Forum Archive Index - December 2000

[Chris Tse <christse@internet.co.nz>]

Hugh

With all due respect, I don't think you have grasped the concept of VC 
companies or ITC in particular.

ITC is not an income stock and I doubt that any investors have invested in 
it on the basis of expected dividend income.

Moreover, I would be utterly dismayed if ITC declared a dividend to 
shareholders - it would be tantamount to management conceding defeat! Ditto 
with a share buyback, in specie asset distribution or other form of capital 
repayment.

As regards to "positive cash flow oriented planning", how do you rate the 
sale of exo-net for $9.5 million in cash (plus $3.4 million in Sol 6 stock) 
in terms of a positive cash flow event? Not bad I would suggest, especially 
when you consider the initial cash outlay for the holding was $1.5 million.

Of course, the pressure is on ITC to put these runs on the board 
consistently and herein lies the challenge for management. This also leads 
to the possible dilemma of deciding whether to exit an investment early, 
for the sake of appeasing shareholders hungry for a positive financial 
annual result, or waiting until the optimum time to divest. True believers 
of the VC business model would prefer to look behind any annual result and 
see how the investee companies are performing, however the catch 22 is that 
the market tends to look at the bottom line and re-rate the share price 
accordingly.

And of course, you always need some cash to pay the landlord, the staff and 
to keep the coffee machine stocked up with beans...

Same dilemma occurs in their investment decisions - ITC has been sitting on 
idle cash for awhile and has kept its spread of investments relatively 
small. Considering the "one in ten will be a winner" mantra touted by VC 
companies, this has to be a concern for ITC shareholders, but then again, 
should management splurge out on new investments which may not be quite up 
to their investment criteria just to keep the market happy?

The April tech wreck has resulted in a downgrading of valuations in 
technology stocks worldwide, and whilst this has resulted in potentially 
better buys for VC companies, it has also narrowed the opportunities in 
terms of exit strategies. In this situation I like ITC's strategy of 
becoming a fund manager for others' equity funds and earning management 
fees in the process, however I would flag the risk of their spreading 
management focus and resources too thinly, and 'taking their eye off the 
ball" in the process.

And the fact that they are attempting to do this in China of all places, 
where government regulations and standards of corporate governance are not 
black and white, but decidedly grey, certainly ups the risk/reward premium.

Having lived and worked extensively in Asia, I am a little concerned about 
their China strategy. Firstly, how can they run it effectively from 
Singapore? Singapore is not China and vice versa. In my experience there 
can be substantial difficulties in managing a Chinese operation from one of 
the satellite Asian cities such as Singapore, Taipei or Hong Kong - in some 
cases you may as well be sitting in New York or London. OK, they have a 
local Chinese partner in TVCPG, but where were they when ITC needed help 
negotiate the Chinese regulations in setting up the structure for the 
investment fund? (To quote Jeff Dittus : "The original structure of the 
fund has changed somewhat to address Chinese regulation that we were not 
aware of when we started.")

Despite my reservations on their China strategy I am long ITC and at this 
stage am happy for it to form a small part of the speculative end of my 
portfolio.

It is impossible to predict the future prosperity of the likes of VS, DVI 
and Golden Orb, so at the end of the day, investors have to put their faith 
in the quality of the people running the show. In this regard I am 
impressed, so far, with the likes of Jeff Dittus & co., who also deserve 
credit for fronting up to investors either face to face or by live internet 
chat. Their run rate in the first few overs has been pretty good - now they 
have to build a good first innings total without losing too many wickets.

Thanks also to the sharechat team for continuing to organise these live 
chats - great stuff!

Chris


At 06:08 17/12/00, you wrote:
>hmmmm,
>I did miss another couple of ways of rewarding shareholders
>i.e. (ix) return of capital to shareholders on pro rata basis - but this
>requires some sort of cash suplus planning whereas firms like
>ITC are in chronic cash deficit binds
>       (x) concesional share issues and share bonuses to shareholders
>- but ITC's share price isn't high enough to stand this and it would
>make the final fall to penny dreadful status.
>
>I think firms like ITC are performing a useful economic function in
>mobilising investment into new technology but its just a pity
>they don't have some all round vision to realise that it won't work
>in the long run unless (a) they do some positive cash flow oriented
>planning (b) develop a strategy for rewarding shareholders.
>
>The much better alternatives to actually investing in ITC are to either
>sell them ideas, become a director or less desirably an employee
>but keep your suitcase packed.
>I don't see them as a long term spec investment because they won't
>be long term unless they cover (a) and (b)....
>
>
>
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