Yet Another Value Podcast - Jeremy Raper on Haier Smart Home

Episode Date: January 19, 2021

Jeremy Raper, founder of the excellent rapercapital.com and our inaugural guest, makes a repeat appearance on the podcast. We provide an update on his idea from our last podcast (Brag), discuss a potential $300m+ investment he's looking to source, and then dive deep into his later idea, Haier Smart Home German Shares (690D).Note that BRAG and Haier are both international small cap stocks; please do you own research and nothing in this podcast is investing advice.LinksJeremy's first YAVP appearance: https://youtu.be/X-nVRNiSeosJeremy's second YAVP appearance: https://youtu.be/PuP_c10B_NIChapters0:00 Intro4:20 Jeremy's $400 million special situation8:20 Update on BRAG13:20 Jeremy's new big position, Haier Smart Home German D-shares (690D)20:20 Discussion of fungibility of Haier's different shares25:00 What's the right spread?30:30 Devil's advocate: why can't the Hong Kong shares keep running?38:20 Devil's advocate: comparison to SPAC warrant arb41:05 Devil's advocate: geo-political risk46:00 Discussion of position structuring (naked long or dirty arb)

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have for the third time, the founder of Rayper Capital.com and my friend Jeremy, how's it going? Hey, man. Great to be back. It's going well. How are you? Doing good. It's great to be back on the podcast. It's great to have you back on. As you know, because it's your third time, I start every pod by pitching my guest. That's you. You know, people can go listen to the first two. I think the fact that you are, my first three-time guest, and this makes you about 10% of my episodes at this point, I think that's all the kind of pitch it needs, you know, it kind of speaks for itself. My respect for you, how much I enjoy having you on. But, you know, just to get the audience a little more excited, I'll point out that the last idea you talked about, we came on about six weeks ago. It's up 125% or so since then. So that's pretty nice, you know, listen to anything Jeremy says.

And then the second reason people should be excited, I'll just say nothing on this podcast is investment advice, but we're going to talk about some really quirky ideas. And the idea we're going to talk about today is your newest idea, which you said is the most compelling in your investment set right now. So hopefully people can get really excited about that. Totally. Totally. Just to slightly correct you there, Andrew, not that I, not that I like to do that. But I believe if you check the last stock quote, brag is up a lot more than 125% since we chatted. By the way, more shame on me because I think that it closed today at like 245 or something, because basically one of the key points of the thesis was this uplisting to the TSX. That got announced

today, so there was a big interest, I guess. But for full disclosure, we can talk more about, I've checked out slightly early on that and kind of cut my winnings, you know, around about 175-180-180 levels. So this is all gravy. And we can go into, you know, the rationale there of the thought process. But yeah, it's great to be back on your pod. And as you said, we're going to be talking about something that's my largest position right now. It's extremely compelling, a very different kind of trade to brag, to be frank, but yeah, I mean, before we go into the specifics of that or other things, I think, you know, you wrote a blog post a couple weeks ago talking about your kind of outlook for 2021 or how you're finding the state of the

markets. And you mentioned that simultaneously with the market being extremely expensive in general terms or finding a huge amount of interesting stuff to do under the hood. Like I couldn't reiterate that more strongly. Like the market in headline terms is extremely expensive. And yet, if you look off the beaten path in, you know, international markets or undercover sectors or, and by the way, I'm not talking like Zimbabwe or Nigeria, you know, other developed market liquid opportunities. There is a huge amount of stuff that is, you know, as I'm going to outline, amongst the most compelling opportunities I've seen in my career. And so it's a very fertile, a very febrile time to be involved in the markets if you're willing to kind of go beyond, say, NASDAQ or New York Stock

Exchange top board names, let's say. No, I like that a lot. I mean, I agree with everything you're saying. I think you and I write two of the most compelling subscription services on the internet, I would say. But I almost feel bad when I'm like stepping away from my computer at this point because I feel like I've just got a list of so many interesting things to do. And you go a lot quirkier than I do. But I agree with you. I think the opportunity set is unbelievable.

And like a lot of these companies, if they were coming public through SPACs, they'd be trading at like 7X the multiple that the market's getting on. putting on them. Totally. Yeah, totally. I mean, like the last one we did was brag, right? I mean, that was in Canada. So, you know, not a huge jump from, say, typical, you know, US listed, you know, liquid stocks just north of the border, a little bit of liquid, whatever, but definitely not that funky. But even that small leap, right, there's a huge amount of interesting stocks going on in Canada. I mean, you know, this isn't some kind of massive pitch to go and, you know, jump in with the Canucks. But there's a, I mean, like you said about your list of long, long research names, I have at least three or four names that are Canadian listed names that look quite interesting on first

past that I just haven't had time to get to. So, yeah, there's definitely a lot out there. We'll try to cover a bit of it. We obviously won't cover all of it. And that's part of the attraction. But yeah, it's an exciting time for sure. So let's start with one of those opportunities. So we're going to dive into your most a point idea, but I just want to talk about an update on brag and first, a tweet you recently said. So you said you found a special situation that it could be a double or triple. the only key catch is it would take $300 million in capital to execute. I think it's one of the coolest tweets I've ever seen,

both because it's hilarious, it's audacious, and I 100% believe you that this opportunity exists. So I know you don't want to go fully into the idea, but maybe, you know, just broad outlines what you're seeing, if you've had any response to that tweet so far. Sure, sure. Yeah, look, it's kind of a singular opportunity. As you said, I can't really go fully into the details yet.

What I can say is the reason the amount, And by the way, that 300 million capital, that turned out to be lower. It's probably more like 400, maybe even more. But the reason the couch cushion's amount of capital there. The reason I need that amount of capital is because it's obviously like a special situation where you need to take control of a certain class of security, right? So because of the capital structure of the underlying company, I'm looking to try and get 51% of a certain class of that company's securities in order to delist.

it because that would catalyze a value creation opportunity where that class of securities would then be made, what's the word for it? It would be made a whole in the ordinary securities of the company, which obviously would trade it at a huge premium. So basically trying to take control of one class of a company, trading in an insane discount to catalyze a revaluation to where the other shares trade. And that can only be accomplished through a delisting event, which takes a majority in my reading of the docs, which obviously is still kind of pending. And so that's why I sent it out. I was like, you know, let's really give this fin-twit platform a test. Let's see if I can kind of crowds crowds is the wrong word, but, you know, find the right pool of capital that would look

at an opportunity like this. And the response has been great. I mean, I haven't managed to get back to every single person who tweeted me yet, or de-end me, I should say, just given I got quite flooded. Thank you very much for the interest. And I'll just say, look, as in when I confirm this up on the legal side, as in when I can make sure it's real, let's say, I will judiciously reply to everyone who DMs me. How many Nigerian princes responded saying they were just looking to park their family's fortune, get it out of the country? You know, it's funny, the whole Nigerian prince thing, they're normally asking me to wire them $100 million, and then they'll wire them back, you know, I'll wire you back 500 million next week or whatever. So actually, I'm the one asking for the money. When you're the one asking for the money, it's okay to accept the inbound increase.

But I didn't get any Nigerian princes yet. Well, you know, I'm hoping in, this would probably be a longer process. But I'm hoping in a year we can do another podcast. And on this one, you'll be at a much bigger house. You know, you'll be in the castle. We'll be celebrating the 400 million that you turn to a billion. If this works out, my friend, you're going to see a picture of me wearing that Hawaiian shirt shirt you wore last time for your other pod with Toby.

but I'll be holding a gold-rimmed pina colada glass just, you know, with like raper capital in gold stencil or something, just like that. But yeah, no, no, no, this, in all seriously, this, this was a bit of a process. This one, obviously, it's kind of a very kind of special situation type event thing that is going to take probably a year to work out. And so let's park that and we'll come back to it. Hopefully, you know, knock on wood with confetti and, you know, those money shooting guns that you see at strip club sometimes in a year from.

I just think, A, the creativity and the thought process to be like to see something and say, A, to find something that discounted. And it'd be, you know, I would probably just be like, oh, this is too big. I park it. But the creativity, the audaciousness to go and say, hey, let me see if I can raise this money. I think it's awesome. So that's really cool. Thanks, man.

What about before we get into your big new idea, let's just do a quick update on the last idea, brag. So, you know, we're talking, I said it's up 125%. You correct to me, it's up more. But just a quick update. It sounds like you've checked out there. How are you thinking about Brad these days? Sure.

Okay, so just very briefly for people who missed the first pod. The thesis on Bragg was B2B software of gaming, B2B provider of gaming software, dominant in some European markets, misunderstood and or no one knew about it because it was listed on a really bad Canadian exchange, the venture exchange, that was one, going through a fundamental transformation where the P&L was inflecting, and two, had these idiosyncratic technical catalyst through an uplisting to the TSX main board and then the NASDAQ in the coming months. That was the thesis when the stock was, you know, I think we spoke about it when the stock was 80 or 90 cents.

I wrote it up on my site when the stock was 60 something cents around 60, something like that. And frankly, it's hit a rocket ship since then. I mean, look, when I last came on the pod, I thought it was probably worth $1.50 to two in my conservative estimation of fair value. The stock is now at $250, right? So obviously the whole market has gone up. The main comp, GAN, a U.S. listed company, has gone up as well, about 30%.

So people are benchmarking against GAN. So there's some give there. But basically, the broad strokes of the thesis have played out. One, you've just seen today the delivery of this uplisting to the TSX on time, as expected. Two, you had the continued play out of the financials. Three, you had continued client win momentum. And importantly, a lot of these new clients that have been well. one, the press releases have made clear that they're winning not just the content business,

which is the low margin business. They've been very clear that they've said they're winning the higher value ad platform, stickier recurring revenue piece of the business. It's really where the juice is in these kind of businesses. So they've done well on the fundamental side. Obviously, they haven't had an earnings report since we spoke, but the momentum in the business appears to be quite strong. And then something we commented on Twitter when it happened,

we had another positive external signal, which was the company's management tipped in another 3 million Canadian of money at $1.20, $1.22 or something, which, I mean, look, it's a lot lower than where we are now, but at the time it was a screaming 52 week high. They just raised a bunch of capital at 70 cents, and then they came in and tipped a boat load more money in $1.20. So the signaling was very strong. And so what I would say is the profile of companies obviously much higher now. The market is more abullient. The forward outlook on the fundamentals is unchanged to maybe slightly better. And, you know, I'm still very, bullish on the fundamentals mid to longer term. But for me, the valuation is just no longer in my

range. Like when I first wrote it up, it was maybe two and a half, three times recurring revenues. When we discussed it was three and a half four times recurring revenues. And today it's at 14, 13, 14 times recurring revenues. In EV EBITDA terms today, it's I think, hold on, let me pull up my sheet here. I think I have it. Yeah, today it's at 35 times EV EBITDA on my 2021 numbers. When we discussed it with like seven times or eight maybe eight times and so nothing about the fundamentals i'm very you know appreciative of the opportunity and i think it's a it's a very solid company and should continue to execute and shame on me because obviously i missed the last you know i got out as i said 180 or whatever and so i've missed the last 30 percent but um you know as again i'm at heart

i'm a value investor the discipline is you get out when you think it's reached your version of fair value or close enough. And that was my judgment. And I do have a, I do have a habit of selling too soon, especially in these more growth-oriented businesses. And I took a little flak, but I, you know, there are a few people said, why did you even sell before the relisting catalyst? And I said, frankly, I didn't think the stock would get here before the relisting catalyst, right? We chat at what, a month and a half ago, not even. And the stock was on the relisting, right? This is kind of where you and I were saying, probably two on a relisting, a dollar rating before the relisting. I agree. I agree.

Yeah. I mean, the long and the short of it is if every idea worked out one-tenth as good as this idea, we would all be living in the Bahamas at Atlantis. And so, frankly, when a stock triples or whatever, and from my cost, you know, four-bagged or whatever in a matter of months, I mean, it's just very, very difficult. So, you know, all the best of the company. I'm still following the story, obviously. I'll still stay involved with it and probably come back to it at some point in the future. but a valuation base is time for me to check out. Well, look, I'm just going to give one more quick plug for rape capital. I mean, you did it, you nailed it, you hit the thesis out of the ballpark. I'm a very happy subscriber. I'll just go out and disclose, like, I disclosed we were longer about the last one.

We participated in the 70 cent, in the 70 cent capital raising. All of that was because you highlighted the opportunity. Obviously, we did some more work on the company and stuff, but it was all used. So very happy subscriber, very happy that you got me into that. And I think the work, the work was outstanding. Thanks, man. I'll look forward to seeing your silver-plated pewter gift that you're sending to me in the mail. Okay?

Maybe it works out because, you know, again, disclosure, this is going to be, it's a little bit more on the liquid side. It's a German small cap. So let's put that disclosure out of the way. Both Jeremy and I have a position in the stock, all the disclosure out the way. So let's turn to the immediate discussion. Can you give us a rundown on your new big position? Sure. Okay.

So my highest current conviction idea is higher. smartphone. Okay, so this is a Chinese company. Basically, they're maybe not the world's largest, the second largest manufacturer of white goods. So you may, U.S. listeners and majority of listeners are probably U.S. listeners, probably recall that hire bought G appliances in, I think it was 2010. But before that, they were also a very large white goods manufacturer. So, you know, everything for washing machines, dryers. They do air conditioning as well, microwave. So basically the meat of the business is, is home, homeware and appliances. And it's, look, it's a very large company. The market cap today judging from the Hong Kong

line, we'll get to this, but the market cap today judging the Hong Kong line is just under $40 billion. U.S. dollars. And so this is a quintessential special situation. This is very, as I mentioned earlier, it's very different from the Bragg situation. I'm almost going to speak nothing about fundamentals today. This is a technical arbitrage trade at this point. It's a spread trade. And what I mean by that is what I'm recommending or the position that I have on today is long one line of stock, the one listed in Germany that you mentioned, and short another line of stock, the one listed in Hong Kong, to try to profit from the spread between the two as they narrow, which is the idea of the trade. So just to give you some background, I mean, look,

I told you about the company. More than the fundamental history of the company, important is the technical listing history of the company. So just to give you some quick background, In China is not like other markets, right? So China is not quite a closed capital account, but analogous to a closed capital account. What that means is if you have money in China, it's not, I just can't go to my bank, industrial commercial bank of China, take out $10,000 and transfer it to U.S. bank. It's not that easy. There's quotas, there's restrictions.

For native Chinese, it's very difficult to take money out of the country because, you know, it's not a liberal, liberal democratic system, right? they want to keep the money in the country. So what that means is when you have companies that are listed in China, invariably the Chinese listing price is not what I would call the real world price, right? Because there's a lot of captive Chinese money that simply can't go anywhere else. So it either goes to invest in Chinese listed stocks or Chinese real estate. Now, this is important with regards to hire because the Shanghai listing of the company is formerly known as Qingdao hire. It's now called Higher Smart Home. It's been listed for many,

many years since the mid-1990s, but when the company decided to sell shares in Germany, so obviously an offshore market, an open capital account market where money can enter and exit freely, when they did that, that was the first offshore data point for their shares and their stock. So basically what they did is in 2018, at the end of 2018, hire for whatever reason wanted to diversify their sources of capital financing. I think it was largely a political drive, really. But basically they went, and instead of listing their shares in Hong Kong, which is by far the majority of Chinese companies, list their shares in Hong Kong was the first step, or say the New York Stock Exchange, like Alibaba or whatever, they went to Germany and

listed their shares on the Frankfurt market. And they were called D shares, D for Deutsche, so, you know, German. And look, it was the first and only of its kind on a special section of the Frankfurt Stocks. I mean, they trade like a normal German share, electronic exchange, you know, it's just, they created a special subsection for the D shares. They were the first of its kind, you know, probably an omen of its lack of success. The bank running the deal was Deutsche Bank. And I actually heard about these shares when I was still working on the buy side at a European hedge fund shop because I got a random call from my Deutsche Bank salesperson saying, hey, hire is doing this listing

of their D shares. Do you want to buy some Chinese appliance shares listed in Germany? And yet, you can imagine how that ended. As all these chats end, you know, the deal didn't go well. There was no market for the shares. No one understood what they're trying to do. They were trying to sell, I think, 450 to 500 million shares. They ended up selling 270.

And all of those 270, 140 got placed with friends and family, let's call it. So basically, cornerstone investors in China who were supporting the deal. So that was the kind of history of this weird, funky security where you had a very large cap company trading in China at one valuation. And then they randomly sold, say, Okay, so 270 million shares at a euro or just over a euro at the time. So call it $350 million. So 1% almost at the time higher was lower. So between 1% and 2% of the company was sold in Germany for political reasons.

Now, fast forward two years later, the stock had gone nowhere. It basically traded like crap. It traded at a huge implied discount to the Shanghai line for many, many years. There was no volume. It was trading in 100 grand a day. 200 grand a day. You know, it was basically a failed, forgotten German IPO. This all changed late last year because hire, I guess, they understood the error of their ways, wanted to kind of normalize the capital structure of their company. So what they did is they went and absorbed one

of their Hong Kong subsidiaries, the company called Higher Electronics, which was listed in Hong Kong. Okay, so I'm trying to simplify the story, but they had one of their operating subs was listed in Hong Kong, not the same as the parent entity, just one of their, basically, it had a few of their brands, not all their brands. It had a lot of the cash, but not a lot of the debt. So basically, it was a messy entity, but it was listed in Hong Kong, but it was not the same thing. So they said, listen, we want to make this simple. We want to unify our capital structure. So we are going to buy out all the minorities of our Hong Kong listed sub and in return give them shares of the parent, hire smart home. So in essence, what they did is they became a tri-listed

company. Hire Smart Home shares in Hong Kong, shares in Shanghai, shares in Germany. Now, you can pull up the Hong Kong listing prospectus, which was published fourth quarter last year. You can find it. But the key point is these shares were listed on December 23rd, two days before Christmas, okay? And from that date, the Hong Kong shares, the German shares and the Shanghai shares all represent the same economic rights in the company. It's not the same thing as saying they're fungible. as in convertible into one or the other, but they're all the same economic entitlement, same dividend entitlement, same voting rights, just different currencies and different listing locations. That's it. So that's the kind of background. So, okay, in a situation like this,

I guess there's two or three things you need to think about. The first thing you need to think about is, are the shares fungible? So that means if I buy it in Germany and it's trading it a big discount. Can I then call up my broker and say, give me the Hong Kong line or the Shanghai line? Now, as I mentioned, the Shanghai line, obviously the answer is no, because for most accounts, it's quite difficult. It's not impossible. It's not actually impossible, but for all intents and purposes, let's say it's not possible for me to buy a Hong Kong or German share, turn it into the Shanghai share and sell it in Shanghai and then get my money out. It is probably possible for domestic Chinese to maybe do it, but let's just, it's going to get too complicated.

Let's just put that to one side. However, Hong Kong is an offshore market, right? So Hong Kong, even the political change is notwithstanding, is and was and will remain an offshore market in the same way that Germany is an offshore market. So you would think all else equal that if it was fungible, you would see a huge amount of buying in the D shares, calling up the custodian and or the registrar and turn them into the Hong Kong share and just sell it in Hong Kong. And therefore, the prices of the two would go to almost almost the same level to account for the transaction costs, whatever, and liquidity. And so that was my first thought. If I go and buy these D shares, I can just call them up and call up my broker and my custody and it might take a month

of a few weeks or whatever, but I'll just, you know, make an instant ARB. Because at the time I found these, you know, the D shares were trading, you know, like a 60, 65 percent discount to the Hong Kong line, right? So as soon as the Hong Kong thing got listed December 23, you know, the D share at the time was trading 1, 1.2, whatever, it was an crazy discount. So obviously, if that process was possible, the ARB would collapse to near zero immediately, and you'd make a huge winfall. And now, if you look at page 291 to 292 of the Hong Kong prospectus, they actually outline in black and white, in very plain language, that it is possible to turn the D shares

into eight shares. However, the key determinant of whether it's allowed or not is with whether the company says, okay, you can do it. So there's this step-by-step process of how you would go about it. It's very procedural. It's like, you know, fill out this form, send in a letter. The registrar has to change the share registrar number. The Hong Kong Exchange has to approve the change in the share capital, whatever, basic stuff. But ultimately the company has to approve the request. So that's really the bottleneck. And so then I called up the company and spoke with others who, you know, had ins with the company. They said, look, we're not

allowing conversion right now because it's a lot of paperwork. We spent effort to get the German listing two years ago. We might need it in the future. You know, there's two different regulators. You have the German regulator. You have the Hong Kong regulator. You know, it's never been done before, quote, unquote, turning a D share into a Hong Kong share. Well, obviously, there's only one D share. In other words, they basically fobbed me off and said, we don't want to deal with it. They didn't say it's illegal. They said, we don't want to deal with it. Would you put an emphasis on that right now? I mean, look, I only spoke with a couple of people in IR. So if I put emphasis on them saying, right now, maybe I'm reading too much into the response. Honestly, I don't know. My sense was

they've had a few calls asking about it. They said, no, no, we're not, we're too busy. We're trying to unify the business. We're trying to reorganize the company. We don't have time for this. Was my sense. We'll come to why I think this is kind of an excuse. We'll come to that. Okay, so that's point one. Point one is, is it fungible or is it not? Now, it seems to me, my reading of the situation is it's obviously not fungible right now, but there is a clear legal pathway for this to be fungible in the future. That's important because it means there's optionality on fungibility. Now, you could say, well, you're still captive to some Chinese bureaucrat. That may be true, but as we'll see, that optionality has a huge amount of value

because if we look at other situations where there's no optionality, where the shares don't become fungible ever, and there's no chance at changes, the discount is already much lower. And so that's really the key of the thesis here, right? One, there may become fungible in the future, in which case the spread collapses immediately to zero. But we don't have to underwrite that to make a lot of money because the spread today is 40%. You buy higher D shares today at 2.15, whatever. And yes, it's moved up a lot, but the Hong Kong line's moved up a lot.

The Hong Kong share today trades at 33 Hong Kong, divide through by the European exchange rate, which is 9.35. You get a price 355. So the exact same economic right is trading Hong Kong at 355 euro equivalent that you can buy in Germany at 3.5. 215. So the spread's 40%. So if we just put fungibility to one side and forget about that for now, what's the right spread for this kind of trade? Well, okay, so then you dig into the world of dual listed companies, right? So these are a special class of share where the economic rights

are the same. The shareholders are entitled to the exact same economic performance, but for whatever reason, the listings will never converge. There used to be a lot of these things. You know, Royal Dutch Shell used to be this way. Unilever used to be this way. There are a couple other Dutch companies that used to be this way. But today, there's really only a handful that I can find, the two most prominent of which are B.HP and Rio Tinto, both Aussie mining companies, both dual listed in Australia and the UK.

Now, by the way, I should clarify, there are a lot of companies that have two stock listings, but the vast, vast majority of those are what are known as ADRs, depository receipts. So a depository receipt, there is no ARB, Because a depository receipt is essentially a trust bank or a custodian, buying the local shares, then taking them and holding them in, say, New York, buying some share in Hong Kong, whatever, taking the certificates, putting them in a bank in New York, and letting you trade against that bank

with the underlying stock certificates sitting in this New York bank is essentially what it is. And so it's completely fungible, right? An ADR is almost always fungible. So if there's an ADR, you know, quote unquote ARB overnight in any Japanese stock or Hong Kong stock, there are people today just arbing that away by buying and selling the ADR and converting them. And the only difference in price is the 50 bips or whatever it costs to convert. So we're not talking about ADRs. We're talking about dual listed companies, which are a completely different ballgame

and which there's really only two, Rio and BHP that I've found in kind of liquid developed world. And so I pulled up the history of these spreads over the last five or ten years. And frankly, look, BHP is very liquid in Australia and it's also liquid in the UK, but less liquid. and similarly Rio Tintra is extremely liquid in Australia and also liquid in the UK, but less liquid. And the discount between the UK and Aussie line is about 15%, give or take. And in the height of the panic in March, when you expect these things to win it out, bless you, when you expect these things to widen out because obviously it's a liquidity-driven trade, right?

The less liquid thing will get punished more. Even then, the spread was only 30% for like one day. And so basically my point is, even if this thing is never an utterly fungible, why would it trade at some crazy wide discount to the only two other examples in the world? And so the answer to that, the devil's advocate answer to that might be well, the higher German share is much less liquid relatively to the Hong Kong line than those BHP and Rio ones. To which I would answer, yes, that's an excellent point, but the capital structure is also completely different. Now, here's the key. So I alluded before,

well, I stated outright that this is a tri-listed company. But it's not just the three listings, it's also where are the dollars, right? So you have the Shanghai listing, you have the Hong Kong listing, you have the German listing. The Hong Kong listing is about 21% of the shares outstanding. As I said, the German listing is about 2% of the shares outstanding, and therefore the Shanghai listing is about 75%. Forget the Shanghai listing, as we said, just don't deal with that. At the current price today, the market cap of only the Hong Kong piece, only the offshore

liberalized free market piece, let's say, is about $8 billion, U.S. dollars. Now, the market cap of the German piece, the 2% of the, you know, 38 billion or whatever, the market cap of that is only $700 million, whatever it is, slightly less. Yeah, maybe $600,000. Now, the free float of the German piece is even lower than that number again, okay? Because of that 270, 60-something is already owned by the parent company that controls higher. And then of that, other 200 to 10 million shares, a lot of them are owned by strategic investors in China. But let's just say the free float is 200 million, just keep it easy. Of that 200 million, which is about 400 million euro, let's say, let's say 500 million US dollars.

$500 million out of 38 billion total market cap and relative to the Hong Kong line, 8 billion. What I'm saying is you only need a very, very tiny piece of the Hong Kong active, rational, fundamental investors to exchange liquidity for cheapness to drive this spread to a much tighter level, right? So if there's $8 billion of money in Hong Kong, obviously a lot of that is passive. It's indices, whatever, or it's, you know, Asian accounts that can't trade outside of Hong Kong. The vast majority of that money is not going to go to Germany. It doesn't matter the discount. But there is also some portion of that $8 billion is going to be active managers, is going

to be looking for the cheapest exposure and wants to own hire. By the way, hires, you know, There's an investment story there. It's a dividend story. It's an operational improvement story. It's a hot stock. But that aside, we're just looking for the relative capital flows here. And so how much do you actually need of that $8 billion to move to Germany to force the spread where it needs to be? I actually don't think that much.

I think maybe $50 million, maybe $100 million. In other words, what? One and a half percent of the Hong Kong free float needs to go to Germany and move it. And I think that's already happening. And so that's kind of point one. So yes, you have this argument that it's, well, it's less liquid than the Rio shares or the BHP shares in the UK, but it's still pretty liquid. I mean, higher German line today is trading $10 million a day.

Now, I think it's inflated right now for a few reasons we'll discuss. But even on a normalized basis, if it's $5 million, $6 million a day, we're not talking a stock that never trades, right? There's obviously a liquidity premium to be paid, but 40% is egregious. It's beyond egregious. I think I've thought of some interesting, as you said, devil's advocates points to this, right? That's my first one. In the U.S. market right now, I've seen a lot of Chinese listed U.S. companies. Chinese companies listed in the U.S.

They'll go private in the U.S. Go private. Two months later, they'll relist in the Hong Kong Stock Exchange of Forex. Have you seen a couple companies do that? I know what you're talking about. Yeah. Clearly, the valuations are much higher over in Hong Kong than a U.S.-based list of company will get credit for it.

So I've seen that happen a lot. So my first pushback would be maybe you're not thinking about it correctly where the German company is undervalued. Maybe the Hong Kong company is just inflated by, you know, whatever investor is inflating the Hong Kong company. And they just don't care about the German side of this. So, you know, if it's a retail and kind of ETF-driven mania over there, they're never going to go over to the German side, the German companies where the fair value is, the

Hong Kong company is over inflated. And again, I don't know what the borrower is over at the Hong Kong, but you're kind of risking that a mania in the Hong Kong stock that just keeps standing up, up, up, up, up, and just not enough people care about the German company. So I guess that would be my devil advocate point number one. Yeah, I mean, it's a reasonable, it's a reasonable counterpoint and it's something I've thought a lot about. I guess the main counter to that is, other than my point about, you know, you only need a very small percentage of the rational investors to move capital to close it. Other than that point, which I still think is valid, it helps to think about why this opportunity exists, right? So basically what you're saying is no one cares about the

German listing and or they're just retail guys chasing the, well, actually, the Shanghai listing is even higher. The Shanghai implied price is like above four euro, whatever, four, 10, four 20 euro, actually maybe higher than that even. The Hong Kong name is only very recently listed and that's been on a rally as well. That's up to 355, right? So, of course, that could continue to happen. But if we go back to the fundamentals of why this opportunity exists, it helps explain why the German line is so cheap.

I don't think it's so much that they ignored it and don't care about it. I think it's only that they don't know about it. Why? This thing has been on a backwater exchange for two years. It was a failed IPO. No one was looking. Point one. Point two. Until very, very recently, the shares were not listed on an offshore market

where you could ascertain that their economic. economically equivalent, right? In other words, the Hong Kong prospectus only got published at the back end of last year, which clarified exactly for the first time in an offshore jurisdiction that these are all economically identical exposures. Point three, the Hong Kong listing happened on December 23rd. Point four, something I haven't discussed yet, highest parent company put out on December 31st a notice saying they're going to buy back up to 2% of the company all through the D-Share line alone. So who's paying attention to the stock market on? Christmas and New Year's only me and you and a few other people so actually you know I was paying

attention but you published this uh I can't remember when you published it first but I you know I was kind of triaging because I was doing holidays and working but I was triaging and then I came around to it like five days later and the stock was up 30% I was like god damn it why am I putting Jeremy stuff on the back I look I published it before that announcement came out it was to set late December but before the 31st so in between the Christmas New Year window And that was found information. That was like a new positive, right? So we haven't talked about that yet.

But essentially, the answer to a question, why would people just not keep caring is, look, a lot will not keep caring. But that's okay. We only need 1% of the Hong Kong guys to want to buy the German line. This thing goes to 10% discount. And guess what? At the same time, the company has announced we want to buy almost all the D shares outstanding. What a bonanza. So look, of course, there's no guarantee they'll buy all the German D shares, right?

they don't have to execute the buyback. But if you put two and two together, why would the company allow conversion before their parent company has executed their buy plan? By Chinese law, they have six months to complete the buy. If they announced that they made it pari pass, excuse me, if they announce that they made it fungible immediately, even though that's legally possible, the spread goes to zero immediately because I, you, every other R belt out there would buy with both fists as much as we could. So they're not going to close the discount before their own parent has the chance to buy. So I think there is a large amount of capital that will never ever own the D share, right? I think that's fair. All the indexes, all the passive guys and a lot of

the retail guys in Hong Kong or whoever who can't trade in Germany, whatever. At the same time, there's also a lot of relative value guys in the world. There's a lot of guys who, look, it's Germany. It's not, as I said, it's not, you know, sub-Saharan Africa. No offense to anyone in sub-Saharan Africa, but it's not a frontier market. All the disposures are in English. And it's offshore to offshore and the liquidity is okay. It's not ample, but it's decent. So the arguments for a 40% discount, look, I got into this in the 50s on average. Actually, I got into it in the 60s and I added more in the mid 50s in big size. And I mean, just 40% is just plain wrong. It was plain wrong before the company, the parent company said they wanted to buy back shares. But even just

on the numbers alone, it was plain wrong at 40%. If you told me the discount was 20%, we could talk. that might be approaching fair value. But now with the company in the market also buying the stock, I think this should be tighter than Rio. Honestly, I do. I think it should be 10%. And have we seen a confirmation that the company is actually executing on the share by that?

No, no. The notice said, basically they said there's a minimum amount we'll commit to buying, which is not a huge amount, to be honest. It's about 10 million euro or something of value, not shares, 10 million euros, so call it 4 or 5 million shares.

But we're looking to buy up to 2% of the company minus what we already bought in September 2019. So by the way, hire already bought back a huge block of these, not bought back, but the parent company bought a huge block of these shares at a deep discount in 2019 before they did this whole restructuring. So obviously the price has gone up a lot. The price had already gone up a lot on December 31st when they said they want to do it, right? So to the extent higher keeps going, to the extent higher is trading at 355 in Hong Kong and four something in Shanghai.

a price in the twos is still extremely cheap. Again, no guarantees they buy the shares. I'm not saying that. I'm saying it's incremental and you don't need a lot to close the discount. In addition to the fact that, look, it's January, what is it? January 16, January 17, a lot of people are getting back to their desks looking at these kind of trades. This is one of a kind.

This is very juicy. We didn't even talk about the other technicals involved. The borrow is easy. You can borrow all the stock you want in Hong Kong because it's $8 billion float. I'm paying 2% for my borrow. Well, guess what? The implied dividend yield on higher in Germany is, it's not 4% any longer, but it's in the threes. The implied yield on the stock in Hong Kong is 1%. So basically the implied yield on owning the German and shorting the HK line covers your borrow costs. Oh, and also if you short sell Hong Kong dollars and get long euros on a funding spread basis, that's a positive carry trade too. So this is positive carry despite the borrow fees and you're getting into it at a 40% discount. So I just don't think it last. These kind of trades shouldn't last. And unless I'm missing something really fundamental, I think it just continues to grind tighter. Let me just, again, I'm just going to come out with

the disclaimer for everyone. You know, shorting is very risky. Nothing on the podcast investing advice, though I do. I like all of Jeremy's ideas. So I just wanted to disclaim that. Let me give a little bit more pushback. So, you know, in America, we've seen a lot of these convert warrant arms for specs, is what I'll call it. So just to give the brief, basics. A lot of specs come with warrants and the warrants lets you buy shares for 1150 and a lot of these spacks, they'll run up to 30. And if you look at the warrants, the implied price of the warrants will trade for 750 or 850. So the implied price of the stock through the warrants will be 20 and the common will be trading for 30. And lots of people say, hey, these weren't arms. They are like shooting fish in a

barrel. And I think a lot of the downsides of them actually the trades have worked out quite well so far, surprisingly well. But I do think a lot of the downsides are, hey, these things have have no borrow. And if the common continues to run, you get into this world of court where people put it on a discount and just keeps sliding, why, you know, people are just saying, oh my God, what's going on? And they're just getting killed because, as you said, the warrants aren't quite fungible to the common sharemanship, right? So I don't want to talk about the SPAC warrant art here, but, you know, is there any worry for you that, again, you've got this Hong Kong bubbleware up, up, up, up, up, up, up, up, these shares. And for the people

who are on the audio, not the YouTube, I'm going flat with the German shares and the Hong Kong just keep rising. So even though you are right and eventually collapses, are you, is there any worry here, hey, why don't I just put on the 40% spread, just go along the Germans and kind of take that paid a risk? Or how do you? I mean, look, you can you can definitely do it outright and I think it works. The only reason I'm carrying it as a spread form is because the German share has already rallied a huge amount, driven also by the Hong Kong line richening. So as I said, this is not really a fundamental trade. I don't really want to take an outright view on the company. The spread is more than juicy enough for me, right? If the spread grows from 40 to 15 percent or whatever

on the amount, you know, on my largest position, this is a huge amount of value creation. So you can definitely do that if you're worried about that. Having said all that, I'm not at all worried about it. I'm not worried about in the same way for the SPAC warrant arms. Both you and I have done SPAC warrant arms. The number one risk is not the immediate fungibility. The number one risk is losing the borough and or the borough getting so expensive that you cannot carry the hedge. Okay. That is very, very unlikely here. Why is an $8 billion float in the Hong Kong line? As I said, it costs 2%. For that to happen, for us to lose the borrow here, so many people would have wanted to put on this trade and pile in that the spread will have already tightened aggressively, right? The only feasible scenario in which that borrow gets crazy tight or gets recalled or whatever is if so many people have put on this trade already that the spread has already been driven to a really tight level, if you see what I'm saying. I love it. Yeah.

So I'm not that worried about that. I guess the other thing to say is the, you know what? I just lost my training for it. It can't be that important. Sorry, I got you off. Go ahead. Let me come out here with an esoteric risk for you, right? So geopolitical tensions, right?

And over again, the U.S., you know, the U.S. just basically kicked 30 Chinese companies off of the NYSE, right? They said, you can't trade them, you know, Chinese telecom. Yeah, a couple other ones that had Chinese national companies. Yep, yeah. And it was actually quite bad. So if you were a shareholder, like we knew one company and our prime actually emailed us and said, hey, you need to sell it before this date because if you don't, you're going to be locked into these shares.

And if you ever want to do anything with them, like, you're going to have to go in front of Sipias and like literally file with the U.S. government and all this or something. So the shares just collapsed ethically because every hedge fund needed to get out of theirs. And there's no buyer on the other side. that, right? So, you know, is there any esoteric risk where there's a Germany, there's Germany saying, hey, we don't want this. There's only one D share on our market, right? We don't want it anymore. Get rid of it. We're done, whatever. Is that like an esoteric risk you've thought about it all? Yeah, look, it's, this is honestly probably one of the risks that I actually, look, I'm not so worried about it, but it's definitely more worrying than some of these other risks

to me. I think, I think there's two things. There's what would Germany do, then there's what the US would do. Okay. So the US is far scarier in that they could wake up tomorrow and just decide that higher funds the German military because they put washing machines in the apartments of offices or whatever, right? And there's nothing you can do about that. The main pushback, or I guess the main thing that I'm not too worried about it is it's already January 18th, 19. Biden's coming in in a couple of days. If it hasn't happened by now, is it really going to happen? This is all basically a Trump kind of get in some shots before you get it's booted, right? So I'm not too worried that Biden is going to come in here and find

a whole bunch more companies that haven't already been mentioned to go after. So I'm pretty relaxed on that. But look, it is a risk. It's a risk for sure. There's no way to hedge it. It's an idiosyncratic risk that would hurt if it happened. Now, on the German side, I would love it if this thing got delisted. If this thing got delisted, there'd be no reason for the companies to not allow fungibility. It makes the legal case very certain. The whole reason they won't allow fungability right now is purportedly because they want to maintain their access to the German capital markets. If they get automatic de-listed, I'm calling my lawyer, we're just calling the company, I'm getting Elliott, whoever else is on board, we'll just get this thing converted immediately

and we'll make out like bandits. So frankly, that might hurt temporarily penal-wise, but the outcome is I just get Hong Kong shares. That's great. I'm just imagining a headline where like investors celebrate in their push for the Germans regulating, cracking down on Chinese-listed the German companies. I imagine the headlines. It'd be a really awesome story. What about, I mean, obviously you've talked to a lot of other investors. I think we've covered a lot of the concerns. What are other pushbacks or anything that you're hearing? Are the things that are worrying you? Other things that you're excited about that we haven't talked about here?

Look, most of the critiques and or worries fall into this camp of yes, but it's a dirty arb. Dirty ARB is a term used to describe an arbitrage opportunity that is not perfectly clean in the sense that, as we discussed, it's not fungible right now, right? So to your point about SPAC warrant ARBs, there is an ARB to intrinsic value, but you're seeing as you can't convert and exchange the warrant for stock right now, it's a dirty ARP, right? You have to carry both legs for some period of time. So most of the pushbacks have been along that line, well, yeah, dude, but you're betting on a dirty ARB, it's a spread, like spreads can always widen against you. And I was like, well, yeah, it's a dirty arb with an option to become a totally clean arb. And all these other dirty arbs have existed for a long time. And they all trade at 10, 15%.

Why should this trade? I mean, that's the point. Even if you treat it like a dirty arb, like all these other things, the spread is still way too well. I mean, that's the whole attraction of the trade. Even if I'm wrong completely on this fungibility angle, why over time should this not trade at least kind of in line with UK's, sorry, Rio and BHP, plus adjusted for these other factors that those don't have. namely the difference in float size and how that should push up the German line relatively, and also this buying from the parent company, which doesn't exist in those situations either,

which may be added benefit on top. So most of the pushbacks are in that kind of camp of you're betting on the spread. You have to close the spread at some point, good luck, which, yeah, you're right, I am. That's kind of the bet I'm making. Other than that, other than that, it's the political, like kind of your geopolitical, point there is, yeah, I mean, that's a sticking point. But I think if we get through the next week or so without any fireworks, knock on wood, I think that will diminish. To me, the bigger question is like, the spread is so big that it's, hey, do you put this in small size where you

just buy the German shares? Because, you know, if you're going to take, if you take a 1% position, 2% position, just buy the German shares, you can say, hey, 40% discount, come what may, I can just take a 40% but you can't do that with a 30% position right then you need to have a lot of analysis you can take a 30% position with the hedge but then you're exposed to the widening out wrists and all these other words we talk about so to me it's do you go and I just chose 30% out my head do you go the Jeremy Rayper route and put on a huge dirty R but hedged position or you go with the Andrew Walker route and put on a small position and just say hey beta come up Meg, I'm betting that this is going to close. That's really the debate to me. Obviously,

there's other concerns and everything that's fine. But that's kind of debate to me. Look, I think that's a great way of putting it. And the only thing I would say is I was in your camp at the beginning. In other words, just it's, I mean, look, the price at a 60% discount where a 65% discount was just absolutely insane. Like, there was no need to hedge it. All the value creation would be through the German line, just getting closer to where it should be. But that was, you know, when the stock was 13, 140. Now with the stock above, to it's it's more it let's say for me philosophically it's more difficult to underwrite because when the stock was 131 40 you are buying higher look through at like a 5% div yield right at at a single

digit multiple of earnings and all its comps are in 20 20 times earnings 20 times earnings right so you could actually underwrite it as a deeply discounted fundamental trade since then the stock's gone up a lot right so you're actually buying it now outright basis in germany in the mid teens maybe slightly higher than that with a 3% div yield again it's still very cheap versus the comps, but you're starting to get into that range. So look, you're completely right. For me, personally, I just prefer carrying the spread from here, as I think most of the juice now is in the spread, not the outright.

But again, look, if the Hong Kong line just stays where it is, that's an assumption. So, you know, do your own duty limits. But if the Hong Kong line stays at 33, that's 355, 353. And if the spread, the discount gets to 10, 15%. You know, obviously that implies a 3, 320 or whatever, 3 to 320. German line and the stocks at 250. I mean, so it's still like a 50% upside and maybe more because, look, I think the discount, there should always be a discount for liquidity in Germany.

That's fair enough. But look, it would not surprise me if overtime is grinded much, much tighter. I think 10 to 15% is the right range. So you have like 50% upside in the German line on that basis. And look, if you carry it outright, then you also get this added kind of P&L, well, up, down. But if you're bullish on hire, you can do the work and you can make a lot more money than if higher also goes up. Because a lot of a lot of sell side brokers do actually like hire. I mean, look, this is one point I actually didn't touch upon, which I should have. And that is the

cell side is just getting up to speed on this. And even in their initiation notes, they're covering higher Hong Kong. I've read like three or four of them. They don't even mention the D shares, half of them. They mentioned the A shares and the eight shares. And there's like, why aren't you talking about the D-Share. So, like, even the sell side isn't aware properly. I've read Jeffries, nothing, or maybe a one line. I can't even remember in Jeffries. Even the Chinese banks. I read what was it. Was it OCB, DBS, DBS, Singaporean Bank, big Asian coverage. They didn't even mention the D-shares. So, so, like, they're not even telling their clients to even look at this offshore market as if it doesn't exist, which helps explain why the opportunity

is there for now. And it makes sense for them because they get paid on trading volumes, right? and their clients are looking to trade in China and Hong Kong, so they're not, there's no real, hey, go to look at this esoteric German company. The real trick is you and I need to re-record this podcast. We'll do it in Chinese. We'll explain to all the people who are buying the Hong Kong shares right now. Hey, just go buy the German and we'll self-catalyze by brushing up for Chinese and recording that. Japanese, I can sold you out.

Chinese might be a bit trickier. Jeremy, anything else we should be talking about with a hire or anything else you want to talk about in general? I mean, just on higher, I think I have something going up on Seeking Alpha, which kind of summarizes everything I said. So you can, you know, with all the details on paper, so you can look at that. I guess if it's going up today or tomorrow or something. So it'll be out soon enough. So just follow up on that. Otherwise, no, man, I think I think that's it.

I just look forward to coming on again in a month when the spreads 10% to break it down. In a month, spread 10%. Cheers doubled. And we'll just have to talk about the next one. Jeremy Raper, it's a pleasure. I mean, look, anybody listen to this? Jeremy and Nongapper, the two subscription services, anybody who ask me, I say, these are the two that Jeremy's really esoteric stuff all across the world.

I love it. You can hear it in the conversation. So love having you on. Looking forward to having you all even getting in the near future, and we'll talk soon. Awesome, bud. Be well. Speak soon. Okay.