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.

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..

TTJ: Voluntary Conditional Offer

Objective

This post attempts to fulfill two objectives. First, it seeks to demonstrate that the value in TTJ ("company"), even when conservatively considered, is leaps and bounds higher than the conditional cash offer. The exercise does not involve by plainly looking at the Net Asset Value stated in their books, but a practical and simple way of assessing things.

The second, is how I felt about the whole situation, what one should realistically expect as a shareholder, and what I had learnt from this episode.

Back of the envelope valuation of TTJ

As we go along, keep in mind, the offer from THC Ventures is 0.23$ a share, or a total consideration (for 349.5m shares), 80.385m.

The value of TTJ are primary in 3 areas, liquid assets, properties, and the structural steel business.

Liquid Assets

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)

The first step is to consider the more liquid assets of the company, namely cash, receivables and contract assets. Then, we proceed to apply a discount to each asset according. In case of cash, there is zero need to discount it-- after all, cash is cash. As for receivables ($ owe to the company by customers), 15% is applied in case of counterparty risk. (Do take note: no discount is applied to any liabilities, include account payables.)

But what are contract assets? According to the latest annual report in 2021, it states:

"The contract assets are for entity’s rights to consideration for work completed but not billed at the reporting date on the contracts; 

costs incurred to obtain or fulfil a contract with a customer; costs to obtain contracts with customers; 

pre-contract costs and setup costs; 

and the amount of amortisation and any impairment losses recognised in the reporting year. 

The contract assets are transferred to the receivables when the rights become unconditional. 

The contract liabilities primarily relate to the advance consideration received from customers. The entity recognises revenue for each respective performance obligation when control of the product or service transfers to the customer  "

Since there is a fair amount of judgement needed, a 20% discount to the value stated is reasonable.

The sum of these assets, discounted, is 77.452m

Properties

TTJ has property (both leasehold and freehold), that are either in the books, or disposed. For asset not sold, the acquisition cost price of the asset would be used. After all, if the price is not reasonable, why did management purchase it?

We will omit the property at 57 Pioneer Road as there is only 2 years left on lease, although I recognize that there is definitely value in it, and hence left out in this exercise.

1) Disposed factory at Johor Bahru
valued at 13.377m SGD

Source: https://links.sgx.com/FileOpen/T%20T%20J%20-%20Disposal%20of%20Assets.ashx?App=Announcement&FileID=670523

2) Factory in Chachoengsao District, the Kingdom of Thailand

for the purpose of wood pellet business which is suspended.

Acquired at cost: 5.95m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_of_Assets_in_Thailand.pdf

3) Factory in 51 Shipyard Crescent

for the purpose of wood pellet business which is suspended.

Acquired at cost: 16.81m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_BFI_announcement.pdf

Total value: 36.137m

Structural Steel Business

Due to the cyclical nature of the business, it is more prudent to look at long term earnings of the company. Figures below are extracted from annual reports of each year, usually classified under Note 4 "Financial Information by Operating Segments."

Profit Before Tax for Structural Steel business

2009     15.891m

2010     6.244m

2011     12.818m

2012     14.042m

2013     9.297m

2014     14.630m

2015     5.152m

2016     19.562m

2017     9.894m

2018     9.898

2019     5.022m

2020     -3.526m

2021     10.952m

Average: 9.99m

Median: 9.89m

Applying a tax rate of 17%, it is 8.217m, and applying a conservative multiple of 7 times, the structural steel business is worth about 56m. Even at the worst year earnings of 5.022m (post tax: 4.17m), it is worth about 28m.

Take note that Mr Teo has always run his business prudently, outlasting many of its peers. It has an order book of 187m, which are projects that will run between this year till 2024. 

Summary

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)
Sales/Disposal/Acquisition of factories/offices
JB factory	13.37m (disposed)	13.37m
Thailand factory	5.95m (at cost)	5.95m
Singapore (51 Shipyard Cresc)	16.81m (at cost)	16.81m
Total Assets		113.582m
Total liabilities	26.695m	26.695m (no discount)
Value of TTJ (without accounting for structural steel business; and 57 Pioneer Road leasehold property)		86.887m or $0.248 per share
Estimation of Structural Steel Business		a) Based on worst year earnings: 28m b) Best on median year earnings: 56m
Value of TTJ with Structural Steel Business		a) Based on worst year earnings: 114.515m or $0.329 a share b) Based on median year earnings: 142.515m, or $0.409 a share
Stated Net Asset Value (from half yearly result, announced Mar 2022)		128.582m, or $0.3679 a share
Voluntary Conditional Cash Offer		80.385m, or $0.23 a share

My Opinion

A reasonable assessment of the company's value, even without considering the structural steel business, is at least modestly more than the offer.

Mr Teo has been widely thought of as shareholder friendly, honest and forth-coming. This move to buy out, using a company to circumvent takeover codes, is very surprising and disappointing. 

Surely he wouldn't want his company, in the many years to come, to be quoted as the reason why a certain Singapore Exchange rule was birthed, out of the need to patch a certain loophole? Reputation is priceless.

I would be very fair and say that as minority shareholders, it is not reasonable to expect 40 over cents (that is the value, in my head, for optimal price + premium for control. Your value might differ.). Firstly, Mr Teo could have carried on status quo for as long as he likes. Secondly, he assumed the risk and effort in building up the company. Sure, as a listed company, there is a a minimum amount of public shareholders required, and credit is easier to access as a listed entity. 

Meeting at middle ground is a far more balanced and fair approach to both shareholders and management, leaving both parties feeling that nothing is lost or taken away. I note that in the offer document, under note 2(e), that the offer is not fixed. So I am hopeful.

Lastly, as a note to myself, this episode reminded me that cigar butt investing is fraught with danger. Cheap companies (even with asset value modestly discounted), with low returns on equity, required countless injection of capital over the years, as the price keep falling.

When one pursues this approach, he or she will feel immense unease-- that prices will remain depressed for years, or worse, got acquired with an offer as unsatisfactory as this. I have success with this approach in the past, but this is not one of them. However, it is a very good lesson.

-as of writing, TTJ weighs 9.81% of the entire portfolio. I have been a shareholder since 2017.