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• There is a book called The Outsiders by Will Thorndike. Who are the outsider CEO's of Asia?
Great question. The ones that come to mind are CK Lau of Lion Rock, Allan Wong of VTech, Prem Watsa of Fairfax Financial and Fairfax India, Kuan Kam Hon of Hartalega, Suk Cha of Hugel, Vicha Poolvaraluk or Major Cineplex and maybe Hiroshi Koshidaka of Koshidaka.
• What would your advice be for an entrepreneur in Asian markets or a foreign entrepreneur looking to do business there?
I think choosing the right jurisdiction is key. I've seen foreigners become rich by starting companies in Singapore, Hong Kong and Thailand, but not as many in say Indonesia or Vietnam. I suspect that's because in the former markets, foreigners are on equal playing field when it comes to getting licenses and access to bank financing, though it could also be due to high base rate, i.e. that there are more foreigners in those jurisdictions.
• What books on accounting and due diligence do you recommend? How do you kill an investment thesis quickly?
Tan & Robinson’s book Asian Financial Statement Analysis is pretty good https://www.asiancenturystocks.com/p/fraud-in-asia. The fastest way to kill an investment thesis is to look at the share count, dilution is rarely positive in an Asian context in my experience. Second, you can look at the return on equity. If it's consistently low and the company is selling a commodity product, then I'd personally move on there and then.
Absolutely. But it will require the USD/JPY interest rate differential to narrow. Perhaps significantly narrow. If the US enters into a recession and the Fed responds by cutting rates, we'll probably see a much stronger yen. Otherwise, there's no real reason for the yen to be weak. The current account balance is positive, there's not much external debt, money supply growth is low.
Hi JA! Broadly bullish given the recovery in room rates and occupancy. Fundamentals are trending in the right direction. I'm cautious with Robert Kuok companies including Shangri La - I believe they are plagued by related party transactions and not working on behalf of minority shareholders. I'm personally interested in Hongkong & Shanghai Hotels and Tai Cheung. Another good write-up is Koneko Research's post on Far East Consortium https://konekoresearch.substack.com/p/far-east-consortiums-international
This is a great idea, and I love hearing your raw, unedited answers to all our questions! I got one for ya! If you had a million dollors and you had to put them into one Asian index, which one would you choose?
Near-term, I'd choose an index or a fund with exposure to the Philippines since they just finalized a decrease in the share transaction tax from 0.6% to 0.1%. I think this is going to spark higher transaction volumes. It also helps that you can now trade individual stocks via smartphone apps like GCash. It helps that Philippine stocks are cheap.
Longer-term, I'd invest in an Australian index, as Australian equities provided the highest yearly stock returns between the period 1900 to 2020. I think the explanation is strong protections for minority investors on top of innovation https://mindfullyinvesting.com/historical-returns-of-global-stocks/
Hi Michael! Thank you very much for your insights! It’s truly an amazing read. I just wanted to ask your thoughts on Multi Bintang. The stock has been going down for the last year for no apparent reason. Why is that? What are your thoughts on the company and Indonesia in general?
Thanks! Yes, the stock has been surprisingly weak. The company has recovered nicely from COVID-19, yet the stock languishes at multi-year lows. It's not clear what's caused this selling. But a few theories are 1) it's thinly traded with a tiny free float, so a single seller can have a large impact on the price 2) investors might be concerned about competition from craft brewers, seems like it's easier to get a license these days and several of them have listed on IDX including Hatten Bali and Cap Tikus's parent company 3) caution about new president Prabowo Subianto and the likelihood that we're going to a see a full alcohol ban 4) a weak Indonesian consumer due to falling coal and palm oil prices combined with high interest rates
But neither of these theories hold up to scrutiny, in my view. The craft brewers remain tiny. I don't think Prabowo Subianto supports an alcohol ban. So I am puzzled, too. Perhaps the answer is simply that the consumer is hurting. Multi Bintang is not the only stock that's done poorly. Just look at Astra International and Unilever Indonesia. The MSCI Indonesia / EM ratio is close to its COVID lows. So I remain a shareholder in Multi Bintang.
Yes, a few weeks ago the CSRC submitted a plan to waive dividend taxes on Hong Kong stocks for Mainland Chinese buying them via the Stock Connect program. It's apparently going to be implemented later this year. And given the strong performance of Hong Kong dividend payers, the word must have got out as early as late last year. https://www.thestandard.com.hk/section-news/section/2/262650/China-may-waive-dividend-tax-on-Connect
I don't provide investment recommendations. But in terms of earnings, I predict spot cocoa prices to stay strong for the rest of the year while futures will start to decline with colder weather in the second half of the year. But the effect on Delfi will be longer-lasting since they hedge 12-18 months forward and continue to do so. It looks like they will adjust end-user prices, hurting them on the top-line rather than the margins, but in any case, current high cocoa prices are a headwind. I think it will take until late 2025 or early 2026 for the headwind to entirely subside.
I think it's going to be acquired by KKR and TPG, but exactly at what price is unclear. If you ask me, I'd consider the news to be positive, because the stock continues to be undervalued compared to its peers.
I think your thesis is that they can double listing fees, and earn EBITDA margins of 30%. Do we have evidence the market can support the doubling of fees? Can agents still be profitable themselves having to pay 2x? And there won't be loss of share to 99.co?
The key data is on slide 40 in the PowerPoint deck. As for the TAM, my guess is as good as yours, but at least Rightmove charges twice as much in listing fees vs the average home price, and depth revenue also has significant upside vs REA. I don't think agents have much choice, the agent I spoke to before writing the report said that 99.co wasn't even an option because all traffic came from PropertyGuru.
Hi there. After you recent trip to HK and your inclusion of some HK and Chinese stocks in your portfolio. Do you think the political risk of holding HK equity has risen over the past few years and how to rationalise political risk when considering mainland based companies? Thanks
Difficult question. A few of the risks include Hong Kong losing its status as a free trading hub, or Chinese being cut off from the SWIFT system. I think the only way to deal with such risks is to demand a higher return on particular investments. IMAX China is a short-term bet with, in my view, a high potential IRR. And Best Mart 360 is so cheap that I definitely felt the risk was worth taking.
A potential invasion of Taiwan is grabbing the headlines, but if you look at how the communist party actually operates in countries like Cambodia and Myanmar, it's clear that they seem to favor a divide-and-conquer approach to gaining influence overseas. A bit like how Iran is using Hezbollah to gain influence in Lebanon. I think the risk of an amphibious invasion of Taiwan is minuscule. The risk is far higher that the communists will infiltrate the Taiwanese political system from the inside through control of the legislative yuan. There could also be a multi-week blockade, which would cause global supply chain disruptions and certainly cause Hong Kong equities to sell off. But given the negativity, some of that risk is already priced-in.
A different manager posted the yen as undervalued by 40-60% compared to expected value. Identifying Japanese companies with high domestic exposure as particularly desirable if/when there is an upward correction in the yen for dollar based investors. Do you foresee a correction in the yen to the benefit of dollar based investors?
Yeah, I think that's correct. I'm also looking for companies earning their revenues in yen, service companies and such. In my mind, the only reason why the yen is this cheap is because US Dollar interest rates are 5 percentage point higher, leading to an accumulation of carry trades. As long as this current interest rate differential exists, new carry trades will be entered into, pushing down the yen. But if and when Fed lowers rates, I think the unwinding of those carry trades can be rapid.
There was a similar scenario in 2006-2008, when the yen ultimately strengthened. I think the yen will be a flight to safety currency in the next global recession, if we ever have one. It seems like US employment is heading in the wrong direction, so my guess is that Fed will start lowering rates sooner rather than later.
Hello Michael, do you have any insight at all into grocery retailing in the Phillipines? I have found a stock $PGOLD that seems to trade at a very low multiple. With it being a retailer, I'm mostly uninterested and think the valuation is relatively justified. But I'm wondering if there is some case for investment in these types of competitive, necessary industries (for which some version of them must exist to maintain a middle class)?
Hi Layne. Yes, Puregold trades at an incredible multiple. Lucio Co has somewhat of a troubled past, but he's moved on and his retail business has become widely successful. I love the S&R concept. What I don't like is the fact that they own all their properties, and I think that's probably why the return on capital is around 10%. Another question is the extent to which Puregold serves sari-sari stores, and whether the loss of such customers as the Philippines moves towards modern retail might lead to a negative consequence for Puregold itself. That's just a question mark, and in fact Puregold's numbers have been decent: slow but steady growth. I don't see how a company like this should trade at a P/E ratio of 8x, especially not when S&R has this incredible potential to grow.
If you ask me, I'm perfectly happy to invest in competitive industries if there's room for differentiation. In airlines, differentiation is difficult but possible (Ryanair). In other industries, like retail, there's greater scope for differentiation and there are many success cases including CostCo and Best Mart 360.
Good morning Michael. In your portfolio review May 2024, you stated that you are hesitant to accept the rollover shares instead of cash related to the L'Occitane take-out bid. I was wondering why. Do you avoid non-listed holdings in general? Or do you have reservations in this specific case?
Yeah we don't know anything about the rollover shares so far. But yes, I'm concerned about liquidity. I feel like there are plenty of potential double-baggers in public markets so why complicate things. If there's any color on the plans of a US listing, and how soon such a listing will come then perhaps I'll consider it. How about yourself, what's your plan with regards to L'Occitane?
I already sold off about half of my holding and now waiting for the composite document as well as the annual report to have more information. I also hesitate to hold a non-listed company for an unknown period of time where you are at the mercy of the main shareholder to be treated fairly.
In addition, I am wary that the whole take-out operation might fail to reach the minimal amount of offers. The non-insider shares, besides the funds that already committed to the take-out offer, are mostly held by HK and CN brokers for retail investors. I don't know how to estimate whether enough of these private investors will commit to the offer.
Finally, the mind of key person Geiger has proven to be somewhat fickle in the past. In the case of lacking interest in the bid, he may decide to call it a day instead of raising the bid price a bit or polishing up the rollover share scheme.
Questions from a person who replied to my email:
• There is a book called The Outsiders by Will Thorndike. Who are the outsider CEO's of Asia?
Great question. The ones that come to mind are CK Lau of Lion Rock, Allan Wong of VTech, Prem Watsa of Fairfax Financial and Fairfax India, Kuan Kam Hon of Hartalega, Suk Cha of Hugel, Vicha Poolvaraluk or Major Cineplex and maybe Hiroshi Koshidaka of Koshidaka.
• What would your advice be for an entrepreneur in Asian markets or a foreign entrepreneur looking to do business there?
I think choosing the right jurisdiction is key. I've seen foreigners become rich by starting companies in Singapore, Hong Kong and Thailand, but not as many in say Indonesia or Vietnam. I suspect that's because in the former markets, foreigners are on equal playing field when it comes to getting licenses and access to bank financing, though it could also be due to high base rate, i.e. that there are more foreigners in those jurisdictions.
• What books on accounting and due diligence do you recommend? How do you kill an investment thesis quickly?
Tan & Robinson’s book Asian Financial Statement Analysis is pretty good https://www.asiancenturystocks.com/p/fraud-in-asia. The fastest way to kill an investment thesis is to look at the share count, dilution is rarely positive in an Asian context in my experience. Second, you can look at the return on equity. If it's consistently low and the company is selling a commodity product, then I'd personally move on there and then.
what is your favorite color?
Green. Interpret that as you wish 🫡
Hi Michael, when do you think the Japanese Yen will increase vs the USD ? Is this even a scenario? Can the Japan economy survive a much stronger Yen?
Absolutely. But it will require the USD/JPY interest rate differential to narrow. Perhaps significantly narrow. If the US enters into a recession and the Fed responds by cutting rates, we'll probably see a much stronger yen. Otherwise, there's no real reason for the yen to be weak. The current account balance is positive, there's not much external debt, money supply growth is low.
Hi Michael. Do you have any thoughts of hotel companies listed in hkex? For example, Shangri la (0069.hk)?
Hi JA! Broadly bullish given the recovery in room rates and occupancy. Fundamentals are trending in the right direction. I'm cautious with Robert Kuok companies including Shangri La - I believe they are plagued by related party transactions and not working on behalf of minority shareholders. I'm personally interested in Hongkong & Shanghai Hotels and Tai Cheung. Another good write-up is Koneko Research's post on Far East Consortium https://konekoresearch.substack.com/p/far-east-consortiums-international
This is a great idea, and I love hearing your raw, unedited answers to all our questions! I got one for ya! If you had a million dollors and you had to put them into one Asian index, which one would you choose?
Near-term, I'd choose an index or a fund with exposure to the Philippines since they just finalized a decrease in the share transaction tax from 0.6% to 0.1%. I think this is going to spark higher transaction volumes. It also helps that you can now trade individual stocks via smartphone apps like GCash. It helps that Philippine stocks are cheap.
Longer-term, I'd invest in an Australian index, as Australian equities provided the highest yearly stock returns between the period 1900 to 2020. I think the explanation is strong protections for minority investors on top of innovation https://mindfullyinvesting.com/historical-returns-of-global-stocks/
Hi Michael! Thank you very much for your insights! It’s truly an amazing read. I just wanted to ask your thoughts on Multi Bintang. The stock has been going down for the last year for no apparent reason. Why is that? What are your thoughts on the company and Indonesia in general?
Thanks! Yes, the stock has been surprisingly weak. The company has recovered nicely from COVID-19, yet the stock languishes at multi-year lows. It's not clear what's caused this selling. But a few theories are 1) it's thinly traded with a tiny free float, so a single seller can have a large impact on the price 2) investors might be concerned about competition from craft brewers, seems like it's easier to get a license these days and several of them have listed on IDX including Hatten Bali and Cap Tikus's parent company 3) caution about new president Prabowo Subianto and the likelihood that we're going to a see a full alcohol ban 4) a weak Indonesian consumer due to falling coal and palm oil prices combined with high interest rates
But neither of these theories hold up to scrutiny, in my view. The craft brewers remain tiny. I don't think Prabowo Subianto supports an alcohol ban. So I am puzzled, too. Perhaps the answer is simply that the consumer is hurting. Multi Bintang is not the only stock that's done poorly. Just look at Astra International and Unilever Indonesia. The MSCI Indonesia / EM ratio is close to its COVID lows. So I remain a shareholder in Multi Bintang.
What markets or industries do you reckon will grow quickly (10%+ per year) in Asia over the next decade?
Deathcare in China
Japanese B2B software
India's automotive industry
Indian airports
The online travel industry
Online retail trading in the Philippines
Business process outsourcing in India & the Philippines
Chocolate in Indonesia
Chinese offshore oil & gas exploration
Malaysian rubber gloves
Indonesian sportswear retailing
Philippine casino industry
Discount grocery retailing in Hong Kong
Interesting stuff. Thanks for such a comprehensive list, Michael.
Hello there. Could you detail one of your recent comment about the possible waiver of a 20% tax on dividends in HK?
Yes, a few weeks ago the CSRC submitted a plan to waive dividend taxes on Hong Kong stocks for Mainland Chinese buying them via the Stock Connect program. It's apparently going to be implemented later this year. And given the strong performance of Hong Kong dividend payers, the word must have got out as early as late last year. https://www.thestandard.com.hk/section-news/section/2/262650/China-may-waive-dividend-tax-on-Connect
What do you think is the short to medium-term view on Delfi & Cacao prices? At 0.86 SGD - still a buy?
I don't provide investment recommendations. But in terms of earnings, I predict spot cocoa prices to stay strong for the rest of the year while futures will start to decline with colder weather in the second half of the year. But the effect on Delfi will be longer-lasting since they hedge 12-18 months forward and continue to do so. It looks like they will adjust end-user prices, hurting them on the top-line rather than the margins, but in any case, current high cocoa prices are a headwind. I think it will take until late 2025 or early 2026 for the headwind to entirely subside.
Updated thoughts on PGRU? What do you make of the strategic review news?
I think it's going to be acquired by KKR and TPG, but exactly at what price is unclear. If you ask me, I'd consider the news to be positive, because the stock continues to be undervalued compared to its peers.
I think your thesis is that they can double listing fees, and earn EBITDA margins of 30%. Do we have evidence the market can support the doubling of fees? Can agents still be profitable themselves having to pay 2x? And there won't be loss of share to 99.co?
The key data is on slide 40 in the PowerPoint deck. As for the TAM, my guess is as good as yours, but at least Rightmove charges twice as much in listing fees vs the average home price, and depth revenue also has significant upside vs REA. I don't think agents have much choice, the agent I spoke to before writing the report said that 99.co wasn't even an option because all traffic came from PropertyGuru.
Hi there. After you recent trip to HK and your inclusion of some HK and Chinese stocks in your portfolio. Do you think the political risk of holding HK equity has risen over the past few years and how to rationalise political risk when considering mainland based companies? Thanks
Difficult question. A few of the risks include Hong Kong losing its status as a free trading hub, or Chinese being cut off from the SWIFT system. I think the only way to deal with such risks is to demand a higher return on particular investments. IMAX China is a short-term bet with, in my view, a high potential IRR. And Best Mart 360 is so cheap that I definitely felt the risk was worth taking.
A potential invasion of Taiwan is grabbing the headlines, but if you look at how the communist party actually operates in countries like Cambodia and Myanmar, it's clear that they seem to favor a divide-and-conquer approach to gaining influence overseas. A bit like how Iran is using Hezbollah to gain influence in Lebanon. I think the risk of an amphibious invasion of Taiwan is minuscule. The risk is far higher that the communists will infiltrate the Taiwanese political system from the inside through control of the legislative yuan. There could also be a multi-week blockade, which would cause global supply chain disruptions and certainly cause Hong Kong equities to sell off. But given the negativity, some of that risk is already priced-in.
A different manager posted the yen as undervalued by 40-60% compared to expected value. Identifying Japanese companies with high domestic exposure as particularly desirable if/when there is an upward correction in the yen for dollar based investors. Do you foresee a correction in the yen to the benefit of dollar based investors?
Yeah, I think that's correct. I'm also looking for companies earning their revenues in yen, service companies and such. In my mind, the only reason why the yen is this cheap is because US Dollar interest rates are 5 percentage point higher, leading to an accumulation of carry trades. As long as this current interest rate differential exists, new carry trades will be entered into, pushing down the yen. But if and when Fed lowers rates, I think the unwinding of those carry trades can be rapid.
There was a similar scenario in 2006-2008, when the yen ultimately strengthened. I think the yen will be a flight to safety currency in the next global recession, if we ever have one. It seems like US employment is heading in the wrong direction, so my guess is that Fed will start lowering rates sooner rather than later.
Just be aware that many Japanese companies are exporters. Their earnings tend to benefit from a weak yen. Some discussion of potential strong yen beneficiaries here: https://www.asiancenturystocks.com/p/what-if-the-yen-strengthens
Hello Michael, do you have any insight at all into grocery retailing in the Phillipines? I have found a stock $PGOLD that seems to trade at a very low multiple. With it being a retailer, I'm mostly uninterested and think the valuation is relatively justified. But I'm wondering if there is some case for investment in these types of competitive, necessary industries (for which some version of them must exist to maintain a middle class)?
Hi Layne. Yes, Puregold trades at an incredible multiple. Lucio Co has somewhat of a troubled past, but he's moved on and his retail business has become widely successful. I love the S&R concept. What I don't like is the fact that they own all their properties, and I think that's probably why the return on capital is around 10%. Another question is the extent to which Puregold serves sari-sari stores, and whether the loss of such customers as the Philippines moves towards modern retail might lead to a negative consequence for Puregold itself. That's just a question mark, and in fact Puregold's numbers have been decent: slow but steady growth. I don't see how a company like this should trade at a P/E ratio of 8x, especially not when S&R has this incredible potential to grow.
If you ask me, I'm perfectly happy to invest in competitive industries if there's room for differentiation. In airlines, differentiation is difficult but possible (Ryanair). In other industries, like retail, there's greater scope for differentiation and there are many success cases including CostCo and Best Mart 360.
Another company an Indian retailer which typically owns its properties and grows slowly due to that approach, is DMART. https://www.screener.in/company/DMART/consolidated/
Fascinating, thanks Ashwin. 111x P/E and 15x book? Oh boy
Good morning Michael. In your portfolio review May 2024, you stated that you are hesitant to accept the rollover shares instead of cash related to the L'Occitane take-out bid. I was wondering why. Do you avoid non-listed holdings in general? Or do you have reservations in this specific case?
Yeah we don't know anything about the rollover shares so far. But yes, I'm concerned about liquidity. I feel like there are plenty of potential double-baggers in public markets so why complicate things. If there's any color on the plans of a US listing, and how soon such a listing will come then perhaps I'll consider it. How about yourself, what's your plan with regards to L'Occitane?
I already sold off about half of my holding and now waiting for the composite document as well as the annual report to have more information. I also hesitate to hold a non-listed company for an unknown period of time where you are at the mercy of the main shareholder to be treated fairly.
In addition, I am wary that the whole take-out operation might fail to reach the minimal amount of offers. The non-insider shares, besides the funds that already committed to the take-out offer, are mostly held by HK and CN brokers for retail investors. I don't know how to estimate whether enough of these private investors will commit to the offer.
Finally, the mind of key person Geiger has proven to be somewhat fickle in the past. In the case of lacking interest in the bid, he may decide to call it a day instead of raising the bid price a bit or polishing up the rollover share scheme.