8I Holdings – Another outsize gain

In earlier post, we showed you how 8I Holdings turned a 1.5m investment into 40m worth in 11 months. This time, again, no surprise, 8I turned a 2.3m investment into a 12m profit in 1 year.

Initial investment: 2.33m

In April 2015, 8I bought 49.9% of Velocity Holdings Pty Ltd (“Velocity”) for A$2.33m. At first, it may sound straight forward. But, the footnote in 8I’s FY16 annual report may confuse you a little.

Its FY16 annual report explained that 8I’s subsidiary acquired 100% equity interest in Fusion 462 Pte Ltd, Oxford Views Pte Ltd and Vue at Red Hill Pte Ltd (the “Velocity Group”) for A$2.33m. The Velocity Group together owns 100% of Fusion 462 Pty Ltd, Oxford Views Pty Ltd and Vue at Red Hill Pty Ltd.  Subsequent to the acquisition, 8I swapped all of its interest in Fusion 462 Pty Ltd and Vue at Red Hill Pty Ltd for 49.9% stake in Velocity Holdings Pty Ltd. 8I gained S$1.67m from the share swap.

Note that those companies mentioned above with Pte Ltd are registered companies in Singapore, while those with Pty Ltd are registered in Australia. They are separate entities sharing the same name (e.g. Oxford Views Pte Ltd vs Oxford Views Pty Ltd). These registered companies in Singapore (the “Pte Ltd”) owns 100% of those registered in Australia (the “Pty Ltd”).

What I don’t understand is how the share swap could resulted a gain of S$1.67m. The initial investment was only A$2.33m. Assuming AUD and SGD have exchange rate of 1.0 for simplicity (the actual is really close to 1.0 now), then the gain of S$1.67m is 71% return on investment capital of S$2.33m. This was already highlighted in my earlier post. So, there was nothing new.

What’s new is that 8I sold the stake in these companies for an outsize gains again.

Profit: 12m

In June 2016, 8I sold 78.6% of its 49.9% stake in Velocity for S$3.085m. The buyer is Labelle Capital Inc, a venture capital company financed by approximately 200 investors, many of whom are minority shareholders in 8I.

Next, 8I also sold 100% of its stake in Oxford Views Pty Ltd (“OVPL”) for S$10.58m. The buyer is Crescenta Investment Ltd, an investment company financed by approximately 360 investors, many of whom are minority shareholders of 8I.

Notice what’s suspicious?

Here, we list them down:

  1. In April 2015, 8I bought 49.9% stake of Velocity for A$2.33m, valuing Velocity at roughtly A$4.67m. In 15 months, it sold 78.6% of its 49.9% stake (or 39.22% of Velocity) for S$3.085m, valuing Velocity at 7.86m. In 15 months, the value of Velocity rose by 68%.
  1. OVPL was sold for S$10.58m. Wasn’t OVPL part of the purchase in 8I’s initial investment of 2.33m? Its annual report said so. Sale of OVPL for S$10.58m is a huge gain from the initial investment of 2.33m. If OVPL is not part of this initial investment, then what’s the initial cost of OVPL?
  1. In 8I’s organization chart, OVPL is separate from Fusion 462 Pte Ltd and Vue at Red Hill Pte Ltd. Therefore, it seems to me that OVPL is not part of Velocity. In a separate document detailing the disposal of OVPL, it mentioned that OVPL operates through joint ventures with subsidiaries of Velocity and is entitled to receive 50% of the profit from the property development projects in which it has invested. It achieved unaudited revenue of S$1.2m for period 1 July 2015 to 31 March 2016 (9 months) with net profit S$0.8m. As at 31 March 2016, in the balance sheet, it has net total assets of S$0.2m. So, after net profit of 0.8m, the net assets is just 0.2m, implying that it was negative before this net profit.
  1. OVPL, with net assets of just 0.2m, was sold for 10.58m. That’s P/B of 52x!
  1. OVPL has developing properties with a subsidiary of Velocity in Brisbane with a combined gross development value (GDV) amounting to A$11.3m. If the whole property development has GDV of A$11.3m, how can OVPL be worth 10.58m? GDV describes the estimated value that a property development would fetch on the open market if it were to be sold in the current economic climate. To derive profit, we will take GDV and subtract construction cost, land cost, and other fees, such as marketing, legal, etc. The profit to be derived from GDV of 11.3m will certainly be much lower than 10.58m, which is what OVPL is sold for. OVPL will need other assets to justify its selling price of 10.58m. But its net assets is just 0.2m!
  1. At first, I thought these real estate companies in Australia were setup first to do business, and 8I came to know them and invested in them. But, I’m surprised that all the three companies in Singapore, Red Hill Pte Ltd, Fusion 462 Pte Ltd and Oxford Views Pte Ltd, were registered in 2013 and 2014. That’s 1-2 years before 8I invested in Velocity. Or these property developments in Brisbane were originated by companies in Singapore? (8I?) and subsequently, 8I swapped the shares in these firms with shares in Velocity, resulting a gain of 1.67m? I don’t have a clue.
  1. Both of the sale are to investors who are minority shareholders of 8I. Labelle has 200 investors, while Crescenta has 360 investors. I’m not sure if these two groups have any overlap in terms of investors. Which private companies do you know that have this large number of investors (200 or more)? Very likely, I guess, these companies are formed by the participants (students) who have attended 8I’s investment courses. These people are probably willing to buy what (ever) 8I is willing to sell, perhaps, believing that 8I will make them rich. If they have learned value investing properly, they should be able to value companies properly. If not, at least, they should be able to spot overpriced assets and avoid them. Which one is the case for this deal?

200 and 360 Investors

If you are in the shoes of these 200 & 360 investors, why would you buy these companies from 8I and pay at much higher price than 8I did just one year earlier?

Possible answer is to sell them at even higher price. 8I intends to list Velocity in the stock exchange. If Velocity turns out to do as well as Digimatic (formerly CPA Academy, see this post), then these investors would have reaped high rewards. This is just what I conjecture. I know nothing about these companies and these investors and no one at 8I.

But if what I guess is correct, then these investors have to see what happened to Digimatic after listing. Digimatic’s share price has fallen from 0.395 at IPO to 0.12 today, nearly 70% loss. The investors who sold earlier would get the rewards, while those who sold late would be penalized with losses. If you think you can sell earlier, then you have to see if everyone else (those investors in your group) is thinking the same. Because if they do, then the share price will plunge quickly. This is an illiquid stock. Even if you just want to sell shares worth $50k, you can cause the price to fall by 10%.

Is Velocity worth 7.86m? Looking at its summarised financial statements, it’s still making loss of 1.2m on revenue of 14.9m. It has net assets of 5.7m but with 6.58m goodwill. Excluding the goodwill, the net assets is negative 1.57m.  I don’t have experience valuing property developer and don’t have details about Velocity’s business. But given the negative net assets, it’s likely that Velocity is still early in its development process.

Velocity - Financials FY16.PNG

Source: 8I Holdings’ FY16 Annual Report

Is OVPL really worth 10.58m? If yes, then it’s fair deal for all parties. If it’s underpriced, then 8I is doing its shareholders disservice by selling it cheaper to some of the minority shareholders. If it’s overpriced and some of the 360 buyers are participants who attended 8I’s investment course, then 8I is selling overpriced assets to its own students. This is ethically wrong.

What do you think about this OVPL deal? Is it fair, overpriced or underpriced? Well, we are all outsiders to this deal. So, in the end, the 360 investors have to be responsible for their own action.

My word of caution is that if you buy something without knowing its actual value, and intend to profit by selling it at a higher price, then you have to rely on finding a buyer who is willing to pay more than you did. This is speculating, not investing. Stock market bubble is formed by this reasoning. If you buy something expensive and want to sell it for profit, then there must a greater fool out there for you to do so. On the other hand, if you buy something at bargain and want to sell it for profit, you don’t need to rely on finding the greater fool. Sooner or later, someone will want to buy it, at least, at fair price.

Both the sale of stake in Velocity and OVPL provided 8I with profit of S$11.96m. This gain is achieved in less than 2 years of investment. Given my observation of how 8I operates, I think, it will sell stake in other companies that it invested in again, probably in the next 9 months. It reported 18.6m profit for FY16, which included 18.6m gain from the sale of CPA Academy. Coincidentally, both figures are around 18.6m. Therefore, in order to grow its profit for FY17, it will likely need another outsize gain from its private equity business because the combined recurring profits from its education business and investment gains from listed securities are not likely to surpass FY16’s total profit. Without another outsize gain, there could be a substantial drop if profit for FY17.

Acquisition of 8 MAD Group Sdn Bhd

In July 2016, 8I bought 51% equity stake in 8 MAD Group Sdn Bhd (“8MG”) for RM 430k. This values 8MG at RM843k. 8MG provides integrated branding and marketing communications consultancy and customized training and performance coaching solutions to learning institutions and corporations.

It has unaudited revenue of RM 4.1m and net profit after tax (NPAT) of RM 260k for financial year ended 31 December 2015 (FY15).

The interesting part of the acquisition is that 8MG have guaranteed a minimum NPAT of RM 244k for FY15 and minimum NPAT of RM 250k for every subsequent financial year. In the event that the NPAT for the financial year falls below the minimum NPAT, 8I shall have the right to decide on the dividend payable to the Company by 8MG.

This acquisition implies that 8MG is worth RM 843k. Assuming the NPAT for FY15 and subsequent years are RM 250k, then the P/E is just ~3.4x! This deal is a steal for 8I. And if it’s a steal for 8I, it’s a loss for 8MG’s original owners. Why on earth would they be willing to sell 51% of the Company for just 843k when it can guarantee NPAT of 250k per year?

They lost the controlling stake after selling 51% of the Company. Also, the RM 430k that they receive from selling the 51% stake can be earned in just 1 year 9 months, assuming NPAT of 250k, which they guaranteed. If they have such a confidence to guarantee the NPAT, then why sell it cheap? A rational owner, who is also an entrepreneur, will check how to value his company properly after all the hard work he put in to build the company. Even if he doesn’t know how to value his company, he will know that in stock markets, many companies are valued at 10 – 20x P/E. Why would he value his own company at rock bottom P/E of 3.4x?

In any way, this seems like a very attractive deal to 8I. Given 8I’s operation of flipping companies, 8MG can be the next target for flipping. Perhaps, this time, 8MG could be sold to the Malaysian students of 8I’s investment course in KL for another outsize gains. Perhaps, 8MG could also be listed some time later, giving its original owners large rewards. Maybe that’s why they are willing to sell it cheap in the first place to 8I. Maybe. It’s all just my maybe. All my guesses only.

 

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8 thoughts on “8I Holdings – Another outsize gain

  1. Great work on 8I! I agree that there seems to be a worrying lack of transparency in a lot of these dealings that the company has conducted, especially when it comes to the identities of the buyers and sellers. It is about time someone from the regulators start to probe a little bit more. Not suggesting that there is outright manupulation, but at least more clarity should be sought if public money is involved.

    This article by Fool australia might be of interest to you as well:
    http://www.fool.com.au/2015/04/27/could-8i-holdings-ltd-shares-be-worth-9-cents/

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    1. Thanks for the article. I read it and agree with the author.

      The multiple dubious transactions involving Digimatic (or CPA Academy) and Velocity (and its subsidiaries) have given 8I realized gains of 25m or more in cash. The initial capital outlay for both was just less than 4m. Each exceptional gain was achieved in around 1 year or shorter. The realized gains of 25m from just two companies in two years is even more than the entire capital that they invested in public listed securities.

      Novice investors will be impressed by this outstanding performance and may sign up their investment courses. Experienced investors will be skeptical of these dodgy deals unless more transparency is provided.

      Value in a business is created by increased cash flow. For Digimatic and Velocity, they have not yet demonstrated any substantial increased cash flow to substantiate their exploding valuation in such a short time. In both cases, value has not been created. Value has merely been transferred from the new optimistic buyers to the seller, who is 8I. I expect the third case to happen within next 12 months.

      I hope the new optimistic buyers don’t turn out to be the students who attended 8I’s investment courses as I suspect. Like in anything with very strong believers, what the preacher sells, the followers buy. The followers (or students) may not think and act rationally. Being in the group, the herd mentality kicks in easily.

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  2. Hi, just chanced across this article. Well, the group of ‘private investors’ are no more than members of this exclusive Mcircle club. The entry price to join this ‘club’ is around S$6k in 2015 (could be more now), and the benefits are access to private deals, pre-IPO shares etc. Of course one criteria is that you first have to be a MIP graduate (Millionaire Investor Program), their flagship Value Investing Course. Some eligibility requirements of Mcircle are that you have to also be an 8I shareholder and have at least S$50k of liquid assets.

    I am a MIP grad and also a Mcircle member, but have not ‘invested’ in any of these as the numbers simply do not add up. You are right when you say it’s a greater fool theory, and many of these poor schmucks don’t even know they are being taken for a ride. They think that they are getting the deal of a lifetime, but they are simply providing the base support for the house of cards to keep building up.

    Such investment usually comes with a 2yr moratorium period, and the reason is simple – there is very little free float, and liquidity is next to none. If anyone were to want to sell their shares, it would create a huge drop in share prices, leading to a panic and a straight line for the exit door. Of course true value investors will not do that, but these people are anything but value investors. They have been blinded by the story of an outsized gain down the road, and rather let someone do the thinking for them than to do their own due diligence.

    I feel that 8I is simply not building a sustainable business, and have no choice but to do this to justify its current high valuation. If their share price falls, it won’t give confidence to the very group of people they are trying to attract to their value investing course. This is an ecosystem they have created for themselves, and it will just keep growing until the bubble is too big or people start seeing the truth…

    But then again who am I to comment. I am no boss of a $300m listed company.

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    1. I see. Didn’t know that within the MIP program and membership, which costs nearly 4k, there is a further exclusive membership, which costs additional 6k. The promise of outsized gain must be too tempting.

      I’m recently reading about game theory in business competition and I think that it can be applied to this situation of high valuation, supported by inner members, and illiquid. Simplified, if all the members cooperate to support the high valuation, then the high price can be maintained. But those who cheat in the game by taking profit at high price will stand to gain more at the expense of those who don’t sell.

      On the other hand, the high price can rise even higher as there are new members joining every month and believing that they found the good deals. History suggests that high valuation will eventually get corrected, but we can’t predict when.

      At the end of the day, we can only wish them good luck in their investing journey.

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  3. Hi,

    I am a MIP graduate and a M-Circle member. Contributed to $10k revenue to 8I. I am also a shareholder of 8i (a requirement by 8I to be able to get into their M-circle deals) and an IPO investor of Digimatic. I sold my Digimatic shares at 30% loss within 6 months as I find myself drifting away from value investing principles. I was lucky as I invested much later which do not require me to hold the shares for 2 years but I bought the shares at higher price of AUD0.20. We were promised a 20% extra shares but to date I have not get anything extra and I don’t see efforts from 8i in fulfilling this. I thought I might have remembered wrongly but quite a number of my M-circle friends remember the same offer.

    The M-circle members are fat cash cows for 8i. Every private deal is shared in the M-circle and majority of the members are blinded with good faith in 8i. We were taught on value investing in the MIP classes and the assumption is the teachers will do what they preached. The 8i founders pledged such practice in all their investments. Many put their trust in 8i and probably 8i deserved it with their pretty reasonably well run MIP courses with genuine good people. Their listing of 8i has also make many millionaires out of the earlier M-circle members. The M-circle has a huge membership base with many of the members having capital to invest.

    So far, I’m the only one out of my M-circle group, who has bought into Digimatic, has cut losses. The rest of the group are still holding on to the hope that the shares can go back to its early short lived heyday of AUD0.40. Some have even invested into the next campaign – the potential and imminent listing of Velocity. Some have also spend more thousands to attend business owner course. According to one attendee, it’s a course for 8i to identify good investment target while charging the business owner for it. I would say 8i is shrewd and very good at killing many birds with 1 stone. They are superb at leveraging their cash cow, milking them as much as they can. They are practising value investing for 8i group but probably at the expense of their loyal M-circle members.

    I believe 8i will achieve great financial results leveraging on the M-circle members especially the new ones who have just graduated from the MIP courses. 8i is expanding this course to Malaysia and China and I believe their m-circle memberships will keep on growing in the next few years.

    I personally believe the top management in 8i are very smart and shrewd people. There are very good businessmen. From a business perspective, if you look at it from a financial perspective, they are one of the best I have seen, building up so many ways and channels to obtain revenue and profit within a very short period of time. However, there is a shift of principles. The vision, values and their actions are not always aligned and consistent.

    Recently I attended VIS 2017, a yearly value investing summit organised by 8i. I met up with many of my previous MIP graduates turned M-Circle members. The sentiments within our group are generally negative with many sharing that they are being milked many times over and have yet to see value in each of the milking. Many are not looking at renewing their m-circle membership and VIS 2017 will probably be the last event we want to be involved with 8i.

    As more M-circle members get smarter, more will leave. However, the rate of recruitment is much faster than drop out now as more and more are attending MIP courses. There are numerous intake per year across 3 countries. Furthermore, M-Circle membership is for 2 years. There will be many years for 8i to milk the cash cows before this M-Circle bubble burst (if it ever burst). The management is so smart and shrewd that I believe before this happen, they will have already created other models to build cash cows and leverage on.

    If you are an investor and you do not care much about potential credibility,ethical or integrity issue of the management, 8i is probably a good bet to be able to continue to deliver shareholder values. If you are smart enough, buy 8i shares instead of shares of the private deals in the M-circle. There is much more value there. If you are smarter, do more homework and think more carefully before investing.

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    1. For the promise of 20% extra shares, the company can’t do it to a selective group of shareholders only. If they do it to all shareholders, then the value created is zero because when everyone gets 20% extra shares, the share price will fall by 1/6. Hence, the net value is zero.

      Initially I thought the M-Circle membership costing 6k was for lifetime. I didn’t know that it expires in 2 years and will need renewal. That’s another recurring income for the company.

      As investors, we do need to care about the credibility, ethical and integrity of the management of the companies that we invest in. Leaders who fool others in public will eventually fool themselves in private. If you and your group share the negative sentiment, then other groups might also share the same sentiment. In the very worst case, if a deal goes sour, one angry member might bring a lawsuit against the firm, which will seriously affect the reputation. I don’t think this will happen though. There is probably indemnity clause in the private deal agreement.

      I will not buy the shares though as I think it’s very overpriced. It will take many deals like Digimatic’s and Velocity’s to build up the assets to justify current valuation.

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    1. Thanks for the update. Just read the news.

      The profit warning is mainly due to the absence of one-off gain from Digimatic sale/IPO last year. I believe their core education business is growing very well.

      With Digimatic’s share price reaching new low, sooner or later, they may have to adjust down the fair value for their Digimatic holdings. This can reverse the previous fair value gain, resulting a fair value loss later.

      All this one-off gain/loss should be stripped out when assessing the core earnings from the start. But their private equity business makes such huge one-off gain like on regular basis. In the end, the sale of subsidiary business did increase the net cash on hands, and consequently the net worth.

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