Thursday, August 18, 2011

Laxey Partners VS Wee Cho Yaw (UIS) - United international securities

If experience has it, perhaps more due diligence can be done before launching an activist approach, especially to an entity linked to one of the more well known businessman in the South East Asia.

Some points to note
  • Laxey only owns 10% vs Wee 49% (overwhelming difference)
  • Laxey was also quoted as impudent."Asia does not work this way!" Look at how TCI fund performed when it tried to do something with J Power Corp.
  • Wee did something meaningful to grow UIS, why would people vote for you especially with that sort of attitude. If you cannot relate to other minority shareholders, half the battle is lost.
  • Stating that UIS as a closed end fund is trading below NAV is a weak motivation to change the board since most closed end funds trade below NAV, even one of the best in the world, Berkshire Hathaway does not always escape this fact with a good reason. NAV is often not a good representation of earning power and firm value. 
  • Lastly, independence of the board is really a facade for Laxey to bring its own people up. How can the people be sure Laxey will not leave the shareholders high and dry?
Good Luck to Laxey and Mr. Andrew Pegge, it is interesting and helpful to see minority interests are still much alive. If you are reading and wish to get in touch, feel free to drop me a note.

Saturday, August 6, 2011

August 2011

Some important highlights 
  • S&P downgraded US ratings from AAA to AA+ 
  • BOJ sold Yen to stabilize currency with losses on Thursday 4 Aug 2011 of approx US$ 50 billion
What this means
  • While everyone is fleeing from equities, I cannot help but think that US is in fact much more important than I ever thought. With Debt to GDP of over 1x, it is around the same league as the many nations which have experience defaults in some ways or another but US had only a downgrade to AA+.
  • Everyone knew long ago that US rating was not AAA and this day will come eventually, however when the day comes, it seems alot of compromise was reached and much "face" given to US.
  • Click this link to understand the rating positions of the countries - Guardian UK
  • While there is expectation of rising interest rates, there is nowhere else more liquid and more productive to be than in US debt. As such, we did see that US 10 year notes were in fact rising in price, hence a lowering yield.
  • US is undoubtedly still highly competitive with advanced technology, a quarter of world's industrial production, so end of the world day scenario will NOT come.
  • US and Japan has 40% of the world's largest companies with assets over US$ 40 trillion.
  • US, Japan and Germany has over 50% of world's patents with US having 30%.
  • There will definitely be an impact on the credit side, likely an across the board rise in required yields and probably lower volumes in higher yield issues as restrictions keep institutions from acquiring them.
  • Short side have performed well. Whilst shorts are not my focus and expertise, this current year is filled with opportunities on this front and have done well beyond expectations. See Portfolio
    • Decided to keep the shorts in Olam and Gallant 
    • Reason being they are highly exposed to economic cycles
  • Long side while performance is not satisfactory, is still positive and undervalued.
    • Koon, one of the larger positions sees a high price $0.30 never reached in almost a year. Came from positive news that firm bought into a real estate agency and expansion into advisory and valuation. Firm also secured S$30.9mm of projects (Seletar-marine bridge/TPE) to total of S$90.4mm excluding precast projects worth S$53.2mm. On both fronts, significant traction made and if firm maintains a minimum of 10% margin (was 17% in 2010), we will see at least S$9 to 11mm of profits for 2011 (was $12.7m in 2010). With cap at $43mm and net cash of S$19mm, one pays S$24mm for earnings of S$9-11mm, with a free option on a S$225mm Vietnam Port project (S$22.5mm worth of profits at 10% margins) and throw in the Australian power business for free which gives an additional S$1mm in profit est. annually. Sure that some guy warned me that income is not recurring and this looks bad. However at 2010 when I bought in, and at this rate, the company would had paid for itself with its earnings in the 2 years at 2x PE. Who cares whether it recurs or not at that level.
    • Nanyang Holdings remains deeply unappreciated and being more on commercial and individual focused, will have minimal impact from the corporate front in terms of the sovereign downgrades and economic situation in the west. Core properties in Kowloon also facing  redevelopment due to lack of space in Central. Low costs mitigates risks of a downturn. 
    • Roxy 2H came out well, lower sales but higher profits as expected, still undervalued versus other hotel cum development players out there. Hotel value alone is >= its market cap.
    • World precision had a new book order RMB 21.5mm, looks set to break 2H profit estimates. Price wise has also had strong support from good volumes.
  • Many opportunities in the west, however I will pick choices based on superior returns profile, preferably event driven and with a limited time period to limit possible losses from USD. I will be working hard to crunch the numbers over the weekend.
    Thats it for now, Monday will be rough.

    Monday, August 1, 2011

    Updates for July 2011

    A friend of mine posted a thought on the US debt situation and proposed the following (thought it may be good to share some of the reasoning behind). Not saying right or wrong, just an opinion as well as my view.

    My friend proposed 2 likely scenarios on the FED debt ceiling issue and the ballooning debt
    1. with fed bal sheet expansion
      • fed expands its bal sheet and purchases further up the curve probably in the 5-10y space, while 
      • simultaneously targeting speculation by hiking short rates
    2. with stable fed bal sheet - the fed extends its portfolio duration by either
      • rolling over expiring paper (buying short term) into the belly of the curve, or (Buy ST, Sell MT)
      • buying in the belly funded by selling at the front end, or (Sell ST, buy MT)
      • buying in the long end funded by shorter duration reverse repos (Sell ST, buy LT)
    And so my reply was:
    1. Expansion + hiking rates - Expansion likely but raising rates is not possible
      • Expansion is very possible at the risk of inflationary effect on prices
      • Contraction of capital or leaving it at status quo is not possible so I left out that possibility
      • Rates wise, GSOs are still very sensitive to rates and not yet out of the woods and buying MT to LT debt will also signal a hint to raise rates accordingly
    2. Changing the term structure (Without expansion) - Possible but wont solve any key issues
      • Buy ST, Sell MT
        • Raises overall financing costs and rates in the long run 
        • Puts off current pressure on financing needs
        • Possible but will people buy when rates are artificially compressed in the future? Economy and Institutions will demand higher rates from new MT to LT issues 
      • Sell ST, Buy MT
        • Sell ST to suck in money, use the money to buy MT
        • Possibly lowering or controlling the interest expenses as well as requisite rates
        • Look at this diagram for latest FED assets 
        • However, more volatility in liquidity supply on demand of expiry of the notes
        • Puts strain on the already large debt principal
      • Sell ST, Buy LT
        • Essentially the same as above, just extending the liquidity period

    Some thoughts on the Issues
    1. US Stats
      • GDP of US$ 14.12 trillion
      • Assets of about US$ 2.4 trillion 
      • Total debt owed of over US$ 14 trillion (of which 2/3 is public debt) 
      • Other off balance sheet liabilities of over US$ 52.1 trillion (social aid and medicare) and US$ 4.4 trillion intergovernmental debt
        • That's a equity deficit of over US$ 58 billion
      • US annual spending
        • US$ 0.45 trillion of interest expense
        • US$ 0.70 trillion of defense spending
        • US$ 0.85 trillion of healthcare spending
      • See:
        • Only interest on debt is falling, the rest heading north
        • Debt to GDP is near 1945s high of 120% 
    2. A bulk of FED assets lies in MBS assets and I believe they are trying to sell down those assets and buy back notes as they have done in the past months (which has the effect of signalling rate hikes)
      • However that is little in respect to the amount of debt load US has incurred
      • With the current debt load and unstable economic output from the US, monetary expansion seems likely based on the FED discussions with simultaneous cutting of expenses and deficits. 
    3. In essence, in layman terms
      • US issue debt = receives cash 
      • US buys back debt = exhausts cash 
      • US print money = creates cash 
      • The reason for the huge negative equity is due to US raising debt to get cash to spend/fund on unproductive assets/ activities which leads to impairment of assets so asset value vanishes which debt remains
      • So if US wishes to pare down debt, they have to either 
        1. Buy back debt = exhausts cash = more cash in system = inflation 
        2. Cut down debt = agreement to impair the debt principal without cash infusions (owe $10 debt becomes owe $5 debt)
          • Also can manifest itself via currency devaluation
        3. Debt to equity swap = change debt to owning US's assets (which is not a lot anyway)
      • 3 is not likely and for 2 results in sudden major global shifts in risk benchmarks and financial markets. As a result, 1 is still the most likely path to take and eventually 2 will come gradually
      • However I am thinking if US devalues its currency (which is very likely), ultimately US will suffer from high inflation and yet a risk of people not spending. 
        • Hard to pinpoint inflation/ deflation since there's hybrid scenarios such as Stagflation. 
        • Does that ring a bell to you?