My Thoughts on Investing: "Carpenter Tan"

Showing posts with label "Carpenter Tan". Show all posts

Tuesday, March 15, 2022

March 2022 Portfolio Update

"Beware the ides of March!"

S&P 500 Index Fund: -7.59% -> -11.04%

Hong Kong Tracker Fund: -2.44% -> -19.99% (ridiculous)

Straits Times Index Fund: 4.36% -> 3.06%

My portfolio: -8.39% -> -15.38%

So in a matter of less than 3 weeks, the Hang Seng index was blipped 17%, and my own portfolio is not too far behind, losing 7%. The S&P 500 is still outpacing my portfolio.

Transactions made:

-Significant amount of Alibaba (9988) in Hong Kong Exchange.

Since 1st of March, Alibaba went from 103.8 to 71.25 HKD. This is purchased for both my parents and my own portfolio.

As I write, the market capitalization of Alibaba in NYSE bears a market capitalisation of 227.87B USD.

This is the back of envelope SOTP I done some time back:

"The e-commerce business, in the latest interim, contributes about 12B USD. The cloud computing and entertainment branch, as well as its "innovation" branch are still loss-making.

They could possibly spin off the cloud computing branch. The cloud computing segment contributes about 5.6B in revenue for the last six months (or 12B USD annualized). It appears to grow 30%, so let say if we give it a 5x-10x Price to Sales ratio value, that is 60B-120B.

33% of Ant Group belongs to Alibaba. If it had gone through its 35B USD IPO then, Alibaba stake would be worth ~11B USD (~452B HKD). Its latest interim earnings was 1.7B USD

To guess-timate very, very conservatively,

Alibaba current market cap is 339B USD

-E-commerce, if it contribute 24B in annualized earnings, on a P/E of 10-15= 240B-360B

(There were whispers that at current valuation, one is only paying for the e-commerce business and everything else is free. That is only the case if e-commerce is valued highly. I am not sure, going forward, if there is sufficient margin of safety)

-Cloud Computing= 60B to 120B, average it and give it a 90B.

-Ant Group IPO= at 1.7B USD interim, is worth about 3B USD x 15 PE= about 45B. If Ali owns 1/3 of it, that is about 15B.

Sum it up, Alibaba is worth between 315B - 465B."

What happened between then and now? We know that the IPO for ANT Group will be further delayed, with no visibility. We know that there isn't anything promising from the cloud segment yet. If we were to mark down our valuation of Ant and the cloud business by another 30%, that would mean that they will be worth 40B and 10B each, a sum of 50B.

The E-commerce business is perhaps worth 200B (further mark downs)

So there is a total of 250B worth, without considering the amount of unneeded cash in its books. So there is a ~10% margin of safety under very grim considerations.

-Token increase of Central China Management (9982) at the start of the day, before results release.

The results of CCMGT does not look too worrying. A decent amount of dividend is to be dispensed, 0.099 HKD per share. That, along with 0.086 HKD a share earlier this financial year, represent a total distribution of 609m HKD.

The market capitalisation of CCMGT is a mere 2.6B HKD.

The amount of cash in its book is 1.7B after subtracting all liabilities. This means that you are paying only 900m for the company as a private owner.

A matter of concern in its book is a 317.552m RMB (389m HKD) worth of Trade Receivables to a 3rd party. This TR is to be settled in a year and the interest payable of 15% is payable to CCMGT by this unknown company. I would assume that this means two things: Times are either truly desperate for both construction firms and banks, one unable to borrow and the other unwilling to lend; and if this party is truly unrelated to CCMGT, the debt issue of this sector is of major concern, and hence they deserve to trade at gigantic discounts over the months.

-Initial amount invest in a gaming company call IGG. It is trading at reasonably low valuation to its books, and is another asset light company (as all gaming firms are). It has a reasonable promising game in the pipeline, which is something to be hopeful for, despite the profit warning issued recently.

I have also noticed that a huge amount of options were exercised, and it definitely contributed to the sell down of stock (post profit warning). By eyeballing the amount of options exercised, and the amount of trade volume, I think it is a decent amount but not a worrisome percentage.

-A small amount of Hong Kong Tracker Fund for my parents only. I do not believe in investing in index funds personally.

Personal Opinion of Centurion Latest Result

I would summarize the performance of Centurion firstly:

 
Company Performance (in millions) 2021 2020 2019 2018
Shareholder Dividend 4.203995 8.41 16.816 21.019
Revenue 143.017 128.355 133.353 120.07
Net Income 52.679 17.171 99.951 79.326
Fair Value Gains (or loss) to IP 11.416 -27.641 66.266 48.553
Adjust Net Income 41.263 44.812 33.685 30.773
Operating Cash Flow 74.349 60.48 70.247 57.475

As you could see, revenue numbers are not affected badly year on year. This is normal because the business of dormitories is irreplaceable.

If we were to look at net income, it does suffer from addition and subtraction of investment property valuation. One can reasonably argue that property revaluation is reflective of actual earnings, or improvement to infrastructure. I find it highly subjective. As such, I would add it back (in the case of lower valuation in year 2020) or subtract it off net income (all the other years).

The result is Adjusted Net Income, and you could see that it doesn't decrease too badly. Add in the operating cash flow, it does look like the company isn't doing so badly over the years.

However, the dividend distributed decline dramatically.

A look at management salary

Names 2020 2019 2018 2017
Wong Kok Hoe 782 207 NA 
Teo Peng Kwang, Kelvin 703 933 750-1000 750-1000
David Loh 58 46 <250 
Han Seng Juan 58 46 <250 
Chandra Mohan S/O Rethnam 73 81 <250 
Gn Hiang Meng 92 103 <250 
Owi Kek Hean 70 78 <250 
Tan Poh Hong 55 61 <250 
Lee Wei Loon 48 6 - 
Kong Chee Min 741 861 750-1000 
Key Management 
Foo Ai Huey 250-500 250-500 <250 250-500
Ho Lip Chin 250-500 500-750 250-500 500-750
Leong Siew Fatt 250-500 250-500 250-500 250-500
Lee Geok Ing Janice <250 <250 <250 <250
Lim Choon Kwang <250 <250 <250 <250
Yeo Boon Hing David <250 <250 <250 <250
Departed Directors 
Tony Bin Hee Din NA NA 750-1000 
Lee Kerk Chong NA NA 250-500

There will be a resolution put up for voting this year, and that salary cuts brought in during COVID-19 years be reinstated, which I presume will be back-dated from 1-Jan-2022.

If we look at the figures above, I would argue for a case to reinstate the salary for Mr Kong Chee Min, which have taken a significant cut. I will reserve my judgement for the rest for the wiser, as I cannot claim but to be ignorant of the exact amount paid to personnels under "Key Management."

In view of the declining amount of dividends, as well as the reasonable consistency of earnings over the years, I am ambivalent about voting for this resolution.

I would suggest that a more shareholder-aligned incentive be structured for key management. I am in favor of conserving cash for the sake of reducing debt, but something in these figures hint to me that perhaps the dividends could be higher. On the other hand, it would take many good years to completely eliminate debt without paying dividends. Hence the ambivalence.

Loss Porn

During the last 2 trading days, the HSI lost >5% daily, and the tech index lost a lot more. My portfolio, of course, was not spared. Perhaps the following could be cold comfort for the rest of you out there... life is not a bed of roses.

Heading the list is Didi at a loss of 75%.

Central China Real Estate loss is 52%

Thankfully, both of the above is only about 3% of the portfolio.

The following are among my 6 biggest position in the portfolio

Alibaba Group's markdown is 41%
Central China Management loss is 39.5%
Carpenter Tan is 20.9% down.

The other main holdings are more or less still because they are iliquid Singaporean asset-cheap stocks, with Centurion being the only turnaround play.

Sunday, December 12, 2021

2021 Year End Review (numbers review, projections, bagholders and indexing)

//I am posting this up ahead of time due to family reasons.

//as of 17-Dec, 11pm Singapore Time, I have sold out of Futu Holdings.

2021 has been an incredible year due to 1 and only 1 stock: Perfect Shape Medical. Returns has been monetarily rewarding but intellectually lacking. I am not proud of the idea as much as perhaps Xinghua Port. Realized P&L from Perfect Shape represented 80% of total returns.

Here are the numbers, screen captured from Stock.cafe. The portfolio currently has a time weighted returns of more than 10% over SPY, and hopefully should remain this way at the end of the year.

Overall XIRR is 29.89% but largely skewed because of the last two years of returns. The market has been very kind to me.

Interestingly, my portfolio has been far more volatile than SPY, but less so that the Hong Kong Tracker Fund. Volatility is not an important measure for value investors.

Max Drawdown is also higher compared to SPY this year, but it was nothing compared to what Hong Kong investors suffered. On the bright side, I think if you could endure draw downs like this, you could endure almost anything.

Dividends returns % in total returns

Dividend returns is only 8% of my total returns this year.

This is significantly lower (~30%) than last year's returns because of the complete divestment of Perfect Shape /Medical. Perfect Shape Medical is currently yielding 0.427 cents of its 5.94 HKD price. The median price of my holdings back then was about 2.5 HKD, which means it is 15-17% yield had I held on. But could I stomach the loss of 50% opportunity to sell had I held on?

The answer is a strong no. The management seems to cheerlead its stock far too much, and the other reason for selling the stock is potential di-worse-ification-- it could be spreading its resources far too thin across too many fields. I don't regret selling Perfect Shape one bit.

That doesn't mean that the management is wrong-- perhaps they could pull it off and this article would not age well.

My investment strategy is mainly towards capital gains. Dividend is just salary for the waiting.

Looking Forward to 2022

This is the section which is going to get me into trouble.

In terms of expected returns, I would repeat what I said in 2020's year end review: I pretty much doubt I could do better than what I had in 2021. 2020 was a great year, 2021 was incredible. I would be very happy to beat the index by a meaningful margin, and that is all I wish for.

Some bold hopes and projection for 2022:

OKP

I hope that OKP would value revert soon. The company is back to winning contracts and hopefully earnings will return to pre-accident levels. There are a few ways this can happen, besides increase profitability:

a) Increased share buy back

b) Going private: I would be happy with a 40% premium, although that is actually a good deal for whoever is buying over OKP at this price. Given the Or's majority stake, they are the only possibility of this happening.

c) Acquisition of a more "interesting" business (unlikely)

d) Special dividend (also unlikely)

At this moment, I am looking at my portfolio and thinking about my position sizing. It is unlikely I would increase shareholding in OKP. In the event that a market crash of 30% and upwards, I would likely to purchase local bank stocks and index funds as I am generally out of ideas at the moment.

China Property Sector

I am not optimistic of the Chinese property market as a whole. There will be casualties. This is a classic case of leverage gone wrong. Yes, one could make a case that the Chinese government is responsible for issuing the 3 red lines policy, hence introducing turbulence in this sector. I would argue that leverage has been adopted too freely, and the G was right to bring this to heel.

My bets on the Chinese property sector is marked by sizeable and meaningful investments (17% of total portfolio) in Central China Real Estate and Central China Management. The latter is very cheap on cashflow: but if the market does suffer a meltdown, the biggest casualty would not just be the highly-leveraged, but the banks. I would expect the G to inject capital, and perhaps nationalize the debt in some manner.

Perhaps they could force the companies into some kind of convertible debt issue (i.e. the ones some auto had made with the US Govt in 2008-9), or replace the managements. But as of now, I still believe that in the worst case scenario, CCRE is one of the better ones around, and CCMGT is probably more than priced in, in the event of a meltdown. Both have been backed by adequate insider buying, which is comforting to me. These two companies represent the best chance I got when recovery takes place.

Alibaba

I am going to offend a lot of people in this section.

Returns are likely to be lackluster at best. I do not expect permanent loss of capital. As it stands, I am about 14% down. The market is very generous to growth; and punishing when it doesn't. I think Alibaba as of now is fairly priced, but moderate growth should bring about market-equaling returns. There is a strong possibility of the Ant Group IPO, but that is in the mercy of the markets. Surely during a bear year, no one would be in the right mind to IPO? Would they be so kind of distribute Ant Group in the form of a special situation, such as a spin-off? Unlikely.

So I am going to put my head out there and value it using my layman understanding:

The e-commerce business, in the latest interim, contributes about 12B USD. The cloud computing and entertainment branch, as well as its "innovation" branch are still loss-making.

33% of Ant Group belongs to Alibaba. If it had gone through its 35B USD IPO then, Alibaba stake would be worth ~11B USD (~452B HKD). Its latest interim earnings was 1.7B USD

To guess-timate very, very conservatively,

Alibaba current market cap is 339B USD

-E-commerce, if it contribute 24B in annualized earnings, on a P/E of 10-15= 240B-360B

-Cloud Computing= 60B to 120B, average it and give it a 90B.

-Ant Group IPO= at 1.7B USD interim, is worth about 3B USD x 15 PE= about 45B. If Ali owns 1/3 of it, that is about 15B.

Sum it up, Alibaba is worth between 315B - 465B.

So very conservatively, we are looking at about fair value for Alibaba. I shall discount the other business segment from Alibaba as they are generally loss-making and prospects are dim.

What can change the narrative? I believe there has to be a reasonably large growth in the e-commerce sector (which is facing competition), a very blissful valuation for Ant's IPO (more likely since the G has a share in it), and AliCloud...well I have no idea how much AliCloud is worth.

Centurion and TTJ (combined weightage of 17.4% as of writing)

I do not expect anything from these. TTJ could possibly raise dividends if business improves, but not much. Centurion has too much debt but would stand to prosper if COVID is a thing of the past.

The Rubbish: Pershing Square Tontine Holdings, Futu Holdings, and Didi Global

These stocks are call the rubbish because they are generally so badly hated by existing shareholders. Rightfully so, all of them probably saw losses of 50% and more.

PSTH has little to no down side and I am holding on to it using LEAPs. Every other day, I would log in to Reddit r\psth and look at the despair. I am more optimistic than the typical tontard (term used to self-deprecating Tontine + Retard, I suppose?)

Futu Holdings: I believe that unless regulatory backlash is overly shocking (which will result in cash outflows), Futu is currently fairly priced based on very conservative growth projections. This is a high risk, high reward play, and the G could take its time. Betting with options is risky, and the last time I check, they are costly due to its implied volatility. I am holding a small amount of stock and have written put options. Even if the puts do get converted, it does not represent a huge sum of money on my portfolio.

Sold out of Futu. I think valuation would be severely affected (by possible regulation by China authorities) and hence I am sold out.

Didi Global: I have no idea when the G will decide, and how it will be delisted. As such, a small amount of money is riding on the outcome. As mentioned the previous post, I am holding the stock after the option buyer exercised the put option. I am still holding the stock today. I think it is a bit risky to buy options for this. I do not expect a windfall, probably a modest gain at most. The possibility of a loss is still prevalent as I had mention in my previous post.

Unrealized losses: Which stocks am I bagholding?

In terms of percentages, 3 of my holdings contribute to the most amount of unrealized capital losses are:
-Alibaba Group (-14%)
-Carpenter Tan (-13.2%)
-Fu Shou Yuan (-11.54%)

In terms of absolute unrealized loss, in descending order,
-Carpenter Tan
-Alibaba Group
-Central China Real Estate Limited (CCRE)

Alibaba and Fu Shou Yuan are my only growth at an reasonable price (GARP) stocks. Ironically they are beaten down the most. I have no idea why FSY is down (although 11.5% isn't a big deal). I have already said my piece about Alibaba above.

Carpenter Tan is proof that the market is based on growth and nothing but growth. The top line of this little company has experience little to no growth over the years, but it yields an astonishing returns on invested capital. I think Carpenter Tan would have been valued more kindly if it was privately held.

Net income margin is 28, 33 and 36% for the last three years. The company has not been in red since IPO.

Free cash flow ranged from worst, 60m to best, 120m. The average is about 96m.

The company is selling at only 892m HKD as a whole in the market. Dividends is on the generous side, and even this year (which is definitely its poorest year) is yield just under 5%. The company bears no debt. Cash position is 78m RMB (~95m HKD), 253m RMB (~309m HKD) in financial assets (mainly in low risk, principal guaranteed financial products). That is almost 400m HKD in liquid assets.

You are paying only 500m HKD for a business that pays you 96m of free cash flow every year. That is a cash yield of almost 20%!? The business would have paid for itself in 4 years.

So the market is betting that the fortunes of this company would only go downhill from here.

Investing in Carpenter Tan as a stock market participant has not been fruitful. Capital loss is evenly covered by dividend returns. The stock market is a funny place. But I do wish Carpenter Tan had not been so generous in its dividend earlier on, else the value would had been very evident today.

Carpenter Tan has a weightage of 10% on my portfolio.

Should I have Index?

I started my investing journey at the rip old age of 36. That is a tremendous disadvantage, since I have lost 10 years of precious compounding. Back then my meagre salary would mean that I could only invest perhaps 600$ SGD every month. If had start passive indexing, assuming a 5% CAGR, back then, would I have done far better than my efforts in the last 5-6 years?

It turns out that I done pretty well investing actively... I would have to index 23 years to get returns like this. But friends have remarked that I aged pretty much these years too. So, I would have to be 26+23 = 49 years old to get returns like this from passive indexing if I started at 26 years old. I saved 8 years of life at least.

I still believe that indexing is the way to go. Firstly... the returns is actually better than 5% long term (I am very conservative). Secondly, indexing consumes less of your time, allowing you to focus on your other cash flows-- your career (salary), or business.

I earn way lesser than the median salary, so I have virtually no choice. You wouldn't be able to tell from reading this, but I am just feeling so grateful now, looking back at my results, that I wasn't punish for starting investing so late in my life.

That is all. Hopefully the rest of the year and next would be kind to us. I am only hoping that my parents be well.

My Thoughts on Investing

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