Monday, March 17, 2008

Searching among Rubble

Everything is shattered so badly that it's getting difficult to tell a good company from a bad one if one only looks at the share price movement. Indiscriminate selling is everywhere as the yen carry trade continues to be unwound. I really feel sympathy for those who are going to Japan for the Easter holiday, like my brother. But I feel even more sympathy over my stock holdings, of which prices move more like mortgage backed securities now.

After the surge of Yen, I can safely declare RMB is now the 2nd cheapest currency after the USD, which I wouldn't hold. As the USD looks oversold and RMB looks undervalued, owning China stocks in HKD remains the best option. HKD is a funny currency as it's pegged to USD but economically tied to RMB. As interest rate is extremely low and will go even lower, I hope that'll eventually attract speculative money.

After today's decline both the HSI and HSCEI are up by only 6.5% from the end of 2006. Yes, it even underperformed holding yen in time deposit! Here are some stocks which I found are even trading below 2006 year-end prices. (please feel free to add to the list if you find more companies of similar caliber)

ICBC (1398) -3.7%
BofC (3988) -30.6%
BofComm (3328) -16.2%
China Life (2628) -3%
PetroChina (857) -16%
Sinopec (386) -15%
Datang (991) -10%
Huaneng (902) -33%
Mengniu (2319) -23%
Fuji (1175) -49%
Bank of EA (23) -18%
CoscoPac (1199) -30%
ND paper (2689) -52%

I don't know about you but this looks like a typical all-star team to me, and could've been a portfolio held by any given fund. But if you hold these stocks then you would've underperformed the index by a wide margin. Whether this serves a valid investment lesson is another day's topic. Today I'm more interested in finding broken jewels among the rubble, sort of like wild men finding ways to survive after a huge earthquake or nuclear disaster.

The reasons for the dismal share price performances could be that the market is now less enthusiastic about their prospect, or they have problems not identified before, or they happen to be heavily held by funds who need to liquidate positions, or a combination of the above and other factors. Therefore this is not an endorsed list but rather a to-do list.

It's a lot of work to be done in a bad mood but I think it'd be worth the effort in the end.

DISCLOSURE: I happen to hold 3328, 3988, 991, and 1199 at time of writing. This doesn't mean I prefer these holdings over the rest at all.

Thursday, March 06, 2008

Results Brief: OOIL (316)

The results surprised me in two ways.

1st, it was quite remarkable that the rising oil price did not seem to bother the operation too much. OOIL still managed to grow its profit by 29% (recurring and excluding property revaluation) last year. Gross profit was down a bit but operating margin stayed at around 9%, indicating high efficiency.

In fact, last year's profit of $4.3b was not far off from the all-time-high of $4.9b (excluding port operation) achieved in 2004. To say OOIL is well managed is an understatement.

But the negative surprise was the lack of a special dividend, which surely has upset the market including myself. So far only about half of the $17.3b proceed from selling the North America ports has been paid out, and management continues to be mute about the use of fund. I recall UBS was once hired to advise on this matter but if there was any result, it wasn't made known to the shareholders. The cashflow breakdown also confirmed my earlier belief that the shipping business can be self-financed, i.e. cashflow coming in was sufficient for capital expansion. So there's really no need to keep a large pile of cash at the head office.

Another omission was the lack of the outlook section in the results announcement. Maybe the outlook is really cloudy that the management don't want to commit to any view, or they want us to know as little as possible.

China property business had some progress but contribution won't come until 2010. NAV was $5b. Applying a 2x p/b to it and adding the valuation of Wall Street Plaza, the property business should be worth $11.5b. However, the market doesn't seem to attribute much value to OOIL's property business.

Idle cash is at least $8.5b, from disposal proceed alone, and could be as much as double.

For the fleet, I'd stick to my estimate of $24b, i.e. $3b x 8 times p/e.

The combined valuation would suggest an upside of at least 50% from today's price.

DISCLOSURE: I hold 316 at time of writing.

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