Abaci's Common Sense Investing

SOC runs 4 businesses, the biggest of which is property development which has been spun-off and become 18% holding in Shui On Land, next is some cement plants in southwestern China, then there's distressed property development, and finally the old school construction business. There's also some venture capital funds but since the profit contribution is small yet unpredictable, I'll skip here.

Shui On Land (272)
This is Tony Measor's favorite pick for 2007 which he expects has the most chance to double. But instead its price has dropped by 5% so far this year. I think the share was listed at $5.35 last year, making the gain up to now about 20%, very modest compared to other China property plays. One reason seems that people believe locals are more experienced and informed in their homeland and hence can better run the business. And Vincent Lo being a HK citizens is thus regarded as second grade at best, even the fact is he already invested in China as early as in the last property slump in the 90s, and I guess many of the new crop of local Chinese property developers didn't even exist back then. So much for the local is better myth for me.

Quite the contrary the 'foreigner' status of Shui On Land gives me more confidence, for Shui On group has a long listing history in HK (3 listed companies) and a reputation to rely upon. And its track record has been respectable and the Shanghai Xintiandi is a fine example. I'd rather buy into Vincent Lo than many new Chinese property tycoons whom I don't really know much about, especially those who seem to get too rich too quickly. I initially thought many foreign funds would follow this logic and found SOL a more reasonable and reliable investment than the Chinese counterparts. Again the market logic beats me and I don't have a clue.

There's no much to really look into SOL because it's not a simple business to understand. It's like the city redevelopment council here in HK except it's without government funding. Valuing this type of long term property projects which may run anywhere from 5-10 years or even longer is nearly impossible. But here one can count on the long term trend of the Chinese property market which is up, and the proven Shui On management quality. The long duration of the projects can also soothe out the impact of any interim fluctuation in the property market.

Lastly, the less precise value of the business can really give scope for imagination and fuel speculation.

Cement business
SOC runs the plants mostly via a 45% owned JV with the french cement company Lafarge. It aims at the upscale market with plants in Chongqing, Sichuan, Guizhou, and Beijing. Separately SOC runs plants in Guizhou and Nanjing under its own name. Last year's results were hampered by an one-off provision of old equipment of $170m. Discount that the JV would have been profit making already. The cement market has come around if you look at the latest results or share price of Anhui Cement. Business should prosper with much construction activities going on in central/western China and in Beijing for the Olympics (note SOC's plants are all nearly by).

Profit is not easy to predict for a turnaround play. So for valuation I'll arbitrarily but conservatively give it 1/20 of the capitalization of Anhui Cement, although SOC (cement division) had more than 1/10 of the turnover. This will give a value of $2.25b.

To continue...

DISCLOSURE: I hold both 272 & 983 at time of writing.