What does the company do?
Contrary to popular belief, markets aren’t necessarily the most efficient arbiters of value. Even our blue-chips have the potential to surprise – usually on the downside.
Market efficiency requires two elements: perfect information and liquidity.
On London’s alternative bourse, both are in short supply, which throws up anomalies.
The company invests in assets including property development and mines across Asia.
The investment company has undergone and is still undergoing something of a transformation – one designed to help unlock significant latent value.
Under Harmony Capital, which has been managing ADAM’s portfolio since May 2017, historic investments in China have been restructured and are being monetised.
This will enable Suresh Withana, managing partner of Harmony Capital, and his team to focus on their real goal of unearthing investable gems from among Asia’s small- and medium-sized companies (SMEs).
ADAM under Harmony Capital’s management is probably the only listed investment company of its type in London focusing on Asia’s SME sector.
Withana and his team have considerable experience in this regard, having managed the successful US$270mln Harmony Investment Fund I, which had a similar mandate to that of ADAM today.
You can see why Harmony has focused on the region. There are 270mln SMEs and an estimated US$2.7trn funding gap present in Asia.
Investments in the portfolio
So far, ADAM has invested in a virtual doctors’ network, a luxury ski resort in Japan, a magnesium mine in China, and a high-end food and beverage business. There’s also a proposed investment in a maker of needle-free injections.
In October it announced it had azquired a 40% stake in Infinity TNP, a newly formed subsidiary of Infinity Capital Group (ICG) which owns Hirafu village ski resort in Japan, and is currently developing seven property units into a luxury hotel, 'Tellus Niseko'.
It also owns 84.8% of Linfen Zhuangpeng, a large open pit dolomite magnesium limestone operation located in Shanxi Province, China, with operations there expected to restart in the second half of 2019 after restructuring and renaming its holding company to 'Future Metal'.
The deals have been financed via traditional debt and convertible loans. Its proposed PharmaJet needle-free investment allows it to convert debt into equity on favourable terms at a “liquidity event” such as an initial public offering.
The returns are high (coupons on the debt can be double-digit), but then ADAM is operating at the riskier end of the investment market. That being said, Harmony Capital ensures that transactions are structured with strong downside protection in place to protect ADAM’s interests.
It should also be stressed, these are not throw-of-the-dice opportunities. Harmony’s team can spend as long as six months on due diligence. “Independent valuations are carried out at arms’ length,” Withana adds.
At the March 2019 year-end, there was cash of US$8.8mln on the balance sheet and the unaudited estimated net asset value per share was US$1.10 or 86p per share.
Harmony’s contacts around Asia mean there are plenty of deals to be done.
“We have a very significant pipeline of opportunities; a number at the term sheet stage,” Withana explains.
So with a unique approach – and the intention of paying a dividend along with capital growth – why is the company’s share price (36p) trading at a 58% discount to its last available NAV?
Well, ADAM has a number of Chinese legacy assets that are perhaps viewed (possibly wrongly) as a drag on performance.
Harmony Capital inherited these investments, which includes a majority-ownership and control of Hong Kong Mining Holdings (HKMH), the largest magnesium dolomite mine in Shanxi Province, China. This is also ADAM’s largest single holding.
Withana has said the aim is to exit from them all, which would free up cash that could then be ploughed into pan-Asian opportunities, rather than solely in China.
One example was the US$3mln received from the disposal of Global Pharm assets was exchanged for a convertible bond in the Fook Lam Moon chain of restaurants in Hong Kong.
- In late December, Adamas said its portfolio firm Future Metal had commenced production of dolomite at its quarry in Xi County, Linfen City, in the Shanxi Province of China
- Chairman John Croft said in June that increasing the liquidity of Adamas stock was “a key priority, one we will continue to take further actions to improve during the coming year”.
- Croft said the board was “extremely encouraged by the considerable progress” made by the Harmony in seeking out new income generating investment opportunities.
- The board expects NAV to benefit from mining operations at HKMH restarting in the second half of 2019.
- ADAM struck a deal to acquire a 40% stake in Infinity Capital Group for £5.63mln, which is developing the Japanese ski resort accommodation project.
- ADAM believes the deal with a “highly attractive co-investment partner” enables the company “to re-allocate capital within the company's strong pipeline of high-growth Asian small and medium-sized enterprises across the region”.