By Jarrett Banks
China’s booming property market has long tempted American investors and Shenzhen-based Nam Tai Property (NYSE: NTP) certainly fit the bill for the likes of BlackRock, Vanguard and State Street. But things took a downward turn three years ago when developer Kaisa Group Holdings Ltd. (HKG: 1638) bought 18 percent of Nam Tai’s shares and replaced the CEO, according to activist investor IsZo Capital Management, which owns 9.8% of the shares.
In an interview with CorpGov, IsZo Capital Founding Partner Brian Sheehy said since then the company has been a case study in mismanagement. IsZo recently sent a letter to shareholders asking for Nam Tai to “refresh” the Board of Directors. Nam Tai didn’t immediately respond to an e-mail. The full interview is below:
CorpGov: Why is there so much uncertainty around Nam Tai Property and Kaisa management?
Since Kaisa Group began accumulating its stake and seizing control of Nam Tai Property in late 2017, the company has been on a value-destructive tailspin due to dismal corporate governance, incessant self-dealing, non-existent shareholder engagement, bare minimum disclosures, and reckless capital allocation decisions. The company’s total shareholder returns during Ying Chi Kwok’s two-and-a-half years as Chief Executive Officer is nearly -57% (through day before we first went public on May 26, 2020). The Board, which established shown is packed with Kaisa affiliates and family members, appears to have spent far more time authorizing related-party fees to Kaisa than developing a strategy. To further underscore Nam Tai’s current disregard for non-insiders, it was recently announced in a single, buried sentence in the company’s 20-F filing that it purchased a $101 million site – equaling 80% of cash on hand – in Dongguan City. We believe Kaisa insiders cannot be trusted.
CorpGov: Is this fundamentally a difference in the way Chinese companies are run vs Western companies?
It’s important to realize that there are many well-managed companies based in China. While governance norms are different there, the best companies in China share many of the same attributes that the best companies in the West maintain: they have clear corporate strategies, they engage with their shareholders, they focus on creating value for all investors and they provide levels of disclosure that public market participants expect. We believe Nam Tai can become one of those companies if our slate is installed and retains a top executive management team in China. Our slate is in the process of assessing strong managers in mainland China to help turn around Nam Tai. We intend to take prompt, pragmatic action if our slate assumes control of the board of directors and is able to work with incumbents Peter Kellogg and Mark Waslen.
CorpGov: How does this compare with other high-profile mismanagement in US-listed Chinese companies such as Luckin Coffee?
We don’t use a broad brush to paint companies. There have certainly been instances of egregious mismanagement in China, but there are also plenty of examples of collapses and poor governance in the U.S. and Europe. Keep in mind that a number of notable U.S.-listed Chinese companies have performed quite well since going public. Unfortunately for Nam Tai shareholders, the company’s deteriorating performance is the byproduct of a self-interested and corrupt management team that is among the world’s worst. Kaisa has a well-documented and very public history of defaulting on obligations, mistreating investors and prioritizing its own interests. To be clear, though, Nam Tai isn’t a fraud. The projects are real and the company very valuable assets, which are unfortunately being pilfered by a self-interested manager/family.
CorpGov: Nam Tai’s shareholders include asset managers like BlackRock, Vanguard and State Street. Have you been in touch with the company’s largest shareholders about your special meeting request?
Although we can’t comment on interactions with specific shareholders, we’ve received strong and positive feedback from many investors. The shareholders we’re interacting with seem very enthusiastic about the potential for a special meeting and the opportunity to reconstitute the board of directors with our six-member slate. That’s exactly the reception we hoped for when we set out to obtain support from 30% of the shareholder base for a special meeting.
CorpGov: Why do you think there has been very limited communication from Nam Tai Property senior management to investors?
Management’s decision to perpetually ignore shareholders’ concerns has been a major red flag. We suspect that Mr. Kwok and Kaisa insiders don’t want to transparently communicate with shareholders because they have no strategy and are simply focused on enriching themselves. Based on our own experience and communication with other shareholders, it seems like Mr. Kwok is generally unengaged and rarely even visits any of the company’s projects. We’re looking forward to installing a China-based chief executive officer that is hands-on when it comes to implementing a value-enhancing strategy and engaging properly with shareholders.
CorpGov: Can you talk about the amount of value you think can be realized if you win and the Board is reconstituted?
Although Nam Tai’s shares trade at what we believe is a steep “Kaisa discount” today, we believe the intrinsic value of the company’s assets is well north of $20 per share. We’ve pointed out in the past that the company’s commercial projects previously had three independent valuations that ranged from $2 to $3 billion, suggesting per share value of $20 to $40 per share. Nam Tai should commission new valuation estimates if it now wants to talk down the value of its assets amidst our campaign.
The detailed strategic plan that our slate will release in the near-term includes specific steps to unlocking the value currently trapped within Nam Tai’s assets. Even if Kaisa tries to implement cosmetic changes or orchestrate a tender offer to undermine our campaign, we believe shareholders will focus on the significant long-term value creation opportunity being presented by our slate.
CorpGov: How does this compare to other cases where U.S. activists sought to reconstitute the Board of a company in China?
This is a relatively unique situation because we have the ability to call a special meeting of shareholders and we’re proposing to hold a vote to reconstitute a majority of the board of directors. We also believe the involvement of Kaisa – a publicly-listed company itself – and its dramatic value destruction makes this situation all the more unique. Most of the activist engagements that we’ve followed in Asia and China tend to be more conventional director nominations ahead of annual meetings. Fortunately, Nam Tai shareholders have the near-term opportunity to effect truly meaningful and sweeping boardroom changes.
CorpGov: What are the COVID-related issues?
There are pandemic-related issues that every responsible board of directors should be planning for right now. When IsZo began recruiting its slate, we factored in how important it is to have the right mix of individuals with current public company director experience and legal and risk management expertise. This has equipped our slate to identify local experts to support health-related and regulatory requirements at projects, monitoring COVID-19 statistics in relevant jurisdictions, and planning for how to manage Nam Tai’s portfolio of assets and maintain liquidity if a harsh market downturn ensues. We’re thinking about pandemic-related risks and the preservation of assets as if we were already in the boardroom.