Feb 2023 Portfolio Update (Centurion, Yangzijiang Finance)

Despite sleeping very early these days, I was feeling perpetually tired throughout the day. That explains why this post is late.

I did a presentation some weeks back on value investing with Boon Tee:

STI Index Fund returns -0.52% (was 2.93% in Jan)
Hong Kong Tracker Fund returns 4.16% (was 7.84%) 
S&P 500 Index Fund returns 6.05% (was 4.19%)

My portfolio returned a measly 4.25% (was 7.15%), largely due to another round of correction by Alibaba and Central China positions. This was very much inlin with expectation; the overhang (of property worries) should continue for years. Alibaba isn't doing so great, in terms of market price movements, but it does look like they have managed to control cost. However, Alicloud and International Operations continue to be loss making. There is still no clarity in how one should value Alicloud and the (potential?) Ant Group IPO.

Transactions:

Purchase 2000 shares of Nanyang Holdings for my portfolio.

Nanyang Holdings is just a very cheap stock which main operations are good old rental and investment. The main investment is of course their Shanghai Commercial and Savings Bank, which is mainly based in Taiwan. I would readily say that banks and financial institutions are far beyond my circle of competence. However, the value is still apparent in other aspects of its balance sheet. I am just uncomfortable with their investment process-- it is too active for its own good.

Discussion on OKP, Centurion and YZJ Finance, as they had released full year (FY) earnings during Feb 2023.

OKP: 

While revenue is definitely higher, so are costs. The balance sheet looks far more fragile than a year ago, so now the investment thesis has become one of projection instead of protection. It was also revealed that 3m was spent in the arbitration with CPG Consultants. I believe, if OKP is successful, would bring significant one-off 'earnings' to the 53m market cap company.

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Centurion: 

As usual, the dividend is a joke, and the stock price corrected a fair amount (8% intraday at one point). The only bright spot is that the debt is getting reduced. Amusing enough, I think it is far better to be a debt holder in Centurion than a stock holder. It had been 2+ painful years. 

Perhaps Centurion should do a major rights issue to bring down debt? Since the cost of equity (in dividends) is less than a Singapore Savings Bond? It wasn't that business was poor; things are actually picking up. So do the major rights issue, let's clear the debt in the books. In the mean time, management should show that they deserve to be management by:

a) Not increasing their remuneration, or best: be paid with stock options instead. Strike price should be significantly higher, lets say 25%, than prevailing market prices.

b) Voluntarily purchase securities in the open market.

On 22 Feb 2022, I wrote:

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.

It is disappointing that 1 year from today, the narrative remains unchanged.

Let me put the numbers into context. Centurion is earnings between 70-100m in free cash flow over the years. The figures for 2016-2023 as follows:

	2016	2017	2018	2019	2020	2021	2022
Free Cash Flow (m)	65.037	54.263	54.986	66.554	59.146	70.256	101.679
Dividend Declared (m)	7.399	7.957	8.408	8.408	0	8.771	8.412
Interest payment	21.383	21.545	23.929	28.759	23.319	22.734	28.341
Total Remuneration of Directors (Retrieved from Annual Reports, Sect. 9)	0.38	0.422	2.113	2.422	2.68m	3.277m	2.971m (from earnings release)

 

I think the numbers above does not justify why dividends are suppressed over the years!

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YZJ Finance: 

has finally released its full year earnings. Examining the balance sheet reveals:

-620.6m of cash

-2264.6m of debt investment, which are current

 407m of debt investment which is non-current.

This is the most important of the lot.

It is noted that 536m of those investments were transferred to YZJ Ship-Arm (parent) before the spin off. I thought initially that it was a protective move by the parent to relieve the child (YZJ Finance) of potentially bad assets. I also viewed the reduction of debt investments in 2022, of 1.7b from 4.57b, to be favourable. Management also stated that the interest income was 312m (see below). I think a yield of 10% for its debt investment is sufficient given the risk.

-413m of financial assets, which are mostly unlisted China equities (see below)

-322m in investment on associated companies. This associated companies are not disclosed, but likely related to YZJ Ship-arm.

On the liabilities side, there is a total of 332m, of which 228 are deferred tax liabilities. These are tax which are not paid and will be paid in the future.

Let's relist the assets and do some brunt discounting.

-620.6m of cash

-2264.6m of debt investment, which are current

 407m of debt investment which is non-current.

413m of financial assets, which are mostly unlisted China equities

322m in investment on associated companies

With cash, there is no discounting needed. The amount of interest income (20.5m) represents 3.3% which is likely reasonable.

With the debt investment, the management presentation slides indicate that about half was performing, with the majority of the other half being non-performing:

One would look at 2021's performing loans of 3.16b and wonder how did it turn up to be only 1.35b this year? Well, 1.6b was redeemed (refer to the first screenshot of this post).

However, I going to be brutal and write off the existing under-performing and non-performing portion from its assets. That would mean the debt investment would be worth only 1348b instead of the stated 2264m.

Obviously this is going to be too conservative since

a) There might be reversal of NPL, and given that management guided earlier that there is collaterals.

b) There is some residual income from the performing loans. Stated amount in the book is merely principal, and does not include interest.

I going to reduce the unlisted Chinese equities by 75% (overly conservative) because there is no way to look at those numbers (since they are not listed!)

I will also reduce the value of the investment in associated companies by 50%.

That sums up to be ...

Asset	Stated Value	Discounted Value
Cash and EQ	620.6m	620.6m
Debt Investments	2671m	1348m
Financial Assets (Investment in Chinese Equities)	470.072	138m (unlisted equities are discounted by 75%)
Investment in associated companies	322m	161m
Total	4083.6m	2267.6m

... a total of 2267m, and if we take away 332m of liabilities, the remaining value of YZJ Finance would be about 1.9b.

YZJ Finance, is listed at 1.46b. That represent a margin of safety of about 25%. Since my average price for YZJ Finance is about the market price, I would refrain from buying more stock. The dividend yield, based on a distribution of $0.018 per share, would be 4.7% for my holdings.

Let's wait and see.