Portfolio update November 2021
Disclaimer: This article constitutes the author’s personal views only and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. From time to time, the author may hold positions in the below-mentioned stocks consistent with the views and opinions expressed in this article. I have positions in all of the below stocks at the time of publishing this article. This is a disclosure - not recommendations to buy or sell stocks.
Portfolio update
Here is a first update to the Asian Century Stocks portfolio I introduced to you in October 2021.
Since I funded the account in early October, the portfolio's performance has been +4.7% (net of transaction fees). The performance since my last update on 14 October 2021 has been roughly +2.3%.
The portfolio remains broadly the same, except for one new purchase: Japanese cafe operator Doutor Nichires (3087 JP), which I will describe in greater detail below.
The cash balance stands at 4.0%. I will reduce this cash balance to zero as soon as I find a good-enough opportunity.
Update on key holdings
SBS Transit reported first-half 2021 numbers recently, and they were predictably poor. Public transport ridership remains roughly 25% below the 2019 baseline level, and advertising revenue is less than half its pre-pandemic level.
Government subsidies helped the company stay afloat in 2020, and those subsidies are now fading. But this does not come as a surprise to the market, with sell-side expecting SG$65 million in net profit for the full year 2022.
With the first-half 2021 report, SBS Transit announced that its Downtown MRT-line would transition to a risk-sharing model. SBS Transit’s rail segment has historically had losses of ~SG$15 million. Most of those losses came from the Downtown line.
On the other hand, 5 out of SBS Transit’s 9 bus lines were extended for three years but repriced lower, weighing negatively on earnings. Rising energy costs will also affect earnings negatively in the short run.
The shift to revenue risk-sharing for the Downtown Line could, in theory, shift earnings upwards of SG$20-30 million in a best-case scenario, though counteracted by lower bus segment profitability. I am also confident that public transport usage will recover at some point. The stock remains undervalued at far below 10x forward EBIT in most scenarios that I can envisage.
Not much has changed with Multi Bintang. Bali’s reopening on 14 October 2021 was a baby step in the right direction for tourism. However, as New York Times reported, the re-opening of Bali’s tourism industry was not the massive success as some had expected.
As for Indonesia’s broader recovery from COVID-19, things are moving in the right direction. The case count has dropped almost zero. The vaccination rate has reached 30%. Access to vaccines is improving by the day.
I will continue holding the stock until Indonesia’s COVID-19 restrictions have been fully eased and Bali tourism has returned to pre-pandemic levels. Unless something major happens in the parliament with regards to alcohol restrictions.
Jardine Cycle & Carriage’s subsidiary Astra International saw its third-quarter 2021 earnings recover almost entirely to pre-pandemic levels. Astra kept a 56% share of the Indonesian auto market in September. While the strong performance at Astra was partly because of a relaxation of Indonesia’s luxury car tax, the auto market will most likely recover to the one million+ level, eventually.
Jardine C&C recently started buying back shares, leading to a spike in the stock price from SG$19/share to over SG$22. But the stock trades at a 45% discount to my NAV, and I will probably sell the stock closer to a 20-25% discount.
Ultrajaya’s 9M21 report was decent with an aggregate +12% YoY growth in operating profit. 3Q21 was particularly strong with top-line growth of +20.7% YoY. There was no management commentary in the quarterly report but the accounts look healthy.
Despite strong top-line growth, the high-priced corporate bond issue last year weighed on the bottom line. I already mentioned this corporate bond in my write-up earlier this year and how I felt it reflected poor capital allocation on the part of Ultrajaya.
Chinese oil exploration and production company CNOOC’s 3Q21 production report was positive. Year-to-date production grew +8.5% YoY, the spot Brent crude oil price remains over $80/bbl, and CNOOC’s all-in-cost was $29/bbl. In other words, the company is enjoying strong growth in earnings. The current-year consensus P/E is 4.4x with a dividend yield of 9.9%.
CNOOC’s A-share issue has been confirmed. It looks like the issue price will be the equivalent of HK$16/share, which happens to be my exact estimate of intrinsic value for the stock. Therefore, I don’t foresee much intrinsic value dilution from the A-share issue. What will happen, however, is greater media coverage and more attention to the stock. The date of the A-share issue has not been determined yet.
I bought the shares for the account at an average price of HK$8.9/share - almost top-ticking the share price. For now, the stock remains range-bound, and I may well add to the position if the stock continues lower. The upside in the stock is roughly 100%, and that’s why the position remains large, despite the obvious risks involved with investing in Chinese state-owned enterprises.
Sony’s stock price has continued its upwards trajectory on pure momentum. A positive piece of news was an upgrade of the full-year revenue forecast from JPY 9.7 trillion to JPY 9.9 trillion. The gaming business weakened sequentially as Europeans and US consumers spent less time at home over the summer.
The other segments are on fire: music streaming demand is booming thanks to Spotify and other platforms; the studio segment is likely to do well now that the Spiderman and Ghostbuster blockbusters are soon released. Image sensor demand is improving as well, after last year’s loss of Huawei as a customer. The new Playstation 5 is in high demand. While semiconductor shortages have constrained production, there is now light at the end of the tunnel.
I consider Sony to be a short-term momentum bet that is probably worth holding until Playstation 5 have fully ramped up. This could take another full year. This is a trade rather than a long-term holding.
Bloomberry Resorts had a very difficult 3Q21 because of Manila’s COVID-19 restrictions. The Solaire casino operated at limited capacity and was closed 41 days out of 92 days during the quarter.
The number of COVID-19 cases in the Philippines has dropped to almost zero. While I think Enrique Razon is an honest and competent business leader and that the stock is very inexpensive, I’m nervous about the near-term picture for Bloomberry. How fast will Chinese tourism to the Philippines recover? And how is Bloomberry positioned for the Presidential election of May 2022? I’m very bullish on the stock longer-term, I’m just not sure how to trade these events.
There seems to be an almost complete lack of investor interest in chocolate manufacturer Delfi. The stock came down from its peak of SG$0.96 this summer to SG$0.75 today.
Why has the stock underperformed? First, Marathon Asset Management has been selling its stake. Second, Indonesia’s current COVID-19 restrictions continue to weigh on the stock. Recent management guidance has been cautious. Delfi is a very long-term bet, and I see no reason to sell at the current, depressed level.
British American Tobacco Malaysia reported positive 3Q21 results. The company’s year-to-date volume growth was +7% YoY as the illicit market share dropped by six percentage points so far in 2021. And they achieved this result despite a very severe lock-down in Malaysia during the third quarter. In my mind, it’s evident that the government’s crackdown on illegal cigarettes is bearing fruit, and BAT Malaysia will be a key beneficiary.
The company appointed a new CFO in Malaysian Anthony Yong Mun Seng, who had been with the British American Tobacco group for many decades in other regions. He seems competent.
Following the new vaping regulation planned to come into effect in 4Q21, BAT Malaysia intends to release a vaping product called Vuse shortly after that, which is likely to be earnings accretive.
The only negative factor is Malaysia’s new windfall (“prosperity”) tax, with a one-off corporate tax hike from 24% to 33%. On the other hand, excise taxes for cigarettes will remain at the current level. I’m bullish, and I believe that BAT Malaysia will recover a large part of the market share as long as the government continues to crack down on the illegal cigarette market.
Despite improving fundamentals, the stock has stayed more or less flat. I continue to be bullish on the stock and might increase the position at some point.
Ichigo Hotel REIT is still not showing any signs of recovery. Industry revenue per available room is still down over -80% below the 2019 baseline. Ichigo Hotel REIT is doing better at -60%. But it’s still been a brutal period. Ichigo Hotel REIT’s stock price hasn’t moved much.
It remains to be seen whether Japan’s ongoing vaccination campaign will help move the needle. The vaccination rate among the elderly is ridiculously high, and I’m hoping that youth will get vaccinated as well. Vaccinations should sow the seeds of recovery.
Passenger traffic on Kyushu Railway has remained low due to the state of emergency imposed by the government. Now that the recent Delta wave has faded, I believe that passenger traffic will pick up, though I haven’t seen any good evidence of that yet. In fact, the 2QFY2022 revenue was quite weak, down about 38% vs the 2QFY2020 baseline. The real estate segment was weak as well.
As with my other Japanese COVID-19 recovery bets, I will wait for Japan’s adult vaccination rate to reach 85%+. I’m hoping that full vaccination will help shift consumer behaviour.
I wrote up Karaoke equipment maker Daiichi Kosho a few weeks ago. I sold out of karaoke bar operator Koshidaka and rotated into Daiichi Kosho instead. Koshidaka’s management team is superior, but Daiichi Kosho has a more substantial moat as it dominates the market for karaoke equipment. Daiichi Koshi is a COVID-19 recovery bet, given that the act of singing can spread virus particles. Many Japanese have avoided karaoke during the pandemic.
Daiichi Kosho’s first-half FY2022 saw losses narrow, but overall revenues were still down 7.6% YoY.
Household products and condom maker Okamoto saw its 2QFY2022 revenue rise +12% YoY from a low base. A critical problem has been auto semiconductor shortages. There are now early signs that those shortages are easing. Condom sales are strong overseas, weak in Japan but now show signs of improving.
The company also announced it would buy back another 1.1% of shares outstanding. It’s a dull stock that probably won’t perform until global auto sales start to rise again. Higher demand for condoms following the pandemic might be another catalyst. The stock remains very inexpensive, in my view, and owns an incredibly valuable brand name.
Pico Far East’s stock price remains depressed. In a recovery scenario, the stock could well double or even triple. The timing of a recovery is uncertain. Chinese outbound travel may not recover until late 2022. Quarantines are still needed for inbound travel. I do think, however, that travel between Hong Kong and the mainland will open up soon. And travel between South-East Asian countries and Western countries will also open up soon. I have a small position in the stock, and I’m willing to double it in case I see clear signs of recovery.
Doutor Nichires is the only new position for the account. I described the stock in this prior thematic. Doutor Nichires is a Japanese coffee chain with a market share of 17% domestically. Many of the coffee shops are close to major railway stations. It has a total of 1,100 outlets, out of which 80% are franchisees.
I bought the stock because I’m noticing clear signs of recovery in Tokyo cafe foot traffic. In line with other COVID-19 recovery bets I have put on, Doutor Coffee is likely to benefit from Japan’s rapidly rising vaccination rate.
Today, the company has a large net cash balance representing 40% of the market cap. I disregard the cash in my valuation, but at least it protects you from bankruptcy in a worst-case scenario. If you exclude the excess cash, the company’s return on equity has been acceptable.
Doutor Nichires has been profitable throughout COVID-19 and is guiding JPY 4.4 billion in full-year FY2022 net profit, representing 17x earnings. This protects you from short-term downside.
Assuming a full recovery, we are likely to see the P/E compress to 12x, which, compared to a historical P/E multiple of 18x, provides a potential +50% upside.
Airport gateway service provider SATS reported 1HFY22 revenues of +27% YoY and net profit turning positive. The company remains cash-flow positive. Compared to the 2019 baseline, however, we are still early in the recovery process. Singapore cross-border travel is now improving rapidly with new announcements of 15+ “vaccinated travel lanes”.
SATS also announced that its CEO Alex Hungate had quit joining ride-hailing company Grab. SATS new CEO Kerry Mok Tee Heong is an internal hire, and he was previously the chief executive of SATS Food Solutions.
The stock has stayed flat since I bought shares in this account. The only reason the position is so modest is that the upside is just +30% (SG$5.7/share). And the recovery could take as long as two years, in my view.
Closing thoughts
As you can tell, I don’t trade much from month to month. My yearly turnover tends to be below 1x.
One significant new event is CNOOC’s A-share issue. I expect it to be positive for the H-share in the short run, though I don’t expect the H/A-discount ever to go away entirely. I might add to the position soon.
SBS Transit’s announcement of its Downtown Line adopting a regulatory framework with government risk sharing is another major event. It means that the company’s rail segment will narrow its losses significantly. It’s a more complex story than that, but I believe the news to be a net positive. At 11.5%, the position is already maxed out and I’m not going to increase it further.
Thanks for reading!
If you enjoyed this post, please consider sharing the Substack with others who might want to become subscribers.