September 2024 Portfolio Update

As I wrote, Alibaba just closed another 7.3% up in one day. CSI300 index went up about 7.21% itself (at one point, it was 10%).

"The boat has left the.... p**t"

S&P500: 17.62% was 16.63% 

Tracker: 21.91% was 8.21% (what a month it has been) 
STI: 15.13% was 10.73% (it was quite a climb. Banks's shares are ATH)

My portfolio: 39.74% was 25.78%.

Please disregard this month's return as a bulk of it comes from Anta Sport's rally. As wrote in the previous post, I sold calls for all my shares in Anta, and as such there would be no gains at all. The gain in Anta would had been a cool 22.03%.

//last minute edit: I recall that Cordlife was also responsible for some of the increase this month. 

Unfortunately, the market rally also brought my Alibaba sold-calls to ATM. Volatility for calls outpaced puts-- in other words, if you have bought the shares at 110, and sell a call, you received about 6.6 dollars. If you have sold a put at 110 strike, the premium is 5.6 dollars.

This reflects a market sentiment skewed towards bullishness.

Alibaba represents 13.29% of my total equities portfolio. 

***

The somewhat negative impact of this market rally is not the main reason that my mood is as poor as the weather. My mum's glucose level is now extremely elevated, and her anemia did not improve. The latter requires her to go for a colonoscopy in the next two months.

It is another period of worries.

I have not been paying too much attention to my equities portfolio either. Hence, I am running low on ideas to buy and hold long term. Should I put more capital into the options strategy? I am unsure.

It is quite depressing that Alibaba, a share that I have held for some years (and undergone quite a bit of up and down), is now on its ascend and I am likely not part of it. Is this what most investor cautioned against-- having too much sentiment for a stock? Maybe.

***

Did selling option cost me a ton of capital gains? I would think so...

I have sold calls on...

Tracker when it was 17

HKEX while it was 220

Anta Sports while it was 60-70++

Link Reit while it was 35

and... Tencent while it was 300~!

***

How options can make you look dumb and smart at the same time

As I wrote, the HSI had an incredible week, and the Tracker went up 4% by itself. 

There were many outsized, single-day gains, particularly the ones that were long suppressed (tech comes into mind), and real estate. Heck, even China Vanke went up 20%.

The Dumb

Most of you would know that I have a income strategy with selling options-- through the virtue of a bull market, most of the calls I sold are exercised. A few good examples of missed gains:

Link REIT: wrote calls at 35. Today's price: 38.9
Commentary: I don't regret this being called away as Link REIT is a dividend payer. Dividend payers have very low volatility and hence very little premium yield. I didn't make any money with this one as I have to sell calls below my cost price. The dividend of 1.x HKD distributed was my saving grace, else I would be staring at capital losses.

Tracker Funds: wrote calls at 18. Today's price: 20.66
My cost price was 17... and I wrote calls for the same reason: Volatility on the tracker fund is way too low, and premiums are insignificant.

The Very Dumb

The only stock left in my portfolio as Anta Sports ("Anta") and Southwest Airlines. I regard Anta as a good company-- and selling puts on them have been more comfortable than most. Through the selldown last month, I have acquired a sizable amount of Anta, approximately 50% of the NAV of my income portfolio. 

The problem is, because Anta is already substantial, I did not sell a huge amount of puts this month, but I did sell calls on them, and unfortunately I sold calls on ALL of them.

So when Anta was priced at 69.4 HKD on 16 Sep, with my cost price of Anta at 77.3 HKD, I sold calls at strike price of 77.5, collecting a premium of only 0.417. The premium would be very low if the expiry is on 27-Sep (note: Hong Kong Exchange's options are only available monthly), so I sold the ones expiring on 30-Oct.

So what happen yesterday, 25-Sep?

I was in two minds on 23-Sep and 24-Sep if I should roll my options. Anta was priced at 75 (recall that my strike is at 77.5, expiring 30-Oct). So on 25-Sep, the stock open at 81.45 (practically busting my calls) and I was resigned to it being called away. What happen? the day ended back at 76 HKD. I felt like a genius for not covering/rolling my sold call options.

Charting can make you look like a fool sometimes. Notice the near term resistance at 80 HKD. The price action on 25- Sep would have hint that the market, as a whole, is not ready to go beyond that price point.

So I was reading this and thinking: this is great. Maybe I don't have to cover my calls.

Then today happened.

My call premium was 0.417. FML.

It would cost me MORE than the unrealized profits to cover this "short."

Note that Anta is now priced at 86.85. The strike of this option is 77.50. So there is a intrinsic value of 9.35 HKD. The additional 2 HKD is time value of the option, as well as the spike in implied volatility due to movement of the underlying.

So, what should I do now? Nothing. There is still time remaining in the option, and realistically, no option buyer (the other party in this contract) would exercise the option now (hence forgoing the 2 HKD worth of time value). The only time this happens is if there is a dividend of more than 2 HKD coming up.

The blog post is titled "How options can make you look dumb and smart...".... so where is the smart part?

The Smart
As my income portfolio is looking thin at the moment, I was looking for candidates to sell options for, and ran my screener for good companies. Good companies are basically compounders. They have decent ROE/ROICs, and usually are not priced cheap. A 52-week low of this list reveals an outstanding candidate for investment.... Nongfu Springs ("Nongfu")

There are two sides of the coin with Nongfu Springs. The pro side is: Nongfu has problems that are not economical in nature. Overly nationalistic rumours swirled after Wahaha Holdings' owner passed on, and certain Nongfu products have Japanese-looking design on them.

And then, there was this report of too much bromate.

This result in revenue falling for this natural water segment, but the other segments still displayed growth. I believe this problem is temporary.

However, Nongfu is priced to perfection, despite it falling to as low as 23 HKD a share. This is substantially lower than its IPO price, but by no means it present itself as a silly bargain.

There are two ways you could use options to acquire a position "for free." Notice the quotations-- they are NOT free and comes with their risks.

1) You sell ATM puts and use that premium to buy ATM calls. On normal days, the price should not be too different... if the premium for a put is 0.5 HKD, the call should be close. Today, however, isn't a normal day-- markets are way too bullish and demand for calls went sky high.

So what is the risk? If the stock goes down, the put you sold get exercised, and you have to buy the stock. But hey, you were ready to buy the stock anyway, right? So this isn't too bad.

2) You could use a call ratio backspread. 

A call ratio backspread involves selling a ATM call and using that premium to buy twice as many OTM calls.

E.g.: So assuming you liked Nongfu Springs at 28 HKD, but you are mindful that it still has problems and could go way down.

Selling a call, expiring at the end of the year,  at 28 HKD gives you 2.4 HKD. You would need to buy 2 contracts that cost you 2.4 HKD-- looking up the option chain, it happen to be priced at 31 HKD

So if the price goes down, you lost nothing as the sold call becomes out of the money.

If the price climbs gradually, you start to incur loss on the sold call. The moment the price goes beyond 31 HKD, those two call contracts that you bought becomes in-the-money, and the value of these options increases as the price increases. Eventually, if the stock does "moon," you close both positions.

You should only use a call ratio backspread if there is substantial downside and a substantial upside.

Well... hopefully this bull market have legs.

August 2024 Portfolio Update:

 S&P500: 16.63% was 17.19% 

Tracker: 8.21% was 4.17% 
STI: 10.73% was 8.13%

My portfolio: 25.78% was 23.86%.

I generate this image by asking Gemini to replicate the Disaster Girl Meme but sub the girl with a cat instead. Hopefully my portfolio don't burn like the house.

Despite the portfolio return, the last week was pretty turbulent.
Topics today:
-Brief talk about -10%++ FSY, Cordlife and Best Mart 360. 
-Why investing in Nanyang Holdings is a poor idea.
-Option Income Portfolio update

***

-Purchase of a token amount of Fu Shou Yuan just before earnings, at 4.7$. I thought that earnings for this company would be modest but steady... however, it was anything but that. Management implied that the year before, China's re-opening from COVID released pent-up demand for its services. Unfortunately, the economy does seem to slow down, and earnings and revenue are down almost 30%.

This resulted in an intraday loss of 13% and subsequent falls means I am down 24% on this position. 

To be honest, if FSY's trouble are temporarily, the stock is looking very cheap. HOWEVER, management cut dividend for the first time, which signals that tough times are really ahead.

***

Another stock that has gone nowhere is Nanyang Holdings, who released earnings earlier this month. There isn't anything optimistic about its earnings, and the Shanghai properties' land use right is still under negotiation for years!

The company also tried to be too fanciful with its investments, jumping around different asset classes. Check out the latest interim report's Financial Investment section:

Performance of the world equity markets, in the first half of 2024, was uneven. U.S. inflation fell more slowly than expected and interest rate cuts were pushed back to the latter part of the year. However, during this period, the U.S. equities market continued to perform especially the tech sector. China’s recovery, on the other hand, has been slower than expected and more stimulus was needed to address weak domestic demand and to stabilize the property market. During this period, we reduced investments in emerging market equities and increased investments in investment grade U.S. bonds. For the six months ended 30 June 2024, the investment portfolios, including cash held in the portfolios, increased by approximately 6%. Financial assets at fair value through profit or loss, classified as current assets, totalled HK$419.8 million. This represented approximately 8.3% of the total assets of the Group. They were well diversified and comprised approximately 350 individual holdings. The Group recorded net realised and unrealised fair value gains of HK$22.7 million or equivalent to approximately US$2.9 million and investment income of HK$2.7 million or equivalent to approximately US$0.3 million. Equities comprised approximately 67.6% (of which U.S. 57%; European 17.6%; Japanese 3.6%; Asia ex-Japan and others 9.5% and Emerging Markets 12.3%), bonds 23.5% (of which U.S. 62.1%; European 22.6%; Emerging Markets and others 15.3%), commodities 4.1% and cash 4.8%.

God. If your portfolio size is ONLY 420m, and you have 350 holdings.... that is way too much diversification. Your returns is only 6%, and one could match that with indexing.

(I haven't have the energy to dig out its multi year investing returns. But reading its "strategy", I highly doubt they can make a difference)

Anytime someone said that they have 50 stocks, my perspective is that they had probably hit their portfolio targets and are in defensive mode. The target, would be to match market returns. If one wish to capture market returns, why not just buy ETFs outright?

I wish I could take a plane over and quiz the smart ass management on this. The daughter of the SSH is joined the investment committee recently, and she was ivy league graduate. 

(God, she has 2000 shares in Nanyang Holdings. I can't believe a peasant like myself have more)

I was hoping that things would change, but as of now, nayyyyyy.

If you want to invest proactively, be paid a respectable amount of money, then start pulling your weight.

Cut that portfolio to a respectable amount of, let say, at most 20 stocks. Even if you were to divide that 420m equally, it is still around 20m each. It is not difficult to find good investments to buy with 20m.

Nanyang Holdings' market cap is a mere 810m HKD. The balance sheet contains the following:
-underperforming investment properties, valued at 2.28B

-Financial assets at fair value, both current and non-current, at 2.5B (most of it, around 2B, is invested in SCSB, Shanghai Commercial and Savings Bank ~2B)

-Cash and eq of 100m

Looking at the returns from its real estate business in 2019, it is only ~80m yearly (ignoring fair value gains), and at its stated book value of around 2.2b (again, ignoring that years' fair value gains), that is only a return of 3.6%. Right now, it is worse as rental is soft, and the land use rights is in limbo. 

If I am the CIO of this company, I would move to liquidate the investment properties. Even at 50% haircut, it is enough to privatize the whole market capitalization of Nanyang Holdings!

Don't be the only reason for your existence is to be a lesson for others.

***

Beside FSY, another stock that lost > 10% in a single day ... was Cordlife.

Sometime earlier this month, the Substantial Share Holder (Sanpower), through its investment holdings in Blue Ocean, which is the entity formed for the liquidation of GCBC (Global Cord Blood Corp) , sold a good amount of its shares in Cordlife to an entity call Manital Best, controlled by a person call Kang Lan.

There isn't much information about this person, but some googling (and largely guessing) that she is a high level management in CBC Group. I am going to assume that this is an intelligent bet by an insider (of which I mean an industry insider, no some financial market manipulator).

All this while, NJXJK, which is an entity controlled by Sanpower Group, had been writing letters to the board, outlining its desires to bring the company private and yet also highlighting issues. It was very amusing to me because:
a) Cordlife's board of directors is largely already in control by NJXJK

b) If you really want to ask a lady out, you wouldn't ask 6 times and take a rain check.

So NJXJK did everyone a favor and expressed that they will pass on the privatisation offer on its 7th letter.

This resulted in a intraday loss of almost 13%.

Very fortunately, the group reported on Thursday that MOH has given them the go ahead to resume business. The stock rallied 10%.

Both the decline and recovery were hilarious to me. Cordlife's issue was never if it was cheap or if it would fail to be a going concern (removal of license, or operations made obsolete). It is whether the company can survive the legal issues. It is largely expected with that business would be allowed to resume.

There are a few likely phases that I foresee

a) In a matter of 2 years, we should have clarity on how the group representation (of which there are publicly known to be 2) would go. One is from Peter Lee Chambers and the other, Withers KhattarWong. Both are in early stages of the legal process, and I think they have yet to contact Cordlife.

If the group representation efforts were to fall flat, it is likely to result in value revision of at least 50% from today's prices. The sooner we have clarity on the legal issue, the better it is.

b) Someone would be held accountable, charged and "hang" in public to appease the customers and repair its reputation

c) Aggressive PR efforts to regain trust.

Is Cordlife still cheap?

It has 17.4m in cash, another 8.8m in Pledged FD which is about 25m. Coupled with another 36m in fixed deposits and 5.6m in short term investments, you have about 56m in cash alone.

Its contract assets of 62.5m (hopefully no major impairment)  is matched by its contract liabilities of 62.9m. 

It have interest in other companies as well as the building in Yishun.

Cordlife has no debts, and its market cap is 36.7m as of 31-August.  Its CAPEX is about 3m yearly. If we bump it up to 5m (legal representation and testing fees) for the next 3 years, and that its operating cashflow continues to bleed 10m yearly, it has about 2 years of time to sort itself out before the liquid asset value-price gap closes or ceases to be appealing.

***

Joining FSY, Cordlife in a 10% drop intraday group is Best Mart 360. News broke that its CEO is under arrest, and the stock fell 15%, only to recover to -1%. It was crazy.

And on 28th Aug, the results look... impressive, and they announce a good dividend, so it went up over 11% in 3 days.

I don't have a big position on this stock, so I was ambivalent.

*** 

Option Investing Portfolio

The Tracker Fund have a substantial recovery this month, and most of my sold calls were exercised. I had sold calls on
-a small residual amt of Tracker Funds
-Link REIT. I realized a small amount of loss or break even on this, because of the dividend.

That means all my stocks, except a decent amount of Anta Sports, were called away. I like Anta Sports, and I think it has a respectable amount of volatility. I am also thinking about selling puts on Southwest Airlines, as it undergo pressure from Paul Singer and gang.

On a start up capital of 50000, 

Dividend: 445

Capital Gains: 297 (much reduced due to selling calls on Link REIT with strikes below my cost)

I had little but no choice to sell Link REIT at 35, even though my average cost was 36++. This was because Link had so little volatility, and much of my capital was tied to it. 

Income: 9000

Current returns: ~19.4%

Hopefully I maintain my discipline and not get too aggressive....

July 2024 Portfolio Update

S&P500: 17.19$ was 18.34% 

Tracker: 4.17% was 9.19% (yea, the depressing times are back)
STI: 8.13% was 5.29% 

My portfolio: 23.86% was 25.47% 

Because of shit that happened at work, I decided to focus a lot more of energy into it, to the point that I think I am a nuisance.

It is nice to be rich, not having to deal with all that except to please yourself. Times are both brighter, and darker, for myself.

I do spare a few minutes to update my income strategy portfolio, but I failed to realize that one of my positions was actually a roll-over position to next month. As such, I sold more calls than I have a position for (naked). 

So now I have two choices
(a) Cover the roll position (which is safely more than 50% gain) by the adequate amount
(b) Purchase more shares of the underlying in order to make it a covered call.

I am thinking of doing (b) as I believe the shares are a tad on the undervalued-to-fair side. This stock is Anta Sports. I know growth seems to be slowing, but it isn't a trend with this company alone. I believe the management have enough skin in the game to try their best.

On other news, I know the Mags 7 have suffered a bit this week, but it is only a handful of percentage. Should you sell or buy because of a couple of percentages? Would that have made all the difference? I doubt so.

I am sorry that there is so little to update. Other parts of my life is taking up much of my time.

June 2024 Portfolio Update

I love billiards and snooker.

Celine Dion: "I don't want people to wait in line if I don't have anymore apples"

I am almost done with watching Celine Dion's documentary by Amazon Prime and it is extremely heart breaking to watch with the medical trauma she underwent, her pain and loss in full display.

It was very depressing for me to watch as it reminded me of scenes that my mother went through. It frightens me even till this day, and I live in fear everyday, that something is going to happen, I need to watch out. 

I don't know how she is coping everyday with the loss of identity, the loss of her health, and even though she is definitely very wealthy, I think she would give up of all it just to be the Celine Dion I knew when I was younger.

S&P500: 18.34% (was 14.23% last month)

Tracker: 9.19% (was 13.91%)
STI: 5.29% (was 5.35%)

My portfolio: 25.47% (was 23.09%)

Option income was just north of 1100, which isn't great, isn't bad, considering that I did not truly utilized all my funds for most of the month.

The total profit from income options portfolio totals to about 7000 year to date, based on a start up capital of 50000. All profits will be plough back into the portfolio, which makes this income strategy not so income really. A real income portfolio gives you a sum of money that needs to be use every month, and I have the luxury of a day job.

My position in Anta Sports have increased by another 1000 shares as my sell puts went ITM. 400 shares were out of the money the day before expiry, but 27-June wasn't a nice day in the market.

It might start to make sense to go on an income strategy with Alibaba. The news of the convertible bond sale isn't likely going to make the stock soar in the near future, so an income strategy make sense.

In that, I sold ITM calls on my Tracker Fund positions and the counter party exercised a good majority of them. So with these funds, I have another 10k SGD of capital to sell puts on. Alibaba looks like a proper choice at the moment, and IV isn't too poor (neither is it excellent to sell on).

***

On a more personal note, it is another disappointing year in my main job, and I guess my fortunes has indeed changed for the worse. I think I could learn to adjust to this new normal, where one slides into mediocrity. What worries me is the decline of my mom's health. I wish she doesn't work that hard for her age.

Apologies for this very short update. There isn't any bright sparks-- no teachable moments to share.

May 2024 Portfolio Update (How to use options on Alibaba)

Anyone with Nvidia stock should look happier than this MaineCoon.

S&P500: 14.23% (was 9.3% last month)

Tracker: 13.91% (was 1.09%. Wow! 13% in one month)
STI: 5.35% (was 2.35%)

My portfolio: 23.09% (was 17.3%)

Notable Transactions

Increase in Cordlife after the announcement that application to set aside the interim injunction, so as to allow them to privately place some 51 million shares to some party, has failed. The total amount of Cordlife, alongside a rather generous uptick of 14+ percent so far, means 7% of my portfolio is now invested in Cordlife.

After the AGM, there are a few announcements, one that was published on 28-May-2024..

1) The interview and subsequently arrest of Ms. Chen Xiao Ling

At first, this might smell like bad news, but in reality, it is good because I believe the charges are the same as the rest of the ex-board members. My belief is that there is no financial fraud involved, and the board is only guilty of untimely disclosure. If so, that means all the board members at that time, of which Ms. Chen is a member, is guilty.

2) There are two potential group representation action against Cordlife. This is within expectations.

3) The company is further banned from collecting CBUs for another 3 months. I wouldn't be too anxious as the new board is barely days old, but this would be a matter of concern if things remain status quo 3 months on.

Other than this purchase of additional Cordlife shares, there are no other notable transactions.

My sold call options for Tracker Fund should be exercised, and I would receive a modest profit. This capital is now freed up where I could do options on perhaps Anta Sports or Alibaba. 

***

What follows are some suggestions of which one could use options to express his/her opinion on 9988.HK. I am skewed towards a bullish stance-- I believe this latest convertible bond issue is not a major factor. 

1) Synthetics (Selling a put and buying a call with the premium)

If you are already ready to buy the stock outright, do a synthetic first.

As of writing, the share price of Alibaba is 79.5 HKD. 

I could sell a put option, at 80 strike, for about 6 HKD and then buy a call at the same strike price, for about 5 bucks. Why is there a discrepancy in the price? A put at 80 is slightly in the money, and the implied volatility for puts (36.93%) is higher than calls (29.77%) 

Take note that this is a 94 day option, which is a 3 months. 

If one were to outright buy a call option (without selling a put), he should seriously think of selling the call (to close the position) with about 1 month left before the strike. This is because theta (time value) decay is the fastest in the last month.

But with a synthetic, our mindset is that we are ready to buy the stock anyway.

So instead of spending money outright for 500 shares, we are getting exposure with no "downpayment" except for meeting our margins for the put options.

A leveraged synthetic is why we are VERY VERY BULLISH about a stock. We could sell IN THE MONEY puts (which will give us a higher premium) and then, based on how much risk you want to take, buy a call that is either:
a) Deep in the money: This means your delta is very close to 1, which means every dollar of up /down in the underlying will affect your option price by the same amount.

b) Far out of the money: lower probability of hitting the strike, but cheaper in option cost.

A leveraged synthetic is leveraged not because it is an option play. Options are leveraged instruments per se. It is call an leveraged synthetic because an ITM put has a delta very close to 1, and a deep in the money call has a delta of also close to 1. Adding the delta together would mean you have double the price movement relative to the stock.

2) A Bull Call Spread.

One could try to buy an 80 call, and then sell a call at 100, both at the same time to expiry.

This effectively means that we are happy with a 20 HKD profit per contract. The math looks like this: You buy a call for 4.94 HKD, and then you feel like the upside is NOT much, hence you are OKAY with limiting your profit to only 100 HKD.

Selling the 100 HKD call will give you a premium of about 0.90.

The net cost is about 4$ HKD.

An alternative to a buy a long dated call and sell a short dated call. This make sense if you are very bullish about the stock (i.e. you believe the stock does not go down).  If you sell a long dated call, the theta is actually lower than a short dated call, which means as a seller, a long dated call is less advantageous.

3) A Call Ratio Backspread.

This is a extremely peculiar bet. What you essentially is to sell a ITM call at X dollars and then buy 2 out of the money calls that would add up to X dollars. 

The belief is that there is tremendous downside (hence you selling a call), and you are fine with a higher break even price on the upside. Eventually, if the price does go up a lot more, the benefit of buying 2 out of the money calls (they become way in the money) outweigh the mark-to-market loss of selling a ITM call (which is now also in the money). 

It is this selling of the call and its associated mark-to-market losses, when the prices go up, that push up your break even price.

I think this is not the best strategy to use for Alibaba is there is a known "cap" to the upside of 105. 

***

Unfortunately, my cost price for all my Alibaba stock is also about 101. Hence, I am somewhat "forced" to do something about my shares. 

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?