Prosperity Minerals: Misunderstood and trading at a major discount to its net asset value

Investors in the AIM market are a little like the Australian opal prospectors of old who made their fortune scouring hundreds of miles of barren desert in search of these hidden gems.

Of course it required stamina to cover all that open ground, but the most successful treasure hunters of yester-year had a knack for spotting these beautiful and precious stones in the rough.

The analogy is tortured I know, but the junior market, like the Gibson Desert, does throw up the odd jewel. 

A case in point is Prosperity Minerals (LON:PMHL), but you’ll have to dig a little to find out why it such a sparkling investment.

The market has applied a blanket discount to the stock because it appears to all intents and purposes to be a conglomerate with interests in cement, iron ore trading and property. It is therefore deemed to lack focus. 

Prosperity’s valuation isn’t helped in the minds of the British investing public at least by the dominant shareholding of founder David Wong’s Prosperity International, or the fact that its interests are in China, a nation few investors on this side of the world truly understand.

Counter-balancing this is a net asset value roughly double the current share price, while Prosperity also comes with a kicker for income investors. 

Paying a dividend at all makes the company something of a novelty on AIM.  But a yield of more than 9 per cent marks it out as something of a freak. 

Within the company, meanwhile, chairman and chief executive Wong’s involvement and influence is seen as a boon.

“David Wong has 30 years worth of experience in the China market,” says finance director Patrick Li. 

“So he has a lot of very good contacts, particularly in the property market. 

“All of our developments are with strong local partners who are well established in the areas they working.” 

As we’ve already noted, Prosperity’s is an eclectic portfolio and you can see why investors might eye it with suspicion. 

The sense of trepidation is heightened by the fact that earlier this year the company sold the majority of its cement assets for £305 million and began to plough the cash into property development.

This, on first inspection, would seem a strategic about turn as it had spent the past five years growing the cement operation.

However the deal was a one-off chance to crystalise the value of an operation built up in a very short space of time at a fraction of cash put down by TCC International, which bought the business. 

“We were offered a good price so we took the money,” says finance director Li.

When assessing Prosperity it is perhaps better to view it less as a conglomerate and more as an investment fund built to ride the Chinese dragon. 

And Wong with his local market expertise should be viewed as a fund manager who has a flair for generating opportunities that would largely elude Western investors.

The two properties Prosperity bought last year reveal the benefits of being part of the Wong network.

Silver Bay Plaza and Dongfang Wende Plaza were acquired for £70 million from the entrepreneur and related entities.

And the deal was done at a significant discount to an independent valuation compiled by Jones Lang LaSalle Sallmans, which said Dongfang Wende alone was worth £177 million. Silver Bay, meanwhile, is worth an additional £14 million. 

The acquisition takes the company into the residential and commercial property market in Guangzhou, one of China’s most prosperous cities and an area where new accommodation, particularly for the emerging middle classes, is at a premium.

The two developments are now the bedrock for an ambitious property development programme that takes in Fujian and Zhejiang provinces on China’s eastern seaboard, and which should begin contributing to Prosperity’s cash flow next year.

The 33 per cent stake in Anhui Chaodong Cement, meanwhile, has proved to be a stellar investment. 

Acquired for CNY2.48 a share back in 2007, it is worth more than CNY22 a share today. This is a marked to market valuation as the stock trades in Shanghai.

The iron ore business, meanwhile, looked like it ran out of steam last year. However its performance reflected a destocking phase in the cycle and the Chinese government’s policy of closing the smaller, dirtier and less efficient mills. 

The operation has undergone a quiet metamorphosis as it has sought to reduce its reliance on the big three producers with off-take deals with suppliers in Malaysia and Canada.

And it has taken this a step further by making a £13 million (US$20 million) investment in a Brazilian iron mine, which made its first international shipment of 52,000 tonnes of the ore in March.

The plan over the medium term as the mine expands is to use this as a source for around 1 million tonnes of its annual trading volumes, which stood at 6.3 million tonnes at the end of last financial year.

Given the company’s performance in the first quarter, there is every indication that iron ore market in the People’s Republic has returned to growth.

The recent results for the year to March 31 reveal a company in transition. 

Pre- tax profits were up almost 400 per cent at £120 million (US$192.1 million), but this figure was flattered by the gain made on the disposal of the cement assets. The underlying result was a loss. 

Perhaps a more objective measure of Prosperity for those looking to invest is its net asset value, which rose 30 per cent last year to £344 million (US$548 million), or 240 pence a share.

This is almost double the share price, which currently stands at 122 pence, and that’s with the ACC cement business in at book value. At today’s prices the 33 per cent stake is worth £160 million, or a further 120 pence a share.

“Our investments are not just random investments,” says finance director Li.

“They are very carefully selected, acquired at low costs but where the demand is fundamentally strong. 

“All three (businesses) will be able to provide the company with satisfactory cash flows and profits in the years to come."