Abaci's Common Sense Investing

What an anti-climax! David Webb didn't show and there's very little sparkle throughout. And there's no much to eat either. But I did learn from a minority shareholder a couple of golden lines by the great late Chairman Mao, of the communist party of course.

(1) "Dishonestly always gets one in trouble" but
(2) "Honest people are often pushed around"

Nothing offensive to Chairman Wong. I hope the HKET will have good coverage as its journalist had a lengthy chat with that shareholder.

1st, Kudo to the HKEX for imposing the approval threshold of 75% (YES vote) and 10% (or less of NO vote) to the proposal thus making it harder to pass than usual. Otherwise WKK would simply need 50%+ independent votes to get the resolution through. But guess what - this wasn't necessary afterall as the NO votes outnumbered the YES votes! I think slight more than half of the independent shareholders showed a thumb down to Chairman Wong's offer.

Good news for the financial adviser Standard Chartered Bank and independent financial adviser DBS as they'll get a third chance to do the same work again, having collected their fees twice already.

There may never be a 3rd time, in which case WKK is still very cheaply priced now, but when the chance does come there may be a different structure again. Of course the best scenario as I said before would be for a fund to come in and buy out the PCB assets from WKK, at a much more reasonable price of course, and leave the listing status to Chairman Wong to play around with his latest medical venture, which may or may not by run by him for too long.

DISCLOSURE: I hold 532 at time of writing.

The results were almost every bit as expected, spooky. So I really have nothing to add other than that Dickson could use more transparency in disclosure. The lack of segmental p&l is a case in point and there's no way to tell how much each market is contributing or improving by. Taiwan, which Dickson has quite a presence, is struggling still but that may change after the next presidential election if Ma wins. Other markets should grow at least steadily as the whole asia region is prospering right now so it's hard to imagine people not buying luxury goods.

Check out http://abaci-investing.blogspot.com/2007/01/end-of-era-of-chinese-tourists-in-hk_03.html for detailed analysis as I don't want to repeat myself here.

Looking good and maybe it's about time for the share to run.

DISCLOSURE: I hold 113 at time of writing.

Well I'm surprised to have time to keep track of developments in the HK market and to write while on vacation. Yes my holiday so far is really dull! However somehow I can't open any PDF file and hence much of the HKEX data is unavailable, so all figures used here are rough.

This post isn't really an update on SOC though it has listed its distressed property unit on the AIM in London. But because it's as expected there's nothing to add for now. Those who are unfamiliar can check my posts in April about SOC and my investment rationale. Rather, this post is prompted by announcement of the merger of TCC and Chiahsin Cement. I always keep a close watch at corporate activities as those are orginated by insiders who are more informed and thus whose actions and reasons are usually well thought out, thereby saving my time and energy!

I don't know much about either company other than they, together with the industry as a whole, seem to be turning around after some bad years. I don't expect one to vary significantly from the others as cement is a pretty homogenous product. The merger puts a value on CC at about $3b, against a turnover of $1b. For reference, the industry leader Anhui Cement is trading at $69b against a turnover of $15b, higher but understandable given the difference in size. P/E isn't used here as it's usually irrelevant in turnaround situations.

Using this latest acquisition price (3x turnover) as the benchmark for SOC's cement operation gives a value of $4.5b, double of my last conservative estimate. Apply the same method to value other parts of SOC: Shui On Land ($5.2b), construction ($0.4b), distressed property ($2.5b), less corporate debt ($3b), SOC in total should be worth $9.6b. Current capitalization (including convertible bond) is only $7b.

The current price is very attractive because you get exposure to both the housing and building materials market. Plus there's upside potential from 1st Shui On Land (which is also undervalued at current price), and 2nd SOC itself, a rare double double opportunity I'd say.

DISCLOSURE: I hold 983 at time of writing.

I'll be away for 2 weeks and don't expect to post something new, unless I'm extremely bored in my trip (hope not!).

Next month is an exciting month as most small caps will be releasing annual results and I expect many of them will give pleasant surprises. This month has already seen many small caps flying off at great speed but it's hard to tell, from price movement alone, the great ones from the also-rans. One is forced to play catch up and has to choose between buying a good company at a much higher price post results and buying a potential lemon now.

If you don't hold any position in small caps, then I suggest you opt for the 1st route and wait until July, since you've already missed out the chunk of the movement and it's dangerous to join the ride now. By end of July the dust will be settled and it'll become clear which ones are the better investments.

'The Return of the Red Chips' should be another theme that's worth paying attention to for the 2nd half.

There's rumor which has since been confirmed by the company that it's under investigation for price manipulation, creating a false market for its ultra expensive Tomson Rivieria. I'm bemused by this development because it's quite obvious to anyone that there's NO market for TR at the asking price. Only 3 units have been sold and so there's hardly any 'victim' to speak of. The local government may have gotten its priority wrong too if its aim is to protect those who can afford RMB130,000 per sqm apartment, a sector irrelevant to the daily life of 99% of the population. This makes me think the investigation is more of a gesture than anything. There may be a slap on the hand, fines in the end but I see no more harm done to Tomson.

DISCLOSURE: I hold 258 at time of writing.

What started out as a cheeky steal has turned into downtown robbery!

Check out my last post in April for background (if you're new) and you shouldn't miss today's announcement, because you're not gonna see something like this in a long time (at least I've not seen one before). Don't miss the headings too as they are catchy, e.g. Who's Mr. Webb?

http://main.ednews.hk/listedco/listconews/sehk/20070605/LTN20070605158.pdf

Sure Mr. Webb is trying to create the same independent shareholder activist movement taking place in the U.S. and Europe, and this is the second episode no long after the Mr. Lau vs TCI standoff in the Chinese Estates privatization, save that Mr. Lau opted for a graceful exit whilst Mr. Wong has chosen a showdown.

My guess is Mr. Webb does have enough votes as he's claimed and the proposal will be shot down at the SGM. And those more speculative or feeble are already exiting this morning in fear of the subsequent fall in share price. Mr. Wong has made the statement that he won't increase the offer price and if this fails won't make another privatization move in 12 months, maybe as a threat to all of us holding shares to surrender. But I remind you that this latest offer is not really a privatization offer governed by the SFC, where whatever said during the offer period is etched in stones and can't be overturned, but merely a purchase of assets under the HKSE rules. So Mr. Wong can change his mind anytime and technically won't be in breach of anything (he's not made any announcement under his name), other than personal reputation which I don't think matters the most to him right now.

Having said this I do admire Mr. Wong's courage to go the full distance knowing his chance of success is slim. His only chance of winning is Mr. Webb backing down at the last minute, slim. What Mr. Wong can do now is to grab as many shares as he can, knowing he can't buy up the whole company. What's next is anybody's guess? The best scenario is that Mr. Wong's planning to flip the company over to a private equity fund and the worst scenario is nothing will happen for a long while.

I'm gonna to attend the SGM and see how this eventually plays out.

DISCLOSURE: I hold 532 at time of writing.

All good things have to come to an end. I can see my days with China COSCO is limited. In fact I've been reducing my exposure for some time.

Capitalization is now $67b, about 35% attributable to COSCO Pacific the port operator and 65% to the shipping division. COSCO's vessels are thus valued at $43.6b, or 54% more than that of COSL (2866), which despite a 100%+ rise this year still trails behind at $28.3b. There's no need to compare to OOIL (316) because the discrepancy will be even bigger. Bear in mind shipping profit last year was less than $1b and my best estimate for a normal year was $3b. Either way I look at it the price is steep.

The last time I wrote the cause of the premium was due to the potential injection of dry bulk fleet and A-share listing, the latter has become a reality. The capital will be enlarged by about 20% after listing, which to me is a relatively small scale offering. The proceed will be funding mostly expansion of container fleet. So any injection will come at a later stage. Let's just assume the new container fleet will generate the same rate of return as present so we need not worry about the dilution from A-shares for now.

With the A-share listing factor gone, the premium of $15.3b (over COSL) is based entirely on injection hope, which makes up 1/4 of the current capitalization. It's common ground that share price tend to precede facts and market consensus now seems that China COSCO will be dished $15.3b worth of favor in the coming asset injection.

How big is a favor of $15.3b? For benchmark I use China Shipping Development (1138) which is trading at 19x p/e. I calculate the market valuation for each $1b of dry bulk earnings injected, then how much discount is needed and the injection p/e in order to give $15.3b favor to China COSCO.

1b; 19b; 81%; 3.61x
2b; 38b; 40%; 11.4x
3b; 57b; 27%; 13.9x
4b; 76b; 20%; 15.2x
5b; 95b; 16%; 16x

I don't think the discount to market comparable can be too great so it'll have to be assets with more than $2b earnings at least. With China COSCO's capitalizaiton of $67b, unless the injection is of a grand scale (like that of Dongfang Electric (1072)) the market is likely to be disappointed.

It's not my principle to invest on hope nor ride on speculation too much. So to me it's time to reduce and watch the development.

DISCLOSURE: I hold 1919 at time of writing.