March 2023 Portfolio Review

"stressed, tired-looking middle-aged man painted in Van Gogh's style"- by Dall-E

Year to date,

STI Index Fund returns +0.25% (was -0.52% in Feb)
Hong Kong Tracker Fund returns +1.8% (was 4.16%) 
S&P 500 Index Fund returns +4.95% (was 6.05%)

My portfolio returns year-to-date is currently 6.11%. This excludes a substantial amount of Singapore Saving Bonds and T-Bills which I purchased on behalf of my mum. Bulk of these bonds will be redeemed or will mature in 2H 2023.

The returns look positive due to OKP. The market granted kindly a 23% revision upwards-- largely because OKP had been awarded a princely sum of 43m from its arbitration proceedings with CPG Consultants (market cap for OKP is still only 59m). CPG consultants were ordered to pay up 28 days from 3-March. The last I checked, OKP is still checking with its legal team if they have to make an announcement in SGX, when they are awarded the sum. 

The returns were offset by colossal sell-downs by Central China Real Estate (CCRE) and Central China Management (CCMGT). The reason why I am extremely concerned by the wellbeing of these two holdings, due to the substantial amount of capital, valued at cost, invested. The amount represent #2 of my holdings (Alibaba is a distant #3). If the Chinese property sector does not recover, it would also impact Yangzijiang Finance (also a top 5 holding), which hold bonds mostly in China.

In just the past month alone, CCMGT lost 24%, and CCRE lost a blood-curdling 42.1%.

This is the second time in less than 2 years, which I have to endure drawdowns of this magnitude. 

During the earnings release for CCMGT on 22-March-2023, the controlling shareholder, Mr Wong Po Sum ("Mr Wong") was extremely upbeat. He declared that the worst is over for CCMGT. 

But the market vehemently disagreed.

Within a matter of days the stock fell from 56 cents to 48 cents. That is more than 15% in less than 5 days. While there was a rally of 9% today. I could find nothing to attribute such a market movement, and certainly there is nothing within CCRE's earning (that I just read) release to suggest that all is well.

Last but not least, Alibaba announced that they are splitting the business into 6 separate units, paving the way for spin-offs. The theoretical gap between market price and its sum-of-the-parts value could finally be bridged. I am not overly excited because I think there wasn't a huge value proposition-- too much assumptions regarding the cloud and fintech value (regarding the latter, I placed zero weight to private valuations by investment banks, regardless how prestigious they are).

Alibaba regained 16.41% in the last 5 trading days alone. In terms of cost, Alibaba is #3 in my portfolio, so it helps.

Earnings Release Review

There were many companies in my portfolio which release earnings this month.

I had just digested the release from CCRE and language does not appear to be upbeat, and neither were there any positives to take away. Dividend was withheld, which is sensible. There is a sum of 900m in bonds to be paid this year, and a default in any of them will trigger a cross-default to bonds maturing much latter. How strongly would the local banks of Henan support CCRE? My guess is as good as anyone.

The results from CCMGT isn't positive as well-- they appear to have lost their #2 position in management leadership in central China. The wisdom of the crowd surprises me, the price corrected to a 5% yield. So the market did not over-correct... Market efficiency should usually be respected. 

A quick back of the envelope calculation suggest that the current price of CCMGT is at net current assets, with some blunt discounting of its receivables.

I just digested the results from Clifford Modern Living and the IT services segment was the only negative surprise. Dividend is maintained on a yearly basis. Cash in the books has increased, but the cashflow statement is not published in the unaudited release. I would examine it when the annual report is published.

Nanyang Holdings' result was out earlier this month. It has been a year and there is still no land use rights agreed upon for its Shanghai operations. It disappoints me greatly that the management persist in managing its investment in a overly-active manner, and to makes matter worse, the controlling shareholder has decided to rope in his daughter as an advisor (she had brilliant academic credentials but unfortunately is working in a unit trust/fund as well). 

The Nanyang Plaza main tenant (of which about 15% of its revenue was attributed) has moved out. While the share prices for SCSB has risen since the rights issue, I think we may mistake symptoms for the cause. Only time could tell.

Despite the downcast report, Nanyang Holdings' price did not move at all due to illiquidity. 

Transactions in March

I made a huge increase in OKP after earnings release. I think two things are probable here: 1st, CPG Consultants should be able to pay up; 2ndly,  OKP's earnings should improve with its biggest order book in the last 5-6 years, since the incident.

There are areas which I am dissatisfied with this company (nothing is perfect in this world). I hope to be able to discuss this with management or like-minded shareholders next month during the AGM.

As of now, OKP is 33% of my entire holdings.

Comments

While I am grateful towards the increased share prices for some of my counters, the intellectual satisfaction was not there. I have held OKP for good 5-6 years since the incident, and Alibaba is a popular holding. I can't help feeling bitter by the manner which TTJ and Centurion owners treat its shareholders..

I find it deeply ironic that since young, I have a special place in my heart for the downtrodden, and this was a minor reason for buying such shares (the big reason is that they are undervalued, have problems, and have plenty of avenues to recover). It is regrettable that the attitude of these two companies management is no different from the market's as well.

If authors of investment books were to look for examples where management could be attributed for the poor share price performance of their companies, Centurion and TTJ would currently top the list.

Hope my fortune turnaround in the coming months.

Feb 2023 Portfolio Update (Centurion, Yangzijiang Finance)

Despite sleeping very early these days, I was feeling perpetually tired throughout the day. That explains why this post is late.

I did a presentation some weeks back on value investing with Boon Tee:

STI Index Fund returns -0.52% (was 2.93% in Jan)
Hong Kong Tracker Fund returns 4.16% (was 7.84%) 
S&P 500 Index Fund returns 6.05% (was 4.19%)

My portfolio returned a measly 4.25% (was 7.15%), largely due to another round of correction by Alibaba and Central China positions. This was very much inlin with expectation; the overhang (of property worries) should continue for years. Alibaba isn't doing so great, in terms of market price movements, but it does look like they have managed to control cost. However, Alicloud and International Operations continue to be loss making. There is still no clarity in how one should value Alicloud and the (potential?) Ant Group IPO.

Transactions:

Purchase 2000 shares of Nanyang Holdings for my portfolio.

Nanyang Holdings is just a very cheap stock which main operations are good old rental and investment. The main investment is of course their Shanghai Commercial and Savings Bank, which is mainly based in Taiwan. I would readily say that banks and financial institutions are far beyond my circle of competence. However, the value is still apparent in other aspects of its balance sheet. I am just uncomfortable with their investment process-- it is too active for its own good.

Discussion on OKP, Centurion and YZJ Finance, as they had released full year (FY) earnings during Feb 2023.

OKP: 

While revenue is definitely higher, so are costs. The balance sheet looks far more fragile than a year ago, so now the investment thesis has become one of projection instead of protection. It was also revealed that 3m was spent in the arbitration with CPG Consultants. I believe, if OKP is successful, would bring significant one-off 'earnings' to the 53m market cap company.

********

Centurion: 

As usual, the dividend is a joke, and the stock price corrected a fair amount (8% intraday at one point). The only bright spot is that the debt is getting reduced. Amusing enough, I think it is far better to be a debt holder in Centurion than a stock holder. It had been 2+ painful years. 

Perhaps Centurion should do a major rights issue to bring down debt? Since the cost of equity (in dividends) is less than a Singapore Savings Bond? It wasn't that business was poor; things are actually picking up. So do the major rights issue, let's clear the debt in the books. In the mean time, management should show that they deserve to be management by:

a) Not increasing their remuneration, or best: be paid with stock options instead. Strike price should be significantly higher, lets say 25%, than prevailing market prices.

b) Voluntarily purchase securities in the open market.

On 22 Feb 2022, I wrote:

Results were much better, and the debt level was pare down by a modest 20 million. However, the dividend proposed was a paltry 0.005$ a share, much lesser than the expected 2 cents a share. The company put up a resolution to restore director and management pay for voting as well. This news depressed share prices, and whatever paper profits from profit alert, prior to announcement, were all but vanquished.

It is disappointing that 1 year from today, the narrative remains unchanged.

Let me put the numbers into context. Centurion is earnings between 70-100m in free cash flow over the years. The figures for 2016-2023 as follows:

	2016	2017	2018	2019	2020	2021	2022
Free Cash Flow (m)	65.037	54.263	54.986	66.554	59.146	70.256	101.679
Dividend Declared (m)	7.399	7.957	8.408	8.408	0	8.771	8.412
Interest payment	21.383	21.545	23.929	28.759	23.319	22.734	28.341
Total Remuneration of Directors (Retrieved from Annual Reports, Sect. 9)	0.38	0.422	2.113	2.422	2.68m	3.277m	2.971m (from earnings release)

 

I think the numbers above does not justify why dividends are suppressed over the years!

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YZJ Finance: 

has finally released its full year earnings. Examining the balance sheet reveals:

-620.6m of cash

-2264.6m of debt investment, which are current

 407m of debt investment which is non-current.

This is the most important of the lot.

It is noted that 536m of those investments were transferred to YZJ Ship-Arm (parent) before the spin off. I thought initially that it was a protective move by the parent to relieve the child (YZJ Finance) of potentially bad assets. I also viewed the reduction of debt investments in 2022, of 1.7b from 4.57b, to be favourable. Management also stated that the interest income was 312m (see below). I think a yield of 10% for its debt investment is sufficient given the risk.

-413m of financial assets, which are mostly unlisted China equities (see below)

-322m in investment on associated companies. This associated companies are not disclosed, but likely related to YZJ Ship-arm.

On the liabilities side, there is a total of 332m, of which 228 are deferred tax liabilities. These are tax which are not paid and will be paid in the future.

Let's relist the assets and do some brunt discounting.

-620.6m of cash

-2264.6m of debt investment, which are current

 407m of debt investment which is non-current.

413m of financial assets, which are mostly unlisted China equities

322m in investment on associated companies

With cash, there is no discounting needed. The amount of interest income (20.5m) represents 3.3% which is likely reasonable.

With the debt investment, the management presentation slides indicate that about half was performing, with the majority of the other half being non-performing:

One would look at 2021's performing loans of 3.16b and wonder how did it turn up to be only 1.35b this year? Well, 1.6b was redeemed (refer to the first screenshot of this post).

However, I going to be brutal and write off the existing under-performing and non-performing portion from its assets. That would mean the debt investment would be worth only 1348b instead of the stated 2264m.

Obviously this is going to be too conservative since

a) There might be reversal of NPL, and given that management guided earlier that there is collaterals.

b) There is some residual income from the performing loans. Stated amount in the book is merely principal, and does not include interest.

I going to reduce the unlisted Chinese equities by 75% (overly conservative) because there is no way to look at those numbers (since they are not listed!)

I will also reduce the value of the investment in associated companies by 50%.

That sums up to be ...

Asset	Stated Value	Discounted Value
Cash and EQ	620.6m	620.6m
Debt Investments	2671m	1348m
Financial Assets (Investment in Chinese Equities)	470.072	138m (unlisted equities are discounted by 75%)
Investment in associated companies	322m	161m
Total	4083.6m	2267.6m

... a total of 2267m, and if we take away 332m of liabilities, the remaining value of YZJ Finance would be about 1.9b.

YZJ Finance, is listed at 1.46b. That represent a margin of safety of about 25%. Since my average price for YZJ Finance is about the market price, I would refrain from buying more stock. The dividend yield, based on a distribution of $0.018 per share, would be 4.7% for my holdings.

Let's wait and see.