TTJ: Voluntary Conditional Offer

Objective

This post attempts to fulfill two objectives. First, it seeks to demonstrate that the value in TTJ ("company"), even when conservatively considered, is leaps and bounds higher than the conditional cash offer. The exercise does not involve by plainly looking at the Net Asset Value stated in their books, but a practical and simple way of assessing things.

The second, is how I felt about the whole situation, what one should realistically expect as a shareholder, and what I had learnt from this episode.

Back of the envelope valuation of TTJ

As we go along, keep in mind, the offer from THC Ventures is 0.23$ a share, or a total consideration (for 349.5m shares), 80.385m.

The value of TTJ are primary in 3 areas, liquid assets, properties, and the structural steel business.

Liquid Assets

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)

The first step is to consider the more liquid assets of the company, namely cash, receivables and contract assets. Then, we proceed to apply a discount to each asset according. In case of cash, there is zero need to discount it-- after all, cash is cash. As for receivables ($ owe to the company by customers), 15% is applied in case of counterparty risk. (Do take note: no discount is applied to any liabilities, include account payables.)

But what are contract assets? According to the latest annual report in 2021, it states:

"The contract assets are for entity’s rights to consideration for work completed but not billed at the reporting date on the contracts; 

costs incurred to obtain or fulfil a contract with a customer; costs to obtain contracts with customers; 

pre-contract costs and setup costs; 

and the amount of amortisation and any impairment losses recognised in the reporting year. 

The contract assets are transferred to the receivables when the rights become unconditional. 

The contract liabilities primarily relate to the advance consideration received from customers. The entity recognises revenue for each respective performance obligation when control of the product or service transfers to the customer  "

Since there is a fair amount of judgement needed, a 20% discount to the value stated is reasonable.

The sum of these assets, discounted, is 77.452m

Properties

TTJ has property (both leasehold and freehold), that are either in the books, or disposed. For asset not sold, the acquisition cost price of the asset would be used. After all, if the price is not reasonable, why did management purchase it?

We will omit the property at 57 Pioneer Road as there is only 2 years left on lease, although I recognize that there is definitely value in it, and hence left out in this exercise.

1) Disposed factory at Johor Bahru
valued at 13.377m SGD

Source: https://links.sgx.com/FileOpen/T%20T%20J%20-%20Disposal%20of%20Assets.ashx?App=Announcement&FileID=670523

2) Factory in Chachoengsao District, the Kingdom of Thailand

for the purpose of wood pellet business which is suspended.

Acquired at cost: 5.95m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_of_Assets_in_Thailand.pdf

3) Factory in 51 Shipyard Crescent

for the purpose of wood pellet business which is suspended.

Acquired at cost: 16.81m

Source: http://www.ttj.com.sg/newsroom/yr2018/TTJ_Proposed_Acquisition_BFI_announcement.pdf

Total value: 36.137m

Structural Steel Business

Due to the cyclical nature of the business, it is more prudent to look at long term earnings of the company. Figures below are extracted from annual reports of each year, usually classified under Note 4 "Financial Information by Operating Segments."

Profit Before Tax for Structural Steel business

2009     15.891m

2010     6.244m

2011     12.818m

2012     14.042m

2013     9.297m

2014     14.630m

2015     5.152m

2016     19.562m

2017     9.894m

2018     9.898

2019     5.022m

2020     -3.526m

2021     10.952m

Average: 9.99m

Median: 9.89m

Applying a tax rate of 17%, it is 8.217m, and applying a conservative multiple of 7 times, the structural steel business is worth about 56m. Even at the worst year earnings of 5.022m (post tax: 4.17m), it is worth about 28m.

Take note that Mr Teo has always run his business prudently, outlasting many of its peers. It has an order book of 187m, which are projects that will run between this year till 2024. 

Summary

	Stated value (31-Jan-2022)	After Discount (Discount %)
Cash and equivalent	29.152	29.152m
Trade and Receivables	24.2m	20.6m (15%)
Contract Assets	34.7m	27.7m (20%)
Sales/Disposal/Acquisition of factories/offices
JB factory	13.37m (disposed)	13.37m
Thailand factory	5.95m (at cost)	5.95m
Singapore (51 Shipyard Cresc)	16.81m (at cost)	16.81m
Total Assets		113.582m
Total liabilities	26.695m	26.695m (no discount)
Value of TTJ (without accounting for structural steel business; and 57 Pioneer Road leasehold property)		86.887m or $0.248 per share
Estimation of Structural Steel Business		a) Based on worst year earnings: 28m b) Best on median year earnings: 56m
Value of TTJ with Structural Steel Business		a) Based on worst year earnings: 114.515m or $0.329 a share b) Based on median year earnings: 142.515m, or $0.409 a share
Stated Net Asset Value (from half yearly result, announced Mar 2022)		128.582m, or $0.3679 a share
Voluntary Conditional Cash Offer		80.385m, or $0.23 a share

My Opinion

A reasonable assessment of the company's value, even without considering the structural steel business, is at least modestly more than the offer.

Mr Teo has been widely thought of as shareholder friendly, honest and forth-coming. This move to buy out, using a company to circumvent takeover codes, is very surprising and disappointing. 

Surely he wouldn't want his company, in the many years to come, to be quoted as the reason why a certain Singapore Exchange rule was birthed, out of the need to patch a certain loophole? Reputation is priceless.

I would be very fair and say that as minority shareholders, it is not reasonable to expect 40 over cents (that is the value, in my head, for optimal price + premium for control. Your value might differ.). Firstly, Mr Teo could have carried on status quo for as long as he likes. Secondly, he assumed the risk and effort in building up the company. Sure, as a listed company, there is a a minimum amount of public shareholders required, and credit is easier to access as a listed entity. 

Meeting at middle ground is a far more balanced and fair approach to both shareholders and management, leaving both parties feeling that nothing is lost or taken away. I note that in the offer document, under note 2(e), that the offer is not fixed. So I am hopeful.

Lastly, as a note to myself, this episode reminded me that cigar butt investing is fraught with danger. Cheap companies (even with asset value modestly discounted), with low returns on equity, required countless injection of capital over the years, as the price keep falling.

When one pursues this approach, he or she will feel immense unease-- that prices will remain depressed for years, or worse, got acquired with an offer as unsatisfactory as this. I have success with this approach in the past, but this is not one of them. However, it is a very good lesson.

-as of writing, TTJ weighs 9.81% of the entire portfolio. I have been a shareholder since 2017.

Self Reflection: the desperate need to get rich.

A good friend of mine was deep into his bible studies and shared this little piece of wisdom with me some time ago. (I do not subscribe to any religion but I like this part)

He that is without sin among you, let him cast the first stone

***

According to the Gospel of John, the Pharisees, in an attempt to discredit Jesus, brought a woman charged with adultery before him. Then they reminded Jesus that adultery was punishable by stoning under Mosaic law and challenged him to judge the woman so that they might then accuse him of disobeying the law. Jesus thought for a moment and then replied, “He that is without sin among you, let him cast the first stone at her.” The people crowded around him were so touched by their own consciences that they departed. When Jesus found himself alone with the woman, he asked her who were her accusers. She replied, “No man, lord.” Jesus then said, “Neither do I condemn thee: go and sin no more.”

***

Simply put, none of us are faultless in our ways. 

With the recent cryptocurrency crash, as well as significant plunges in stocks (tech, medical, etc) in mind, this is a timely reminder. I know many of us, who deem such risk taking behaviour as foolish, might feel very vindicated for being a naysayer. 

"I told you so," are words that many of the didactical ones could easily utter.

It is far too easy to criticise, and far too easy to mock people on the receiving end, for being naive. 

"There is a reason for such high yields"

Lets take a deep breath and self reflect.

Deep within, I think most, if not at least a good majority of them, wish to get rich. Being a poor lad myself, I cannot relate to those who already have a good sized fortune, but still choose to bet the farm on risky assets. So this post is dedicated to my fellow low-middle-to-low earning class readers out there.

I have a friend who is also stuck in the current cryptocurrency mess himself. He have a sizeable amount of his net worth, staked in a certain crypto asset. The maturity to his lock-up stake period is still a distant future away. So he is looking at his portfolio wasting away as time passes. A terrible situation.

This isn't his first time getting into the wrong end of a trade. He was also involved in the Tesla selldown (not the recent one), a covered call cock up by the trading platform he dealt with (which he ended up having to cover with prices bid way up due to a short squeeze) and a few others.

I do feel very exasperated and wished that he would listen to me.

Despite my efforts to advise him to stick to conservative indexing practices, his rejoinder then shook me. Not because of its wit, but because it reflect how helpless we, the generally not that well-off, all are. 

"My index funds are my long term, but I need something for short term too."

At that moment, I took a deep breath, and had mentally organized a set of replies (which were said in the past), but they were stuck in my throat. I think this is not the best time to say harsh words. Thinking back now, all I have is a deep sigh.

As I am writing this post, my mum, at a ripe old age of 69, is coughing. She had two tiger balm plasters pasted on both her knee caps, which were hurting after having to cover for her colleague. My mum is a cleaner, and my dad is a retiree, and before that, he was a ship fitter (repair man).

I am not born into a rich family, and none of them know anything about investing. Saving money is all my mum knew. At her age, she have type 1 and 2 diabetes, and we are still waiting to undergo more tests, which might reveal more worrying problems.

My mum have never say it but I know she kept working because she is worried that she might run out of money for her late years of sickness. Her workplace offer her insurance, which we claim on a regular basis. So that is another reason why she is afraid to quit and retire.

Although the market has treat me well over the last few years, giving me way more than market average returns, the sad fact is that I do not have a lot of money to begin with. I am far from the sum that I need to retire, and other unforeseeable circumstances.

I do feel very helpless and trapped. I earn a very modest amount of salary (<5k). Even if my conservative investing ways were to work out, it will take some years. By then, perhaps my parents will no longer be around. I am not even 70% confident that I will do well in my investments. 

I do feel that I have let my parents down a lot, and have failed as a son.

To that friend of mine, and many others hurt by the markets recently, I genuinely feel for you. 

To my younger readers, I wish you will start earlier. do not end up like me. Index early, concentrate on your career, and you do not have to take undue risk.

May 2022 Portfolio Update

As of 12-May-2022:

S&P 500 Index Fund: -4.32% -> -14.49%

Hong Kong Tracker Fund: -5.53% -> -14.91%

Straits Times Index Fund: 8.26% -> 3.02%

My portfolio: -4.22% -> -11.64%

Results would have been more respectable if OKP, TTJ and Alibaba have not fall 6% today... Nevertheless, I am glad my portfolio is still a little ahead of Hong Kong and America indices.

Transactions:

There were four transactions of special situation nature, they are:

a) Oversubscribed to the rights of Lendlease REIT and was allocated full.
The use of perpetual securities, which pays a pretty high interest rate, as a source of capital to purchase JEM is not the best of news to share holders. I have just finished a zoom presentation and a Q&A by the CEO. He does sound down-to-earth and genuinely have unit-holders' interest in mind. Despite the share price going back down to 72 cents a share (rights-offering price), it might be worthwhile to hold on.

b) Initial arbitrage investment in Activision Blizzard
There is a good 21% or so gap between today's price, and the going private price of 95$. This is a copy of Berkshire's trade, and the unlikelihood that anti-trust will bring the stock down.

c) Slight increase in Embecta
Since my last post, the stock has given up the 10% or so of capital gain. With a small discount of about 8.8% from my initial buy price, I choose to inject another round of modest capital. I have also wrote a put contract, strike price 25$.

d) Initial investment in Yangzijiang Financial Holdings (CPF)
There are three main reasons why I have inject a small sum of capital into this company.

i) This is a spin-off play. It does look like the market prefers the less uncertain (but cyclical) shipping arm and sold off YZJ Financial without much discourse. I do believe that investors, who have YZJ shiparm invested via CPF, was unable to unload their shares. They could only look on helplessly in recent days until 11-May, and are also contributing to the sell-off

ii) The investment portfolio, consisting of mostly corporate bonds is not the most savoury, but I believe about 70+% of it is secured by assets of some form (real estate, land use rights, etc). 

Quote: As at 31 December 2019, 2020 and 2021,approximately 60.9%, 78.4% and 70.5% of our Debt Investments were secured by collaterals, respectively. We mainly accept land use rights, building ownership rights or other securities as collateral for our loans and Debt Investments granted.

Assuming that all unsecured debt goes bad, that would be a proper write off of maybe 25% of the book value. This company has lost more than 50% of its book value, which means that there is a small amount of margin of safety between price and risk. Hence, current capital injected is small, but rationally sized.

iii) There is no indication (at least to me) that this spin off is the trash. The moratorium of 6 months will be revealing, but still feels like a distant future away. Any uptick in sentiments of the Chinese market would bring relief to this stock. The CEO seems abled and had sold his company, GEM Asset Management to YZJ (related transaction beware). Any insider purchase by the CEO would be taken seriously in the future.

The possibility of improved earnings, by the way of asset management contracts, is a hidden plus, but would take time.

Other transactions of this month involves:

d) Increase in purchase of Alibaba (9988.hk) at 88 HKD. As of writing, the market appraise Alibaba at 80 HKD per share. Losses are mounting in this stock but I am remaining patient. Return on capital has to be reassess there and then.

e) Increase in IGG due to falling prices

f) Increase in Centurion (in CPF), as fundamental data suggest that the business is improving, but the share prices seems to be beating a retreat.

g) Slight increase in Fu Shou Yuan due to falling prices. FSY remains a moderate growth company and falling prices means lower risk. Currently, the FCF yield is about 6%, so it does feel timely to make additional purchases.

***

In view of the amount of selldown experienced this week, I am re-posting my answer to a question posed by a fellow telegram group member. Basically, it is a standard list of "easy buys" during market selldowns.

When market crash, should add to current holdings or initiate new ones? I am already holding 7 business Liao.

Personally, I will run through my list of holdings to determine if I want to add on to those positions, since I have some basic understanding of it.

I do not subscribe to a belief that one must have a minimum amt of stocks to be diversified, and neither is the market that kind to provide you so many bargains.

At times, I do not add to my existing positions because my stocks are very iliquid, or the selldown in the stock is nowhere as bad as the market drop (as in, my stock drop 2% but market drop 5%).

If you have been diligent, you should have a list of stocks in a watchlist, but you have yet to acquire because the price is not attractive (or in my case, some stocks only have liquidity during market panics)

Obviously some stocks, during market corrections of 20% and beyond, are easy buys (in no order)

a) Singapore banks trading at way below book value; the CET scores of our banks are safe as it can be. Banks are easy business to grow at a slow/moderate pace.

b) Stocks that are undergoing privatisation— i.e. risk arbitrage stocks, e.g. Activision Blizzard

c) Blue chip stocks that were already reasonably priced (to cash flows or to books). Blue chip stocks are usually recover the soonest during recovery periods.

d) Stocks that are cheap to liquid assets (cash+investment, acct receivables net of payables). These stocks usually are pretty illiquid and market panics usually provide liquidity.

****

Looking Forward:

We are 5.5 months into this year and I have already way more capital than any single year in the last 5 years of investing. I have always inject capital pretty organically-- all my years, I am a net buyer except for 2017 (the Singapore market was pretty bullish then). I do not look at the market and decide that this is the amount of capital I am going to put in.... I merely look for opportunities.

Portfolio level, at cost, is at all time high.

The last two days saw crypto market in fearsome correction territory. Major coins lost 20% of the value intraday, after Terra USD, a coin allegedly used to support the price of BitCoin, collapsed after losing peg value to USDT. Understanding the whole ordeal is way beyond my intelligence and I am glad that I do not have a single cent.

The mood in the market has clearly soured. The darlings of yesteryears has been clearly forsaken. Sell down of 20% and more intra day is becoming commonplace. Perhaps the market is seeking repentance from all the freewheeling option traders, or casual growth stock buyers, I wouldn't know...Every single winner of 2020 is getting plummeted to the ground, but I would still put them on the "Too Difficult" tray.

But I know this is where the wheat gets separated by the chaff... either I relentlessly acquire stocks as the market goes on a freefall... or I pare down on my less convicted holdings to raise cash. This is suppose to be the time where I work under my desk lamp and look for ideas. Looking at the record amount of cash spent this year, I am worried that I could be deploying capital with too much pace.

-end

About Spin-offs: Yangzijiang-Yangzijiang Financials

What follows is a feeble attempt to elaborate on the spin-off section that I wrote last week on my portfolio update, using a real life situation.

What I will try to add is my own 2 cents on the spin off of Yangzijiang Holdings. This would be a developing entry since the spin-off story is still very much in progress (i.e. not a done deal). 

A Summary

Yangzijiang (YZJ) is giving away, as a dividend, a share of Yangzijiang Financials (referred as YZJFH thereafter) for every share of SGX:BS6 held. YZJ Finance deals with mostly debts, and within those, largely corporate and government debt, while the rest lives in the risky world of micro-finance. Language in the introductory document suggest they will be changing their business to wealth management and giving equities a lot more weight. They would acquire GEM Asset Management (unfortunately, a related party transaction since Ren Yuanlin owns about 30% of it through "NewYard co").

Of particular interest to me is its board composition and an individual call Vincent Toe will be running this ship (pun intended). By reading his background, he seems suitably experience in both the nature of work (asset management) and familiarity with China. 

My personal opinion is that the elder Ren is handing over YZJ ShipArm to Ren LeTian (the son) for good.

Back of the Envelope Calculation

These are usual angles to look at a spin-off situation. 

(a) YZJ's valuation is weighed down by uncertainties due to YZJFH. Spinning it off, and hence relieving YZJ from risk of having it in its books, will revalue YZJ upwards. Personally, I don't think this is the case.

(b) YZJFH's value (and hence YZJ's own valuation, pre-split) is not given its deserving weight because it is obscured by YZJ's shipbuilding business. This is likely, imo.

(c) YZJ, as a mini-conglomerate of sorts, suffers from a conglomerate discount, and hence deserve a better valuation. If YZJ (as of writing, is priced at 1.64 a share) is spinning off YZJFH (with a net tangible asset of 1.0x), this means its remaining business is only rated at 60 cents a share. 

My notes tells me that YZJ has currently 3913.4145 million shares. Multiply 60 cents a share, this means the shipbuilding ("ShipArm") is given a market valuation of 2348m. My notes, taken since 2013's annual report, tells me that ShipArm has a CAGR of 2.44% topline (not relevant for a cyclical sector), and a return of asset of 7.8% to 13.8%. 

Pre-tax profits averaged at about 2.2B RMB. 

Depreciation charges averaged about 371.114m yearly, and addition to PPE (which is another way for me to guesstimate actual capex) is about 260m. So expenditure is about 300m RMB yearly.

Using a corporate tax of 25% (just throwing figures around), we looking at (0.75* (1900m RMB) )= 1425m RMB. 1 SGD is about 4.69 RMB, so we looking at 300m SGD profit after tax. 

What about YZJFH? I would not be too adventurous. Let's assume all of its debt will mature without... issues. That would mean 20.5B RMB (or 4.36B SGD) worth of assets is release, and these funds are available for reinvestment.

If I assign a price-to-book of 1.0 (fair given the ROA it was capable of), market cap would be 4.4B SGD. The company expects a market cap of 4.239B. A 10% difference in opinion or less is no opportunity to act on, imo.

In other words, assuming that the market believes that YZJFH is worth about 1 sgd a share, the market is giving YZJ ShipArm a valuation of 2348m, a profit of 300m SGD. 

I feel that this valuation for the ShipArm is a little to the high side.

What will happen post-spin off?

I going to put my neck out there. This is likely to happen:

The price of YZJ, post spin off, will sink. The market had already moved, and priced YZJ up, from 1.3x to 1.64 in a matter of weeks. I believe this is because the market think that financial asset management is after all more attractive and less cyclical. Personally, I still think the loans in YZJFH needs more scrutinizing.

My notes tell me that ROA of the finance arm is about 9%, there are some lean years where they return 4%, but I going to treat it as an outlier. From 9 year average figures, YZJFH had impaired about 200m RMB of its 16B assets (mainly loans). Figures do not include impairments that are later reversed (too much work for me). 

The Risk

Literature suggests that most of its loans will mature in Dec 2023, which feels like a lifetime ahead of us with all the problems of war and diseases still ever present. Debt assets is not a sexy thing in times of inflation, and certainly risky assets if you are dealing with high-yield (read: junk) bonds. 

Management, however, seems cautious. As I read, I note that about 3.8B of debt (of its 15B in the books) would not be transferred to YZJFH due to various reasons (page 78 of the introductory document). I have no reason to believe that YZJFH is not given every chance to succeed. 

In other words, YZJFH is not the 'trash'. In assessing spin offs, we want to know which coy is the treasure and which is the trash. But sometimes, there isn't any perceived treasure or trash, and hence there is no opportunity.

My assessment is to wait until the spin-off is completed, and re-assess how the market values each company. Personally, at present, 1.6x a share of YZJ does not represent a good risk-to-reward ratio to take advantage of. The opportunity is only going to be present if YZJ remaining coy (ShipArm) is sold down way too much.

=== update on 24-April ===

While YZJFH will only trade on 28-Apr, YZJ itself have a very humble sell down of only 40% thereabouts. The price reflects market opinion that YZJFH is only worth about 60 cents a share, which is puzzling, and also to me, an opportunity to accumulate should YZJFH falls on day 1.

Is market perceiving YZJFH as the "trash" and are glad that it is finally out of YZJ's books? I find it puzzling. The ShipArm should be more cyclical.. a much harder bet.

On a sidenote, YZJFH would be regarded as a member of the index, and hence it is unlikely to be discarded by closet indexers. I would be highly surprised if YZJFH does get sell down on day 1.

===Update on 30-April ===

YZJFH began trading on 28-April, 1pm, at $0.69 a share.

In less than two hours, it lost 16% of its value to 0.58 a share, and recovered towards the end of the day at 62.

The selldown resume the next day, from 62 cents to 57.5 cents in the first half hour. Volume lessen significantly compared to its maiden day of trading. A volatile last hour of trading saw it lost another 12% of value eventually, closing at 54.5 cents a share.

So I was completely wrong in my guess. YZJFH is, in the eyes of the market, the "trash," while YZJ ShipArm is the treasure. With the investment portfolio mainly of debt instruments, and credit worries ever present in China, this is rational.

So since the market has presented its case, my work is to look at the introductory document (if I have the energy) and determine if this is an opportunity. It does look like about 70% of its loans are back by collateral of various forms, such as land use, property, etc. Mathematically, this tells me that it would be prudent to discount at least 30% of its books.

With an NTA of about 1 dollar, YZJFH is now trading at just above half of it. So we are talking about a possible 16 cents per share of "discounted fair value." 

April 2022 Portfolio Update

S&P 500 Index Fund: -11.04% -> -4.32%

Hong Kong Tracker Fund: -19.99% -> -5.53%

Straits Times Index Fund: 3.06% -> 8.26%

My portfolio: -15.38% -> -4.22%

The onslaught to the Hong Kong market recovered unexpectedly with comments by Vice Premier Liu He, promising to support the market among other things. Markets rallied incredibly, but with some hindsight, levels are still depressed when compared to 6 months back.

Hang Seng Tech ETF 3067

The Hong Kong Tracker Fund

I have no love for Hong Kong tech as I felt that they are excessively valued, despite their long term promise. It was a clear example of what happens when you are a buyer of something when is too popular. How do you know if it is too popular?

5 years ago, you have to depend on the news to tell you so. Now, we have:

-Youtubers 

-creation of "sector" ETF (created solely by financial institute to capture the interest through fees from assets under management) to "cater to the needs of investors"

-daily chatter, as observed from chat groups.

Mainland tech firms not only have to contend with regulation and growth in mainland itself, but deal with the narrative of having to expand out of China one day. That could be way more difficult than their present ordeals. From my layman valuation techniques, and that generally people around me are still very hopeful of these companies (a good gauge of market sentiment), I would avoid increasing my position in Alibaba unless valuation declines.

Notable Transactions

-Purchase of Embecta, a spin off from Becton, Dickinson and Co.

Fell from 40.x to almost 27 at one point.

The basic reasons why spin-offs sold down in the initial phase usually follows this narrative:

a) A huge company, ideally an index constituent, decided to spin off a much smaller division/branch of its business.

b) For Embecta's case, existing share holders of BDX gets 1 share of Embecta for every 5 shares it owns.

c) Embecta gets sold off "indiscriminately" by share holders for the following reasons:

-Embecta runs a business that could be perceived by BDX share holders as unexciting (an opinion), of low growth (certainly). 

-Stock gets sold because of disinterest. After all, they might be seen as "dividend" from the parent.

-Embecta is not a member of the index and is under 2B market cap (contrasting BDX's market cap of 78B presently). For e.g. a fund manager might be forced by mandate to only hold stock of market cap x and above.

-The spun-off entity could be transferred undesirable assets, such as debt, or legal issues.

The basic reasons why it is a good idea to buy a spin-off:

a) existing management is incentivized to do well since they now hold stock options, and have clearer and more public standards to live up to (stock price, targets to meet to receive additional remuneration, etc)

b) The sell-off could bring prices to conservative levels (main reason for buying Embecta).

At my purchase price of Embecta at 30.8 USD per share, the company's market cap is 1.7B.

It bears a debt of about 1.6B

The last three years of profit is about 300-400m.

If one were to disregard debt, which is convenient enough when credit is cheap, the company is worth only 5x PE at worst. Since one should never disregard debt and value a company like a private owner, Embecta actually cost 3.3B (1.7B market cap + 1.6B of debt).

That isn't a bad price by itself since you are paying 10x earnings. 

Unfortunately, my position in Embecta is very modest. Last evening, perhaps the market had realised its folly, and the stock went up 10%, 14 at one point. It is just the problem with the way I inject capital-- very small amounts. I only buy more when the stock plunges 10%-15%.

-The significant amount of Alibaba purchase did not actually materialised last month. How I wish it had! I simply wrote a put contract at strike price of 87.5 HKD, right before the selldown begins. Alibaba went from 100+ to 71 HKD, and the contract spiked up to 800% in value.

(my bad luck with option contracts continues after the Didi Global episode, where I failed to cover my put by 1 or 2 pips that night. The next day, Didi's management announced that they are delisting from America and re-listing in Hong Kong. Its price plunged 20+%, and the option contract spiked 1900%. Very poor luck... never go to sleep before you covered your put!)

I have no luck with options. Thinking that it would be exercised, I wrote prematurely that I had purchased stock. After market rallied (Alibaba went back above 100), obviously the contract holder did not exercise his rights. Unfortunately, that means I only bought 200 shares of Alibaba (direct purchase from market) that month, albeit at a very fortuitous price of 71.8 HKD a share.

-Token purchase of Clifford Modern Living. After which, dividends are cut from 0.027 to 0.022 HKD a share. If I have to guess: illiquidity and its boring, property services business kept the share price from plunging. 

Market capitalization is 490m. Growth is modest and its cashflow is reliably positive, averaging 60m a year for the last 8 years. Dividend payout is on the low side, but still respectable at 4.6% yield currently.

-Token purchase of Central China Real Estate-- it is still far from the previous amount of stock that I sold down from. It appears that the situation at CCRE is indeed better than other property developers-- at least they got their financial statements out! Sunac and Evergrande remains in suspension by HKEX...The central china coys positions remains a bet on Mr Wu Po Sum...

-Token purchase of IGG (I Got Games). After a huge profit warning at the start of this year, the stock looks something like this: 

The stock gapped down from 6.2 HKD to 5.09 in a single day. The sell down was relentless and continues after result release. If you had bought at 5.09, you would still be looking at a loss of 33% today!

Presently, the price per share is 3.37 HKD a share. The problems (I am always attracted to problems) overhanging as follows:

a) Results paled when compared to the year before, particularly with the divestment of XD at huge profit last year; its current position in its 2 funds are not doing so well.

b) Increasing capex: marketing on existing games, construction of a HQ, as well as R&D on upcoming games

c) Losses from operating in "Russian-speaking" countries due to sanctions.

d) No interim dividend this year. I think this is prudent.

All of these problems, in my opinion, should be temporarily (with exception for the Ukraine invasion). If it continues, IGG could declare an impairment. That could be an opportunity.

Despite looking downtrodden, IGG still has a huge cash position of 1.9B, and the current market cap is 4B. 

Figures from Stock.cafe

This is a company has a decent track record. Current prices mirrored what it was priced at 2013, which in that year it was able to make 100+m in cash flows. If the cash-burn continues for 1 more year, my worst assumption is that it will take another billion dollars out of its coffer. Hence we could be paying for 4B market cap - 1B of cash= 3B in the future.

The stock would be priced on the high end of fair value (almost to overpriced region of 30x for me) under such pessimistic assumptions. The lifetime of its most popular game, Lords Mobile, is reaching the end. Its second breadwinner is achieving revenues nowhere near to Lords Mobile, and the most promising game, Project Yeager, will only be release much later this year. The stock is, imo, cheap, but not irrationally priced down.

Looking Forward

Performance this year should be dull at best, supplemented by an agreeable sum of dividends. Positions adopted this month have increase the number of holdings to 16, which is way more than I like. Top 5 positions contribute to 70.8% of the entire portfolio, and they are:

1. OKP (28.83%) - hopefully the outcome of the arbitration will be positive. There should be news this Sep.

2. Central China Management (11.68%)

3. Alibaba Group (11.27%)

4. Centurion (9.6%)

5. Carpenter Tan (9.44%)

I have (over)subscribed to the rights issue for Lendlease REIT and the results should be unveiled by 20-April (shares are credited on 21st). These positions are for my parents...

Till next month.

March 2022 Portfolio Update

"Beware the ides of March!"

S&P 500 Index Fund: -7.59% -> -11.04%

Hong Kong Tracker Fund: -2.44% -> -19.99% (ridiculous)

Straits Times Index Fund: 4.36% -> 3.06%

My portfolio: -8.39% -> -15.38%

So in a matter of less than 3 weeks, the Hang Seng index was blipped 17%, and my own portfolio is not too far behind, losing 7%. The S&P 500 is still outpacing my portfolio.

Transactions made:

-Significant amount of Alibaba (9988) in Hong Kong Exchange.

Since 1st of March, Alibaba went from 103.8 to 71.25 HKD. This is purchased for both my parents and my own portfolio.

As I write, the market capitalization of Alibaba in NYSE bears a market capitalisation of 227.87B USD.

This is the back of envelope SOTP I done some time back:

"The e-commerce business, in the latest interim, contributes about 12B USD. The cloud computing and entertainment branch, as well as its "innovation" branch are still loss-making. 

They could possibly spin off the cloud computing branch. The cloud computing segment contributes about 5.6B in revenue for the last six months (or 12B USD annualized). It appears to grow 30%, so let say if we give it a 5x-10x Price to Sales ratio value, that is 60B-120B.

33% of Ant Group belongs to Alibaba. If it had gone through its 35B USD IPO then, Alibaba stake would be worth ~11B USD (~452B HKD). Its latest interim earnings was 1.7B USD

To guess-timate very, very conservatively,

Alibaba current market cap is 339B USD

-E-commerce, if it contribute 24B in annualized earnings, on a P/E of 10-15= 240B-360B

(There were whispers that at current valuation, one is only paying for the e-commerce business and everything else is free. That is only the case if e-commerce is valued highly. I am not sure, going forward, if there is sufficient margin of safety)

-Cloud Computing= 60B to 120B, average it and give it a 90B.

-Ant Group IPO= at 1.7B USD interim, is worth about 3B USD x 15 PE= about 45B. If Ali owns 1/3 of it, that is about 15B.

Sum it up, Alibaba is worth between 315B - 465B."

What happened between then and now? We know that the IPO for ANT Group will be further delayed, with no visibility. We know that there isn't anything promising from the cloud segment yet. If we were to mark down our valuation of Ant and the cloud business by another 30%, that would mean that they will be worth 40B and 10B each, a sum of 50B.

The E-commerce business is perhaps worth 200B (further mark downs)

So there is a total of 250B worth, without considering the amount of unneeded cash in its books. So there is a ~10% margin of safety under very grim considerations.

-Token increase of Central China Management (9982) at the start of the day, before results release.

The results of CCMGT does not look too worrying. A decent amount of dividend is to be dispensed, 0.099 HKD per share. That, along with 0.086 HKD a share earlier this financial year, represent a total distribution of 609m HKD. 

The market capitalisation of CCMGT is a mere 2.6B HKD.

The amount of cash in its book is 1.7B after subtracting all liabilities. This means that you are paying only 900m for the company as a private owner. 

A matter of concern in its book is a 317.552m RMB (389m HKD) worth of Trade Receivables to a 3rd party. This TR is to be settled in a year and the interest payable of 15% is payable to CCMGT by this unknown company. I would assume that this means two things: Times are either truly desperate for both construction firms and banks, one unable to borrow and the other unwilling to lend; and if this party is truly unrelated to CCMGT, the debt issue of this sector is of major concern, and hence they deserve to trade at gigantic discounts over the months.

-Initial amount invest in a gaming company call IGG. It is trading at reasonably low valuation to its books, and is another asset light company (as all gaming firms are). It has a reasonable promising game in the pipeline, which is something to be hopeful for, despite the profit warning issued recently.

I have also noticed that a huge amount of options were exercised, and it definitely contributed to the sell down of stock (post profit warning). By eyeballing the amount of options exercised, and the amount of trade volume, I think it is a decent amount but not a worrisome percentage.

-A small amount of Hong Kong Tracker Fund for my parents only. I do not believe in investing in index funds personally.

Personal Opinion of Centurion Latest Result

I would summarize the performance of Centurion firstly:

Company Performance (in millions)
2021
2020
2019
2018
Shareholder Dividend
4.203995
8.41
16.816
21.019
Revenue
143.017
128.355
133.353
120.07
Net Income
52.679
17.171
99.951
79.326
Fair Value Gains (or loss) to IP
11.416
-27.641
66.266
48.553
Adjust Net Income
41.263
44.812
33.685
30.773
Operating Cash Flow
74.349
60.48
70.247
57.475

As you could see, revenue numbers are not affected badly year on year. This is normal because the business of dormitories is irreplaceable.

If we were to look at net income, it does suffer from addition and subtraction of investment property valuation. One can reasonably argue that property revaluation is reflective of actual earnings, or improvement to infrastructure. I find it highly subjective. As such, I would add it back (in the case of lower valuation in year 2020) or subtract it off net income (all the other years).

The result is Adjusted Net Income, and you could see that it doesn't decrease too badly. Add in the operating cash flow, it does look like the company isn't doing so badly over the years.

However, the dividend distributed decline dramatically.

A look at management salary

Names
2020
2019
2018
2017
Wong Kok Hoe
782
207
NA
Teo Peng Kwang, Kelvin
703
933
750-1000
750-1000
David Loh
58
46
<250
Han Seng Juan
58
46
<250
Chandra Mohan S/O Rethnam
73
81
<250
Gn Hiang Meng
92
103
<250
Owi Kek Hean
70
78
<250
Tan Poh Hong
55
61
<250
Lee Wei Loon
48
6
-
Kong Chee Min
741
861
750-1000
Key Management
Foo Ai Huey
250-500
250-500
<250
250-500
Ho Lip Chin
250-500
500-750
250-500
500-750
Leong Siew Fatt
250-500
250-500
250-500
250-500
Lee Geok Ing Janice
<250
<250
<250
<250
Lim Choon Kwang
<250
<250
<250
<250
Yeo Boon Hing David
<250
<250
<250
<250
Departed Directors
Tony Bin Hee Din
NA
NA
750-1000
Lee Kerk Chong
NA
NA
250-500

There will be a resolution put up for voting this year, and that salary cuts brought in during COVID-19 years be reinstated, which I presume will be back-dated from 1-Jan-2022.

If we look at the figures above, I would argue for a case to reinstate the salary for Mr Kong Chee Min, which have taken a significant cut. I will reserve my judgement for the rest for the wiser, as I cannot claim but to be ignorant of the exact amount paid to personnels under "Key Management."

In view of the declining amount of dividends, as well as the reasonable consistency of earnings over the years, I am ambivalent about voting for this resolution.

I would suggest that a more shareholder-aligned incentive be structured for key management. I am in favor of conserving cash for the sake of reducing debt, but something in these figures hint to me that perhaps the dividends could be higher. On the other hand, it would take many good years to completely eliminate debt without paying dividends. Hence the ambivalence.

Loss Porn

During the last 2 trading days, the HSI lost >5% daily, and the tech index lost a lot more. My portfolio, of course, was not spared. Perhaps the following could be cold comfort for the rest of you out there... life is not a bed of roses.

Heading the list is Didi at a loss of 75%.

Central China Real Estate loss is 52%

Thankfully, both of the above is only about 3% of the portfolio.

The following are among my 6 biggest position in the portfolio

Alibaba Group's markdown is 41%
Central China Management loss is 39.5%
Carpenter Tan is 20.9% down.

The other main holdings are more or less still because they are iliquid Singaporean asset-cheap stocks, with Centurion being the only turnaround play. 

The Perils of Active Investing

In less than 20 days since the last update:

S&P 500 Index Fund: -4.13% -> -7.59%

Hong Kong Tracker Fund: 6.02% -> -2.44%

Straits Times Index Fund: 9.18% -> 4.36%

My portfolio: -1.96%-> -8.39%

The portfolio suffered a heart-wrenching battering in less than 20 days. If I were a professional fund manager, I would no doubt be questioned and face redemptions. However, I face a fate much worse-- I return home at the end of the day, guilt-stricken that perhaps I have placed my parent's fund in jeopardy. 

More so, the self-doubt gets ever louder. I felt more like an imposter each day. The fog of war became unbearable as suspicions if management were not disclosing information. Most of my holdings are downright underpriced, and yet the sell down was relentless. 

Recent days seen some relief for growth and even cryptocurrencies, but, mercy, was not forthcoming on my holdings.

In ascending % of loss in value are:

Capenter Tan and Fu Shou Yuan (10.8% and 3.99% weightage) -15%
I have no idea what to make of this decline, except that FSY is a good business at a fair price. As such, I could accept the market's valuation of such a stock. The market should be worried about price controls by the CCP on living expenses. 

Fu Shou Yuan's board will convene on 18-March and the full year result would be announced.

Market cap: 13.38B HKD
Cash/Eq: 1.3B, and in addition of invested (mainly structural deposits, which capital are NOT guaranteed)  worth 332m. That works out to be about 1.98B HKD

Free Cashflow in the last decade or so
2012: 153m
2013: 85m
2014: 221m
2015: 259m
2016: 405m
2017: 525m
2018: 552m
2019: 615m
2020: 715m
2021-1h: 400m

Let's assume that going forward, this company generates, at a no-growth basis of 600m, that would means a private owner is paying at 18 times free cash flow. This would imply that growth have to continue for the market to price it higher, and that the multiple would be maintain. 

What I mean is that a low-growth company, even with a steady cash flow (e.g. Carpenter Tan), is assigned a very low price multiple. My numbers suggest to me that FSY's ROIC is between 13-16% in recent years. Not a low number, but not a overly promising one. 

So this investment yields about 7% last year. If an investor looks at long term inflation of 3%, a equity risk premium of 4% might not be so tempting. You can replace inflation rate with anything, such as government bonds, and think if investing in this business make sense.

As such, it might not be a great idea to go big on Fu Shou Yuan. As such, I deserve to go 18% down on this company, and perhaps it was great that I didn't put too much capital in it.

Alibaba Group (10% of portfolio) -20.1%

Much have been written about Alibaba. I would not add more.

Central China Management (9.28%) -27.8%

Joel Greenblatt would have been shock that a spin off, with a balance sheet as clean as this, could be sold down so heavily.

It has 2.2B RMB (2.72B HKD) of cash, and 560m of liabilities. This equates to 2B HKD worth of cash.

The market capitalization is a paltry 3.32B HKD. This means a private owner is only paying for 1.32B HKD.

Even at 100m of free cash flow per year, this company is not excessively expensive. The company earns 500-600m RMB (620-742m HKD in the last three years. 

The worries is with the parent, and the earning of this company's earning is still pretty dependent on it (much of it is in Henan). 

I am not too sure what else to add on this.

It is not as if the insiders were not trying. They bought a huge amt of stock, and also did share buy back from company's fund.

Central China Real Estate (3.01% of portfolio) -36%

This would have been more painful if not for the trimming I did some weeks ago. The crushing amount of debt looms large on this company.

Didi Chuxing (1.9% of portfolio) -41%

Unfortunate case of put options been exercise, this is now a sad reminder of my folly, and would probably remain so.

Looking Forward

The portfolio is expected to underperform all indices, especially Hong Kong, and to a lesser degree, Singapore's. There is a lot of value in Hong Kong, and recovery to my holdings will usually means a greater degree, likewise, to the index stocks. Whereas for Singapore, the prices of the banks had already advanced far out of expectation, and that profit margins had to be extraordinary to warrant further increases.

One thing for sure, is that I would not change my investing strategy in order to get a better result.

I would put up an article about Centurion in the next few weeks, following the disappointing amount of dividend.

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.