Abaci's Common Sense Investing

Tomson (258)
There wasn't much activities during the period, save that Company managed to earn a few bucks from the stock market, decent but unreliable and not to be encouraged. Income from golf club, hotel, and commercial properties was stable but nothing spectacular. There are a few smaller scale property projects in Pudong being built mostly via its associated company Riviera. While these will provide income, they are only peanuts next to the 4 towers of Tomson Riviera. The way I see remains that this project alone should be worth more the entire Tomson's capitalization right now. And the other property assets of Tomson are worth of at least their book value.

WKK (532)
On the contrary, the results were really bad with both turnover and profits down substantially, by 24% and 42% respectively. This raised serious question on the timing of the privatization. If Senta Wong knew the business was going bad, he could've waited until now to make the offer, and his chance of success would've been much higher. Or more importantly, why would he want to make an offer at all? He's too smart to have missed that. I'm too dumb to understand him.

Maybe now he's failed in taking over WKK cheap, he wants to 'demonstrate' he was actually trying to do all shareholders a big favor, so we should send our apologies to him for misjudging his good intention.

There was no mentioning of the Chinese medicine and health product business which Senta Wong talked about during the privatization period (WKK had invested 10 million already). In fact there's almost nothing in the MD&A section and shareholders are pretty much left in the dark, as before. Let's hope darn isn't far away.

The funny thing is that the stock barely moved after this disastrous results. It seems that the holders are all very calm, at least up to now. I guess most stocks are now split between Senta Wong, his friends, supporters, and his enemies (like David Webb and other funds).

The soap opera continues.

DISCLOSURE: I hold 258 & 532 at time of writing.

After reading the paper and looking at the announcement again, I found I'd got it wrong at the 1st place. China COSCO is indeed buying the whole fleet (not part of it). And that made the consideration even more absurdly low, $34.6b for a fleet which earned $6b last year and $6b in 1st half of this year (likely earning over $10b for the whole year! I can't really find any rationale for a price this low except the average age of the fleet may be considered high and so one had to account for replacement cost in determining the overall consideration. Still, the price was dirt cheap and reminded me of the Angang asset injection last year, from which Angang also benefited immensely, and so did the H-share holders.

I reworked the figures and found the bulk fleet is trading at about 11x p/e, or 13x p/e if I apply a more realistic p/e to the container fleet. So the current price is mostly fair, maybe ahead a little bit since contribution from the bulk fleet probably won't come until next year when the deal is completed.

I think I can forgive myself for letting go the share too soon, for this kind of deal is really unpredictable. To compensate I can only thinking of buying more H-share index or fund, as for sure there'll be more injections for all state owned enterprises down the road but one can't be sure which one will come first.

p.s. to share my friend's blog which is quite enlightening: http://hk.myblog.yahoo.com/ohpalkof/

Finally the mystery is over and I come to understand, again, that the market, or at least some part of the market, is more efficient than I. Last time I questioned about the market enthusiasm over the asset injection and suggested reduction. Subsequently I sold out my last position at around $12. Of course looking back now, when the share price is standing over $19, that sell call appears very premature or even questionable. But hey that's also the fun/pain and challenge of investing on your own.

The dry bulk fleet acquisition deal is at last inked and proposed, but I don't think it'll have any difficulty in seeking approval from shareholders, given the terms are so favorable. In fact it's hard to imagine why this type of deal can still exist - there's no better way to demonstrate that selling state assets cheap is still everyday life in China.

The fleet (over 400 of them though some will only be partly owned after completion) will be acquired at a total of $34.6b, $24b to be financed by shares and the rest in cash. And part of the consideration is even deferred, meaning China COSCO can take time to arrange financing or even pay from the cashflows of the acquired fleets!

Attributable earnings from the fleet were $2b for 2006 and judging at the doubled results of 2007 1st half, one can safely assume $4b annual earnings. So we are talking about a prospective p/e of 8.65x for a national dry bulk fleet! Its competitor China Overseas Shipping Development (COSD) which reported similar interim profit has a capitalisation 100%+ higher at $78.5b. With a discount this deep my valuation framework used last time was immediately rendered useless. Now I know a price of $12 is of course sustainable but how about $19?

Let's try again. The market capitalisation post completion is about $190b. Taking out value of COSCO Pacific ($25b) and container fleet ($55b, generously using CSCL as benchmark), we have $110b for the dry bulk fleet. This translates to a 07 p/e of 27.5x, or 40% higher than COSD. It seems even the big favor from the parent company can't mop up all the excitement and hype around the share. China analysts are suggesting a target price of $40! I'm beginning to like my Chinese counterpart more and more as they really do introduce new rules and bring a whole different ball game here.

From this episode I think I have overlooked two things: (1) the grand re-rating of all H-shares which is still pretty much continuing and (2) the much improved prospect of dry bulk shipping since my last analysis in June. Perhaps the biggest lession is as value investors we can often tolerate undervaluation for as long as we want, but when its comes to overvaluation we don't do as much as we need to.

Of course I don't recommed a buy at this price. This should go without saying.

DISCLOSURE: I don't hold 1919 at time of writing.

p.s. to share my friend's blog which is quite enlightening: http://hk.myblog.yahoo.com/ohpalkof/