration seems to be working out and risk receding, just when the capacity expansion is going to deliver results, the minorities are asked to get lost?

Do you mean the minorities should thank for a job well done by selling off their shares at an unfair price under the threat of delisting?

Don't the management and board members get paid for doing their jobs? Are they doing their jobs so well that those "ungrateful" shareholders should surrender their shares?

And now this is called a "bail-out"? Who has asked for the "bail-out" in the first place?

Just for disclosure again. While I'm a so called stubborn billis, rest assure I'm no mole of Apollo :)
You may check out my comment history. I'm passionate on many subjects, especially on the subject of fairness!

I read past comments to tailor my replies

Haha, have to ask Lim Peng Jin. Nobody knows. But long term investors wouldn't be bothered. How's your JAG?

@dragon328, the CIMB analyst has covered himself with the statement "a higher offer price from Scientex is an upside risk". So he will never go wrong :)

I just read the CGS CIMB report, written by the analyst who has abruptly changed his position after Scientex's offer on 9/13. To recap:

6/23: TP RM3.83 based on 18.6X CY22F P/E
9/13: TP RM2.75 after cutting FY7/22-23F EPS by 21-34%
9/23: TP RM2.70 based on Scientex's offer price.

Now the TP trajectory is complete.

The title of today report is "short of expectations". But further down it wrote "FY7/21 core net profit was 6% short of our full-year estimate". Usually analysts will consider results within +/- 10% of their forecast as within expectations. This is another example of conclusion driving the headline.

Supporting Scientex's offer, the report has added warning that "Even if Scientex does not manage to attain 90% of Daibochi’s shares, the former will not look to comply with Bursa Malaysia’s public shareholding spread, and investors could be stuck with illiquid shares"
(Note: Low liquidity concerns are more for the institution clients. Typical retail investors don't hold millions of shares and therefore can get in/ out without moving the share price)

But the analyst failed to notice that after two weeks of offer, until yesterday Scientex only managed to get a miserable 4.47% shares, increasing its holding from 61.88% to a mere 66.35%.

Besides, if the analyst is concerned about the low liquidity, why would he has recommend a buy call just three months ago while the public float only differ by a few percent?

@Investmon, you're welcome. I agree switching to another pure play flexible plastic packaging stock is a viable option too.

For me I feel that the short term reward of revised offer from Scinetex within the offer period (may extend to 60 days) is roughly balanced by the risk of offer lapse (price declines but still above pre-announcement level if players including Scientex buy on dip).

On balance, as I'm more focused on the longer term, I decide not to get out and in again. Besides my average holding cost is rather low. So I agree there is no standard answer as it all depends on individual's risk profile, holding period and level of conviction.

@Investmon, welcome to this discussion thread.

I'll refrain from saying anyone here has an ulterior motive. I'm just amused on why a typical Scientex shareholder will be overly concerned about the success of Daibochi's privatization. After all, as a subsidiary of Scientex, Daibochi's earnings are already rolled up to the parent's level and Scientex enjoys 2/3 of the fruit. According to Kenanga, even with 100% acquisition, the earnings accretion of this deal to Scientex is only 5%. If I were a Scientex shareholder I will rather pay more attention to issues like what does rising building material costs mean for its affordable housing segment, just for example.

Anyway for full disclosure, as you may have already guessed, I'm a Daibochi shareholder who will rather hold on for the long term unless the offer price is revised much higher to reflect Daibochi's long term growth potential. So my position is definitely biased. And I certainly hope that other minority shareholders will also reject the current offer and that my shares cannot be compulsorily acquired (compulsory acquisition is dead now anyway).

But still I welcome contrarian opinions, based on numbers and good reasonings, on why Daibochi should not be worth a lot more as I believe. A valuation exercise to show the contrary will be a good starting point. A healthy debate can help us to discover and estimate Daibochi's intrinsic value. It can be more useful than those independent advisor's exercise (TA has been appointed) that will come up with those "fair and reasonable" or "not fair but reasonable" conclusion.

Given Daibochi quarterly results today aren't so bad, and given only a miserable 193k of share (0.06% of total) changed hand after the results announcement, expect to get more advocacy for selling in the coming days!

Hope next time they will be backed with better logic.

Some valuation exercises would be good.

@Investor420,
First you argued that retail investors, your so called billis, should just sell and switch to Scientex. BTW you're not the first to argue it here.

When pointed out that your "big funds are restrained by liquidity" logic is wrong, you then argued, based on your speculation, that big funds are acting emotional. Oh I'm so sorry for their shareholders!

Then you put forward yet another argument "you don't see how great Scientex has been for the past 20 years", as if other investors don't know how to read share price charts.

Unfortunately your new logic is akin to Top Glove offering 10% higher than today market price to acquire Kossan or Supermax, arguing that Top Glove has been the greatest company for the past 20 years and therefore the smaller ones should sell.

If the great can always acquire the not so great at an undervalued price (your own words to dragon328), then Bursa will be left with just one company. The greatest one would have swallowed up all the not so great ones.

Actually the not so great Daibochi's share price has appreciated more than 1,200% over 20 years, split adjusted and dividends excluded. What Claire Barnes of Apollo in her blog, and myself too, have argued is that if Scientex is unwilling to offer a fair price, why don't it just leave Daibochi listed? We're happy with Daibochi's organic growth. Why the desperation?

Curious to see in your user profile that, as a self proclaimed Scientex investor, the i3 account has been created today. The first comments were to advise Daibochi retail investors to sell.

@Investor420, your logic is flawed.

The funds have liquidity issue to swap also means they have liquidity issue to sell Daibochi in the future if they don't take Scientex's offer now (they can easily invest the proceeds in stocks other than Scientex).

Yet the funds not only hold out, but have increased their holdings, doubling down their bets.

And now a smart alec comes here to ridicule other retail investors while getting his own logic wrong?

@dragon328, thanks for the analysis.

Yes, it's not as bad as feared given the quarter experienced many operational disruptions. I've expected earlier that they may do some impairments given this is also the last quarter of an eventful FY21. But that didn't happen. Still can't rule out in next quarter especially with the Myanmar operations.

@Syndicates, one possibility the management didn't declare dividends is not to complicate Scientex's privatization. According to Clause 4.1, any dividend within the offer period will be deducted from the offer price later. It may create unnecessary confusions and angers among shareholders who accept the offer and later find out they receive less than RM2.70.

If my guess is right, the dividend may be declared in the following quarter instead.

Claire Barnes also said "We found it very odd to read reports from brokers and press that appeared to assume this as given..."

I agree. For example, Dagang News looks silly now for not only regurgitating the hastily changed opinion from CIMB, but further portraying Scientex as a hero. What a joke.

https://dagangnews.com/scientex-grabbing-bull-its-horns-9056

As predicted last Sat, today The Edge comes out with yet another article on Daibochi. This time besides quoting the view of Scientex controlling shareholder Lim PJ, and the private investor and former investment banker Ian Yoong who last week used the pandemic year earning to reach his "12X EV/EBITDA fair value at RM2.70", The Edge also gives the space for dissenting shareholder Claire Barnes of Apollo.

Claire Barnes said "We took the view that if Scientex wishes to increase its stake at RM2.70, and the best-informed investors see good value here, it's also a buying signal for other investors who have less information ...
We agree with Scientex that the company represents excellent value at RM2.70, and hope that it will remain listed -- as per the assurance given by Scientex when it first bought the shares."

Well done for a more balanced reporting.

Scientex's ownership of Daibochi shares:
Date Holding Changes
Start 61.88%
14-Sep 64.22% 2.33%
15-Sep 64.58% 0.37%
17-Sep 65.32% 0.74%
20-Sep 65.61% 0.29%
21-Sep 65.88% 0.27%
22-Sep 66.02% 0.14%
23-Sep 66.07% 0.05%

The acquisition pace has slowed down considerably. There are few sellers now.

Meanwhile, Apollo and Samarang have slightly increased their share holdings from 5.06% to 5.10%, and 9.38% to 9.54% respectively.

But that is not the full picture. For defense, warrants can be converted to shares. Now consider the scenario where all warrants are converted. The maximum number of shares will be 327.372 million + 27.297 million = 354.669 million. Under this scenario, Scientex's ownership will be

Date Holding Changes
Start 57.45%
14-Sep 59.94% 2.49%
15-Sep 60.49% 0.55%
17-Sep 61.17% 0.68%
20-Sep 61.45% 0.28%
21-Sep 61.71% 0.25%
22-Sep 61.83% 0.13%
23-Sep 61.88% 0.04%

And Apollo's position will be

Date Holding Changes
Start 9.38%
14-Sep 9.38% 0.00%
15-Sep 9.53% 0.15%
17-Sep 9.98% 0.45%
20-Sep 10.19% 0.21%
21-Sep 10.19% 0.00%
22-Sep 10.19% 0.00%
23-Sep 10.19% 0.00%

Therefore by 20-Sep Apollo has already crossed the 10% necessary to deny Scientex's from acquiring above 90%. It has stopped buying after the date. This may have to do with the common practice where funds do not own more than 10% of shares in a company.

The buying above RM2.70 (for shares) and RM0.32 (for warrants) have come from investors other than Apollo, Samarang and Scientex.

Preying on Fear - Pirates of the Dai-bo-chi
https://www.apolloinvestment.com/F210916.htm

Couldn't put it better than Claire Barnes of Apollo!

Today filing shows that Apollo has further bought 1.6 million warrants. Its share of total warrant has increased from 9.4% to 15.3%, more than Scientex's latest control at 11.4%.

@Multibagger, thanks for pointing out.

I don't want to speculate on the intentions of analysts or even journalists. However while the report may sway some retail investors, some could have even sold already, there is zero impact on big players. The fact that long term shareholders like Apollo and Samarang have increased their positions clearly shows they have a different opinion.

I could be wrong. But I believe Scientex is a stuck with its RM2.70 offer now. Anyone familiar with the rules may correct me, but I believe an offeror cannot increase its offer price in the midst of an offer period. Otherwise it opens a can of worms since some retail investors have already sold at RM2.69/ RM0.32 based on Scientex's stated offer.

Not only that. As I recall in other failed privatizations, an offeror is not allowed to buy at a price higher than its original offer price within the next 6 months. So the soonest they can come back with a revised fair offer is 6 months later.

If my understanding above is right, anyone who plans to hold out need to be patient. This could be unfortunate not just for Daibochi shareholders and management, but also for Scientex. All just because of its original underpriced offer. If Scientex indeed believe there is further synergy to be derived from 100% ownership, its penny pinching is just going to delay that synergy for everyone involved. Not a smart move.

Nonetheless, the fact that any revised offer is at least half a year away doesn't bother me personally. Daibichi has strong fundamentals and is growing well. So I can be as patient as Apollo and Samarang :)

I also don't expect this will be the last time The Edge writes about the privatization. Look forward to reading more interesting stories in the coming weeks and months!

Former investment banker Ian Yoong said the offer, priced at 12X EV/EBITDA for financial year ending Jul 31, 2021, is fair.

The Edge does not mention Ian's basis of using 12X. However, why use financial year ending Jul 2021? Why not next year EV/EBITDA? FY2021 is the year with severe Covid disruptions, multiple lockdowns as well as Myanmar workers' strike. Does it mean the future will be like the past one year? If so many Bursa stocks can be shown to be way overvalued!

I checked up the historical EV/ EBITDA. The past 5 year average is 19.8X. Current EV/EBITDA is 15.3X. A simplistic calculation will show the value could be up to 30% higher if EV/ EBITDA reverts to 5 year average.

Today Edge Weekly edition reports on the acquisition. The article mostly repeats the lines of Scientex, and quoting Kenanga and CIMB reports as discussed before.

The cynical side of me couldn't help but notice how CIMB and Kenanga have independently arrived at their so called "fair" value through contradictory assumptions. Can't help but suspect analysts work their valuation backward from TPs they feel compelled to give.

Kenanga took the Bloomberg’s consensus (before CIMB update) 1Y forward net profit RM65.7m; worked out the consensus EPS as RM65.7m/ 327.37m = 20 sen; then slapped a 13X PE on it to get a "fair value" of RM2.60. Just 4% away from Scientex' RM2.70.

Why 13 times PE? It said industry peers' average is 15.5X. 13X because Daibochi lacks pricing power. How about the difference of 10 sen? That is the premium to gaining full control. Sound logical?

Now visit CIMB again. On Jun 23, CIMB prescribed a TP of RM3.83 based on 10 year average forward PE of 18.6X. But after Scientex's offer, CIMB slashed its next year EPS to 14.8 sen to arrive at RM2.75, but still recycling its 10 year PE logic. No surprise, the new TP 2.75 is close to Scientex too even though it's arrived from very different assumption than Kenanga.

If we apply CIMB's EPS of 14.8sen using Kenanga's 13X PE, Daibochi can be shown to worth only RM0.148 * 13 = RM1.92. Does Scientex overpay by 40%?

But if we apply Kenanga's EPS of 20 sen on CIMB's 18.6X PE, Daibochi's value is RM0.20 * 18.6 = RM3.72, 38% higher than current offer price.

What is the value of analysts?

Apollo and Samarang topped up their position to strengthen bargaining position against Scientex. Given at least 2 out of 3 of these funds have spoken out, Scientex can't get above 90% without changing its offer.

The Public series of funds may be doing the same. They have the privilege not to disclose their position since they are not substantial shareholders.

Unlike the last two days, all the shares at RM2.70 have been mopped up. Scinetex is not allowed to buy above RM2.70.

@Zackmeiser, thank you for sharing the MISC example. This is yet another case where minority shareholders could refuse to take the short end of the stick. Even giants like Petronas have to obey the listing rules which are there to protect all of shareholders.

BTW kudos to Scientex for keeping its privatization move in secrecy. It is also possible that the privatization plan has been worked out long ago (since borrowing facilities need to be arranged) but activated hastily given the temporary market weakness.

I said this because after looking at the Bursa filing. Most likely Mr. Choo Seng Hong who is the Scientex packaging COO also did not get wind of it. He has been selling down his Daibochi warrants in Jun, Jul and Aug. He could have almost doubled his gains if he were to hold on until today.

@Zackmeiser, this is my personal opinion. We just watch Scientex and the big players. We have the luxury of time to decide after they have made their move.

Based on Scientex's daily disclosure we can deduce whether the big players have sold to Scientex. Their holdings are large. Apollo >9%, Public >7% and Samarang >5%. We will know if such volume change hands. Besides Apollo and Samarang, being substantial shareholders, have to report their positions too.

Recall the offer period is 3 weeks. Scientex may extend it up to 60 days with advanced notice. You can choose to nothing now (assuming you don't want to top up). You can decide whether to sell at the end of offer period should all the big players cash out. Scientex is obliged to buy your shares at RM2.70 during this period.

For me, if ALL the big players sell and Scientex gets more than 90%, my shares will anyway be compulsorily acquired at RM2.70 as @Multibagger has pointed out. Limited downside for me.

If the big players don't sell, I will just let the offer period slips, top up further if price falls back to RM2.4 level. I then wait for Scientex's second offer at a better price.

It serves me well too if Scientex refuses to offer again. It has been my original intention to stay on with Daibochi before this acquisition announcement. I just let my holding grows.

@dragon328, reading your comments I have a feeling that Scientex "go cheap" strategy may backfire on them.

Listing rules dictate that Scientex cannot buy in the open market at price higher than the offer price. It also has to disclose its latest position. This is a handicap for Scientex.

Big boys who want to play against Scientex can simply buy at one bid higher at time of their choice while Scientex cannot. In fact that happened for the warrant on 9/14 where over 300k was bought just half a sen higher than the offer price of RM0.32.

Scientex has shown its cards by announcing for the the privatization now. Ironically, by following a "go cheap" strategy, it has reduced the downside risk for other competing parties. We will see whether this could end up being penny wise but pound foolish.

Last and current QR results will be unpredictable for many manufacturing companies either due to closure or restricted operation. Although Daibochi did not announce any closure, you may search Facebook where someone posted KKM closure notice imposed on its premise effective from Jun 19.

In July Astro Awani also reported 8 factory closure in the Ayer Keroh industrial area where Daibochi is located. Though I'm not sure whether it was one of the closed factories in July, the Ayer Keroh Kluster did hit the area hard, including at least one of its client. The cluster is like the infamous Teratai Cluster for Top Glove earlier. In fact I've suspected earlier that the recent month share price weakness could be related.

Anyway, short term investors who might be most agitated by a bad QR could have already sold out their position in the first two days of trading. With weak hands flushed out, whoever picked up as well as the big funds themselves will not let their decision be swayed by a single quarter result. The move by Scientex now has provided an important signal.

Not meeting the 75% public spread requirement is not such a big deal. As shared in my earlier comment, The Edge reported Bursa has taken a lenient stance in recent years. In fact you can find a long list of companies which routinely fail to meet the requirement, including companies of failed privatization attempts like FGV and CCB.

https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=PUBLIC%20SHAREHOLDINGS%20SPREAD&cat=&sub_type=&company=&mkt=&alph=&sec=&subsec=&dt_ht=&dt_lt=&per_page=50&page=1

Anyway even if there is a forced delisting by Bursa, it will drag on for several years. This is more than enough time for Daibochi to show its potential and for the share price to reflect accordingly.

@dragon328, I like your analysis on the transaction volume. After reading your comments I've checked up and worked out the math to get a glimpse on what is going on.

Mother share
9/14 - total volume 8,869,800 (2.71% of total shares). Scientex acquired 7,637,100 (2.33%)
9/15 - total volume 1,903,200 (0.58% of total shares). Awaiting filing on Scientex's acqusitiion

Warrant DAIBOCI-WB
9/14 - total volume 12,816,500 (46.95% of total warrants). Scientex acquired 1,200,700 (4.40%)
9/15 - total volume 991,000 (3.63% of total warrants). Awaiting filing on Scientex's acquisition.

As volume declines in the coming days, I agree with you that Scientex couldn't acquire sufficiently large number of shares in the open market. As discussed before, it's also unlikely to get most of the funds to part their shares at RM2.70 in order to reach 90%.

On 9/14 more than 1.2 million shares have also been bought by parties other than Scientex, including by small potato like me.

The warrant market is more interesting. There are 27 million outstanding warrants. If all converted they could add another 8% to the total share base of 327 million. Before current exercise, 95.79% of the warrants were outside the hand of Scientex.

On 9/14 alone, 46.95% of the outstanding warrants have changed hands. But 42.6% were picked by by other parties while Scientex only managed to acquire 4.40%. If the new warrant owners are a united lot, they will pose a challenge to Scientex's control. If converted it will dilute Scientex's efforts to consolidate. It's a cheap way (priced at RM0.32 instead of mother share at RM2.69!) to get some bargaining power against Scientex later!

My questions are who are these people and what could their game plan be?

The warrant has a strike price RM2.50 with a conversion ratio of 1:1. Bought at RM0.32, the total cost of converting to ordinary share is only RM2.82, just a little less than 5% of the current mother share price of RM2.69. Buying up warrant instead of mother shares to bargain with Scientex is very capital efficient!

Besides the downside isn't as large as I originally thought. The warrant expires in Jun-2022. Even if Scientex doesn't play ball, as long as Daibochi can deliver good results in the coming three quarters it's not inconceivable that its share price could return back to previous height exceeding RM2.82.

However to me that's still an element of gamble (which was why I topped up mother share but not buying warrants). But it strikes me when you said it could be big funds buying up the warrants. To think about it, who could be in a better position than Apollo, Samarang and Public funds to use warrants as a cheap way to strengthen their veto power over Scinetex's privatization?

If my guess is right, given Apollo and Samarang are substantial investors, they will have to disclose their positions in the coming days. But even if there is no disclosure, it still doesn't rule out the various Public funds which are below the disclosure threshold. Of course there is also the possibilities of other groups who could have gauged the intention of these big funds.

Of course this is just my speculation. Feel free to point out if there is any flaw in my deduction.

@Multibagger, any plan to update your view on Daibochi in your blog?

:)

It's up to individual investor's choice. But if you believe it's undervalued, you can have the choice of staying for Scientex to come up with a fair offer later, or staying invested as if nothing has happened.

Of course, as @iknownuts pointed out, there is also the choice of further investing alongside Scientex by topping up at RM2.69 now. I just did that albeit in a small way. The privatization by Scientex has now cleared my remaining uncertainty of Daibochi's value. It will be nice if Scientex offer to buy my stake back at a higher price later. Else I just grow with the company.

The key is, as explained in the previous discussion, it's will be difficult for Scientex to secure 90% with a mere RM2.70 offer. Even assuming they reach 90%, Scientex is still obliged to acquire the remaining shares at RM2.70. The downside is limited for me.

It's misleading to compare Daibochi with CCB on what could happen if privatization fails. Prior to Jardine first announcement in 2020, CCB share price has been declining for years to about RM1.2. CCB is also loss making. Its prospect is bleak after losing the wholesale distributorship of Mercedes Benz vehicles. Yet even CCB could see its share price bid up to 150% higher. Despite the failed privatization, the latest price is still at RM2.2 which is more than 80% higher than 2020 price.

Now compare with Daibochi -- 15 years of non interrupted quarterly profit; CAGR of net profit at about 10% in the last 10 years; growth picking up in the last 5 years (check out annual report); and RM100 million for 60% capacity expansion in FY20-21 is about to bear fruits. With or without the privatization offer the earning prospect is as good as before. Over time share price will follow earnings.

Besides the mere RM2.70 offer has reduced whatever little downside of a failed privatization. Assuming the exercise fails, the share price probably retreats to pre-offer time of about RM2.4. This was the level Samarang topped up in Apr.

One key difference is now investors know that Scientex wants to get the whole pie for itself at RM2.70. When price drops back to RM2.4 what should a rational investor do?

Yes, Daibochi is about to enter a high growth phase.

In fact, Daibochi's acquisition of MPP in 2019 has already contributed substantially to the top and bottom lines since FY2020. The borrowings used to fund the acquisition has been rapidly paid down from newly generated cash. Daibochi has an even healthier balance sheet today than pre-acquisition time.

Furthermore, to use the words of Chairman Heng Fu Joe, "Daibochi has embarked on its major expansion programme with capital expenditure of RM100.0 million over a two-year period from FY 2020-FY 2021 to expand our manufacturing capacity by approximately 60%. This gives the Group the capability to serve our customers and capture more growth opportunities alongside the expanding businesses of our regional clientele, onboard new customers, and further enhance our operating efficiency through adoption of newer and higher-output machines."

All else being equal, that extra 60% capacity invested now is going deliver a 60% growth in revenue and earnings in the next few years.

Scientex knows that. That is the reason it has chosen a moment of temporary share price weakness to privatize the company.

Not only the price is a bargain for Scientex, but it also represents a very safe acquisition. The riskier period was when Daibochi was ironing out integration issues and digesting MPP acquisition. That period of uncertainty already passed. Just when the prospects look bright, Scientex wants minority shareholders to get off the bus.

Mmm..., director DATO TAN GUAN CHEONG disposed all his shares and has zero holding now. Not nice.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3192742

I have also checked out on how public spread is defined. Under normal circumstances, the condition is 25% public spread and 1,000 public shareholders. As of 19 Oct 2020 Daibochi had 2,609 shareholders.

Public shareholders are defined as investors with less than 5% shareholding. While funds under Public Mutual are not designated as substantial shareholder (its holding spread across multiple funds), Apollo Asia Fund Ltd. and Samarang Asian Prosperity each holds above 5%.

But the shareholding of institutions, also regarded as a “collective” investment scheme, can be regarded as part of the public float. Therefore I believe Apollo's and Samarang's holdings are considered as part of the public float.

More importantly, as the article below explains, Bursa Malaysia has been taking a more relaxed approach on public spread. Rightly so since the number of public listed companies in Bursa has been stagnant in recent years.

https://www.theedgemarkets.com/article/more-flexibility-public-spread-listed-companies

@Multibagger, thanks agin for sharing the story of HLCAP before it was delisted (and now relisted).

There are a few lessons I draw from your article.
1. Dr Yu is a long term investor who is willing to get locked up in a good company. I think his patience is more important than his deep pocket.

2. The invested company must have good business fundamentals. In this case HLCAP which is into investment banking, fund management and stockbroking generate synergy with other parts of the Hong Leong empire. Similarly Daibochi is a good business which is synergetic with Scientex.

3. The return for holding out for the right investment can be substantial. The share traded at RM1.2 before Quek offered to take private at RM1.71. The holdout pushed the price up to as high as RM14.5. Even those who got locked after the delisting in 2015 could escape at above RM8 when it was relisted in 2020, which was 4 times higher than the offer price.

4. Most importantly, it took more than 2 years from late 2013 to early 2015 before HLCAP was eventually delisted. Applying the same lesson here, there could be many opportunity to escape for speculators and investors alike. For Daibochi today is just Day 1!

@dragon328, analysts have many considerations.

For example, if he keeps the TP at RM3.83, he may be concerned that it looks contradictory when advising clients to take up the offer at RM2.70. So may be it's safer to set a lower TP first. Words like business adjustment processes, which nobody can understand what it means, can be used to justify the new TP.

For me a better way to handle this is to work out the TP based on true business fundamentals. Later on if the analyst wants to urge his clients to take up the offer, he could argue for it based on another set of reasons like liquidity issue or delisting lists. This way will be far more transparent.

But what is important is, based on pre-announcement consensus, the offer price represents a FY22 forward PE of about 14 times, as compared to past 5 year average of 20.5X and 10 year average of 18.6X.

Shareholders will have to judge for themselves
1. Is 14X forward PE a good enough offer?
2. Among Apollo, Samarang and Public, how likely will at least two of them also agree that the offer is good enough, and thereby parting their shares to clear the way for Scientex to acquire above 90%?
3. Even if 2 of the 3 funds above sell out, how likely will some other deep pocket investors/ institutions increase their stake to stop Scientex from reaching 90% without offering a higher price later?

I just read the latest CGS-CIMB report today. In the previous report dated Jun 23, the analyst Kamarul Anwar assigned a TP RM3.83 based on 10 year average PE of 18.6X for CY22.

In his report today the TP has been miraculously adjusted to RM2.75, just 5 sen above Scientex's offer price of RM2.70. The valuation basis is still based on 18.6X for CY22. But projected EPS has been adjusted downward by citing various reasons like shipping constraints, rising raw material cost.

Didn't he notice the same condition exist when writing his previous report less than 3 months ago? Besides these problems are not firm specific. They affect all players including Scientex. Besides these are likely to be temporary challenges.

He also cited Scientex's rationale of taking Daibochi private to “meet the stringent requirements of multinationals and local prominent brands, who are increasingly reliant on suppliers that are equipped with good risk management and business contingency plans with the capacity and capability to provide reliable, dependable, and quality products on a consistent basis.”

Therefore he opined that there will be a lot of adjustments needed in Daibochi’s cost structures and business practices to comply with its end-clients' needs, like investing in risk-mitigation factors for its facilities.

But has Daibochi financial health deteriorated drastically since previous report published in Jun 23? Let's look at balance sheet and cash flows over the past 5 years.

For period ending in Dec 17, Dec 18, Jul 19 (new financial year), Jul 20 and Apr 21 (latest quarter reported), Daibochi's gross debt to GDP ratio are 31.5%, 31.7%, 27.2%, 28.2% and 21.0%. It has actually trended lower!

Including cash, the net debt to GDP ratio is even lower at 23.2%, 26.9%, 19.1%, 17.9% and 14.3%. Trended lower again.

The average monthly net cash flow from operating activities during these periods are RM2.4m, RM1.5m, RM4.0m, RM10.0m and RM5.6m. Cash from operation has been growing fast.

In short Daibochi has a healthy balance sheet and is getting better.

In contrast, looking at Scientex's latest balance sheet as of Apr 21, Scientex's gross and net gearing are 33.9% and 30.1% respectively. The gearing is in fact higher than Daibochi. So I'm puzzled by the rationale used in CGS-CIMB report today to cut its EPS projection.

Or more likely has the Scientex's offer price influenced the analyst's TP? The disclaimer can be found in the last sentence "Scientex raising its takeover offer prices could re-rate the stock"

After these studies, not only that I'm clear that I won't sell, I just placed an order to top up at RM2.69 based on reasons mentioned in previous comment.

The Kuans will not be bothered by short term share price fluctuation. Harta does not need to raise capital from the market. Why do they need to talk up their share price or perform gimmicks for that purpose?

They want to attract long term investors. It's better to be truthful to the shareholders. Those who look for quick profits will jump ship now. Whoever remain or the newly joined are prepared for a tough journey.

Besides, if they don't tell the truth, the share price will still catch up sooner or later as coming quarter results are released. Keeping quiet could not change the business environment where competition is heating up.

@rl68, I suspect Sri Trang has a much lower operating margin because it has major exposure to non-glove segment i.e. natural rubber supply chain. While other glove companies also have non-glove business, the contribution is smaller.

The current data may be too volatile to draw good comparison. However as ASP normalizes and margin declines in the next few quarters we might be able to differentiate their strengths. Pre-Covid Harta has the highest margin among them.

Among the values of Daibochi is its stable MC client base. Its MNC clients include Nestle, Mondelez International, Pepsico, Hershey's, Dutch Lady and Ajinomoto. They are in the stable consumer staple industry. Daibochi has built up the base before Scientex's acquistion in 2019. Otherwise why would Scientex venture downstream in 2019 to acquire this client?

Another point is Daibochi has recently acquired Mega. This has complimented its portfolio as Mega caters to non-MNC clients.

Personally I prefer Daibochi to Scientex despite Scientex's share price growth in the past. I see the downstream converter business as the more valuable part of Scientex's portfolio.

Besides I like simple business. Investing in Scientex mean buying not just its plastic packaging but also the property business too. I would rather hold Daibochi and separately investing in a pure property play of my choice.

Thanks Multibagger for the useful info on FGV scenario. The third scenario mentioned by CGS-CIMB is the key. Even if Scientex increases its holding to near but below 90%, Daibochi cannot request for delisting if more than 10% of the minority shareholders are against.

Next is the guessing game of the intention of the few major minority shareholders. As shown in the shareholder list of the past annual reports, all of them have been with Daibochi longer than Scientex. None of them took up Scientex's offer in 2019.

Public Islamic Opportunities Fund first appeared as a shareholder in 2010 with 1.71%. The latest annual report shows this has grown to 7.34% under four separate Public funds.

Apollo Asia Fund Ltd first appeared with 2.47% in 2011. It has grown to 9.38%. It has never reduced its stake. From the fund website it seems to be a long term patient capital. The manager Claire Barnes lives in Malaysia. She probably understands the value of Daibochi as much as Scientex.
https://www.apolloinvestment.com/

Below was the 2019 quarterly report where she wrote about Scientex first acquisition.
https://www.apolloinvestment.com/F190107.htm

Samarang Asian Prosperity inherited the stake from Halley Sicav Asian Prosperity after a merger in 2017. The fund first appeared with 2.44% stake in 2012. Over time it has increased to above 5%. According to Bursa filing, its shareholding briefly dropped below 5% in 2020. But it added back in the RM2.4 to RM2.5 range in April this year.

Based on the past behavior of these three funds, I can conclude that they are long term shareholders. If they didn't sell in 2019, it doesn't make sense for them to sell in 2021 at an unattractive price given Daibochi's fundamentals remains healthy (else Scientex will not up its stake). Of course there could be non-investment related factors like raising cash to meet redemption or acquiring better opportunity. But given current market condition the likelihood is low.

So my conclusion is first these funds are unlikely to sell at RM2.70, and second Scientex cannot reach 90% without getting two out of three of them to sell. The threat of delisting is not easy to carry out as Multibagger has shown.

Personally not only will I not sell my shares, but I consider opportunistically to top up at RM2.69. At worst I have to sell back at current price or hold it for long term. The upside is Scientex may give a fair offer if it's really keen to acquire full control.

What could be the possible scenarios if Scientex increase its holding above 75% but below 90%?

Rule 8.02 of Chapter 8 of the Listing Requirements issued by Bursa Malaysia (“the Exchange”) stipulates that a listed company must ensure that at least 25% of its total listing of shares are in the hands of the public shareholders.

Daibochi may still apply to the Exchange for acceptance of a lower spread. So the next question is will Daibochi just simply allows itself to be delisted, which is against minority shareholders' interest but Scientex probably doesn't mind?

Any precedence?

Scientex's offer is inadequate.

All the three analysts who follow Daibochi have buy call on it. Their TPs range from RM2.90 to RM4.04. They are all higher than Scientex's miserable RM2.70.

The other way to gauge is to compare against the past 5 years average forward PE of 20.5X. Based on FY22E EPS of 19 sen, Scientex's offer price implies a forward PE of only 2.7 /0.19 = 14.2X. The offer is 31% below the past 5 year average. At the 5 year average of 20.5X the offer should be worth RM3.9.

Moreover just by paying the average is not enough. Acquirers usually pay a premium to gain complete control.

Obviously Scientex is taking advantage of the current, temporary low point. Shareholders should simply reject its offer.

There are many levels of Chinese governments. Glove companies like Intco receive support from local governments which are only too eager to bring in investment and employment.

The implicit subsidy comes in several forms. Take the example of investment agreement signed between Intco and Pengze county government. The county government offers 800 acres of industrial land at the price of CNY 40,000 (RM26,000) per acre. In comparison, Harta pays MoF RM228.7 million for 250 acres at Bukit Kayu Hitam, or about RM0.91 million per acre.

https://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=300677&id=5938481

Like Malaysian glove fans, Chinese glove fans believe their side have the cost advantage and can remain profitable at sub-USD20 nitrile ASP. They claim advantage in NBR supply (new supplies have come online), tax incentive, secured freight arrangement among others. As a proxy to the cost structure I look up the quarterly reports. In the latest quarter Intco has 64% operating margin versus Harta at 73% and Top Glove 63%. So they are in the same league. A more accurate comparison can be made after ASP normalized.

Nonetheless like many I have confidence in Harta's long term prospect considering its efficiency, innovation, culture and management. However I'm also prepared for a rough ride in the next few years. Even if the Chinese fails to further expand market share, at minimum they can sell aggressively and suppress everyone's margin.

Treasurehunt has rightly pointed out the wildcard is the expiry of Section 301 exemption. But also need to consider while technology blockade receives bipartisan support, many within Biden's circle view the tariff war as a mistake as the bulk of the tariff have actually been passed on to the American consumers. Lets wait and see.

@bang_miskin, before the pandemic it was hard for Chinese competitors to secure capital to fund expansion. As profit margin was only single digit even for Malaysian leading firms (except Harta) the payback period was too long.

But the pandemic and ensuing fat margin has changed the calculation. In the short term the Malaysian glove industry enjoys a windfall. But this has also opened the door for competitors everywhere. The Chinese poses the most serious threat due to their industrial might and implicit government subsidy.

Do the Chinese expand aggressively because they have the insight that ASP will remain elevated in the future? I don't think so. I agree with treasurehunt's comment. The Chinese are prepared to price below cost if necessary. They hope through their industrial might, the newly established economy of scale, and government's backing, they can displace Malaysian's top position and dominate the market.

It remains to be seen whether they're capable. I'm not clear about their cost advantage as compared to the Malaysian especially Harta. But intense competition could happen in the interim period until inefficient producers get pushed out.

We refer to the Company’s latest update as announced via the Quarterly Report of the Company on 25 August 2021 with regard to the proceedings by the Company’s wholly-owned subsidiary, Allianz General Insurance Company (Malaysia) Berhad (“AGIC”), against Virginia Surety Company Labuan Branch.

The Board of Directors of the Company wishes to announce that the Court of Appeal of Malaysia had on 3 September 2021, dismissed AGIC’s appeal against the Kuala Lumpur High Court’s Decision delivered on 28 June 2019. (The High Court had on 28 June 2019 dismissed AGIC’s application to challenge the Award of the Arbitral Tribunal dated 8 February 2018).

As the matter involves the application of fundamental principles of insurance and reinsurance law, AGIC is in consultation with its legal advisers on its legal position and the next steps in relation to this matter.

This announcement is dated 8 September 2021.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3191232

According to quarterly report, total fair value gain is 49m in 2Q21 versus 368m in 2Q20. Adjusted for FV effect, PBT should be 158m in 2Q21 versus a loss of 120m in 2Q20. Fair to say YoY performance is good? But probably isn't a surprise since MCO 1.0 fell on 2Q21.

But on QoQ basis this quarter isn't as good. ANP and NBV also decline. However MCO 3.0 fell on 2Q21.

The lockdown effects have made it difficult to assess its underlying performance.

Not just Allianz. AIA Life has also done well in Malaysia. Refer to slide 13. During 1H2021, VONB in Malaysia increased by 89%. It seems that life is doing very well despite current economic situation.

https://www.aia.com/content/dam/group/en/docs/press-release/2021/1H2021%20Analyst%20Presentation%20Final.pdf

The other surprise for me is insurance companies hold a lot more capital than regulatory requirements. In Malaysia LPI capital adequacy ratio (CAR) exceeds 400%. In Singapore United Overseas Insurance is 449%, and Prudential is between 335% to 400%.

Why so much capital? Do these players see a lot of growth potential to underwrite new businesses so would rather hold on to the capital than returning to shareholders?

There was an article on last Sat The Edge weekly which interviewed the Great Eastern group CEO Khor Hock Seng.

According to Mr. Khor, general insurance, with the right distribution and capabilities to manage products well, can be reasonably profitable. On the other hand, life requires more capital, so from an internal rate of return (IRR) basis, general insurance may be better. For general insurance, profit is evaluated yearly and not on future profits as life insurance is. But The Edge also mentions that in terms of absolute profit, though, life is higher than general insurance.

I'm not sure whether Mr. Khor is speaking about Singapore situation or insurance in general. As I understand the Malaysia GI space is competitive. But if GI really offers a better IRR, does it mean shareholder capital is better spent in expanding the GI business?