Tuesday, February 28, 2006

ROI on Uchi: Part III - the ESOS issue

It would appear that we have a very interesting situation in Uchi Tech.

We are looking at a stock...

  • With a CAGR of 25% over the last 6 years.
  • With a CAGR of 18.76% over the last 4 years.
  • Last year's net profits grew 17%
  • Net profit margins of 56%.
  • Nett cash. No debts

But it is considering a tacky 15% ESOS!!

As mentioned by the great, late Philip Fisher:

  • the management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.

Yes, by issuing a 15% ESOS, the directors of the company are putting themselves in a position where they benefit themselves more than the minority shareholder.

Now here is some interesting issue worth considering. Here's what we need to do. Open the wordfile attached to that ESOS

1. See line 3. Maximum no. of Shares to be issued pursuant to the exercise of outstanding Existing ESOS options granted/ which may be granted. Total? 23,445,280 million shares.

Question that begs to be asked. Why is there so many outstanding existing ESOS?
Since there already exist so many outstanding ESOS, why the need for another 15%?

2. See line 5.
To be issued pursuant to the Proposed New ESOS (up to 15%)... 59,375,712.

Now if you add both figures up, you will get 82,820,992 new shares, assuming full exercise of ESOS.

Currently Uchi has 372,392,800 shares. Which means there is a possible dilution in earnings per share of 22% assuming full exercise of all these ESOS.

Now let's be realistic and ask ourselves this... is 22% dilution in earnings per share a lot or not?

Simple way to look at this dilution.

Say U** has a current eps of 100 sen.
Say U** has a possibility to trade at a price earnings multiple of 18x.

Which means U** could be worth some 18.00 in market price.

Now a 22% dilution means... the eps would be 78 sen.
And using the same pe multiple assumption of 18x, U** should be trading at a market price of 14.00.

See how disadvantage to the minority shareholder?

Oh yes, it is mentioned that ESOS is important for a company for it is a proven method to retain talent in a company. No doubt about it. But from a minority shareholder of the company oint of view, do you think it is fair that your earnings per share be diluted by so much?

Now comes the really subjective and tricky part of any review.

Say you really, really hate such a proposal but on the other hand you recognise that this is still a very solid company. How?

Would you forgive Uchi on this and consider this as just one red flag? Are you willing to forgive UCHi and consider this as only just one naughty thingy?

Or would you kick Uchi out of the door?


Oh this issue of flags... LOL... sometimes... I wonder if investing is a game of collecting flags? Like in soccer, you get a yellow card and then a red card! Ahhh.. but do not get me wrong here.. me just ranting on it that's all... lol... just poking fun lah..... :p

Anyhow... at the end of the day... it matters not what I think about ESOS or what I think about UCHi... most important is us making the correct rational decision.

just for the record... Uchi is now trading at 3.30.


hhc1977 said...


True, the amount of ESOS will be huge, at 22%. But, if the ESOS is only accorded 10% discount from the market price, there wont be much incentive for the holder to exercise it unless there is sustainsive gain.

ESOS normally has locking period and percentage period before the holder can get the profit. For my company, there are 2 kinds of grants (most of the MNC here employed the same rule). Usually, holder can exercise the option in 25% batch for each anniversary of the grant date. The other is 50% for each anniversary.

In order to make the option worthwhile, the option amount must be big or the price increase must be justifiable for the transaction cost and opportunity cost.

If i got 100 unit option with 4 years grant option.

After 1 year, i can only sell 25 unit. Unless the price difference between the grant price and market price is huge, i wont do anything. Anyway, if the company price is in up-trend, something must be good. So why kill the golden goose?

Assuming i m a good employee, i will be strucked with this company since my option benefit after 4 years will be very sustaintial.

In the other word, the company has managed to retain one talent to create shareholder value.

hhc1977 said...


For bad malpractise where minority shareholders are schemed,

ESOS is no way close to other "creative" ways.

For me, these practise raises Red "CArd" for me.

1)related party transaction with no justified reason. AKA, pumping in junk asset into company

2)Private placement with sustaintial below market price

3)Acquiring company for the sake of diversification.

The list is endless....

Moolah said...



LOL!... hey dude, don't get too worked out on it lah.

I have only given you my personal opinion why I think this ESOS is simply bad for the minority shareholder... if you don't agree.. lol... it means you don't agree lor...

And as you know in the share market... views and opinions always varies...

ps... are you sure you are not going out of the way to justify this ESOS thingy?.. err... err... errrr.... consider this... say if you do not have UChi, would you buy it now despite its plans to introduce a new 15% ESOS?

hhc1977 said...


yes, i agree with u we can be disagreed.

For ESOS, it's really a double edged sword. And a pretty sharp one at that.

Running a tech company isnt like running a mum and pa shop where talent/skillset doesnt weight much on yr bottomline. U dont need a rocket scientiest to sell Milo, do u.

For high tech ppl, u r going to deal w pretty smart ppl with a pretty mobile and worldwide workforce. In FIZ, Engineers/managers simply hopping between jobs in order to get the best deal. The mantra for HR here,

" If u r really high performer, u have the luxury to get the best package from the company". Workforce is the one which differentiate high and low tech.

From my opinion, huge ESOS is definitely a red flag. But i would observe how they dish out the ESOS.

If the shareholder value is being created faster than the ESOS dilution, that means that the management has used ESOS efficiently in growing the money. As long as i dont see issue like stagrant or reverse growth, i wont make any move first.

Dont worry too much. If it's going to sink, there would be many more erd flags waiting for collection.

Moolah said...

Err... all the best dude... :)