Sep 20, 2022Liked by Michael Fritzell

Investing in conglomerate with deep discount in Hong Kong is a painful and ineffective strategy. The problems come from multiple fronts I just don't see things improve:

1. Anglo conglomerates such as Swire and Jardine succeed before 21th century is because they are first in the party and they have good relations with authority. For a long time Hong Kong is a heaven for oligopoly and they were at right place at the right time. When you have prime locations, license, relations, finances...etc even dummies can run a business well. Their success were not innovation driven, does not improve people's life. A book called "Asian Godfathers" did a good job explaining such phenomenon. It's not a surprise to me they did poorly in recent years when the world faces rapid changes and disruptions because they are not battle tested in the first place.

2. Deep NAV investing does not work in Hong Kong. I have tried with (296 281 635 373 56 266 51) and David Webb have tried with a bunch more. In US where the legal infrastructure is fully in place, financial rewards are lucrative, shareholder rights are taken care of. Not the case in HK.

3. HK is the place with one of the worst corporate governance. Most of the time undervalued stocks will rot, then large shareholders will privatize the company with a low-ball offer and squeeze out little guys. This happens over and over again. A lot of international value funds flat out had enough and left HK, ditto for many pension/sovereign/endowment funds. The exchange and SFC did jack to fix such problems.

4. HK still has a Covid Zero strategy in place. The juicy part is... they quarantine both Mainland and Overseas travelers. It is now in year 3. That is asinine to the nth degree. I don't see how Swire's business(hotels, leasing malls and office, airlines) going to turn around. On top of that many MNCs set up headquarters in Shenzhen and Shanghai. There is a little point to utilize HK as a hub.

5. Swire trades at $9. It traded at that level in Q1 2007. Under performance for over 15 years tells you everything about management's ability in creating value and return value to shareholders. I don't see buybacks now is going to turn around many years of poor performance.

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Hi Michael, thank you for the good work. Should we not include corporate costs in the SOTP? Thank you

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