Cordlife: The AGM, my valuation, and many more

Obligatory food shot for the people in InvestingNote. Just kidding.

The author is vested in Cordlife, and has 6% of his portfolio "invested" in Cordlife.

Today is 14-May-2024, and the AGM for Cordlife had ended a few hours ago. Unlike many other AGMs before it in the recent weeks, this was a contest for board control, one that was ignited since tanks storing Cryopreserved Cord Blood Units (CBUs) were found to fail temperature controls and checks. For the full story, read the MOH summary here.

https://www.moh.gov.sg/news-highlights/details/update-on-investigation-of-cordlife-group-limited-8apr2024

The story will be written from an investor/opportunist/vulture point of view.

Long story-short, here is the sized down story:

CBUs stored in tanks, where samples were tested to be non-viable (damaged) are called the high risk group. On the other hand, there were several tanks found to have temperature excursions, but all but one were found to have misplaced temperature probes—the remaining one had the highest temperature recorded at -144 degree Celsius (the requirement was -150).

Since then, MOH has concluded their part in the matter. The high risk group was offered compensation, and the company disclose that if all parties in the high risk group accept the offer, the P&L would be affected by an estimate of 9.2million. 

As a investor, the main bits of the saga were:

a) CAD arrested all the directors on board and the CFO, with the exception of 3 which are not interviewed yet. 2 are from the Nanjing XinJieKou group (“NJXJK”), who will attend the interview on the 21-May; and the other was Mr Joseph Wong (previous Chairman) who had retired from the board and is overseas, citing health reasons.

b) The reason cited for the arrest is not confirm—but as of now, the company’s announcement hinted that it was due to untimely disclosure.

c) The company has two main substantial shareholders/factions: 

-TransGlobal, who acquired shares from Mr. Hon Kwok Lung back in the 2021. I believe the share price was about 50 cents

-Nanjing XinJiekou, who acquired shares in 2016 from two parties, one of which was Bonvest Holdings and its entities.  I believe the share price was about $1.4.

d) A requisition was made by both parties to remove directors from the other group as the issue brewed.

e) A contentious private placement, which will result in 51.2m new shares, was announced (more on why it is contentious later)

f) An interim injunction against the private placement was applied by NJXJK and was approved by the high court

g) The board applied to set aside this interim injunction on the 10-May. The court rejected this interim injunction and ordered the company to pay for legal fees.

h) After the hearing, the board announced that the private placement would be terminated.

These articles were printed and stuffed inside an envelope, which was placed on every seat.

What Happened in the AGM

The AGM was held at Temasek Club, Grand Ballroom at 9am this morning.

As expected, there was a lengthy Q&A by shareholders to the board. All of the directors answered questions, excluding TransGlobal’s Mr. Yiu Ming Yiu.  Most of the questions were directed and answered by Dr. Ho Choon Hou, who I felt demonstrated calm and professionalism in the Q&A segment as well as after the AGM resolutions were voted. 

The issues raised during Q&A could be generally classified into the following:

Private Placement

- Why the private placement was necessary despite a strong balance sheet

- A legal representative suggested that there was possible vested interest between the TransGlobal group and the private placement subscriber, CDH, owned by Mr. Jiao Shuge.

- The CEO explained that some of its banks (UOB/DBS) bankers have placed Cordlife under high alert, and as such could not borrow to address cash crunch needs.

- A shareholder hint that there was an overlapping period of which Cradle Investments (which is a client of Southern Capital, of which Dr. Ho is a director) were in negotiations to acquire Cordlife, and that a tank was found to be compromised. The acquisition did not go ahead in the end.

Dr. Ho claim that whatever he had advised Cradle was publicly available information. The shareholder further quizzed if the company was aware of who was trading the shares during the period (there was significant volume). The board and Dr. Ho claimed ignorance, adding that it was impossible to track as it would be handled in nominee accounts anyway.

Disclosure issues; Is the board hiding material information from the public?

- The board claimed that they were only aware that one tank was affected (and not 7 as MOH had realized later on), and that the members of board wanted to convene a COI when the issue became serious. I was observing every member of the board during this conversation and I believe this to be true.

Why KPMG decided to walk away

- I read what KPMG had said in the SGX announcement so I wasn’t paying attention. All I could say is the KPMG partner-in-charge was ice-cool and poker-faced.

Outcome of the resolutions

The announcement is not uploaded on SGX at the moment, but from what I could recalled:

a) The resolution to re-elect Ms Chen Xiao Ling received significant support. This was a sign, at that point of time, that things are going NJXJK’s way.

b) Mr Yiu Ming Yiu and Mr Chow Wai Leong was re-elected with a more modest result than Ms Chen’s.

c) Resolution 10: to allot and issue shares was denied. I think everyone have enough after the private placement.

d) The share purchase mandate was also denied, which is very odd indeed.

e) The resolution to remove all existing board of directors, namely Dr Ho Choon Hou, Mr. Yeo Hwee Tiong, Mr Cheong Titus, and Mr Joseph Wong (who had retired) was voted FOR. I think all of them accepted the results with grace, and even stayed on after the AGM to talk to press and shareholders alike. Commendable.

f) All the directors proposed by NJXJK was voted into the board.

g) Right after this resolution, Mr. Yiu Ming Yiu requested the Chairman to withdraw all the requisitions made by TransGlobal. This amounted to a concession and hence the meeting is concluded.

I had the opportunity to mix around with some of the shareholders and none of them responded to the events vindictively. One lady was impressed with how professional the directors were. I could speak briefly with Ms Chen, congratulated her and wished the company well.  Dr Ho stuck around and interact with media and shareholder alike, and I can't help being impressed by him.

Valuation

Now that the fate of the board is more or less settled, they can proceed to account for the incident and also repair the reputation of the company. As such, I think it is opportune for me to speak about valuation.

I have never been a fan of estimating a company’s value through its earnings—earnings don’t interest me although I do think they have the most direct impact on share price. 

The company is expected to endure a few years where business is poor. However, at liquidation value (meaning, the company is forced to unwind itself, sell assets, pay liabilities and then return the remainder to shareholders), the current share price is very attractive. We will put aside the question of compensation until the end.

Liquid Assets

There were about 62m of contract assets versus 70m of contract liabilities. So the net contract asset value is -8.348m

There were 22.6m of trade receivables, of which we will discount 25% in the event of collectability issues. Net off payables of 6.2m, the net trade receivables is 6.22m

There is cash and equivalents of 18.4m, ‘pledged fixed deposits’ (FD) of 8.86m,  unpledged fixed deposits of 40.7m. We will take all these value as it is.

There is also investments in a company call CRC, valued at 5.85m. I remove this from consideration as it is unquoted equity.

Summing it all up, there is a total net liquid assets of 65.8m

If we divide this value with all outstanding shares, the company, with only liquid assets in consideration, is worth $0.257 a share.

The stock market is pricing this company at $0.13 as of writing.

What about the non-current assets?

It has an investment property worth 4.7m. I believe this refer to office space being rented out.

It has Intangible assets; value of stake in Stemlife Berhad, Healthbaby and Cordlife HK, worth 29m. We will discount this value by 40% (estimation). It has a PPE stated at 16.3m, of which 5m is for its working premises. This value is likely conservative due to depreciation over the years. We will use 5m for the value of PPE, disregarding everything else (other than the property).

The non-current assets add another 26.5m to the value of the company. Along with the liquid assets, the company is worth a total of 92.47m, or $0.36 per share.

Compensation

But what about compensation? I believe the low risk group would turn out to be fine. If I were to guess-- that the total compensation would amount to some 30 over million, the company, with all assets considered, is worth at least $0.24 a share. With just liquid assets in consideration, the current price would be fair value. Hence I would not increase my shareholding without impunity unless the market price it down further.

The “3 stages” and where we are now

In early-mid April, I looked at the timeline of events and estimate the valuation (which you saw in the earlier section), along how I should act based on the probable outcomes.

There were three important events, two of which had already lapsed, and one of which would not happen because of the outcome of the AGM

1) The result of the private placement hearings

If the private placement is allowed to go through, this investment idea is half-dead in the water. Certain entities would have more than enough votes to have de facto control. Before this moment, I already have a few shares in my account, just to keep myself interested. I believe even if the private placement go through, the company has enough value-price gap that can be overcome through time... but I am not willing to inject so much capital, time-adjusted returns wise.

As you might already know, the Duty Hearing Judge rejected the appeal and the private placement was then terminated by the board.

After the outcome was announced on 13-May (yesterday), I bought more shares.

2) The outcome of the AGM.

As an opportunistic investor, the best outcome for me is that board members then retain power, but not win so decisively that NJXJK is discouraged from making a general offer in the future.

In other words, the votes should close enough that NJXJK felt like they have a good chance to get enough Yays in a general offer. The AGM resolution is a “free” way for them to gauge the success, and support from the substantial shareholders.

This would of course, realized my investment returns sooner.

I spent enough time looking at the substantial shareholders, asking SGX RegCo and the company if certain parties have to abstain from certain resolutions, in order to gauge the odds. I concluded that it would be very close if certain entities are NOT allowed to vote (my guess from the votes is that they were allowed to), and if the two other substantial shareholding entities belonging to Li Defu and Chen Yi Dan were to be neutral (and abstain).  

So did I vote for the TransGlobal group? I did not. I voted for NJXJK because I believe it is the right thing to do. I believe that when you do the right things, eventually you will end up alright. That leads us to the last stage (that would not happen…) 

One of my friend was extremely puzzled by my decision...

3) A mass general offer (This would not happen anymore!)

In the event that the outcome for the AGM resolutions do not go favorably for NJXJK, there is enough value in the stock for them to make a general offer. 

In other words, they will not be acting out of spite.

I have also checked their balance sheet and I believe a general offer should not strain their books too much. A competitive bid could come from TransGlobal and ultimately the shareholder will prosper.

Judging from the votes today , I think NJXJK won by a substantial amount. TransGlobal would fail in their requisitions put forward in the AGM, or any possible EGMs in the near future. I think the substantial shareholders has made their choice very clearly.

Based on the votes FOR Ms Chen Xiaoling (129m for, 71.8m against), TransGlobal and a small amount of shares stood alone against NJXJK. With so many votes for, I suppose the JPL for GCBC could vote, and both Li Defu and Chen Yi Dan controlled entities voted for NJXJK.

I would go as far to say that unless NJXJK failed to do better than the board in the days to come, a general offer from TransGlobal is very unlikely. 

So there you go. This is how I felt about this Cordlife idea. As for the parents, I think they could be deal with more generously. It is the only way to repair the company’s reputation, and ensure a better future.

-end.

Short Update on the Cordlife idea

I know I am supposed to be releasing an idea on Cordlife since my teaser post last week.

However, in between drafts, the company has been posting updates, and I have been trying to call major shareholders for advice. Attempts were also made to solicit views from certain parties which I am unsure would be comfortable in what was told. Everything felt very legally sketchy on both ends, so I feel the need to tread carefully.

So I figured I would put up a quick post since certain dates are looming near. 

On the 10-May, 10am, there would be a chamber hearing to decide if the interim injunction, which is preventing the company from going ahead with the private placement, could be lifted (at least until a final judgement is made).

This could possibly mean that the private placement could go through before the AGM, which translate to another 51.2m shares, and more importantly, another 51.2m votes. To call it a game changer would be an understatement. Any party that enjoys the allegiance of shares that many would crush the other side, even if every other substantial share holders were to stand with the latter.

Assuming the private placement does not go through, the voting for the resolutions tabled for the AGM (on 14-May) would be quite a puzzle. There are certain parties which could need to abstain from votes (since there is, to me, conflict of interest). As of now there is no clarity.

I have also sent in very pressing questions to both SIAS and the company. The company states that it would make public the answers to the questions post no latter by 48 hours after the deadline for the proxy forms. I am not very familiar with the legalese, but looking at the proxy form, it does indicate somewhat that a shareholder might be rejected from recommending a proxy 72 hours before AGM. So this means maybe the company could only answer a or two day before AGM?

I be keeping my eyes peeled because I took some time to draft and finalize those questions.

Lastly, I have acquired additional shares in the last few days. Cordlife now stands at about 4.8% of my portfolio. I am planning to acquire more as I think the issue is moving alongside my thesis. At the very minimal, I believe Cordlife shares to be very depressed. I have spoke to some friends about my idea (along with anyone who is willing to listen, really), and they cast doubts which I myself harbored.

Until the next post. Apologies.

Apr 2024 Portfolio Update (Hong Kong Recovery, Cordlife Teaser)

Don't ask me why there is a shoe missing. Maybe it reflects a missed opportunity on Anta Sports..

Topics Discussed:
-Recovery of Hong Kong market and how it affects my option income portfolio
-Teaser post on Cordlife

S&P 500 (ytd): 9.3%
STI: 2.35%
Tracker Fund: 1.09%

My portfolio: 17.3%

Portfolio upsurge was contributed by the surge in OKP's share price, which stands at currently 40% of entire equities portfolio size. Clifford Modern Living announced a special dividend which brought the share price modestly. At this writing, it has already gone ex-dividend.

Other notable transactions made:
1) Complete divestment of very small holdings in Fraser's Hospitality Trust.
2) Purchase and increase of Cordlife; more on this later.
3) Huge increase in Clifford Modern Living, as detailed in the earlier post, "The Maths of CML"

***

Recovery in the HK Market and its effect on my option income portfolio

Not long after my remarks that option income strategies are far inferior to directional ones, the market decided that it is time for an upturn and the Hong Kong market staged a recovery of sorts.

Of the few stocks that I have interest on, and their last month performance, as follows:
1) Anta Sports (+9.7%)
Anta Sports was a very good opportunity missed. It was languishing around the low 70s and even 60s. Valuation at 70 was very good-- its current back-of-the-envelope valuation as follows:

Cash + short term investments: 36b RMB
Long term fixed deposits: 11.8b RMB

Debts (of all maturities): ~15b

Net Cash of 32.8b RMB, or 36.18

Earnings: 11.7b this year, 8.9b last. Give or take 10b, which is about 11b HKD

Market Cap: 253b HKD,
it was 200b HKD if its share price was 70 HKD

Market Cap less net cash: 217b HKD
that would be 164b HKD if its share price was 70 HKD

Given the rough earnings of 11b HKD, it is not very high price to pay about 15-16 times multiple for this kind of growth company. Anta is a owner-operator, so management motivation should not be a concern..

Unfortunately, opportunity loss. I was too concern with selling puts and selling calls, and I have a limited net asset value to maintain. 

So I only have 400 shares of Anta Sports. I was quite bullish, even to to the point of selling in-the-money puts on Anta. They have since expire worthless.

2) Hong Kong Exchange (up 9.3%)

I do not think HKEX was cheap pre-recovery, so I wasn't too sore about this.

3) Link REIT (recovered 9% since 19-Apr). 

Link has been quite volatile these days. Pre-recovery, I am looking at a loss of 25% on 1000 shares of Link, which means I could no longer sell calls without making a loss.

4) Tencent (up 15%)
Unfortunately, I am out of Tencent as they are called away. My opinion on the valuation of Tencent is not too dissimilar from HKEX's. It is not dirt cheap but it still feels like an opportunity missed.

5) Alibaba (up 9.5%)
My positions are still way underwater for this recovery to be meaningful.

On the whole, I count myself lucky that I covered the sold-calls on my Tracker Fund before the uptick. There is now a modest capital gain (my avg price is 17 HKD).  I have sold calls at 18.5 till end of May, which net me a small premium of 0.275 per contract. That is a yield of (0.275/17) 1.6% for 1 month.

Assuming the HSI does have further legs upwards, I would use the funds on Cordlife, or to adopt a directional strategy on Hong Kong (using synthetics), or to sell put spreads, or even migrate over to America if there is a selldown.

***

Cordlife is a very interesting opportunity, which I would try to expound on in the next post. Its troubles began way before Nov-2023, the day where MOH began their investigation on the tanks. As I leafed through the annual reports for the last ten years, I think this is a pretty good opportunity. More later.

Another Year Passed (OKP AGM 2023)

It felt like just months ago that I attended OKP's 2022 Annual General Meeting (AGM), and yesterday, I attended 2023's.

I remember what happen in 2022's AGM (took place in Apr 2023) very well. At that point of time, the arbitration award was just been announced, and everyone was quizzing the management about the certainty of payment. I was persistent and questioned the financial controller about when it could be reflected, and she said that we will see it in Aug (i.e. the mid year results announcements).

Fast forward a few months, it was Aug 2023.

The 43m was in the balance sheet, but a not so special dividend was announced. Management was paid handsomely through bonuses. Investors were very disappointed. I remember the share price dropped quite badly.

OKP was (and still is) by far my biggest position. My portfolio and personal life was terrible in the last 2-3 years, and then when your biggest position goes up 20%... you thought that things are turning around ... only to lost it all in weeks.....

It was soul-destroying... I had been holding OKP for 5-6 years. At the same time, management of a few other companies, in my portfolio, was... disappointing. . My Alibaba position wallowed in the depths of the ocean (still is!), and my Central China positions absolutely destroyed my portfolio.

My portfolio went from leading the S&P by over 80%; today it is 60% behind. My XIRR went from a 18%++ to 12%.

I was thinking: When will I see the sun again? Do... I really deserve this?

***

After 2022's AGM, I was leaving the meeting (I did not stay long after the meeting was concluded), a young chap was right walking behind me, and asked if I am who I was. He had watched the video that I did with Boon Tee some time back. 

We started chatting about Central China Management. At that point of time, there were about 12 private investors that took up placements with the company. He said that it was very strange that a cash rich company like CCMGT would be involved in such a deal. I was having reservation about the identity of those personnels, and the timing of it all. 

***

I have since sold out of all my CCMGT holdings, and the stock is still suspended since weeks ago. This young chap is not around at this year's AGM. 

This year, I stayed on after the meeting, to join the management during their food/refreshment to hear what some investors have to say and ask. I learnt a bit here and there, things that perhaps I shouldn't write here...

But I conclude that perhaps I should hold on to my shares. 

The stock has recovered and some since those awful times, standing at 0.275 a share. Its balance sheet is stronger than ever, and projects are being awarded at a delightful pace. Everyone looks very cheerful.

In contrast with pre-2023, the arbitration was still on-going, and everything was doubtful. Daniel Or was there as well, and although he was still the same candid and straight-talking  person today, his behaviour during the doubtful times (pre-arbitration, pre-sentencing) could be mistaken as defiance. The mood, this time round, is happier. I did not ask any questions but was listening before and after the AGM.

Before 2021, my investment journey had been too smooth sailing. It felt like I aged a lot after that. 

I hope, as always, that life treat us kindly. 

-boonsong

The Mathematics of Clifford Modern Living...

Disclaimer: Author has a lot of shares in CML

 ...before and after the commencement of trading after the special dividend announcement.

For whatever reasons only known to the owner, management declared a special dividend as well as a final dividend, which total to 0.375 HKD per share.

The last closing price (which is not important, let me explain why later) is 0.59 per share. The last immediate price was 0.56.

Pre-announcement (of special dividend) 

Clifford ML was always cheaply priced as its business wasn't really growing, and it was trading close to net cash per share. Figures are extracted from its latest annual results.

Term Deposits: 120m RMB
Cash and Eq.: 591m RMB
TOTAL liabilities: 121.21m (current) + 50.336m (non-current) = 171.55m

Net cash (net of all liabilities): 539.45m RMB or 583.47m HKD

Total shares outstanding: 1015.75m

Net cash per share = 0.574 HKD

Total dividends declared for work year 2023/4 per share : 0.332 HKD + 0.043 HKD = 0.375 HKD per share

net cash per share AFTER dividends are given out= 0.20 HKD per share. 

Post-announcement of special dividend (02-April-2024)

As I wrote, CML trades at 0.72 HKD a share.

If we assume today it ex-Dividend, that would be 0.72 - 0.375 = 0.345 HKD per share

Out of this 0.345 HKD per share, 0.20 HKD per share is pure cash. The remaining business is now valued at 0.145 HKD a share or 147.3m HKD

If we assume that going forward, the company is going to earn 80m per year, that means that you are paying for less than 2 years of earnings net of all that cash.

Even if we were to conservatively estimate that the ONLY profitable (according to page 9 of the latest result) segment going forward is its main property services company, that would be 60m RMB a year or ~65m HKD a year. That means the current price of CML 'costs' about 2.5 years of earnings.

huh?

The fastest way to show anyone and everyone... that the cash in the books is real... is to give out special dividends... right?

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?

Why options is a necessary evil

The use of options can be as conservative as stocks, or in the mindset of an aggressive man, as dangerous as dynamites. I think of them as ceramic knifes-- awfully sharp, but if you use them as leveraged instruments, you can be undone very quickly. I have a small amount of Tracker Fund (2800.HK) positions acquired since Oct 2022. 

The details as follows: 6000 shares of Tracker Fund, total cost = 17979 HKD 

These positions are acquired incrementally, so the amount of dividends, since the first share was acquired, was a paltry 1840 HKD.

In terms of capital gains, there were... almost none. The Tracker Fund has gone nowhere for a long, long time. 

The use of options to increase position (selling puts, "insurance") or selling calls, brought in a total of 6826.73. That is a return of 38% over the course of a year or so of options selling.

Caveat: Firstly, income strategies with options will perform far worse than directional strategies (i.e. capital gain). But in a sideways market, income strategies are beautiful.

Selling options on Tracker Fund is not attractive because:
a) It has very little volatility (reflective of its price movement)

b) liquidity is poor, and there aren't too many different strike prices (think in 50 cents increments, such as 16.00, 16.50, 17.00).

With the upsurge in prices in recent days, my Tracker Fund positions will be called away (I was selling covered calls on all of them).  I would probably move on to other stocks or to utilize directional strategies (since it has low volatility, it is better to be a buyer of options).

Feb 2024 Portfolio Update

My Portfolio Return: 4.29%

Straits Times Index Fund: -2.44%
S&P 500: +8.38%
Hong Kong Index Fund: 0.23%

Current XIRR: 13.95%

The biggest reason for the improvement to my portfolio returns was... OKP.

OKP had a pretty brilliant and yet dull earnings report for this 2nd half results. The 0.015 per share dividend is nice, but the director remuneration has shot up. This half year alone saw an increase in 6m to its executive directors.

Hopefully this would be the final time we see such a huge payout to the directors. No doubt some activist-minded investor would raise hell in the AGM. I will not be surprised.

This earning release is very surprising; everything positive happened. Be it fair value gains to the investment property, or dramatic increase to its margin, it all came about.

The market probably took note of these abnormalities and did not boost OKP's price significantly-- nothing more than the amount of incoming dividends.

I have never paid attention to the weightage of OKP in my portfolio that closely, but after deducting the bonds component of my mum and my CPF accounts, OKP contributes 43.3%-- an astounding amt.

***

My attention is still on the management of my option selling portfolio, and they are doing quite decent. It makes the expected returns without much assignment/capital loss risk. All the profits are being reinvested-- the starting NAV was 50,000 and realized profits would be 3840 at the end of today.

That would annualized to about 30% if trade progresses peacefully. But there is nothing peaceful about the market.

***

I would be accompanying my mum for another medical in the afternoon and the usual trepidation is consuming me minute by minute. My dad isn't well too... I really don't know what to do but to leave it to the wishes of a higher being.

Jan 2024 Portfolio Update

Portfolio Return: 1.37%

Straits Times Index Fund: -2.48%
S&P 500: +4.2%
Hong Kong Index Fund: -4.8% (sigh)

Current XIRR: 13.27%

Option selling income is not reflected in the investment returns.

Transactions:

Best Mart 360, another somewhat illiquid stock. It has ROIC on the high teens, increasing topline, and a substantial amount of owner-operator ownership.

Given all these years suffering under debt worries, investing in Best Mart is a easy decision: it has 255m of cash, 77m of debt, and 1.8b market cap, which means you are actually paying for 1.7b net. Dividends have been consistently rising and now that a corporate is the major shareholder, it should stay steady. If it continues to earn a free cash flow of 130m, the multiple that you paying for this business is not high.

Much of my attention had been used on my option selling portfolio instead. A mind-boggling 19 transactions was made in this month alone. Underlying companies/funds involved are:
1) Tracker Fund (Tracker)
2) Tencent
3) Link Reit
4) Anta Sports
5) Hong Kong Stock Exchange (HKex)

I have sold ('write') call options on my Tracker positions and given how badly the market is dropping, this trade is safely out of the money. Selling options contracts on the Tracker fund is not a great idea. Implied volatility and liquidity is on the low side. Nevertheless, given the size of my Tracker holdings in relative to my income portfolio, it has generated more than half the amount of premiums this month.

Calls sold that are already deeply profitable are bought-to-close for a few reasons:
a) It has very little theta left-- most of the money had already been made
b) I couldn't sell another call until the current ones are closed. Selling calls when you do not have the underlying is what they call a 'naked' call. It is still possible that the market could surge upwards in the remaining days and you will be force to buy them back at a high price.

Sold puts on Anta Sport, Tencent, and HKex were deeply in the money due to market volatility. The recovery later half this week brought most of them out of the money, which was a pleasant surprise.

So generally, the strategy is

1) Sell Puts for these 'good' companies
2) If I have stock on these companies as well, sell calls if I do not think they are priced cheaply.

This strategy is called "covered-call strangle."

***

(Sell Puts to accumulate stocks) --- Owns Underlying stocks --- (Sell Calls)

If the market turns down, puts are exercised and I own more stock. At some point of time, I would have to stop selling puts.
If the market goes down exceedingly hard, I would be stuck with these stocks and hence it is important to sell puts on only stocks that are good companies (high ROICs).
If the market goes up, there is a good chance my portfolio would be profitable.

***

IMO, the reason why selling calls will make sense is because the market pricing of these good companies are not in bargain bin territory.

Example:

The risk free rate which I have is 3.7-8% on T-Bills. Compared this to a company like HKex, which is yielding about 4.1% (13b free cash flow/310b market cap), the 'risk premium' is 0.4%. If, let say HKex is priced at a yield of 6%-7%, and that the earnings easily grow due to its business  nature, it will make more sense to own stock than a risk-free bond. 

For HKex to yield 6%, earnings has to surge, or the stock has to be sell down. At 240 HKD a share, you need it to be (13b/ x = 0.06, then x is 216) to fall to 216 HKD in order for this purchase to make sense.

Of these companies mentioned, I think Anta Sports has the most favorable pricing, and hence I am quite happy to sell puts on them. It helps that Anta's option pricing has a way higher Implied Volatility, so the premiums are richer.

On an NAV of about 50000 SGD, this strategy yields about 1000 monthly. You need money to make money, and I am not being very aggressive. If I could make 12000 annually on a portfolio of 50000, that would be a yield of 24%, which is attractive. A directional strategy (betting on market directions by buying calls or puts) will beat an option selling strategy WHEN the market is directional. However, I already have positions to capture that area.

Hopefully the market be merciful in the coming days. It has been piss-poor for quite long!

Dec 2023 Portfolio Update: A look back at 2023

Obviously, this will be the final update for the year.

Portfolio Return: +1.99%

Straits Times Index Fund: +1.03%
S&P 500: 24.25%
Hong Kong Index Fund: -15.23%

Current XIRR: 12.6%

Overall, portfolio experienced capital inflows (more buying than selling), significantly more than any other years. This exclude bonds (of which about 1/5 of the portfolio that was used to buy T-Bills for mum).

I am as disappointed as any HongKong stock investor would be. This year marks the third year running which HSI returns negative double digits.

Incase you didn't notice, I lost all my gains against the S&P. It was a very terrible year.

The year started quite nicely for HK actually, +8% in Jan alone. The flickering flame was blown off as the Chinese economy struggled, along with interest rate/inflation worries in the America. 

***

Centurion, which never did have a problem with its business during COVID, increased its dividends at last, and the stock recovered just a little. Unfortunately this is also a year where focus is on interest rates, and its bulging debt is a concern. There was also government regulation coming up soon and given my distaste in its major shareholders, I sold. I remain unconvinced that the owners have OPMI in their hearts.

***

That disdain and scalding from holding companies with debt carried over with Lendlease REIT, and I sold. I disagree with management that they should be acquiring more assets when focus should be getting its Interest Coverage Ratio in check. Long after I sold, Sky Milan revealed plans to downsize their lease. I think this is the only stock that I "escaped." Unfortunately, it wasn't a profitable investment, since I have invested in the rights issue during their ambitious acquisition of JEM.

***

The OPMI issue unfortunately, carried over to my biggest shareholding OKP as well. Its legal windfall was not distributed to shareholders but privately disbursed to management in the form of bonuses. This was by far my biggest anticipation (the legal windfall) and disappointment (when they refuse to give a decent distribution).

Now, OKP's liquidity leaves much to be desired, and letting go of such a large position will take time. I am still convinced that there is value in the company, just that it was suppressed by management. When will management do the right thing? I hope soon.

***

After holding on to the Chinese real estate stock for more than 2 years, I finally craved in and sold all my Central China Real Estate holdings, while selling a respectable portion of my Central China Management (a real estate project management subsidiary) stocks. There is still a large amount left, with painfully deep unrealized losses.

This would might never heal and could be a nice reminder that sometimes the problem is too big for an (honest?) owner/manager to solve.

Alibaba had wanted to spin-off its business and then, given the market conditions, decided not to. The stock promptly cratered. What is new? I have not seen a company that big having to go through so many hurdles. No wonder Adam Khoo sold his holdings in China.

But things have a way of changing when you least expected it. Let's see.

***

Onto the positive points: I have finally decided to put what I learnt from options into practice. 

Some years ago, I had a nasty experience selling puts on Futu (which I thought was easily worth 40+ USD a share). The stock cratered to the sub-20s, and I was looking at a huge loss.

I bit my lips and took the loss. I covered my sell puts, and did nothing more.

Just days ago, I was selling puts on Tencent. I think selling puts on companies which are compounders, is a less worrying proposition. At late morning, the Chinese regulators decided to solicitate opinions  regarding gaming. This brought back all the fear back in 2021. Intraday, Tencent lost 14%and Netease lost 25%. At the end of the day, I think they are not a bargain / steal at this price, but they are compounders.... market hardly offer these companies cheap unless there are huge problems (with the market or the company itself!)

The screenshot above illustrate a few things
- incredible IV%, and very high IV percentile (it means, this volatility is higher than 97.97% of the past)

- Put-Call ratio of 82.87% (everyone is scrambling to buy puts!)

- IV is severely higher than Historical Volatility.

- Again, only 2 days left when market reopens, before contract expires)

So I learnt, instead of just covering my put, I wrote another In The Money contract. Let me explain with figures:

Initial Sell Put of Tencent at strike price 300, premium = 2.8 HKD, implied volatility = ~25%
After the regulator's announcement, the same contract escalate dramatically, premium = 24-32 HKD. Volatility = 60+%

Cover the put by buying a put = 27 HKD. Net loss is 27- 2.8 = 24.2 HKD

Sell another put at 27 HKD, net gain is 27-24.2 = 2.8 HKD

So this "loss" is somewhat neutralized.

Two things can happen: the market calmed during the holidays and the price recover a little. Otherwise, there is only 2 days left in the contract after the market.

So there is a possibility of a implied volatility "crush", massive theta decay, and possibly price recovery. So there are 3 good things that can happen to me. What is the worst that could happen? I have to purchase Tencent at 300 HKD.

It was during this time that I learnt something about portfolio management. Along with some puts sold on Tencent, I have puts sold on HKEX, Alibaba.HK, and bought some Tracker Fund stocks.

I choose to sell calls on these Tracker Fund. This is a bearish trade, and hence it balanced out the sell puts. To illustrate:

Sell Puts = Believe that price will go up = Bullish.
Sell Calls = Believe that price will go down = Bearish. 

If every position in my portfolio is bullish (i.e. just selling puts), this volatility would completely upend my portfolio. 

***

In a couple of days more, my mum would have to go through another medical appointment. As usual, I am worried and could not feel the festive spirit. In fact, I be packing my stuff and going for another shift at food delivery in a few minutes time. Merry Xmas everyone.

Nov 2023 Portfolio Update

Straits Times Index Fund, YTD returns: -0.32% (was -1.26% last month)
S&P 500, +20.3% (was +14%). Wow. I didn't know the US market was so bullish this month.
Tracker Fund, -7.62% (was -8%) 

My portfolio, 0.9% (was 1.4%)

Things didn't go too great for me in November as well. Alibaba had a big intraday drop after announcing a stock sale from Jack Ma's Trust (which in the end did not get executed) and the shelving of hema/AliCloud IPO.

Since Alibaba is my second biggest position and I have already made purchases in the past at this level, the only thing I did during those sell-off days... was to sell puts. I did not sell a single share. More on the options later.

Major Transactions:

Complete Liquidation in YZJ Finance and Centurion.

In addition to the resignation of both CEO and CIO, the legal counsel has decided to throw in the towel as well. Most of my shares are gone at 0.32x. 

As for Centurion, I think the story has pretty much play out and the market is only willing to pay around this level. I can't say that its debt level, as well as my impression that the management is not OPMI-friendly, didn't play a part in my decision.

Most of my attention now is in selling options as the market appear to be quite bearish.

Transaction in options this month includes:

1) Selling two PUT contracts of Alibaba at 67.5 and 72.5 strike price. Both are now somewhat OTM and time decay is working nicely for me. I collected about 150 SGD from providing this "insurance."

2) Sold puts of Link REIT at 35, closing it for a quick gain as it enjoy a bull day, and then sold another 2 contracts at 38 and 40. The put contract at 40 is a in the money put. I was a little confident that the results as well as the approaching dividend (ex-day) will aid in stablizing prices. Total premium collected was 470 SGD without owning a single share. I had more than enough capital to pay in case the other party exercises, of course.

3) Purchase Tracker Funds and sold calls, as well as sold calls for all my Tracker Fund positions previously held. That is a total of 10 contracts sold. Total premiums collected is 330 SGD. 

I expect a portion of these to be called away, 4 of them are having a strike price of 17.00 HKD. The current market price is 17.69, and the premium collected for each of these was 0.6. So if the market does turn bullish next week, it is likely. 

I bought these 2000 units of Tracker Fund this month to sell calls with. (each contract of Tracker Fund is 500 units). This is what is known as a "buy-write", i.e. buy the stock and write (also known as sell) calls.

Inefficient as it is, in terms of ROI when compared to a sell-put strategy, doing a covered call require next to no attention on my part after the trade. Meanwhile, I can sell too much puts and underestimate on margin.

4) Sold Tencent PUTS and covered them after the market has recovered for Tencent. Little to no premium was left... The Tencent call contracts are having a modest profit 250 SGD. They expire next year's June. The plan is to sell them 3 months before expiry before time decay sets in.

Overall, this low risk strategy brought much needed income this month. This portfolio has seen nothing but bad news for more than 2 years... and I am kinda tired to be honest.