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How much of your portfolio is in Asia and what challenges do you face?


theasiareport
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Hi everyone,

 

Little background on me. I grew up in Singapore, studied in London and spend a large part of my time here and in Hong Kong now. I've seen the odd post here or there about Hong Kong or Singapore stocks (mostly cheap on P/B basis).

 

Investing into the US has been reasonably easy given the level of disclosure, discussions on forums and various articles especially into large caps for me. US markets have been pretty frothy and we've allocated a lot of our portfolio back into Asia.

 

Flipping it around, I was curious how comfortable you are investing in Asia (and how that translates into portfolio allocation), and what kind of challenges you face as an investor going in are. If not, I am curious as to the reasons why you give is a miss too.

 

Thanks!

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For me a few things:

 

-unfamiliar with the market and economy in general. what companies dominate? what are the driving factors behind consumer purchases and business purchases?

-unfamiliar with corporate governance. what do successful companies have in common, in terms of (1) management and (2) shareholder engagement

-unfamiliar with reporting standards. how strong is the general disclosure environment? what protections are there to prevent accounting abuses?

-unfamiliar with the investor landscape. what investors/investment funds dominate? what is the history of investment? how is the economy split between public/private companies?

 

Growing up in the US with an interest in business and investment, a lot of these things are picked up gradually over the years and so I put together my own perspective on "investing" as viewed through a US-lens. I have no idea what this perspective looks like for a person growing up in HK or SG, viewing Asia as a whole.

 

Actually, I think your opinion on these items would be very much appreciated by most posters here!

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Asia has a lot more capital intensive companies and owner run companies who are not friendly to minority shareholders. For these reasons, they are not really cheap even if it seems so. For good companies who are shareholder friendly, most still trade at an expensive PE ratio. Currently I still find more opportunities in the US than HK/China/Singapore.

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Timely thread for me.

last year I bought shares of FutureBright, which runs restaurants and food courts in Macau, HK, and the mainland. And I've recently (i.e., the last days) also purchased shares in Vipshop, and invested more in Li Ka-Shing's companies - CK Hutchison and CK Asset. 

 

The stock prices of the latter two are puzzling. Both are valued by the market at ~0.6 BV. CK Hutch trades at 4.7 EBITDA and ~9 annual P/E, and CK Assets at 8 P/E on 1H 2018 earning alone! Plus it has no debt (net debt to total capital of 1.8%).  Is that because they trade on HKSE? Is that part of recent aversion to conglomerates? fear of world trade tensions? China bubble?  BTW, bennycx, both companies are certainly shareholder friendly, with value orientation, owner operator, and long track record.

 

Currently position sizing is conservative, because it's hard to ignore that the HK market knows something I don't. I'd love to hear if anyone knows what that is.  TheAsiaReport, it would be great to learn from your viewpoint in general.

 

 

 

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Timely thread for me.

last year I bought shares of FutureBright, which runs restaurants and food courts in Macau, HK, and the mainland. And I've recently (i.e., the last days) also purchased shares in Vipshop, and invested more in Li Ka-Shing's companies - CK Hutchison and CK Asset. 

 

The stock prices of the latter two are puzzling. Both are valued by the market at ~0.6 BV. CK Hutch trades at 4.7 EBITDA and ~9 annual P/E, and CK Assets at 8 P/E on 1H 2018 earning alone! Plus it has no debt (net debt to total capital of 1.8%).  Is that because they trade on HKSE? Is that part of recent aversion to conglomerates? fear of world trade tensions? China bubble?  BTW, bennycx, both companies are certainly shareholder friendly, with value orientation, owner operator, and long track record.

 

Currently position sizing is conservative, because it's hard to ignore that the HK market knows something I don't. I'd love to hear if anyone knows what that is.  TheAsiaReport, it would be great to learn from your viewpoint in general.

 

 

 

 

Agreed with your sentiment. I've been another company with Ka-Shing ties lately, Razer. It was massively overvalued about a year ago at IPO. Lately you've been able to buy it for about a 1B EV which is half the price it was getting in private funding rounds prior to the IPO.

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I think in Hong Kong there is quite a big selection of ‘boring businesses’: often the founding family owns a large chunk, maybe not top notch management (but not horrible either) that are doing ok (not excellent). A few names of the top of my head: Ming Fai, Playmates, Oriental Watch, ALCO, Dickson concepts, King’s flair. Lots of these have quite conservative balance sheets and are actually returning quite a bit of cash to shareholders. I think they are cheapish.

 

It’s my pet theory that a lot of Asian investors simply don’t care about boring mediocre businesses.

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@theasiareport  What's your take on potential outcomes from the US/China trade war?

 

I read this Bloomberg article and generally agree with its views that China isn't going to back down any time soon.

https://www.bloomberg.com/view/articles/2018-08-24/trump-paints-xi-into-a-corner

 

In answer to your query, I have ~8% portfolio allocation to China + India because those countries represent over 1/3 of humanity. 

 

 

 

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Timely thread for me.

last year I bought shares of FutureBright, which runs restaurants and food courts in Macau, HK, and the mainland. And I've recently (i.e., the last days) also purchased shares in Vipshop, and invested more in Li Ka-Shing's companies - CK Hutchison and CK Asset. 

 

The stock prices of the latter two are puzzling. Both are valued by the market at ~0.6 BV. CK Hutch trades at 4.7 EBITDA and ~9 annual P/E, and CK Assets at 8 P/E on 1H 2018 earning alone! Plus it has no debt (net debt to total capital of 1.8%).  Is that because they trade on HKSE? Is that part of recent aversion to conglomerates? fear of world trade tensions? China bubble?  BTW, bennycx, both companies are certainly shareholder friendly, with value orientation, owner operator, and long track record.

 

Currently position sizing is conservative, because it's hard to ignore that the HK market knows something I don't. I'd love to hear if anyone knows what that is.  TheAsiaReport, it would be great to learn from your viewpoint in general.

 

 

 

 

just based on your numbers alone, 0.6 BV and 9x P/E implies a return on equity of about ¬6.7%. The valuation doesn't sound very cheap to me on a low yielding low growth company. On another note, real estate in HK is also highly overheated and asset/property based companies should all trade below book.

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I think in Hong Kong there is quite a big selection of ‘boring businesses’: often the founding family owns a large chunk, maybe not top notch management (but not horrible either) that are doing ok (not excellent). A few names of the top of my head: Ming Fai, Playmates, Oriental Watch, ALCO, Dickson concepts, King’s flair. Lots of these have quite conservative balance sheets and are actually returning quite a bit of cash to shareholders. I think they are cheapish.

 

It’s my pet theory that a lot of Asian investors simply don’t care about boring mediocre businesses.

I agree with most of that stuff. I'd add Lion Rock Group, where I have a fairly big position (and my only Asian stock atm). Great management, boring business but high ROE and opportunistic M&A that might work as a catalyst. Usually I don't care much for catalysts, but opportunity cost is very real, and some of these companies seem stuck for ages. David Webb also has a large position, so I don't think I've missed anything significant.

 

So, basically I see a lot of optically cheap stuff yet stay clear of most  (due to bad governance, capital allocation, bad biz etc)

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just based on your numbers alone, 0.6 BV and 9x P/E implies a return on equity of about ¬6.7%. The valuation doesn't sound very cheap to me on a low yielding low growth company. On another note, real estate in HK is also highly overheated and asset/property based companies should all trade below book.

 

Re CK assets, rising rates should certainly cool down the property market. But downside is protected in two ways. First, 1113:HK trades at 0.65 book, and book itself is ~0.7 of latest market deals. That might be what Packer calls compound mispricing. So owning the assets via stock ownership, rather than buying the physical properties, allows us to purchase them at 45% their current price. That's a generous safety margin. And second, with zero debt, they will be provider of liquidity in a financial meltdown. A crash is an opportunity rather than a risk.

 

Re CK Hutch, how did you calculate ROE? And Even with 6.7% return on equity, if you buy the equity at the current discount, doesn't it give you a return above 11%? For a company of such qualities, at current rates and expected ERP, I think that's a bargain. 

 

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With regards to many family owned companies (Hong Kong & Singapore - going to exclude China from this group), the thinking among family members is that the company is still pretty much "in the family". The presence of large controlling stakes and illiquid markets makes institutional ownership among these stocks negligible.

 

If you don't like the management - the default thinking is that the right thing to do is just to sell your stock. Many of them take AGMs and Investor Relations as a chore that has to be done.

 

This is not to say that there aren't great companies - I just find that there corporate governance issues are quite acute and there's no real way around it without any sort of institutional ownership to drive reforms. Activism is rare given the non confrontational culture that pervades (Singapore & Hong Kong are small places after all).

 

That explains some situations whereby the company sits a pile of cash/assets and really does nothing for years and years. Remember that the controlling shareholder is probably independently wealth as is and quite content to do nothing.

 

--

 

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Chinese companies on the other hand are completely different ball game - especially if you factor in the ones that are listed overseas and listed within China. The thinking behind corporate governance, minority interests etc is completely different and I would be highly sceptical of superficially cheap companies.

 

In the case above, I wouldn't be too worried about the assets were real but that they won't being deployed in a satisfactory fashion to generate good returns for shareholders.

 

In the case of chinese companies [non SOEs]... there's a high chance the assets don't exist OR if they were there, the shareholder would find a way to tunnel it out anyway [China Hustle on Netflix is a great documentary on this].

 

SOEs on the other hand are an interesting bunch given that they aren't profit maximising... At the same time, the intent on reformation and improvement of efficiency is very real.

 

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That explains some situations whereby the company sits a pile of cash/assets and really does nothing for years and years. Remember that the controlling shareholder is probably independently wealth as is and quite content to do nothing.

 

--

 

Or they can decide that they are not independently wealthy enough and... oops. For example look at what happened to Emperor Watch and Jewellery last week. I would move Hong Kong companies much closer to the Chinese ones.

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