Mar 2024 Portfolio Updates

Topics Discussed:

-Complete Divestment from Central China Management/Central China Real Estate. A short discussion on those service company stocks whose parent (prop developers) are in problem.
-Options
-Investing by Protection or by Projection

S&P 500 (ytd): 12.87%
STI: -0.15%
HSI: -0.57%

My portfolio: 4.48%

The upward momentum from OKP had all but fizzled and the price is now pretty much stagnant. Its annual report is just released this morning. The AGM is scheduled for later part of this month and hopefully I could attend.

The great thing was that TTSH cleared my mum's spots on the kidney as stones but precautions still have to be taken due to its possible complications.

Complete Divestment from Central China Management/Central China Real Estate

Up till a few days ago, I am still holding a small amount (small due to the loss of market price over the last 3 terrible years actually) of Central China Management, a property project management company. A property project management company is asset light, and for Central China Management, had a large amount of cash in its books. During good times, property developers spun out plenty of such service companies (Evergrande and Country Garden does them as well). They are asset light, cash-generative, and hold a lot of cash in their balance sheet.

The owners of these property developers retain ownership of these companies as well.

So when the debt crisis deepen, loans are defaulted, and executives arrested, I am not alone in thinking that these service companies would have its cash siphoned to the parents. The classic way of doing this is to:
a) issue loans to parents and write them off
b) provide working capital to them by trade receivables and writing them off as well.

On the 26-March, the Central China Management, and its sister company, Central China New Life, released announcements on HKEX. For CCMGT, the auditors had resigned and questions were raised about the advances (or trade receivables) made (or held) by these companies. Another auditor is waiting in the wings to take over, but the annual report will be delayed, as well as a possible suspension of its stock due to delay in publishing these reports.

With these announcements, most investors' fears that something insidious could be going on, is coming true.

CCMGT ended on 0.295 a share the night before. On opening, it was 26 and rapidly descended to the depths of hell. I was thinking, farking hell, that is 20 cents now. 50% loss from the day before. I was punching and amending orders more than a couple of times... (and having the wind let out of my gut at the same time), and eventually got my stock sold at 0.16.

I should feel lucky as the price felt to 10 cents not long later. 

Prior to the next trading day, CCMGT released another announcement to detail why the auditors quit. Reading through the announcements, I felt that the concerns raised by the auditors are valid and within reason. 

No auditor/ partner would quit an account with a firm so carelessly. The announcement, which was release pre-market, got a 15% rebound at market open, only for the optimists to get sucker-punched, as the stock fell beyond what it started.

The market is far more merciful to CCNL (as it always is). CCNL counts Zhang Lei, the owner of a very famous Hillhouse Capital as its major shareholder. But as I read CCNL's follow up announcement, words such as "trade receivables" and "impairment losses" do not pacify one at all.

Buffett had a saying that one should bet on the horse and not the jockey. I think some problems are just too big for one, even for one whose reputation is as large as Mr. Hu Baosen, to handle.

The total amount of losses due to Central China make me cry: Just for context, I was handily beating the S&P before this... and now I am way behind. Sigh...

Options

Contrary to my expectations on my Tracker Fund positions getting called away, it didn't. The market went back down before the contract expires. However, my sold calls on Tencent, and a small amount of Anta Sports, did get called away.

As foretold, options are not a surefire way to make money. When the stock price do fall badly, there is nothing you could do. This was the case with my Link REIT positions (> 15% loss) and now no call option could be sold without realizing some capital losses. I would hesitate to sell calls with strike prices lower than my cost, as Link REIT 
a) gives a regular dividend
b) volatility isn't high to make sense to sell options for.

I took the opportunity to sell a few OTM puts on Anta Sport when there is still some volatility post announcement, but they made little difference to the NAV.

As such, the amount of premium collected this month from options is the lowest yet.

Investing by Protection or by Projection

Graham coined this term during his time: One could look up the balance sheet and invest because there is a lot of asset in its books. Hence there is "protection" from "realised" (realised being if the company is eventually liquidated/sold/bought over) downside.

Schloss added that 3 possible good things can come from this approach; one, the owner (or a third party) privatise the company at book value or more; two, the management overcome problems and the stock price rises; three, the management buys back stock. Whatever earnings is less diluted and hence EPS goes up.

So if net asset per share is way more than market price, it is safe to buy such stocks since there is 'protection.' 

Projection is what most people does these days, and those who could do this well would see their portfolio perform very quickly and rewardingly. This is expected: earnings are most correlated with stock prices. 

Such approach are usually nothing more than thematic plays, where the in thing is getting all the hype. Investors pile and step on each other to acquire stocks are senseless prices. I could imagine company insiders giggling as they watch the spectacle, and offload their shareholdings to those fools.

Any idiot could see growth in revenues, order books, and cash flows. The problem is that they think it will continue forever. If one is early, great, but most does not know when to stop.

And the market being a wonderful forward thinking device, would usually sell down before most people have a clue.

I have been thinking about my portfolio and while a good majority of them were invest with protection in mind. With protection I mean protection with assets... even when I bought companies with just  earnings in mind, the multiple is modest, accounting for slow or no growth). I have no idea how to invest with companies having large Price-to-Sales ratios, accompanied with insiders doing nothing but selling the stocks.

This approach hasn't done all that well for me these years. Should I switch? I don't think so. I am not just stubborn... I think I don't have the chops to play the game of projection.

Sellers always know what they are selling, but buyers?