The GeoTeam has uncovered what we believe to be a brand new information arbitrage once again on Utstarcom Holdings (NMS:UTSI) that supports our previous assertions that the company could be poised for meaningful upside.  Our premium members have been kept abreast of the latest developments giving them the opportunity to get valuable actionable arbitrage before the rest of the market.

As we speculated would happen, strategic investor Gu Guoping that we highlighted from a 13D/A appears to have consummated the purchase of ~11 million shares at about $6 per share. It appears that Gu intends on taking a controlling interest in the company or taking the company private. Our diligence concludes that Gu may use the company as a growth platform instead of as a vehicle to raise dilutive capital. Gu has reportedly had success in growing his current company at an impressive 200% year over year rate, according to the article, which also states they currently produced revenue of RMB 10 billion (USD $1.59 billion) in 2014.

On September 9th, we issued a report on UTStarcom (UTSI) highlighting a transaction that we believed could foreshadow strategic involvement or a buyout.

  • On August 7th, UTSI filed an amended 13D/A , inclusive of a Binding Term Sheet, where nearly 12 million shares are planned to be sold between investors for a premium of over 200% of the current share price.
  • The company danced around the topic on its recent conference call and avoided giving any further information on the transaction.
  • Despite this, the company noted that the buyer was a “strategic investor” and reiterated that they think, in the midst of a turnaround, that the company is significantly undervalued.
  • UTSI is priced right around its cash value and at an over 30% discount to its book value per share. It also has a $230M net operating loss carryforward that may make it appealing to a strategic buyer.
  • Due diligence leads us to believe the company could be on the cusp of a material transaction that could result in meaningful appreciation of shares within 60 days.

Today, we’re relaying a Chinese media article published September 28, 2015 (in the U.S., September 29th in China) on Sina Finance. The article points out that the previously reported 13D/A transaction has consummated in full and that investor Gu Guoping may become a majority shareholder — or even tender for — UTSI.

Here is the original text of the article, with key points translated below:

Key Points Translated

The key points of this Chinese media article go on to validate a majority of the thesis we presented in our earlier article. It is stated that the strategic investor involved in the transaction of 11 million shares, Gu Guoping could be working to incorporate his business into UTSI’s public vehicle, help UTSI grow on its own, or potentially look to make an offer for the company and take it private. According to the article, after injecting new products and expanding the company’s scale, investor Gu Guoping has stated he expects UTSI could be a $2 billion revenue company by around 2017.

Here are some of the key points of the translated article:

  • Becoming a major shareholder of UTSI brings Gu Guoping one step closer to his dream of becoming a communication industry giant.
  • Shanghai Feixun Communication Co., Ltd.’s (“Feixun” hereafter) Chairman Gu Guoping confirmed during an interview days ago with a reporter of China Business News that Feixun has acquired an over 30% interest in UTSI, becoming the company’s largest shareholder.
  • Feixun paid for $75 million and afterwards [Feixun] will seek to either obtain absolute control of UTSI or look to privatizing [UTSI].

The article also states that since 2009, Feixun has grown at average rate over 200% annually, arising from transactions in the communication industry. Good at utilizing capital market power, Gu Guoping wishes to push Feixun and its related subsidiaries into the “USD 10 billion Club” via mergers and acquisitions. In his eyes, “USD 10 billion” is not only the launching lane of Feixun’s business, but it is also the “live or die” line.

The reports says the transaction took place on August 07, [2015].

The report continues with a quote from Gu Guoping:

“The acquisition of UTSI has several benefits. First, the reason why we want to conduct an overseas acquisition is to have an overseas capital platform, with which [we] will not necessarily do financing, but we can make additional acquisitions through it. Another benefit is that it (UTSI) has a reasonable market base, because it is very hard for us to start a market from the scratch without such a market base”

This quote coincides with the conclusions that Geo drew out in its September report on UTSI. The report continues:

  • UTSI’s main business is offshore, which covers Thailand, Japan and the United States. Feixun’s European market expansion is going relatively smoothly, while it still lacks a breakthrough in the United States market.
  • An important reason for Gu Guoping to acquire UTSI is [its] R&D team.
  • “UTSI is very famous in the PHS.  In the optical transmission technology, UTSI has a lot of reserves, including at least 400 R&D staff. Coincidently, UTSI’s U.S. headquarters is right next to ours. It is very easy [for us] to consolidate in the future. The brand and staff will belong to us intact.  The only change is the CEO, who is expected to be me,” Gu Guoping said.
  • For Gu to have controlling interest of UTSI, it’ll cost Feixun 150 million USD.
  • “On the other hand, if UTSI tries to increase its revenue, it has to explore emerging markets like China and India, and increase its investments in technology in European and United States markets.  We need technology and the company needs resource support, not only capital support, but also a very big incentive, which is to increase its employee count to 2,000, or just keep its current 400-500 employees,”  Guo Guoping said.
  • According to the article, after injecting new products and expanding the company’s scale, Gu has also stated he expects UTSI could be a $2 billion revenue company by around 2017.

This article seems to validate our analysis in our last article, indicating that Gu might be getting involved with UTSI to reverse merge his company into the U.S. company and take advantage of the net operating loss carryforward that the company comes with. We continue to stay long UTSI, as we believe the endgame here, whether it be a go-private offer or a management shakeup, could send UTSI shares meaningfully higher.

Information arbitrage remains just one of the many actionable idea generators that we offer, rounding out our institutional-grade due diligence for the average, everyday investor. Our information on the U.S. listed China space has helped countless investors protect their portfolios and enhance value by taking advantage of the arbitrage created by the language barrier and time difference that U.S. listed Chinese companies are subject to.

Due to the China angle, we still view this as a speculative trade.  As a reminder, we are only reporting on this transaction because we believe it could be meaningful and have an effect on the stock price. We are not vetting the company, its cash balances, or its claimed operations. We continue to perform our due diligence on the nature of this transaction and the corresponding companies involved.

We will keep investors apprised of further due diligence on UTSI as it comes about.

Disclosure: Long Speculative position in UTSI