Feb 2022: Mid Update (Centurion's Profit Alert and Initiation of Nanyang Holdings)

Profit Alert for Centurion

Perhaps the one above had heard my desperation and decided to bestow some good news upon me. 

Centurion had announced that there is a hefty profit alert.

"...the Group is expected to record a substantial increase in the net profit attributable to equity holders of the Company for FY2021 by not less than 200% as compared to a net profit attributable to equity holders of the Company of approximately S$17.2 million for the corresponding period in 2020"

At 33.5 cents a share, the current market capitalization stands at 281.6m. A 200% gain would put net profit at the 50m region, which will make the stock look cheap (at last?).

The announcement narrates the reasons for this improvement:

"(i) the expansion of the Group’s portfolio of purpose-built workers accommodation (“PBWA”) in Singapore and Malaysia since the fourth quarter of 2020; and 

(ii) the steady recovery of occupancy of the Group’s purpose-built student accommodation (“PBSA”) assets in the United Kingdom reaching 82% for the second half of FY2021; 

as well as due to a fair valuation loss of approximately S$3.1 million in FY2021 as compared to a fair valuation loss of approximately S$27.6 million in FY2020 in relation to the Group’s investment properties.

"

The expansion of PBWA is expected, and hopefully should be the main reason for improvement. The increased in PBSA is welcomed, but not expected to be the main contributor since it was not contributing significantly to the top line earlier. The fair valuation loss of 3.1m, improved from an earlier fair value loss of 27.6m in the previous year, means that:

If the profit was 17.2m last year, should we add 27.6m of valuation loss (since it is largely paper loss) back to the bottom line of 2020, it would mean that the net profit was 44.8m.

At an estimated 50m this year, the improvement is not much. Henceforth, I would pay attention to the numbers arising from the PBWA slice of the business. The recovery of the PBSA was always in the cards, it was just a matter of when.

Would Centurion choose to restart its dividend distribution this time?

At 0.02 per share in 2019, that would mean a yield of almost 5.9%, which is extremely desirable. However, with the mindset of a business owner, I would prefer that they pare down its debt with its free cash flow.

Update on 27-Feb-2022:

Results were much better, and the debt level was pare down by a modest 20 million. However, the dividend proposed was a paltry 0.005$ a share, much lesser than the expected 2 cents a share. The company put up a resolution to restore director and management pay for voting as well. This news depressed share prices, and whatever paper profits from profit alert, prior to announcement, were all but vanquished.

Obviously, I am very disappointed, as this company was my best foreseeable hope in 2022. As it stands, my returns are -6%, and henceforth significantly trail the STI and HK indices. This would likely be the worst performance in 5 years.

Initial Capital Injection into Nanyang Holdings (HKEX: 212)

The history of Nanyang Holdings had an uncanny similarity to Berkshire Hathaway. In 2009, it made the painful decision to cease its textile operation, paying up to 40m to end construction of a factory. There were about 20 employees in 2009. Today, there are only 13.

Instead, they decide to turn their focus into property rental, converting the space of the space which the company held land use right of (in the form of joint ventures with their Chinese counterparts in mainland China), to office or factory rental. Their prized property is Nanyang Plaza in Hong Kong. 

Throughout the decade, they invested and increase, through rights issues, in their shareholding in Shanghai Commercial and Savings Bank (SCSB). The major shareholder is also the chairman of this entity, and this shareholding is very likely extremely long term.

Lastly, the company has an investment portfolio that is growing, though insignificant when viewed against its total assets.

Layman Valuation

The sum it up:

As of 19-Feb-2022:

Market Capitalization: 1.35B HKD
Source: https://www.hkex.com.hk/Market-Data/Securities-Prices/Equities/Equities-Quote?sym=212&sc_lang=en 

1) Investment Portfolio: Fair value of 456m HKD. 
"Equities comprised approximately 80.2%
(of which U.S. 41%; European 14%; Japanese 5%; Asia ex-Japan 27% and Emerging Markets 13%),

bonds 11.8% (of which U.S. 85%; European 3%; Emerging Markets 5%

and others 7%), commodities 2.2% and cash 5.8%."

2) Investment in SCSB: 2.2B HKD

3) Nanyang Plaza: 2.47B (based on level 3 valuation, hence least reliable)

4) Total Liabilities: 104.7m

After some pretty liberal discounting:

The Net Asset Value of 3.3B implies at significant 240% margin of safety after very conservative discounting. In case you ask, I discounted the valuation of Nanyang Plaza heavily, because the cap rate is on the low side of 3.x% currently.

Share Buy-backs and Cancellation

It appears that the management recognizes that the company is undervalued, and hence has been buying back and cancelling shares at a heart-warming rate. It is rare to see shares being cancelled away instead of just sitting still in the treasury, or worse, becoming stock options for management.

In case you noticed, there is a huge amount of Share Buybacks (figures in the centre column is in millions of HKD) in 2015, representing 200.745m of shares, at the price of about 33 HKD. This is through a tender offer by management to existing share holders.

The other bulk share buybacks occurred in 2019, 2008, 2007 and 2020. 

The current price of almost 40 HKD implies a significant amount of premium, but when we consider that there were share buy backs in 2019 and 2020, 40 HKD doesn't seems so bad.The amount of float, as in the number of shares in millions, has reduced from 43.9m to 34.16m in 2021. That is a 28.5% reduction over a span of 15 years. That is a 1.7% compounded, yearly.

Dividends

The dividend record is fair. Green lines represent the % yield, and the blue bars represent amount in HKD.

Risks

The share buy backs signifies shareholder alignment, which is great. But what are the downsides?

-inability to continue joint ventures with the Chinese partners due to conflict, regulation (unable to renew land use rights, regulation, etc)

-Significant losses from the investment portfolio due to active management. The company makes decision on its portfolio based on macro and economic trends, far too sophisticated for a value simpleton like myself. There will bound be times where they will trip badly. However, the value of the investment portfolio is not a huge concern as the following, which is...

-Political issues between Taiwan and Mainland China, as SCSB is mainly running its business in Taiwan. SCSB does have stake in SCB (Shanghai Commerical Banks) which has branches in Hong Kong and China.

-Liquidity is on the low side. Hence, do not over allocate too much of your portfolio into such stocks. In the event that you need cash, this would be a burden.

As the value is apparent, I have started injecting capital into this company. 4.25% of my portfolio is vested, and there are currently 12 companies vested, with the top 5 holdings representing 73.08%. I plan to accumulate heavily into this stock.

Feb 2022 Portfolio Updates

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

My portfolio: -2.64% -> -1.96%

Notable Transactions:

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

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

Losses incurred is about the region of 20%.

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

***

Comments

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

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

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

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

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

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

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

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

***

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

1. OKP (34%)

OKP went nowhere for 5 years.

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

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

3. Carpenter Tan (10.9%)

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

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

4. Central China Management (10.2%)

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

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

5. Centurion (9.7%)

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

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

***

Selling out due to market cycles

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

Unfortunately this section is going to be representative of such.

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

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

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

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

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

--------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

We should focus on the easy stuff.