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!