3Q2013 Updates

Sorry for the slow updates, been really caught up at work. I have not sold as much as I had suggested in my last May post due to onerous restrictions at work.

Just read a local business news publication and saw an article which got me a tad disappointed with the quality of reporting here. Nothing irks me more than generalization and mis-aggregation of information. It talks about China needing to improve quality of disclosures and regulations and goes on to suggest that Indofood taking over China Minzhong (CMZ) is a divine retribution to foreign speculators. In the reporter's exact words, "They should have been aware that Indofood taking up a majority stake would mean they have done their homework". 

To explain shortly the story, basically Glaucus (Canadian based research firm) accused CMZ of fraudulent financial reporting with a report and a short position. Stock fell 48% to S$0.53/sh. Subsequently Indofood, a Singapore listed food products and palm oil company affiliated with Salim Group who already owns a 33.49% of CMZ, announced taking over CMZ at S$1.12/sh, valuing the firm at S$734m. 

A public announcement to rationalise the offer and to correct the article was rather akward. LINK here and LINK here. My thoughts: 

1. Does Indofood taking over CMZ mean they are necessarily right and Glaucus is wrong? 
2. Does taking majority take (30+%) mean Indofood has absolutely done their work and are right?
• If you bought Zhengzhou Siwei Mechanical and Electrical Co like how Caterpillar Co done their work, congratulations, you have just managed to make -84% returns within a few months. Many other examples like China Agritech and China Biotics and the list goes on, and on and on. 
3. The acquisition rationale felt like the planning was messed up. 
4. Ultimately shorting - you need 7 stars aligned. You cant brute it, need to pick the right fight. 
5. I wont comment on CMZ, but feel free to exchange views with me by dropping a note :) 

I cant fathom how anyone can make such a statement. Fallacious much?

Sell in May and go away - 2013 version

Seems like a themed party that didnt work out.

The chase for yields continues as free money drops from the sky. Everyone is massively printing money which has literally thrown the global economy is disarray, losing its much needed equilibrium for an actual recovery to set in.

Post Fraser & Neave bidding war saga, it seems the play on inflation was right. It remains that globally, the scenario where an ever increasing pool of capital is chasing a limited set of assets and options.

Some continued signs of the staggering chase includes:

• US$1.1B acquisition of "Tumblr", a microblogging and social network site which in the past 7 years has recognized close to or 0 revenues. (Nice!)
• "Twitter" was last valued at US$1B, and investors were quoting on its fast growth in revenues, estimated to hit an "eye popping" US$1B. (What about earnings? to speak the least)
• "Oxley Holdings", a Singapore based residential real estate development company setting up a S$300M MTN Programme and issuing S$150M 4 year unsecured at barely over 5.10% (Have fun reading their financials)
• "Croesus Japan REIT IPO popped up 20% on IPO day, with yields of over 8%. (The BOJ Put at work! Mind you, the so called shopping malls are suburban "Wal-Mart" type of malls)
• India Tata Communications/Steel/Auto each raised debt funding in Asian markets despite their financials. Subsequently they raised the money and Tata Steel wrote down assets by US$1.6B within a coincidentally close date after the fund raising. (Check the financials)
• The US$23B "Heinz" acquisition carried a valuation tag of over 14x trailing EBITDA while peers are 10-11x. Note Buffett is this case is the financier, not the acquirer.
• Claims of China's hyper-inflated trade surplus with on the ground testimonials! See the article courtesy of Bloomberg HERE (I wonder what goods people trade this days with that sort of quantum)
• In the 2011-2012, we also saw US$1B acquisition of photo sharing site, "Instagram", game acquisitions such as the US$200M acquisition of "Draw Something", a mobile game application and Hewlett Packard (HP)'s US$11B acquisition of software provider, "Autonomy Inc".
• Asian equities are also enjoying high valuations. Thailand, Philippines, Indonesia etc are having across the board price to book of 2.6-3x which may be anecdotal but sure is a record event.

It may be all happy and rosy with rising asset prices. However the world is usually force-neutral. When theres a cause, theres an effect. Costs are creeping up (technically not true, they are silently moving up aggressively) and it seems that costs are likely to rise exponentially more than sales can grow.

This is far more true when Asia is known to not be a product/service leader and naturally with low levels of automation and/or innovative internal processes. Further, if one would assume a higher level of automation or better internal process, dont forget the capex to implement it, which is of course is much higher upfront now. The underlying value of an enterprise (of which price is partly based on), is the end result of these interactions. For sure, when you cannot successfully maintain a low cost level commensurate with a higher sales level to generate profits, a manager would cut the next most obvious and immediate cost, the raw materials or inputs. That translates to a lower commodity price level which we have witnessed and certain to persist.

As I write this on a related note, I regretfully read that theres 3 new suicide cases at Foxconn plants in China.

It is tough to fight the tide, and it sure looks like its getting stronger.
Perhaps I should just get a drink and sit back for a while.

Random Muses

Have been rather busy at work. I have with me a couple of random writing. Will follow up with updates for 1Q 2013.

I wrote sometime back on why I disagree on Gold being a good investment or so called inflation hedge. Had a lot (and I mean "A Lot!") of discussions or you may call it arguments on this topic and many have slammed me and said I will be the biggest fool in the market for not buying Gold. Reasons given ranged from solid inflation adjusted price appreciation, tight supply (cant be mined specifically on its own, its more of a by product) to it was the value anchor for currency during "Bretton Woods" time etc. To me, it is clear why Gold may not necessarily be a good investment. A overemphasis on inflation adjusted data may be misleading given the lack of understanding on data integrity going back to 1800s and blind faith on charts. Besides Indians who use it massively for their dowry, I cant really fathom what other uses there can be apart from being highly expensive catalysts or electrical conductors. With a limited demand, a tight supply doesnt stand strong as an argument. Last but not least, the value of a currency depends on various factors, including economic strength, investments, currency supply/ demand which are interrelated. However Gold is merely a hot potato which passes around, with each guessing the price of it based on what others guessed.

Given the recent hammering on Gold (no Im tempted to pick up any), I found it rather funny as I read back the comments of one of the global investors whom investment letters I read regularly. Hes Howard Marks of Oaktree Capital, please dont mind me using your quote.

“There is nothing intelligent to be said about gold. Nobody can tell you the right price for an ounce of gold. People will tell you it should go up or go down. To make any intelligent statements about investments you have to know what the right price is. You can’t do that with an asset like gold, which doesn’t produce any cash flow. So you can buy it out of superstition or ignore it because you are an atheist but you cannot buy it with an analytical foundation.”

Secondly, theres also the focus on equities this year to date which I have mentioned in a 2012 post. As mentioned, the larger money supply will continue to hit the markets and the end result will be across the board inflation, not only in the fish and apples we buy but also the stocks and company values. Those who claim stocks will crash might be a little early to be honest. I don't deny valuations are not getting cheap but it does not warrant a doomsday expectation, especially on the back of economic recovery (though it is not clear if its sustainable in the long run). With such rising levels, the likelihood of rates or in some countries implied rates will creep up. What this means is whatever loans you have that is floating rate will likely rise. From an investor's perspective, it means bonds with low yields will get steamrolled so beware of picking up 1) quality fixed income with low yields or 2) crappy fixed income with high yields that is effectively no yield coupled with a sub par principal at the end of maturity. If you bought a perpetual, well hope that the company is of quality name then.


Last but not least, if there's any reader/s out there who can help with the following, drop me a note. 

1) Capital seeders/ investors/ multi manager office for an investment partnership (ideally someone/team that supports fundamental investing across the capital structure on a global basis), and

2) High net worth or institutional investors for 2 coal mezzanine deals in Asia Pacific, one of which is a listed company. The advisory team supporting it is trustworthy and audited results/ JORC reports are available on demand. 

Performance - Year End 2012

Dear all,

2012 has been a pretty interesting year.
Despite the inactivity here, the same cannot be said of the investments made. I will firstly highlight the long performance and will later touch on the short ones, which has been great but of lesser significance since I have been having a lot of issues with the cost and execution of the ideas. So it shall be more of an educational display.

I'll do this manually as Google Spreadsheets is still pretty much a malfunctioning tool.

Long positions 2012
No.       Name             Returns ex dividends     Dividends       Returns with dividends/ Others

1. Nanyang Holdings    + 38.2%                      HK0.5/sh             +  40.8%    
2. Haw Par                  +  27.5%                     SG 0.2/sh             +  31.3%
3. Roxy Pacific             +113.3%                     SG 0.0067/sh       +119.9%    Bonus of 1 for 2
4. World Precision       -     7.0%                     SG 0.027/sh         -     0.7%
5. AEI                          +  10.0%                     SG 0.01/sh           +  19.0%
6. Koon                       -   32.9%                     SG 0.01/sh           -   29.5%    Rights 3 for 5@$0.19/sh

Shorts 2012 

No.       Name             Returns ex dividends     Dividends       Returns with dividends/ Others

1. Olam                      + 32.7%                       SG 0.04/sh           +  31.0%     Rights+warrants+bonds
2. Cacola                    +14.3%                        -                           +  14.3%
3. Dapai                      +58.8%                        -                          +   58.8%

As a brief overview, heres also the operational summary for the long positions. 

Nanyang has been benefiting from the recent revaluation of properties around. Similarly landlord prices around the Kowloon area have shot up in 2H 2012. Haw Par picked up gains in investment income and largely remains undervalued to investments and book. Roxy on the other hand remains astute, recently bought 3 plots of land near Mount Sophia (pretty central area) in Singapore and cost psf remains reasonable. People starting to see value in this name as its hotel performance has been superb. 

I have been thinking of cutting World precision but decided to hold on as its dividends have been satisfactory and recent China PMI and industrial output levels have started to rebound. Company specific, it also benefits from the additional infrastructure spending that the Chinese government  has announced. The firm has also stepped up promoting itself. My concern is the added leverage with less correlation to its order book growth. AEI is still a small position and they recently updated the recover-ability of their loans which remains a significant portion of total assets. Will review again to decide if its to be disposed. Koon on the other hand announced their  foray into Malaysian property segment. Track record is unknown. Rights issue was done at a slight discount.

The current markets have rallied due to a variety of news, from no US fiscal cliff, China didnt crash and Spain/Italy managed to get back on track. Am looking cautiously at some new ideas and will update accordingly.