SAPPHIRE: Gets new substantial shareholder with 27.96% stake

Two of Sapphire Corp's largest shareholders, namely Best Feast Limited and Ou Rui Limited, are swapping a combined 27.96% stake in the company with new shares to be issued by Hong Kong-listed Hong Kong International Construction Investment Management Group (“HKICIM”). According to an announcement by Sapphire, the above share swap represents Sapphire's share price of approximately  S$0.51[1] per share.

Why Sapphire?

I have been following up on Sapphire’s corporate transformation plans over the last few years. I believe potential investors and, possibly, HKICIM were attracted to the post-turnaround Sapphire due mainly to its existing core infrastrcuture business operated under its principal subsidiary, Ranken Infrastructure Limited (“Ranken”). 

My personal view on this transaction

This acquisition gives a strong vote of confidence to Ranken’s capability under Sapphire’s capital market platform, its track records and licenses; and obviosuly, the industrial prospects. In addition, there may be other commercial points to note:

Possible larger pipeline of projects

Looking at HKICIM's profile and its networks, it is likely to have a larger portfolio of projects which may bode well for Sapphire/Ranken over the medium to long term, further strengthening its existing good business fundamentals.

Financial target of RMB64.75m in the 12 months ending 30 Jun 2018

Although Sapphire mentioned that it has not done any independent review of the financial target for the HKICIM deal, I find it encouraging that the financial target is around RMB64.75m for the 12 months ending 30 Jun 2018. To put this into perspective, 1HFY17 net profit ended 30 Jun 2017 was only RMB20.5m.

More stake in Sapphire - perhaps in the long term

I am making a wild guess here, if HKICIM and Sapphire/Ranken can work well together with significant synergies, HKICIM could further up its stake in future – as the current interest of about 28% under the deal is very close to trigger the 30% threshold for a general takeover offer.

Sapphire’s existing business remains very promising

Teh Wing Kwan, CEO of Sapphire. NextInsight file photoNotwithstanding the above transaction, Sapphire’s existing business looks very promising. Last Thurs, it announced it clinched RMB856m contracts and lifted its order book to a record RMB3.4b!

The RMB856m new railway contracts came from Dalian and Urumqi. In my opinion, there are 5 noteworthy points in this contract announcement namely,

♦ Sapphire has clinched RMB1.132b of contracts from 12 Sep to 12 Oct 2017. To put this in perspective, Sapphire’s order book was RMB2.6b before this string of contract wins in the past one month;

♦ 2017 year to date contract wins amount to RMB1.9b which already surpasses the RMB1.7b contracts won for the calendar year 2016;

♦ Since the acquisition of Ranken, this is the first time that Sapphire’s order book has risen above RMB3.0b. This is indeed a significant milestone;

♦ On 12 Sep 2017, Sapphire mentioned that its order book had increased to RMB2.8b. With the new RMB856m contracts announced on 12 Oct 2017, Sapphire’s order book has increased to RMB3.4b and not RMB3.6b. Based on my personal interpretation, this may mean that RMB200m has been “digested” in just one month.

Although some of these RMB200m may not translate immediately into revenue (for example, it may be recorded first as “contracts work in progress”), it does show that things seem to be moving faster in 3Q and beyond vis-à-vis 1HFY17 à based on my personal view;

♦ Contract momentum remains very strong as there are various opportunities such as the Taiyuan City Metro Line which Sapphire highlighted in Section 10 of their 2QFY17 financial statements. Furthermore, according to the 12 Sep 2017 press release, Sapphire is evaluating a potential consultancy contract for a metro rail project in Bangladesh.

Sapphire has been operating in Bangladesh for some time, thus I hope it can clinch this potential consultancy contract in time to come…