Feb 2022 Portfolio Updates

S&P 500 Index Fund: -7.61% (Jan)-> -4.13%
Hong Kong Tracker Fund: +3.63% -> 6.02%
Straits Times Index Fund: +2.92% -> 9.18% (amazing +6 in a matter of weeks)

My portfolio: -2.64% -> -1.96%

Notable Transactions:

1. Significant Reduction (>50%) of Central China Real Estate (CCRE) (HKEX:832)

The motivation to reduce positions comes from knowledge that promissory / IOU notes between subsidiaries are not paid timely or not being paid. When asked, IR replied that they do not wish to respond to unverified news. I guess I have to make a judgement call and reduce position. 

Losses incurred is about the region of 20%.

I have not added nor reduced positions in Central China Management (HKEX: 9982) as of now, and there is no plans to do so.

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Comments

Cutting loss in CCRE is the latest of a series of loss making trades which unfortunately I have to endure since divesting Perfect Shape/Medical.

Significant losses were also incurred earlier on ,selling out Futu Holdings and there is also a huge amount of unrealized losses in Didi Global (50%)

I am extremely humbled and ashamed, and my confidence has taken a backseat these days. It does feels like I have been taking on too many 50-50 bets, whereby the outcome and probability is about the same. 

I would like to apologize if you had taken and followed some of my ideas.

It was heart wrenching to take these losses because the capital is not just my own.

All that is left is a time for self reflection; and unfortunately these mistakes does not provide enlightening lessons-- only reminders. At best, I could only chalk it up to inexperience and a lack of emotional control-- I was committing capital into half-bucket, difficult ideas far too easily. Perhaps I could not contain my contrarian urges to bet. I should have emphasize heavily on risk, and control my capital discipline.

At worst, perhaps I am not suitable to play this game, and that I was just plain lucky for the last two years.

Coupled with the fact that my mum would have to go through more tests, as well as my knees deteriorating significantly these days, my mood is now as gray as the skies. Frankly, I am craving some kind of good news desperately.

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The top 5 positions of my portfolio is still largely the same. I would try my best to briefly state the risk in these positions

1. OKP (34%)

OKP went nowhere for 5 years.

In terms of valuation, OKP bears the lowest risk of the portfolio. Arbitration between the PIE viaduct designers and OKP will commence in Sep and OKP stated that its outcome will be material. Only God knows whether it will be contribute or negate.

2. Alibaba Group (11.6%)
Besides unforeseeable political risk, there is a good to fair chance of bearable losses due to overvaluation. Current price is not a bargain. I just have far too little ideas, and usually giant cap companies do revert in value pretty quickly. Moderate growth with (low) probability of surprise special situations (IPO/spin off of Ant Group/Cloud) could bring about satisfactory profits.

3. Carpenter Tan (10.9%)

The 1 year chart for Carpenter Tan. It wasn't kind.

I am paying attention to its inventory and I am not very positive of this counter. Market feels likewise, and hence the stock is down moderately since the last time I looked at it. I do not expect much, and at best there will only be a humble little dividend. Which is great, since the climate nowadays demands some level of prudence.

4. Central China Management (10.2%)

Spin offs are usually rewarding, but CCMGT had been punishing. The balance sheet is definitely not as ugly as this chart.

Business is slowing and stemming the decline would be great news. With the declining earnings, I think the price is definitely not overvalued, but market pricing is, as always, not predictable.

5. Centurion (9.7%)

Centurion trades at as high as 70 cents in the past 10 years, 50 in the last 5.

I do not expect any surprises, but I do believe this stock would probably perform better than others in my portfolio.

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Selling out due to market cycles

Criticism usually involves a very public, successful figure getting stick from low-lifes who may never amount to a fraction of what the former had achieved

Unfortunately this section is going to be representative of such.

Hence, the low-life (me) is going to keep this short, since I am not doing terribly well these days.

There is a lot of talk in town about this extremely prominent Youtube figure call MeetKevin, who had sold out of his 20-million (?) portfolio. His 35 minute video, which I will embed below, explains his rationale.

a) He believes that we are at the top end of the market cycle and he interprets earnings reports as well as Fed actions to signal that it is turning down. His decision is enforced by his experience in real estate.

b) Feels that the market is in for a huge decline, possibly lengthy.

c) Emphasize that he eventually have to hop back onto "Train America" if he sees signs of reversal.

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So for people following MeetKevin in his footsteps, they are attempting to answer the following questions:

(1) When is the storm going to happen (they think it is soon)
(2) How long would it last (even harder to predict) since (c)

I believe most of us observed that the market is getting unstable. Volatility in the popular growth stocks aside, it appears that inflation numbers are gapping up. So I could at least agree that the market seems to be edging towards a cliff.

I am not a sophisticated investor, so I focus on what I can do (bottom up investing), but how many macro investors could really trade in and out of crisis? 

More often than not, the market can be very humbling, and for most of the time, the market (my opinion) is a leading indicator of public opinion. It could be right or wrong, but one thing is for certain, by the time it is obvious, it is usually too late. How many of us thought the end of the world in March 2020, only to see the market gains ATHs shortly?

I can accept that the market could be in pain for the next 4-5 years, but my job is to pick companies and that is how I try to generate my alpha. I try to look for businesses that are cheap, and if they were cheap today, I am not going to forsake them just because an economic storm seems to be brewing. The idea of selling out is more rationale for someone who is trading on indices. 

If a company is trading cheaply today, and it is down 30% in the near future, in the absence of debt and issues that can cause a company to be insolvent, one should bet more. Buying stocks is all about believing in market eventually regaining sanity; not betting on when it will lose or regain sanity(pricing assets too highly or low). 

If there is a need to raise cash, the right course of action is to reduce positions in unfavorable bets in the portfolio, such as (1) companies that are over-leveraged and has unstable cashflows (2) richly valued or even fairly valued (3) thesis has diminishing chance of playing out. I have stocks in my portfolio that could meet these criteria. But to liquidate the entire portfolio.... is suggesting to me that this guy has no interest in business valuation, the total essence of what the stock market is about.

Note: If the smartest value investor (Buffett), that has been fighting this war for decades, is holding significant amount of cash (Berkshire), then yes, the market is definitely not in bargain basement levels. But to sell out everything is a different matter altogether.

I bet Buffett have a list of companies in which he would snap up if there is a 40-60% discount off today's prices.

There was a book call 100 Baggers: The take-away I had is that none of the companies did it in a matter of 4-5 years and certainly most companies need decades, which is exactly the same duration which MeetKevin fears the market pains could last.

We should focus on the easy stuff.

Jan 2022 Portfolio Update

S&P 500 Index Fund: -7.61%
Hong Kong Tracker Fund: +3.63%
Straits Times Index Fund: +2.92%

My portfolio: -2.64%

Notable Transactions:

1. Complete divestment of Mapletree North Asia Commercial Trust
With the merger with Mapletree Commercial Trust, the pricing of MNACT would be correlated to it. Since MCT is largely priced in, there is unlikely any possible value. MCT's yield, post-merger, would be bigger, but the gearing would similarly increase. Overall, MNACT has not been a satisfactory investment. It was unable to fill up vacancies in its China properties and a long-drawn COVID has not been kind to Festival Walk. Annualized returns are in the region of 15%, dividends included.

2.Complete divestment of Genting Singapore
Divested this for my mum in order to purchase more Alibaba.

3. Increase of Alibaba
Increased holdings for mum and dad's portfolio.

4. Slight increase of Central China Real Estate Ltd
Increased holdings for mum and dad's portfolio.

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Comments
Investment returns is expectedly poor as the last two years were too good to be true. For someone doing value investing, the concept of reversion to mean is palatable. Hence, this performance is kind of expected. 

STI and Hong Kong (sans the tech firms) underperformed last year, and it was not surprising that they are outperformers so far.

There is nothing to suggest that the downtrend for China property, developer and services firms would cease anytime soon. Particularly for CCRE, the worry was again debt, since there is a likelihood that companies, and not just CCRE alone, is procuring debt from other means. Could we trust what is stated in the financial statements? We can only hope.

In the last few weeks, sell down in tech stocks has been overwhelming. The NASDAQ is down 11% as of writing; and several tech stocks got sold down very badly the night before. 

SE limited was down by 10% or more but recovered just 3% lower than last close.
Futu Limited has a similar story.
Tesla, the darling of 2021, had fairly similar chart patterns.

I do not have strong opinions and affinity to tech stocks, particularly those who had done by well since 2020-21. IMO, they are largely priced in, or should I say the stock is priced to perfection. 

Going forward to 2022, looking at my portfolio, the returns will be impact by recovery on both COVID, Chinese debt crisis, as well as the outcome from OKP's impending arbitration proceedings, which the management cited as material.

Pressure on property developers- A quick look at Central China Real Estate (CCRE)

News of pressure on publicly listed property developers are nothing new. Here are a few choice selects of how badly things are, year to date.

But today, I am going to lightly look at Central China RE, ticker 832, which had fallen a fair bit:

Although I would arguably say that it is a bit misleading, since they had distributed 41 cents of dividend, as well as a 1-to-1 spin off of CC Management, a property project management company. 

Both CCRE and CCMGT suffer dramatic amount of decline which I would not elaborate.

The problem with CCRE might not be with the bank debt.

CCRE's debt/leverage instruments are classified into 4 types:

1) Bank Debt

2) "Other" loans

3) Corporate Bonds

4) Senior Notes.

Data is taken off its interim report.

Assuming that this crisis last for another good 2 years without CCP intervention, the company faces an approximate 15.7B in principal to repay. The best case scenario is that the banks would allow this company to refinance its debts. That would mean a relief of 4.5B. There is still about 11B of senior notes to pay.

Even without the best case scenario, it has about 10.8B in cash, and 5.6B in restricted cash deposits. I think it is probable that debt would not be the problem.

The company is opportunistically reducing the amount of senior notes payable by redeeming them at this moment, but looking at the take up rate, it is not high. I believe only widespread contagion could change this.

Ask prices for some of its bonds are really depressed (from Bondsupermart, 6-Nov)

And while not interest-bearing, of particular worry is its contingent liability of 51.8B, which are made towards customers of their properties underdevelopment. Could this sum be adequately covered by its other assets?

There is another 54B in payables, inadequately "covered" by account receivables of 24B.

In summary, given no support from the G, the situation at CCRE looks like this:

This is given that the worst case scenario that all the mortgage loan holders (customers) defaults (under "contingent liabilities"), which is rather unlikely. Mr Wo Po Sum, the overwhelming shareholder of CCRE, might contribute positively to its liquidity. However, his networth at this moment is uncertain.

The current market caps of its listed subsidiaries could be sold at current prices and potentially tide the owner over. Take note that their prices had declined over the months:

Central China Management, 3.78B HKD (68% shareholding of 3.11B RMB)

Central China New Life, 6.22B (69% of 5.11B RMB)

I have not looked at CCNL, but I believe the valuation of CCRE and CCMGT are not demanding, and insiders has bought a respectable amount of shares using their own money in the recent months.

Central China (832) Insider buying records above. That is about 40m of shares bought in just two months, of the 3 billion shares outstanding.

Central China Management (9982) Insider buying records above. Approx 1.7m shares bought in 2 months, total approx 3.3 billion shares outstanding.

As such, I think CCRE has a good chance of emerging from this crisis, especially if the CCP steps in.

Both CCRE and CCMGT represents a total of 15.2% of my portfolio