July 2022 Portfolio Update

As of 14-July-2022:

S&P 500 Index Fund: -19.97% -> -16.2%

Hong Kong Tracker Fund: -6.18% -> -5.65%

Straits Times Index Fund: 0.53% -> 1.4%

My portfolio: -2.63% -> -5.49% 

Notable Transactions:

-Complete divestment of TTJ due to forceful acquisition of shares. I have tendered all but a token amount of them (in my SCB trading account). More on this in a latter section.

-Slight increase in Embecta.

-Increase in YZJ Finance in CPF due to the impending liquidation of TTJ

General Commentary

It does feel like my investments are largely inline with market performance. Most market participants would tell you that the first half of 2022 is horrid. 

Superficially, my portfolio reported a 40% gain at the end of 2021. But really...the nightmare started in 2021 itself, right after the start of 2nd half 2021. 

This is the trailing 12 month performance as captured by Stocks.Cafe

It should be much lower than 33%, had I not have such a huge stake in OKP (largely illiquid stock), and the 20+% upward price revision by TTJ (although it was a ridiculously low ball offer, and felt more like a loss than a gain). 

What was responsible? In short, China. Bulk of the poor performance could be attributed to 4 stocks. Alibaba, Central China Management, Central China Ltd and Didi Global.

After divesting my stake in Perfect Shape (now called Perfect Medical) for a handsome gain, I was looking to put the funds to use. Now... success is a very bad teacher. I was laxed in my valuation.

Purchases in Alibaba started in Aug 2021, at the price of 160-ish HKD. We knew the price fell to 72 HKD. Through my persistent (and foolish?) buying as price fall day after day, my average price is now 115 HKD. I had to endure a 30% paper loss for most part, and reflect on why I had not insist on a larger margin of safety. Alibaba has since regain ground but appears to be selling off again for the last two trading days.

Central China Management (9982) and Central China Real Estate had a far, far worse fate. CCMGT was purchased from 1.77 HKD. Today it is only worth 0.88 HKD. Purchases for CCRE started at 1.17 and today it is worth half... at 0.58. Both of these are large positions. At present prices, it makes up for 13.7% of the entire portfolio (in terms of value). But on a cost basis, it is actually about 19%.

The case with Didi Global has been mentioned before so I shall not repeat it here.

With the exception of Central China RE (which I sold my parents' stake and reimburse them for the loss out of my own pocket, I do not wish for them to be exposed to this risk), I had not sell a single share for the rest of the counters. Unlike the sold down experienced by tech stock holders, these companies mentioned did not enjoy the post-COVID boom since 2020, and have contribute nothing but losses to my net worth. More frustratingly, none of them were bought during "good times." 

China is also responsible for another holding of mine-- YZJ Finance Holdings. Over a span of two months, it managed to make a 20% gain, only for it to crumble again amidst China's debt issues again. The position is now in red.

Overall, there were no mercy from the markets in 22-H1... and it had been a year of continuous bad news. 

Various positions in American exchange did not do well and all of them, except for the arbitrage position in Activision, is in loss of around 10-15%.

TTJ-- The end of the road.

When the offer was announced, efforts were made by investors, regretfully mostly individually, to push the owner for a better offer. IMO I do not think the shame and expose method is a great approach, but looking back, I do have my doubts that a gentler approach would help . 

However, I wish I had at least tried. I wished I had at least given Samarang Asset a call. I wished I had deliver the letter directly to TTJ to prod the owner to do the noble thing. I wished I had done more..

The most regretful part of the story is that some of the major shareholders prefer to adopt a wait and see attitude at the early stages. Moving early, banding up, and getting the message clear to everyone is the key. With no leadership, and no unified voice, each and every investor is trapped into their own little cells, i.e. a prisoners' dilemma, most will be inclined in a way that doesn't benefit them.

The longer the inaction, the greater the number of investors that would tender.

Risk arbitrages pretty much succeed most of the time, as long as there is 20-30% increase over the last traded price. Whether there is a 20-30% gain over the value, that is the matter, since everyone's idea of value differs. 

A decent increase over the last traded price typically works well for the acquirer, because
a) most market participants are not long term share holders. If they were, their annualized returns would have been low to normal due to lengthy time that share prices are depressed.

b) most buyers, post announcements, are risk arbitrageurs. They are motivated to close the deal as soon as possible (the sooner the deal closes, the better their returns look, annualized). 

c) Sellers are motivated to sell because no one wants to be a minority shareholder of a company where the owner has clearly and blatantly taken advantage of shareholders. Should the deal be off, there is really too many ways where the value a company can be suppressed through legal means. It is even more likely so for an illiquid company like TTJ

d) Shareholding structure is fragmented and in most parts of Asia, particularly Singapore, majority shareholding is concentrated in the hands of a few, making activism extremely difficult.

e) weak regulatory body/laws.

***

With the offer all but compulsory, I had no choice to tender and went looking for those forms. Earlier on, I told my fellow investors, who are considering to tender after THC had refused to increase the offer price, that I am still thinking it through. 

.... since I have discarded the forms right from the beginning, I realize that subconsciously, right from the beginning, I have never wanted to sell out...

Luckily, a fellow investor alert me that it is possible to approve digitally. 

 I try to live a life where one should do the right thing without considering if it is beneficial, but I am finding myself increasingly alone. Why is it that nobody cares about reputation anymore... which is something... even money could not buy?

This chapter had left me terribly bitter and deflated, and this is further compound by my portfolio's performance in recent months.

These are very dark days. Now all I could wish is that my mother's impending check up- would turn out fine..

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. 

The Perils of Active Investing

In less than 20 days since the last update:

S&P 500 Index Fund: -4.13% -> -7.59%

Hong Kong Tracker Fund: 6.02% -> -2.44%

Straits Times Index Fund: 9.18% -> 4.36%

My portfolio: -1.96%-> -8.39%

The portfolio suffered a heart-wrenching battering in less than 20 days. If I were a professional fund manager, I would no doubt be questioned and face redemptions. However, I face a fate much worse-- I return home at the end of the day, guilt-stricken that perhaps I have placed my parent's fund in jeopardy. 

More so, the self-doubt gets ever louder. I felt more like an imposter each day. The fog of war became unbearable as suspicions if management were not disclosing information. Most of my holdings are downright underpriced, and yet the sell down was relentless. 

Recent days seen some relief for growth and even cryptocurrencies, but, mercy, was not forthcoming on my holdings.

In ascending % of loss in value are:

Capenter Tan and Fu Shou Yuan (10.8% and 3.99% weightage) -15%
I have no idea what to make of this decline, except that FSY is a good business at a fair price. As such, I could accept the market's valuation of such a stock. The market should be worried about price controls by the CCP on living expenses. 

Fu Shou Yuan's board will convene on 18-March and the full year result would be announced.

Market cap: 13.38B HKD
Cash/Eq: 1.3B, and in addition of invested (mainly structural deposits, which capital are NOT guaranteed)  worth 332m. That works out to be about 1.98B HKD

Free Cashflow in the last decade or so
2012: 153m
2013: 85m
2014: 221m
2015: 259m
2016: 405m
2017: 525m
2018: 552m
2019: 615m
2020: 715m
2021-1h: 400m

Let's assume that going forward, this company generates, at a no-growth basis of 600m, that would means a private owner is paying at 18 times free cash flow. This would imply that growth have to continue for the market to price it higher, and that the multiple would be maintain. 

What I mean is that a low-growth company, even with a steady cash flow (e.g. Carpenter Tan), is assigned a very low price multiple. My numbers suggest to me that FSY's ROIC is between 13-16% in recent years. Not a low number, but not a overly promising one. 

So this investment yields about 7% last year. If an investor looks at long term inflation of 3%, a equity risk premium of 4% might not be so tempting. You can replace inflation rate with anything, such as government bonds, and think if investing in this business make sense.

As such, it might not be a great idea to go big on Fu Shou Yuan. As such, I deserve to go 18% down on this company, and perhaps it was great that I didn't put too much capital in it.

Alibaba Group (10% of portfolio) -20.1%

Much have been written about Alibaba. I would not add more.

Central China Management (9.28%) -27.8%

Joel Greenblatt would have been shock that a spin off, with a balance sheet as clean as this, could be sold down so heavily.

It has 2.2B RMB (2.72B HKD) of cash, and 560m of liabilities. This equates to 2B HKD worth of cash.

The market capitalization is a paltry 3.32B HKD. This means a private owner is only paying for 1.32B HKD.

Even at 100m of free cash flow per year, this company is not excessively expensive. The company earns 500-600m RMB (620-742m HKD in the last three years. 

The worries is with the parent, and the earning of this company's earning is still pretty dependent on it (much of it is in Henan). 

I am not too sure what else to add on this.

It is not as if the insiders were not trying. They bought a huge amt of stock, and also did share buy back from company's fund.

Central China Real Estate (3.01% of portfolio) -36%

This would have been more painful if not for the trimming I did some weeks ago. The crushing amount of debt looms large on this company.

Didi Chuxing (1.9% of portfolio) -41%

Unfortunate case of put options been exercise, this is now a sad reminder of my folly, and would probably remain so.

Looking Forward

The portfolio is expected to underperform all indices, especially Hong Kong, and to a lesser degree, Singapore's. There is a lot of value in Hong Kong, and recovery to my holdings will usually means a greater degree, likewise, to the index stocks. Whereas for Singapore, the prices of the banks had already advanced far out of expectation, and that profit margins had to be extraordinary to warrant further increases.

One thing for sure, is that I would not change my investing strategy in order to get a better result.

I would put up an article about Centurion in the next few weeks, following the disappointing amount of dividend.