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Strategies & Market Trends : Value Investing

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To: Spekulatius who wrote (57653)	7/31/2016 10:44:41 AM
From: E_K_S	of 78719

Re: TCP International Holdings Ltd. (TCPI) - a value Buy or just a value trap pending litigation settlement on manufacturing/fraud allegations The value proposition for me on TCPI was their BV at $3.15/share as shown on Yahoo Finance. There is a line item called "Deferred Long Term Asset Charges" that is large at $24.15mln. I would also back out their intangible assets at $6.5mln and Goodwill ($0.00). There are 28.4mln shares outstanding so worst case scenario is a $1.07/share deduction/adjustment to stated BV which makes BV at $2.07/share. The current stock price of $1.80/share suggests the company is selling at 0.85x using my adjusted BV amount. So not knowing what these deferred long term asset charges are and why they are so large and have been booked at this level since 2013 is something I would want more clarity on. It may have something to do w/ the "Other Liability" entries as those amounts have not decreased going back to 2012 (in fact they are up $6mln). The only other thing that may/could signal a problem is that their receivables have more than doubled since 2012 while net income only increased 36% during the same period. I was concerned that inventory (specifically legacy inventory) may have increased substantially and might have to be written down. When you look at 2013 vs 2014 inventory level only increased 2% so that does not appear to be an issue. ------------------------------------------------------------- However, upon further research, there is disturbing background history on the company upon going public specifically w/ their former CEO who stepped down June 2015. Here is some background history on the departure of the previous CEO Ellis YAN. Ellis Yan will step down as CEO of TCP...the lawsuit suggests that Hauser wasn’t the only one with concerns about how Yan runs TCP. It says that the company’s audit committee, part of TCP’s board of directors, previously told Yan that he needs to “promptly and substantially” change the way he runs the company. The lawsuit listed some of the other issues raised by the audit committee: Allegedly, Yan failed to provide clear financial information to TCP’s chief financial officer, made major decisions without consulting other executives, disregarded company policies and imposed “unrealistic performance demands and pressures on employees as to potentially promote inappropriate employee conduct damaging to the company.”... There may have been fraud in product labeling (as late as 9/2014) and as many as 900K units. It also looks like Home Depot demanded a $4mln credit for mis-labeled product. Before the company went public, YAN and his family members owned 70% of the company. Everything is outsourced in China where they employ over 6K employees. Key Items in the TCP Suit--warning graphic language --------------------------------------------------------------- The company still appears to have some issues transition from a private company to a public company. There could be some hidden value remaining in the company but it is difficult to quantify especially the value of the fixed assets especially since they are domiciled in China and would be difficult to liquidate. It's interesting to see their relationship w/ Home Depot (their largest customer) and how perhaps there was some culture 'crash' in the relationship. I wonder what impact this suit may have on their other large customers (ie Wall Mart). Maybe these issues were/are the reason for these very high deferred asset charges carried on their books. I see no other litigation set aside amounts as an Extraordinary Items liability. For those reasons, I will pass. It may very well present a value/bargain but there are a lot of fleas on this dog. EKS

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