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Hi Michael. Your newsletter is a fantastic read. Thanks for continuing to share your views. You mentioned recently that you view the Hang Seng Index as one of the best value major markets. Any further views on that? Top 5 stocks in your opinion?
Thank you, Mark! Oh Hong Kong is definitely the market in Asia where it's easiest to find lower multiple stocks. Stocks with dividend yields of 7-10% are a dime a dozen. Will that change? Only time will tell.
I've written quite a bit about Hong Kong equities over the past two years. The ones that strike me as offering unusual value at this point include Cafe de Coral, Fairwood, Tai Cheung, International Housewares Retail and CNOOC. All Hong Kong-listed and most trading at mid-single digit normalized P/Es.
L'Occitane traded off after the failed takeover, I presume that merger arb investors sold the shares in a panic, as so often happens. The main business continues to do well. Google search queries for Sol de Janeiro has come off a little bit since the peak but still doing very well and they have several growth levers ahead of them. Even the main brand L'Occitane en Provence is showing signs of life, both in China and in the rest of the world. The only concern I have is unnecessary marketing expenses, suggesting weak spending discipline. But I'm personally giving management the benefit of the doubt, and will stay to see how the Sol de Janeiro story plays out.
Oh wow, that's a tricky question. Let me change the question a bit to the most undervalued Chinese stocks that I've written about in the past. Out of those, I think the answer is undoubtedly Niu Technologies (NIU US), the EV scooter maker. The stock trades at an enterprise value of about zero, despite having the best brand name of any Chinese scooter maker, in my view. They already dominate the EV scooter markets in China's top-tier cities. The products look modern and attractive. The company doesn't have any debt and plenty of cash so the risk of bankruptcy should be low. Hard to say what the company could be worth if it returns to profits and returns to growth. A growth multiple would be a Price/Sales of 2.0x, higher than the current 0.3x.
I guess the key part of the question is will this company be around in 10 years. Do you think scooters are just a fad or do you think that like many companies in China there is so much competition and no scooter company will ever make any money. So I ask my original question is there a really undervalued Chinese company that has a moat so that it will be there in 10 years time.
Yeah I think for them to be around for decades would require decent execution. This is a competitive industry. As long as Dr Li Yan remains CEO, I personally think they will do fine. It's worth noting in the EV scooter segment, there's surprisingly not much competition. Very different from what you see in the EV passenger vehicle segment.
There are plenty of companies that trade cheaply in relation to how I value them. Finding a stock with 2x or 3x upside to conservative estimates of intrinsic value is easy. Beijing Capital International Airport comes to mind - it will certainly still be around in 2034 and remains the only airport in the northern part of Beijing. Tai Cheung should also qualify, since Hong Kong land remains scarce and its assets including Sheraton Hotel cannot be easily replicated.
Hi Michael. Thanks for sharing such wonderful insights. Why do you think Vitasoy (345 HK) has gone down so much despite the strong brand names of its products? Is there still some earnings power left?
Thank you, Russell! Vitasoy used to trade at very high multiples, I think it was one of the darlings of Fundsmith's Emerging Market Trust. The peak in Vitasoy came in mid-2019, just when the anti-government protests in Hong Kong erupted. I seem to remember the backers of Vitasoy supporting the protesters. I think mainland buyers of Vitasoy started boycotting the brand already at that time, calling the company 港毒 (a word play referring to Hong Kong separatists). Then in mid-2010, a Vitasoy employee stabbed a Hong Kong policeman and since then I've massive amounts of negative publicity and negative comments on Weibo and elsewhere about Vitasoy's products. Whether this boycott was driven from the top-down is unclear, but in any case I think their sales in China has been decimated. Vitasoy is a great brand but I doubt they'll ever recover in their mainland Chinese business.
Congrats Michael on being the gold standard of how a substack stock portfolio should be done! What moaty/slow compounding industrial or specialized product companies do you see in China/Japan? Something like Shimano. Master of some boring niche but improving every year (eg. Atlas Copco for air compressors).
Thank you, Thomas! Great question. I tend to focus on consumer companies but let me give you a few suggestions of companies that dominate their niches: Nabtesco, Airtac, Nippon Seiki, King Slide, Koito Manufacturing, Sysmex, E Ink, Haitian. Just a few that come to mind.
Oh the discounts have definitely widened in the past few years... I'm seeing high discounts almost across the board. CK Hutchison, Jardine Matheson, Swire Pacific, etc. The list goes on. In my valuations, I tend to use discounts of about 25% to account for corporate level expenses and in some cases, conflicts of interest.
I wrote a bit about First Pacific in November. Very low valuation multiples and a decent dividend yield. Indomie is an amazing brand that's even started to grow in Australia. Investors are concerned about the high debt levels and the currency mismatch. There have also been some related party transactions with Salim's and MVP's companies and their salaries are on the high side. In CLSA's calculations, they get to an NAV/share of HK$6.3 and that number seems reasonable to me. https://www.asiancenturystocks.com/i/139068387/first-pacific-hk
Hi Michael, no burning questions this time. I would like to take the opportunity to suggest a few deep-dive candidates. These came on my radar as good companies at a reasonably price (not dirt cheap) and also seem to be the type of companies that you write about.
Exotic Food PCL
Mega Lifesciences PCL
PT Industri Jamu dan Farmasi Sido Muncul Tbk
PT Tempo Scan Pacific Tbk
Fraser and Neave Ltd (The Singaporean holding ticker F99, the Malaysian listed subsidiary might also be interesting, but looks expensive right now)
DKSH Holdings Malaysia Bhd
If anybody is aware of any write-ups by other authors about these or has some quick thoughts about these, I would also welcome those. Thanks !
Fraser & Neave Ltd was once a huge conglomerate and a crown jewel of the SGX. In 2012, it became subject of a take-over battle, which was won by Thaibev and other companies controlled by Thai billionaire Charoen Sirivadhanabhakdi. In the years following, the conglomerate was carved up along the lines of the main activities.
The remaining activities are focused on soft-drinks, but there is still a publishing division left over from the conglomerate days and a beer brewery in Myanmar. Maybe this makes it weird to many investors? It looks like the Singaporean investing community gave up on F&N in disappointment by now. You rarely see F&N discussed on fora, blogs or business media. Oddly enough, the share price seems to decrease roughly in line with dividend payouts. Maybe it is considered a liquidation play in some way?
When you look at the Annual Report 2023, you note that the largest asset on F&N balance sheet is a 20.4% stake in Vinamilk. The milk market in Vietnam is perhaps difficult to assess. Even more so, the relationship of Charoen Sirivadhanabhakdi and his son Thapana with the Vietnamese state, who is the largest shareholder in Vinamilk.
Maybe you would get further with this and yield enough insights for a deep-dive report. I remember you already looked at the Sirivadhanabhakdi universe for the Thaibev deep-dive.
Thanks Jake. It does sound like investors have lost faith in Thapana... the question is whether we have a variant view on his ability to grow earnings? Let me look into it.
On Fairfax India, is there any chance the management fee will be reduced in the future. Does the excessive management fee charged by Fairfax India have any cumulative provision, high water mark, or is it just a dead loss to the fund?
I don't think so, and clearly the management fee introduces a conflict of interest. If Fairfax ceases to be able to find good investments in India, will Fairfax India then be liquidated?
From my understanding, the fee is calculated annually at 20% over a hurdle of 5% with a high water mark provision. It's paid out either in cash or in shares, which also introduces a conflict of interest given that a high discount to NAV would then lead to higher dilution.
To Fairfax's credit, though, they chose to receive the last performance fee in cash rather than shares. Perhaps as a response to investor concerns. I also think the valuation marks are reasonable.
Hi Michael, thanks for the great content. How would you invest in something like the PIMCO 25+ Year Zero Coupon US Treasury Index-ETF from the EU? Any alternatives to what this ETF provides?
I personally have three brokerage accounts, one disclosed here for Asian equities, one in Singapore to buy shares in my CPF (pension) account and one with Interactive Brokers in the United States. Most European brokers should offer access to US stocks as well, so I'd be surprised if you aren't able to buy ZROZ. Another alternative is the
iShares 20 Plus Year Treasury Bond ETF (TLT) which also owns US Government bonds but has a shorter average duration.
1) The Asian portfolio did +16.5% last year in US Dollar terms
2) Nope, I find that shorting messes with my head and I perform worse on the long side as well. The Asian portfolio is in a cash account with zero leverage. Hard to find cheap borrow in Asia anyway.
3) Tricky to start a fund where I'm based and I would have to shut down the Substack, which I don't to do (I love writing). But if I ever move somewhere else and decide to start a fund, I'll let you know!
Hi Michael, great newsletter as usual. What is your view on the Japanese stock market? Despite the corporate governance reforms, isn't the stock market driven by the cheap yen as well and low interest rates? Will growth (and value) hold if rates increase in Japan and drop in the US (hence the rest of the world)?
Hi Samuel, yes I 100% agree. Japan's largest companies are mostly exporters and if the currency ever were to appreciate, then their profits would decline. I personally believe that the biggest driver of the USD-JPY exchange rate is the US-Japan interest rate differential, and if we do get a US rate cut in March or May, the yen will slowly start to appreciate. I'm not sure that bodes well for the broader market. Structural reforms such as the TSE's push to increase return on equity is positive but let's remember that change in Japan takes time. I'd personally maintain discipline when it comes price paid. I don't want to be swept up in a bull market mentality that could eventually reverse on a dime.
Hey Michael! Thank you for your content! I have a question regarding Sierra Rutile? And the recent drop in share price by more than 50%? Does that mean that the company didn’t get the needed approval from the government?
The Sierra Leone government is now requiring significant payment for Sierra Rutile to continue its Area 1 operations. And it looks like several concessions will lapse, causing withholding taxes to go from 0.5% to 5.5%, fuel duty from 1.0% to 12.0%, royalty on sales from 0.5% to 4.0% and the corporate tax rate from 0.5% to 3.5%. According to Sierra Rutile, continuing operations at Area 1 will no longer be economic. The next step might be some arbitration procedure to reach an agreement. I'm surprised the Sierra Leone government is so aggressive given that they will need Sierra Rutile's expertise to develop Sembehun. I suppose the market is now pricing in future cash burn and uncertainty.
Well I think they applied for bankruptcy protection in a Hong Kong court - not mainland China? Most assets are on the mainland. In any case, the mainland bankruptcy process will probably lead to a restructuring whereby the assets are taken over by state-owned developers. And Evergrande is not the sole example of a private developer going bankrupt - the bonds of China's private property developers signal distress almost across the board. I expect China's state-owned developers to come out stronger from this crisis than they were before.
Yeah, filed in HK and that poses some issues as it’s not necessarily recognized by certain regions. Believe most of the assets have already been seized or sold by creditors, but additional selling could further damage asset prices. The hit to the banks is what I’m most concerned about. Doubt it has the potential to do what happened to Japan, but can’t it be good. Property meltdown taken down has already taken out a few banks so I’m worried that this could have a material impact on future lending - development and otherwise. PBOC doesn’t seem to want to do a bailout either.
China's state banks enjoy full support of the PBOC. Even if they were to become technically insolvent, that doesn't mean that they'll run the risk of going under themselves. Any issues can easily be solved by further borrowing through the discount window. I personally believe that onshore creditors will be made whole while it is the foreign creditors that take the majority of the losses. I think that's what ended up happening when GITIC went bankrupt in the late 1990s. Wang Qishan was in charge of dealing with that bankruptcy and he is in charge today as well.
I'd probably buy shares in the Philippines. Singapore and the Philippines are the two countries in Asia that are trying to stay neutral geopolitically, and that gives me comfort that I won't suffer from capital controls. Philippine shares are inexpensive and some companies very well run. I also think there's a good chance the Philippines will be entering into a new credit cycle, with FDI laws liberalized and a large number of new infrastructure projects just approved. Demographics are excellent too. I'd just be careful with some of the businessmen as in the Philippines, corruption remains rife.
I've never worked as an analyst or portfolio manager in Sweden. I left the country almost 20 years ago and have covered emerging markets during most of my career. I also don't live in Sweden so I have no edge in terms of access or information compared to people who are actually in the country. A Bloomberg terminal costs around US$24,000 per year.
Hi Daniel, no I have never spent any time on the company. I'd definitely exercise caution here as Honjiu Fruit's cash flows are weak with high accounts receivables. I remember what happened to Chaoda Modern Agriculture in 2011 - this industry is rife with frauds.
Hey KW - I don't have plans to return to Sweden as I have family here in Singapore. I love this part of the world. I'm totally biased but I love the west coast... Varberg, Halmstad, these cities... that's where I spent my summers growing up and you really can't beat them during that time of the year.
Among Swedish stocks, I like Spotify, Bilia and Bredband 2. Reasonable inexpensive all of them and well-run.
Japan, clearly! The yen is so cheap... I saw your post today, and I couldn't agree more. I'd probably look outside the major cities like Tokyo but somewhere with still-positive population like Fukuoka.
I'd also consider Phuket, great lifestyle and will be the destination for many expat retirees who are finding Singapore and Hong Kong too expensive to stay in longer-term.
Hello Michael, I'm a new reader of your insightful and appropriately named Substack missives. Your knowledgeable approach comes at the right time as the Asia, and particularly India opens up to investment opportunities. Could you comment on ICICI Bank which is available as an ADR on the US exchanges?
I've never spent much time on ICICI Bank, but it strikes me as one of the better run banks in India. According to Value Punks, ICICI's technology, risk culture and service has improved over the past 5 years. I can definitely see why investors might be interested in the stock.
A Singapore stock that I'd be willing to hold for the medium term - and that I also personally own - is Delfi, the Indonesian chocolate manufacturer. They totally dominate the mass-market segment and I'd imagine them to grow along with the broader chocolate market. There's also the potential for the company to be taken over by multinational - it's one of very few emerging market chocolate brands that remains independent. Cocoa prices are high, but I'd bet they'll come down in the next year. The forward P/E is 9.4x.
Hi Michael, thanks for the previous posts. What is your view on SITC International? It's business seems to be focused in East Asia and more recently, SEA. Is their business strategy of having smaller ships but more frequent trips stand a chance against other mega size liner?
Well, without knowing too much about SITC I presume its profitability is a function of container shipping rates? Which are benefitting from the Red Sea issues short-term, though probably heading lower over the medium-term. I understand that SITC only does short-haul routes in Asia, but container ships are transferable making the global supply & demand for container ships an important question even for SITC.
thank you very much for the insightful input. I have scrolled through the other comments and noticed that you have a wide array of knowledge on companies in different countries in Asia, may I know how do initiate your research? Personally, I would not have noticed such companies in other countries as they are rarely reported.
This is my full-time job, I think that's why. I also, I spent 15 years in Asia mostly working on the buy-side. I suppose knowledge accumulates (!) That said, I'm better with HK, Southeast Asian markets than say Korea or Japan.
Yes, I think Pakuwon has a great niche, great products and great growth potential. Their malls are excellent, in my view. And mixed-developments are the future as living next to a mall and your office is as convenient as convenient can be.
I know that condo sales has been a bit weak in this cycle, and I honestly don't understand why. Coal prices have now come down, and I suppose that's weighing on the market, too.
Btw, note that Pakuwon's parent has ownership of some assets too, including prime land at their Surabaya township, so the corporate structure isn't perfect.
But among Indonesia's larger developers, Pakuwon really stands out in my view. It's priced as a property developer, even though the majority of value comes from its shopping mall operation.
Hi Gekko - I don't know much about Sim Leisure but I'm definitely keen to learn more. The reviews for Escape Petaling Jaya are amazing. Trailing P/E of 13.9x.
It's a very unknown company, no analyst covering it, i think I'm the only freak in the fintwit that follows the company. Big growth perspectives with new openings in the South east of Asia, let's see how it goes with the release of 2023 earnings soon. I invite you to have a look to the thesis I shared last year in my Substack: https://open.substack.com/pub/gekkocapital/p/sim-leisure-group?r=2719ds&utm_campaign=post&utm_medium=web
Any thoughts on GDS Holdings? Debt is the obvious risk, but I like their international business which has exposure to the offshore growth ambitions of Chinese cloud providers. Currently raising external equity for the international business, which should shed light on value.
Oh that's a tricky one... it has quite a bit of debt, so my first question would be where the bonds are trading. Are they pricing in a default (say <30 cents on the dollar)? If so, there would be a nonzero probability that the equity gets wiped out.
Hi Michael. Your newsletter is a fantastic read. Thanks for continuing to share your views. You mentioned recently that you view the Hang Seng Index as one of the best value major markets. Any further views on that? Top 5 stocks in your opinion?
Also any further views on L’occitane?
Thank you, Mark! Oh Hong Kong is definitely the market in Asia where it's easiest to find lower multiple stocks. Stocks with dividend yields of 7-10% are a dime a dozen. Will that change? Only time will tell.
I've written quite a bit about Hong Kong equities over the past two years. The ones that strike me as offering unusual value at this point include Cafe de Coral, Fairwood, Tai Cheung, International Housewares Retail and CNOOC. All Hong Kong-listed and most trading at mid-single digit normalized P/Es.
L'Occitane traded off after the failed takeover, I presume that merger arb investors sold the shares in a panic, as so often happens. The main business continues to do well. Google search queries for Sol de Janeiro has come off a little bit since the peak but still doing very well and they have several growth levers ahead of them. Even the main brand L'Occitane en Provence is showing signs of life, both in China and in the rest of the world. The only concern I have is unnecessary marketing expenses, suggesting weak spending discipline. But I'm personally giving management the benefit of the doubt, and will stay to see how the Sol de Janeiro story plays out.
Thanks for extra insight Michael!
Based on your research what is the most undervalued Chinese stock on the market at this time, which will still be around in 10 years.
Oh wow, that's a tricky question. Let me change the question a bit to the most undervalued Chinese stocks that I've written about in the past. Out of those, I think the answer is undoubtedly Niu Technologies (NIU US), the EV scooter maker. The stock trades at an enterprise value of about zero, despite having the best brand name of any Chinese scooter maker, in my view. They already dominate the EV scooter markets in China's top-tier cities. The products look modern and attractive. The company doesn't have any debt and plenty of cash so the risk of bankruptcy should be low. Hard to say what the company could be worth if it returns to profits and returns to growth. A growth multiple would be a Price/Sales of 2.0x, higher than the current 0.3x.
https://www.asiancenturystocks.com/p/deep-dive-2022-21-niu-technologies
I guess the key part of the question is will this company be around in 10 years. Do you think scooters are just a fad or do you think that like many companies in China there is so much competition and no scooter company will ever make any money. So I ask my original question is there a really undervalued Chinese company that has a moat so that it will be there in 10 years time.
Yeah I think for them to be around for decades would require decent execution. This is a competitive industry. As long as Dr Li Yan remains CEO, I personally think they will do fine. It's worth noting in the EV scooter segment, there's surprisingly not much competition. Very different from what you see in the EV passenger vehicle segment.
There are plenty of companies that trade cheaply in relation to how I value them. Finding a stock with 2x or 3x upside to conservative estimates of intrinsic value is easy. Beijing Capital International Airport comes to mind - it will certainly still be around in 2034 and remains the only airport in the northern part of Beijing. Tai Cheung should also qualify, since Hong Kong land remains scarce and its assets including Sheraton Hotel cannot be easily replicated.
Thank you, very helpful comments.
Thanks for your questions!
Hi Michael. Thanks for sharing such wonderful insights. Why do you think Vitasoy (345 HK) has gone down so much despite the strong brand names of its products? Is there still some earnings power left?
Thank you, Russell! Vitasoy used to trade at very high multiples, I think it was one of the darlings of Fundsmith's Emerging Market Trust. The peak in Vitasoy came in mid-2019, just when the anti-government protests in Hong Kong erupted. I seem to remember the backers of Vitasoy supporting the protesters. I think mainland buyers of Vitasoy started boycotting the brand already at that time, calling the company 港毒 (a word play referring to Hong Kong separatists). Then in mid-2010, a Vitasoy employee stabbed a Hong Kong policeman and since then I've massive amounts of negative publicity and negative comments on Weibo and elsewhere about Vitasoy's products. Whether this boycott was driven from the top-down is unclear, but in any case I think their sales in China has been decimated. Vitasoy is a great brand but I doubt they'll ever recover in their mainland Chinese business.
Congrats Michael on being the gold standard of how a substack stock portfolio should be done! What moaty/slow compounding industrial or specialized product companies do you see in China/Japan? Something like Shimano. Master of some boring niche but improving every year (eg. Atlas Copco for air compressors).
Thank you, Thomas! Great question. I tend to focus on consumer companies but let me give you a few suggestions of companies that dominate their niches: Nabtesco, Airtac, Nippon Seiki, King Slide, Koito Manufacturing, Sysmex, E Ink, Haitian. Just a few that come to mind.
What's your view on the discounts in Asian conglomerates & HoldCos? Any thoughts on 142 HK?
Oh the discounts have definitely widened in the past few years... I'm seeing high discounts almost across the board. CK Hutchison, Jardine Matheson, Swire Pacific, etc. The list goes on. In my valuations, I tend to use discounts of about 25% to account for corporate level expenses and in some cases, conflicts of interest.
I wrote a bit about First Pacific in November. Very low valuation multiples and a decent dividend yield. Indomie is an amazing brand that's even started to grow in Australia. Investors are concerned about the high debt levels and the currency mismatch. There have also been some related party transactions with Salim's and MVP's companies and their salaries are on the high side. In CLSA's calculations, they get to an NAV/share of HK$6.3 and that number seems reasonable to me. https://www.asiancenturystocks.com/i/139068387/first-pacific-hk
Hi Michael, no burning questions this time. I would like to take the opportunity to suggest a few deep-dive candidates. These came on my radar as good companies at a reasonably price (not dirt cheap) and also seem to be the type of companies that you write about.
Exotic Food PCL
Mega Lifesciences PCL
PT Industri Jamu dan Farmasi Sido Muncul Tbk
PT Tempo Scan Pacific Tbk
Fraser and Neave Ltd (The Singaporean holding ticker F99, the Malaysian listed subsidiary might also be interesting, but looks expensive right now)
DKSH Holdings Malaysia Bhd
If anybody is aware of any write-ups by other authors about these or has some quick thoughts about these, I would also welcome those. Thanks !
Thanks for these suggestions - super-interesting. Fascinating to see Fraser & Neave trade at these levels...
I think Smartkarma has discussed Sido Muncul in the past, and I've met one or two funds who own it. Let me ask around a bit.
Fraser & Neave Ltd was once a huge conglomerate and a crown jewel of the SGX. In 2012, it became subject of a take-over battle, which was won by Thaibev and other companies controlled by Thai billionaire Charoen Sirivadhanabhakdi. In the years following, the conglomerate was carved up along the lines of the main activities.
The remaining activities are focused on soft-drinks, but there is still a publishing division left over from the conglomerate days and a beer brewery in Myanmar. Maybe this makes it weird to many investors? It looks like the Singaporean investing community gave up on F&N in disappointment by now. You rarely see F&N discussed on fora, blogs or business media. Oddly enough, the share price seems to decrease roughly in line with dividend payouts. Maybe it is considered a liquidation play in some way?
When you look at the Annual Report 2023, you note that the largest asset on F&N balance sheet is a 20.4% stake in Vinamilk. The milk market in Vietnam is perhaps difficult to assess. Even more so, the relationship of Charoen Sirivadhanabhakdi and his son Thapana with the Vietnamese state, who is the largest shareholder in Vinamilk.
Maybe you would get further with this and yield enough insights for a deep-dive report. I remember you already looked at the Sirivadhanabhakdi universe for the Thaibev deep-dive.
Thanks Jake. It does sound like investors have lost faith in Thapana... the question is whether we have a variant view on his ability to grow earnings? Let me look into it.
Any coverage on Indian stock universe - anything you find interesting as the Indian stock market seems to be on fire?
No that's a tricky market to cover, because foreigners are typically unable to invest in the local Indian market and the majority of Indians do not invest overseas. I've only written one post about Indian equities: https://www.asiancenturystocks.com/p/hidden-champions-among-indias-adrsgdrs
On Fairfax India, is there any chance the management fee will be reduced in the future. Does the excessive management fee charged by Fairfax India have any cumulative provision, high water mark, or is it just a dead loss to the fund?
I don't think so, and clearly the management fee introduces a conflict of interest. If Fairfax ceases to be able to find good investments in India, will Fairfax India then be liquidated?
From my understanding, the fee is calculated annually at 20% over a hurdle of 5% with a high water mark provision. It's paid out either in cash or in shares, which also introduces a conflict of interest given that a high discount to NAV would then lead to higher dilution.
To Fairfax's credit, though, they chose to receive the last performance fee in cash rather than shares. Perhaps as a response to investor concerns. I also think the valuation marks are reasonable.
Hi Michael, thanks for the great content. How would you invest in something like the PIMCO 25+ Year Zero Coupon US Treasury Index-ETF from the EU? Any alternatives to what this ETF provides?
I personally have three brokerage accounts, one disclosed here for Asian equities, one in Singapore to buy shares in my CPF (pension) account and one with Interactive Brokers in the United States. Most European brokers should offer access to US stocks as well, so I'd be surprised if you aren't able to buy ZROZ. Another alternative is the
iShares 20 Plus Year Treasury Bond ETF (TLT) which also owns US Government bonds but has a shorter average duration.
1) How's your portfolio done over the last year or so?
2) Are you short anything?
3) When will you start a fund so I can place some money with you?
Hey Edmund!
1) The Asian portfolio did +16.5% last year in US Dollar terms
2) Nope, I find that shorting messes with my head and I perform worse on the long side as well. The Asian portfolio is in a cash account with zero leverage. Hard to find cheap borrow in Asia anyway.
3) Tricky to start a fund where I'm based and I would have to shut down the Substack, which I don't to do (I love writing). But if I ever move somewhere else and decide to start a fund, I'll let you know!
Thanks Mike :) my love to you and yours
Hi Michael, great newsletter as usual. What is your view on the Japanese stock market? Despite the corporate governance reforms, isn't the stock market driven by the cheap yen as well and low interest rates? Will growth (and value) hold if rates increase in Japan and drop in the US (hence the rest of the world)?
Give us more perspective and details if you have.
Thank you !
Hi Samuel, yes I 100% agree. Japan's largest companies are mostly exporters and if the currency ever were to appreciate, then their profits would decline. I personally believe that the biggest driver of the USD-JPY exchange rate is the US-Japan interest rate differential, and if we do get a US rate cut in March or May, the yen will slowly start to appreciate. I'm not sure that bodes well for the broader market. Structural reforms such as the TSE's push to increase return on equity is positive but let's remember that change in Japan takes time. I'd personally maintain discipline when it comes price paid. I don't want to be swept up in a bull market mentality that could eventually reverse on a dime.
Hey Michael! Thank you for your content! I have a question regarding Sierra Rutile? And the recent drop in share price by more than 50%? Does that mean that the company didn’t get the needed approval from the government?
The Sierra Leone government is now requiring significant payment for Sierra Rutile to continue its Area 1 operations. And it looks like several concessions will lapse, causing withholding taxes to go from 0.5% to 5.5%, fuel duty from 1.0% to 12.0%, royalty on sales from 0.5% to 4.0% and the corporate tax rate from 0.5% to 3.5%. According to Sierra Rutile, continuing operations at Area 1 will no longer be economic. The next step might be some arbitration procedure to reach an agreement. I'm surprised the Sierra Leone government is so aggressive given that they will need Sierra Rutile's expertise to develop Sembehun. I suppose the market is now pricing in future cash burn and uncertainty.
Any thoughts on how the liquidation of Evergrande will impact property and capital markets in China?
Well I think they applied for bankruptcy protection in a Hong Kong court - not mainland China? Most assets are on the mainland. In any case, the mainland bankruptcy process will probably lead to a restructuring whereby the assets are taken over by state-owned developers. And Evergrande is not the sole example of a private developer going bankrupt - the bonds of China's private property developers signal distress almost across the board. I expect China's state-owned developers to come out stronger from this crisis than they were before.
Yeah, filed in HK and that poses some issues as it’s not necessarily recognized by certain regions. Believe most of the assets have already been seized or sold by creditors, but additional selling could further damage asset prices. The hit to the banks is what I’m most concerned about. Doubt it has the potential to do what happened to Japan, but can’t it be good. Property meltdown taken down has already taken out a few banks so I’m worried that this could have a material impact on future lending - development and otherwise. PBOC doesn’t seem to want to do a bailout either.
China's state banks enjoy full support of the PBOC. Even if they were to become technically insolvent, that doesn't mean that they'll run the risk of going under themselves. Any issues can easily be solved by further borrowing through the discount window. I personally believe that onshore creditors will be made whole while it is the foreign creditors that take the majority of the losses. I think that's what ended up happening when GITIC went bankrupt in the late 1990s. Wang Qishan was in charge of dealing with that bankruptcy and he is in charge today as well.
Which one country's stock market (in Asia) would you be betting on if you have a time horizon of atleast 10 years and why ?
I'd probably buy shares in the Philippines. Singapore and the Philippines are the two countries in Asia that are trying to stay neutral geopolitically, and that gives me comfort that I won't suffer from capital controls. Philippine shares are inexpensive and some companies very well run. I also think there's a good chance the Philippines will be entering into a new credit cycle, with FDI laws liberalized and a large number of new infrastructure projects just approved. Demographics are excellent too. I'd just be careful with some of the businessmen as in the Philippines, corruption remains rife.
Why you don’t invest in Europe as a Swedish, for example in Vistry Group plc ??? How much does it cost Bloomberg terminal annually ???
I've never worked as an analyst or portfolio manager in Sweden. I left the country almost 20 years ago and have covered emerging markets during most of my career. I also don't live in Sweden so I have no edge in terms of access or information compared to people who are actually in the country. A Bloomberg terminal costs around US$24,000 per year.
Hello Michael
Do you have an opinion on Chongqing Honjiu Fruit (6689) ? It seems to me the stock is a buy at these depressed levels.
Thx
Hi Daniel, no I have never spent any time on the company. I'd definitely exercise caution here as Honjiu Fruit's cash flows are weak with high accounts receivables. I remember what happened to Chaoda Modern Agriculture in 2011 - this industry is rife with frauds.
Thanks
Michael any plans to one day return to Sweden and you favourite city in Sweden.
Top 3 favourite swedish stocks?
Hey KW - I don't have plans to return to Sweden as I have family here in Singapore. I love this part of the world. I'm totally biased but I love the west coast... Varberg, Halmstad, these cities... that's where I spent my summers growing up and you really can't beat them during that time of the year.
Among Swedish stocks, I like Spotify, Bilia and Bredband 2. Reasonable inexpensive all of them and well-run.
If you had to buy a property today anywhere in Asia (that you realistically could afford), where and why?
Japan, clearly! The yen is so cheap... I saw your post today, and I couldn't agree more. I'd probably look outside the major cities like Tokyo but somewhere with still-positive population like Fukuoka.
I'd also consider Phuket, great lifestyle and will be the destination for many expat retirees who are finding Singapore and Hong Kong too expensive to stay in longer-term.
Hello Michael, I'm a new reader of your insightful and appropriately named Substack missives. Your knowledgeable approach comes at the right time as the Asia, and particularly India opens up to investment opportunities. Could you comment on ICICI Bank which is available as an ADR on the US exchanges?
I've never spent much time on ICICI Bank, but it strikes me as one of the better run banks in India. According to Value Punks, ICICI's technology, risk culture and service has improved over the past 5 years. I can definitely see why investors might be interested in the stock.
As you are based in Singapore, what is 1 good stock you hold for the medium term?
A Singapore stock that I'd be willing to hold for the medium term - and that I also personally own - is Delfi, the Indonesian chocolate manufacturer. They totally dominate the mass-market segment and I'd imagine them to grow along with the broader chocolate market. There's also the potential for the company to be taken over by multinational - it's one of very few emerging market chocolate brands that remains independent. Cocoa prices are high, but I'd bet they'll come down in the next year. The forward P/E is 9.4x.
Hi Michael, thanks for the previous posts. What is your view on SITC International? It's business seems to be focused in East Asia and more recently, SEA. Is their business strategy of having smaller ships but more frequent trips stand a chance against other mega size liner?
Well, without knowing too much about SITC I presume its profitability is a function of container shipping rates? Which are benefitting from the Red Sea issues short-term, though probably heading lower over the medium-term. I understand that SITC only does short-haul routes in Asia, but container ships are transferable making the global supply & demand for container ships an important question even for SITC.
thank you very much for the insightful input. I have scrolled through the other comments and noticed that you have a wide array of knowledge on companies in different countries in Asia, may I know how do initiate your research? Personally, I would not have noticed such companies in other countries as they are rarely reported.
This is my full-time job, I think that's why. I also, I spent 15 years in Asia mostly working on the buy-side. I suppose knowledge accumulates (!) That said, I'm better with HK, Southeast Asian markets than say Korea or Japan.
I suppose that's how compounding works!
Best books on Asia?
These! https://www.asiancenturystocks.com/p/top-20-book-recommendations
I think you've said good things about Pakuwon Jati in the past. Do you still like it or have any thoughts on it. Thanks!
Yes, I think Pakuwon has a great niche, great products and great growth potential. Their malls are excellent, in my view. And mixed-developments are the future as living next to a mall and your office is as convenient as convenient can be.
I know that condo sales has been a bit weak in this cycle, and I honestly don't understand why. Coal prices have now come down, and I suppose that's weighing on the market, too.
Btw, note that Pakuwon's parent has ownership of some assets too, including prime land at their Surabaya township, so the corporate structure isn't perfect.
But among Indonesia's larger developers, Pakuwon really stands out in my view. It's priced as a property developer, even though the majority of value comes from its shopping mall operation.
Hello Sir! Any thoughts on Sim Leisure? Malaysian theme park developer and operator listed in Singapore. Thanks!
Hi Gekko - I don't know much about Sim Leisure but I'm definitely keen to learn more. The reviews for Escape Petaling Jaya are amazing. Trailing P/E of 13.9x.
It's a very unknown company, no analyst covering it, i think I'm the only freak in the fintwit that follows the company. Big growth perspectives with new openings in the South east of Asia, let's see how it goes with the release of 2023 earnings soon. I invite you to have a look to the thesis I shared last year in my Substack: https://open.substack.com/pub/gekkocapital/p/sim-leisure-group?r=2719ds&utm_campaign=post&utm_medium=web
Any thoughts on GDS Holdings? Debt is the obvious risk, but I like their international business which has exposure to the offshore growth ambitions of Chinese cloud providers. Currently raising external equity for the international business, which should shed light on value.
Oh that's a tricky one... it has quite a bit of debt, so my first question would be where the bonds are trading. Are they pricing in a default (say <30 cents on the dollar)? If so, there would be a nonzero probability that the equity gets wiped out.
Thanks, appreciate the response.