Monday, July 23, 2007
Revisit the 2007 Underdogs
Time for a review of the underdogs, a.k.a. industrials, as the latest results have come out. Against common perceptions or wisdom the results were all outstanding, a fine achievement and it looks like the depreciating USD is really helping exporters.
Check out http://abaci-investing.blogspot.com/2007/01/every-dog-has-its-day-my-industrial.html for the basic story of each selection which remains sound today.
1st a summary of the basic parameters.
894 - sales up 12%, EPS up 15%, 9x p/e, 2.1% yield
927 - sales up 54%, EPS up 84%, 8.5x p/e, 4.3% yield
1120 - sales up 38%, EPS up 72%, 7.5x p/e, 3.3% yield
408 - sales up 18%, EPS up 31%, 12x p/e, 3.5% yield
1001 - sales up 6%, EPS up 209%, 8x p/e, 3.1% yield
Average - sales up 26%, EPS up 82%, 9x p/e, 3.3% yield
Since it's only been 6 months I don't have much to supplement. 408 appears more expensive but justifiable so given its 5-year growth record. And it definitely has re-rating potential as management and owners are restructuring the board and improving corporate governance to please the institutions. 894 and 927 will continue to benefit from the growth in consumer electronics and communications market, plus both are enlarging their capacities. 1120 will enjoy the rising EURO and fashion appetite. 1001 has just turned around and will need time to prove the value in its JV with Ryerson. In short I'm still positive on all five of them. Remember Peter Lynch's rule of 5 and these are meant to be purchased in a basket.
Next let's look at the market performance.
894 - $2.03, $2.54, up 25%
927 - $1.8, $3.67, up 104%
1120 - $$2.58, $3.28, up 27%
408 - $3.82, $5.7, up 40%
1001 - $0.98, $1.5, up 53%
Average - up 50%
50% in 6 months is outstanding and it's actually my annual target for small caps, though one could've done even better if just sticking to my other picks like Chalco, China Cosco, or even Tomson. But this is the cost for diversification and I already forewarned these were dogs. Comparing the price movement with the profit growth, I don't think the dogs are let out of the doghouse yet. That's why I think this sector continues to be a safe place, on relative terms, in today's market.
During this evaluation process I've looked at other potential dogs, as I know readers are always only interested in the 'next' pick, as if past picks were like retired hall-of-famer athletes on wheelchairs now. For which I can say after studying a dozen other dogs, I still can't find any that can really outshine the 'fab 5'. One exception is Meadville (3313) but beware it's the only flop of all my picks in the past! Though I still have good hope of the PCB market and its 3G potential. The other interesting bet is RMIH (1997) but since it's a new IPO and the price has already run away before this post, I'd not recommend it this time.
DISCLOSURE: I hold the 'fab 5' and 1997, no 3313 at time of writing.
Check out http://abaci-investing.blogspot.com/2007/01/every-dog-has-its-day-my-industrial.html for the basic story of each selection which remains sound today.
1st a summary of the basic parameters.
894 - sales up 12%, EPS up 15%, 9x p/e, 2.1% yield
927 - sales up 54%, EPS up 84%, 8.5x p/e, 4.3% yield
1120 - sales up 38%, EPS up 72%, 7.5x p/e, 3.3% yield
408 - sales up 18%, EPS up 31%, 12x p/e, 3.5% yield
1001 - sales up 6%, EPS up 209%, 8x p/e, 3.1% yield
Average - sales up 26%, EPS up 82%, 9x p/e, 3.3% yield
Since it's only been 6 months I don't have much to supplement. 408 appears more expensive but justifiable so given its 5-year growth record. And it definitely has re-rating potential as management and owners are restructuring the board and improving corporate governance to please the institutions. 894 and 927 will continue to benefit from the growth in consumer electronics and communications market, plus both are enlarging their capacities. 1120 will enjoy the rising EURO and fashion appetite. 1001 has just turned around and will need time to prove the value in its JV with Ryerson. In short I'm still positive on all five of them. Remember Peter Lynch's rule of 5 and these are meant to be purchased in a basket.
Next let's look at the market performance.
894 - $2.03, $2.54, up 25%
927 - $1.8, $3.67, up 104%
1120 - $$2.58, $3.28, up 27%
408 - $3.82, $5.7, up 40%
1001 - $0.98, $1.5, up 53%
Average - up 50%
50% in 6 months is outstanding and it's actually my annual target for small caps, though one could've done even better if just sticking to my other picks like Chalco, China Cosco, or even Tomson. But this is the cost for diversification and I already forewarned these were dogs. Comparing the price movement with the profit growth, I don't think the dogs are let out of the doghouse yet. That's why I think this sector continues to be a safe place, on relative terms, in today's market.
During this evaluation process I've looked at other potential dogs, as I know readers are always only interested in the 'next' pick, as if past picks were like retired hall-of-famer athletes on wheelchairs now. For which I can say after studying a dozen other dogs, I still can't find any that can really outshine the 'fab 5'. One exception is Meadville (3313) but beware it's the only flop of all my picks in the past! Though I still have good hope of the PCB market and its 3G potential. The other interesting bet is RMIH (1997) but since it's a new IPO and the price has already run away before this post, I'd not recommend it this time.
DISCLOSURE: I hold the 'fab 5' and 1997, no 3313 at time of writing.
Friday, July 06, 2007
Stop Loss on China Glass (3300)
CG has announced a US$100m bond issue. This is a massive offer compared to its capitalization of HK$1.3b, after falling by more than 10% at one point this morning, and NAV of only some HK$400m. I may be over-reacting but I'm very allergic to any junk bond offering. Interest rate is over 9% p.a. and underwriting fee is 4%, plus I don't like its lead manager Standard Chartered either (no offense to the bank though, just the department). By taking this terms I can only guess CG has run out of funding options, and there's little demand for its shares nor loans. In fact I think the terms are even worse than what Zhejiang Glass got from the IFC when it was in deep trouble.
I guess with this big a warchest CG will continue to expand its presence actively in the glass market. But I doubt whatever good comes out of this will mostly go to the bondholders and shareholders are left in a very vulnerable position - head you win and tail I lose.
The last junk bond of Ocean Grand really turned into junk. I really don't have a good feeling for this one either.
DISCLOSURE: I don't hold 3300 at time of writing.
I guess with this big a warchest CG will continue to expand its presence actively in the glass market. But I doubt whatever good comes out of this will mostly go to the bondholders and shareholders are left in a very vulnerable position - head you win and tail I lose.
The last junk bond of Ocean Grand really turned into junk. I really don't have a good feeling for this one either.
DISCLOSURE: I don't hold 3300 at time of writing.
Thursday, July 05, 2007
More Thoughts on H-share & Red Chips Index
If you agree to what I wrote last time, then it's never too late to accumulate more China positions, for there should be many more good years ahead. This is a time which I think buying the marco concept will probably do just as well, if not better, as performing elaborate micro analysis. Bear in mind the H-share index has risen by 139% (excluding dividends) since 2006 up to today! Don't expect this kind of performance will repeat itself but equally don't underestimate the potential of China, nor the craziness of the market at times.
So unless you are a stock picking fanatic or have extreme confidence in your (proven) ability, think seriously about allocating part of your portfolio in a H-share index fund, or futures if you really know what you are doing. For red chips since there's no ETF readily available, pick a few that you like like China Mobile, CNOOC, or COSCO Pacific, and you are set. Just sit and wait for lady luck to pay you a visit. If you have itchy fingers that's hard to stand, try your luck on other sectors like blue chips or small caps, or do whatever you want that works, just don't get them burnt!
As for timing, I can't tell you but I do know right now some shares are extremely expensive but some are still reasonable. That's why on average I think buying an index should be relatively safe, for the downside may at most be 30%. I'd buy in stages, like I always do, it's best if it turns out I buy on the way down, but I'd be pleased too if I end up buying on the way up, since the alternative would be not holding a position in a rising market, which sucks even more!
So unless you are a stock picking fanatic or have extreme confidence in your (proven) ability, think seriously about allocating part of your portfolio in a H-share index fund, or futures if you really know what you are doing. For red chips since there's no ETF readily available, pick a few that you like like China Mobile, CNOOC, or COSCO Pacific, and you are set. Just sit and wait for lady luck to pay you a visit. If you have itchy fingers that's hard to stand, try your luck on other sectors like blue chips or small caps, or do whatever you want that works, just don't get them burnt!
As for timing, I can't tell you but I do know right now some shares are extremely expensive but some are still reasonable. That's why on average I think buying an index should be relatively safe, for the downside may at most be 30%. I'd buy in stages, like I always do, it's best if it turns out I buy on the way down, but I'd be pleased too if I end up buying on the way up, since the alternative would be not holding a position in a rising market, which sucks even more!
Tuesday, July 03, 2007
Thoughts on H-share & Red Chips Index
This is a continuation of yesterday's post.
One important distinction to make about red chips: I only mean those controlled by the government, e.g. China Mobile, not those owned by private country men, e.g. Citic Pacific. I don't mean the latter has less investment value (in fact I own Citic Pacific) but it's just outside the scope of today's discussions.
And I'll only use the term 'H-share' throughout even I mean red chips as well, just to save typing time. Make no mistake this post is definitely not about investing in 'A' shares.
Right now I see there are at least 4 favorable factors at work driving the H-shares.
(1) China growth story - no need to explain. The China story is more compelling than many others (notably Russia) because it's not resources dependent; on the contrary it's China's ability to grow despite the lack of it that'll make its growth sustainable. The theme will stay for at least another decade amid temporary setback from time to time. Keep in mind the old saying: when the tide comes all ships shall float. I'll add even if you've picked a sucker you're likely to be rescued some point in time.
(2) Industry consolidation - it's clear the government is leaning toward larger national enterprises in policy making and squeezing out smaller private competitors. This will save on the energy bill, environmental cost, increase competitiveness, etc, plus the government will benefit since they own those companies. By forcing the management to pay dividends there'll be funds to implement various social policies.
(3) QDII - though the actual fund flow will come in later and in stages, stock prices always move before facts. This is almost the exact duplicate of the 'freedom tourists' in 2003, save it's 'freedom money' buying cheaper stocks. Remember the last time the share price of many retailers never retreated until 2005! Don't doubt the immediate impact this time.
Looking from another angle, if the Chinese have that much money to create the expensive A-share market, they should have little trouble repeating that in HK whose market turnover is only a fraction.
(4) Asset injection - more national assets are getting listed by injection (or listing) and so far the price set is very reasonable, or you may say unreasonably reasonable. The official explanation is these assets belong to the people and it's only fair the people get to share the prosperity of their country. If there's a crash down the road, the government can also avoid being accused of selling at the top and reaping its own people off, a big no-no in a communist country. The management of these vendor companies are only civic servants so don't expect them to bargain for a good price for the government.
A favorable injection price will ensure favorable response, not only to those receiving the 'gift' but also to their peers, who like a spoiled child, will go to his father and ask for similar treatment. If the injection price is set at a discount to the A-share peers, A-share (of the subject company) will respond and H-share will follow suit (if not immediately, QDII and speculators will ensure it does). If the injection price is set at a discount to the H-share peers, H-share will respond but A-share will go wild, then H-share will go wild too.
The other catalyst to this dynamite is the means of financing and I'm seeing more and more A-shares being issued as consideration. This serves the legitimate purpose of increasing supply which fits in the government's cooling measures. To the company though, it's free capital! Since the management own near zero equity stake they'd care less about dilution than growing faster than its peers, as otherwise their companies would get taken over and they'd lose their helms. How will this affect the H-shares? Of course the effect is highly positive as issuing A-shares, even at a discount, will still be at a price vastly above the H-shares, which of course will jump in response.
The scary part is that these 4 factors are interrelated making this upward trend, in Soros's terminology, self-reinforcing. Discounted injection -> higher share price -> more M&A using shares -> reduced competition -> higher profit -> even higher price. This will likely continue until the rationalization is complete and every industry is dominated by a few big players.
To continue.
One important distinction to make about red chips: I only mean those controlled by the government, e.g. China Mobile, not those owned by private country men, e.g. Citic Pacific. I don't mean the latter has less investment value (in fact I own Citic Pacific) but it's just outside the scope of today's discussions.
And I'll only use the term 'H-share' throughout even I mean red chips as well, just to save typing time. Make no mistake this post is definitely not about investing in 'A' shares.
Right now I see there are at least 4 favorable factors at work driving the H-shares.
(1) China growth story - no need to explain. The China story is more compelling than many others (notably Russia) because it's not resources dependent; on the contrary it's China's ability to grow despite the lack of it that'll make its growth sustainable. The theme will stay for at least another decade amid temporary setback from time to time. Keep in mind the old saying: when the tide comes all ships shall float. I'll add even if you've picked a sucker you're likely to be rescued some point in time.
(2) Industry consolidation - it's clear the government is leaning toward larger national enterprises in policy making and squeezing out smaller private competitors. This will save on the energy bill, environmental cost, increase competitiveness, etc, plus the government will benefit since they own those companies. By forcing the management to pay dividends there'll be funds to implement various social policies.
(3) QDII - though the actual fund flow will come in later and in stages, stock prices always move before facts. This is almost the exact duplicate of the 'freedom tourists' in 2003, save it's 'freedom money' buying cheaper stocks. Remember the last time the share price of many retailers never retreated until 2005! Don't doubt the immediate impact this time.
Looking from another angle, if the Chinese have that much money to create the expensive A-share market, they should have little trouble repeating that in HK whose market turnover is only a fraction.
(4) Asset injection - more national assets are getting listed by injection (or listing) and so far the price set is very reasonable, or you may say unreasonably reasonable. The official explanation is these assets belong to the people and it's only fair the people get to share the prosperity of their country. If there's a crash down the road, the government can also avoid being accused of selling at the top and reaping its own people off, a big no-no in a communist country. The management of these vendor companies are only civic servants so don't expect them to bargain for a good price for the government.
A favorable injection price will ensure favorable response, not only to those receiving the 'gift' but also to their peers, who like a spoiled child, will go to his father and ask for similar treatment. If the injection price is set at a discount to the A-share peers, A-share (of the subject company) will respond and H-share will follow suit (if not immediately, QDII and speculators will ensure it does). If the injection price is set at a discount to the H-share peers, H-share will respond but A-share will go wild, then H-share will go wild too.
The other catalyst to this dynamite is the means of financing and I'm seeing more and more A-shares being issued as consideration. This serves the legitimate purpose of increasing supply which fits in the government's cooling measures. To the company though, it's free capital! Since the management own near zero equity stake they'd care less about dilution than growing faster than its peers, as otherwise their companies would get taken over and they'd lose their helms. How will this affect the H-shares? Of course the effect is highly positive as issuing A-shares, even at a discount, will still be at a price vastly above the H-shares, which of course will jump in response.
The scary part is that these 4 factors are interrelated making this upward trend, in Soros's terminology, self-reinforcing. Discounted injection -> higher share price -> more M&A using shares -> reduced competition -> higher profit -> even higher price. This will likely continue until the rationalization is complete and every industry is dominated by a few big players.
To continue.
Monday, July 02, 2007
Asset Allocation Review
Industrials: 29.3%
Resources: 15.2%
Property: 14.7%
Financial: 11.6%
Shipping/Port: 9.5%
Conglomerate: 6.9%
Utilities: 6.5%
Construction: 3.4%
Retail: 2.8%
The industrials have grown quite a bit and now stand out visibly from the rest. I didn't add much to my positions so the difference came mostly from reflection of earnings increase. I expect a few of them will get re-rated in the 2nd half so there's no immediate need for trimming down, plus the overall sector valuation is still very reasonable.
On the other hand, the shipping stocks look very richly valued despite their good earnings prospect. I'll continue to reduce and probably replace them with pure port plays for a more defensive position and to complement the utility plays, which could occupy a larger space in the portfolio.
Other sectors look fine but I'd like to add one or two Chinese financial plays, which are sorely lacking and performance hurting too. I also plan to buy more Chinese property companies as by now the housing market looks more sane and healthy than the A-share market. Same as last time, China retail is another near-empty space which I need to focus harder.
The 2007 results are very encouraging but I'm not gonna say much here as there's quite a number of stocks in my portfolio which aren't mentioned here. But trust me nearly all of the better choices are already here! As I won't update the Report Card until the end of the year so check out the April post for past recommendations.
More importantly, there's no much to brag about when the H-share index has grown by 130% (135% including dividends) since 2006. I failed to match that kind of return but managed to close the total gap substantially in 2007. The obvious reason is that I didn't have as many H-shares and therefore I still underperformed although my other selections perform satisfactorily (earnings and share price wise). You could say I've made a wrong macro call since 2006 and hence had to double or triple my effort just to keep up with the pace.
In the next post I'll lay out my thoughts on investment value of H-shares and red chips going forward.
Resources: 15.2%
Property: 14.7%
Financial: 11.6%
Shipping/Port: 9.5%
Conglomerate: 6.9%
Utilities: 6.5%
Construction: 3.4%
Retail: 2.8%
The industrials have grown quite a bit and now stand out visibly from the rest. I didn't add much to my positions so the difference came mostly from reflection of earnings increase. I expect a few of them will get re-rated in the 2nd half so there's no immediate need for trimming down, plus the overall sector valuation is still very reasonable.
On the other hand, the shipping stocks look very richly valued despite their good earnings prospect. I'll continue to reduce and probably replace them with pure port plays for a more defensive position and to complement the utility plays, which could occupy a larger space in the portfolio.
Other sectors look fine but I'd like to add one or two Chinese financial plays, which are sorely lacking and performance hurting too. I also plan to buy more Chinese property companies as by now the housing market looks more sane and healthy than the A-share market. Same as last time, China retail is another near-empty space which I need to focus harder.
The 2007 results are very encouraging but I'm not gonna say much here as there's quite a number of stocks in my portfolio which aren't mentioned here. But trust me nearly all of the better choices are already here! As I won't update the Report Card until the end of the year so check out the April post for past recommendations.
More importantly, there's no much to brag about when the H-share index has grown by 130% (135% including dividends) since 2006. I failed to match that kind of return but managed to close the total gap substantially in 2007. The obvious reason is that I didn't have as many H-shares and therefore I still underperformed although my other selections perform satisfactorily (earnings and share price wise). You could say I've made a wrong macro call since 2006 and hence had to double or triple my effort just to keep up with the pace.
In the next post I'll lay out my thoughts on investment value of H-shares and red chips going forward.
Sunday, July 01, 2007
Something Else
Saw this movie 'Bridge to Terabathia' on the flight back from Canada. It's a PG-13 movie but was just as entertaining for adults. It brought back childhood memories and the theme was good - always open up your mind to possibilities and let imagination comes through, a typical Disney message brought by Disney.
This movie echoes what I felt strongly in this trip. Though I've lived in Canada before this time around, I've grown (literally too!) to appreciate the American value 'to dream and to pursuit' more. It's so entrenched in the culture you can find it everywhere. Maybe it's in the genes as America is a country founded by pioneers and enriched by emigrants in search of not benefits but a dream to get ahead. And this value is systematically passed on to each younger generation.
Take my 1st stop at the Disney magic kingdom as an example. Although the tomorrow land has ironically become the place that least lives up to its reputation with outdated attractions, I found time in the Disney gallery and read some literature about the rides. The monorail was actually the 1st one erected in North Amercia at the time (50s) and the 'submarine' (don't bother riding as the vessel doesn't even submerge) was the result of Walt Disney's effect to bring in the latest invention of the time to the park to show kids that everything was possible. The Disney visit was rounded up nicely with fireworks and of course the legendary song 'when you wish upon a star', the lyrics which I now wholeheartly believe. (http://www.niehs.nih.gov/kids/lyrics/wishstar.htm)
Next stop is Hollywood, the dream factory, and the Universal Studio is a fine place to instill that value into kids whilst also a fun experience itself. Even the Seaworld (Ocean Park of America) has the story of a young kid growing up dreaming to become a whale trainer, and of course he's succeed and is performing today. Whether this story is true or not is less important. Then there's the story of Las Vegas growing out of a desert.
I'm not even a half pro-america person but I acknowledge we do have much to learn from them in 'soft' education.
Finally, another good line spotted in America to share 'it costs nothing to dream but everything not to'.
This movie echoes what I felt strongly in this trip. Though I've lived in Canada before this time around, I've grown (literally too!) to appreciate the American value 'to dream and to pursuit' more. It's so entrenched in the culture you can find it everywhere. Maybe it's in the genes as America is a country founded by pioneers and enriched by emigrants in search of not benefits but a dream to get ahead. And this value is systematically passed on to each younger generation.
Take my 1st stop at the Disney magic kingdom as an example. Although the tomorrow land has ironically become the place that least lives up to its reputation with outdated attractions, I found time in the Disney gallery and read some literature about the rides. The monorail was actually the 1st one erected in North Amercia at the time (50s) and the 'submarine' (don't bother riding as the vessel doesn't even submerge) was the result of Walt Disney's effect to bring in the latest invention of the time to the park to show kids that everything was possible. The Disney visit was rounded up nicely with fireworks and of course the legendary song 'when you wish upon a star', the lyrics which I now wholeheartly believe. (http://www.niehs.nih.gov/kids/lyrics/wishstar.htm)
Next stop is Hollywood, the dream factory, and the Universal Studio is a fine place to instill that value into kids whilst also a fun experience itself. Even the Seaworld (Ocean Park of America) has the story of a young kid growing up dreaming to become a whale trainer, and of course he's succeed and is performing today. Whether this story is true or not is less important. Then there's the story of Las Vegas growing out of a desert.
I'm not even a half pro-america person but I acknowledge we do have much to learn from them in 'soft' education.
Finally, another good line spotted in America to share 'it costs nothing to dream but everything not to'.
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