Portfolio update - 2018 June
When I first know of PE ratio, I understand that it is a basic and yet important valuation tool, for quick comparison between all companies. Then I learn about trailing PE, forward PE, PEG; and afterwards the various facets of the important E (earnings). Still, if you ask me what is the difference between PE 6 and PE 7, why does analyst uses PE 6 instead of PE 7; I couldn't really answer it. PE 6 is perhaps cheaper, but maybe this company deserves to be traded at PE7 (at a premium against peers, bla bla bla).
And after many readings, I finally believe that discounted earnings and discounted cash flow should be most appropriate valuation methods. What you invests in the company is the discounted future sum of earnings. (I still don't know much about DCF and am aware of the big variation if different rates are assumed), where the acquire multiple EV/EBITDA is the one of the best ratio. But there are few steps of work need to done to get into this ratio. So with this in mind, I found an eureka moment on how I should interpret PE.
As 10-year sum of earnings is generally used, and PE is multiples of yearly earnings, we can use PE 10 as a dividing line. If a company's earnings can grow together with risk free rates for next 10 years, then using PE 10 is fair. If a company's earnings would stagnate for the next 10 years when risk free rates is at 3%, then PE 8 is fair. If I am not even sure that the company can sustain its earnings for the next 5 years, then even PE 5 is expensive.
Of course evaluating companies is much more than plugging qualitative figures, let alone a simple PE ratio; but by viewing PE as years needed to get back my investment, it helps me to put two crucial factors into perspective, which are sustainability and scalability; especially for those companies with PE more than 10. A cyclical stock with PE of 15, would need to have 50% growth in earnings and sustain it for next 10 years to come back to PE 10; or else it would be expensive. For a defensive stock that commands PE of 20, can its business lasts for 20 years?
Perhaps this is nothing new to most investors, but as a novice, I am really excited about this realization. So much so that I don't really care about Thanos's continual snap on stock markets this month, destroying companies' market caps and our fragile hearts.
This month is a transformative month for me not only for the above-mentioned. I have finally ventured abroad after weeks of preparation. Initially I targeted to do so after first year of investing (this August), but I have decided to fast track it; after seeing so many greener pastures abroad. If you think SG stocks are cheap and undervalued, you will be amazed that there are at least dozens more cheaper and undervalued stocks in HK and China.
What does this mean for my portfolio? Firstly, I will not invest any more on local stocks unless significant value mismatch happens. Secondly, I will slowly build up my oversea portfolio to 50%; which mean I will liquidate some of my current holdings that I deem less attractive (hopefully not at a loss). And my max allocation for a single stock will reduce from 20% to 10%, since I am not limited by choices. An ideal case will be 10 great stocks to hold, each at 10%. If not one 10% slot could be split into 2 good stocks with 5% each. Diversification is needed also because for HK&China exposure I could only rely on second hand information on sites like Xueqiu.
But I am really glad that I made the move. It has greatly enhanced my perspective on what to invest and how to invest. There is sheer number of great value investors in China that I could learn from, and I am surprised that there are countless retails investors in China that focus on FA. The reason is obvious, China is the largest economy of the world, and there are virtually unlimited potential for companies to grow continuously.
So what have I bought this month?
1. Xiwang Special Steel Co Ltd (1266.HK):
A Delong's little brother that pays dividend, is the first thought that came to my mind. A stainless steel company with PE of 2.x and juicy dividend of about 10% yield this year. To go in before the XD is why I have decided to fast track. As indicated by the company name, they sells special steels (30% of revenue) which is less cyclical and have a more sustainable profit margin (currently normal steel's margin is higher due to the supply-side structural reform). Moreover, they are adding 10% more capacity for special steels this year. This works as a natural hedge to my YZJ, though there are chances both could thrive at current stable steel price.
Talking about Delong, I have indeed learnt another great lesson in investing. If I hold onto my Delong (10% of portfolio at average price of 3.4), I would have 40-50% gain at the moment. Main reason for selling Delong was my doubt on management's interest alignment with shareholders. Without dividends and share buy backs, I don't know how management could reward shareholders. Delong is the only listed China steel company that doesn't pay dividend; and they have records on spending money on weird businesses. But with PE of 2.x, what it need to take is just 2 years+ of stable earnings, and you get free business afterwards. To give up on a remarkable steel company at such a cheap valuation just because I don't see how price could rally due to lack of dividends or buy backs, is a rookie blind-spot (of course no one can foresee that 2nd biggest shareholder sold all their shares at loss, but at a premium to current price back to CEO).
Anyway, I have found an equivalent and waiting for it to compete with AMAL to become my first real multi bagger.
Hint: A lot of China retail investors couldn't buy this because it is listed in HK, and its market cap is less than 5 bil HKD to qualify for Shenzhen-Hongkong connect (深港通); while a lot of HK local investors have a more serious S-chip bias than us and think this is a scam stock (老千股). At current market cap of 3.7 bil HKD, it is just a matter of time that it will qualify for the connect, and have its price soars by the northern force (北水).
More details on it:
https://www.gelonghui.com/p/176326
https://www.gelonghui.com/p/173078
2. Sunpower:
It caught my attention when UOBKH initiated buy call on it and then followed by Lim & Tan. After studying it, I have decided to put 5% stake onto it. I like this company for its synergy between new business - Green Investment and its original business in EPC that has grown big for the last 10 years. It also has good R&D capabilities and working culture (based on my search from internet).
Most details are covered in both initiation reports, but I have discovered one X factor that drives me to buy at 0.545 instead of staying at sideline first, despite Thanos looming around.
There are only 4.44%, or 32.7M shares outside of top 20 shareholders. This could mean two things: the price could be easily controlled; and the scarcity of liquidity would amplify price movement in both directions. But regardless whether these X factors exist or not, there is only one reason why top shareholders keep collecting and increasing their % of holding.
3. Wanhua Chemical Group Co Ltd (600309.SS):
At first I was evaluating Jiutian Chemical (PE 4), then I come to know about China Sanjiang Fine Chemicals Co Ltd (2198.HK) (PE 4, with 8% dividend yield). Interested to find out more companies in the same industry (chemical industry), I then checked through most listed chemical companies in HK & China, and found out Wanhua, a top chemical company in China. It is a popular white horse alpha stock (白马股) among China retail investors (much like AEM here) and yet one of the cheapest (PE 10); because of the 'perceived' cyclical nature of chemical industry. (I used the word 'perceived' here because it is generally true for most chemical companies, but less so for Wanhua)
By comparing these 3 companies, I have the first encounter of deciding between 'buying a wonderful company at fair price' and 'buying a fair company at a wonderful price'. I chose the first option and bought 5% of my portfolio at RMB46. In fact, Wanhua, is the first company that I think I should hold it for years; due to its fantastic moat, exciting foreseeable growth in next few years, astounding R&D capabilities, great management with interests aligned with shareholders (because staffs and managements hold about 20+% of shares). All in all, a wonderful company driven by the aspiration to become China's BASF, or world's Wanhua.
More details:
https://cen.acs.org/articles/94/i21/CEN-profiles-Wanhua-Chemical-Chinese.html
http://www.hysec.com/f/tsnr/[D2017]/2017-08/TSNR100/14/RR_3003768457.pdf
The most recent in-depth initiation report from Morgan Stanley has a TP of RMB58, with title of 'The stock could double within five years'.
I don't know how its price will perform in the future, but I am pretty sure a giant is in the making. Through this encounter, it firms up my belief in fundamental investing, and it has helped me to really look at things at long term, with patience. Looking in hindsight, most of my previous battles fought in April were perhaps unnecessarily impatient and doesn't look good at the moment. Firstly, with the new found perspective of PE, the previously perceived 'undervaluedness' in my holdings has dropped a lot. Secondly, if I am looking at long term holding, I shouldn't rush to finish my bullets given that Thanos strikes every now and then.
My portfolio return is the lowest since I started my investing journey, and yet I feel calm and know clearer about my journey ahead. If you asked me if I could get all these experience, principles, realization and paradigm shifts in a few thousand dollar course, I would definitely sign up for it. But I don't think any course can teach me this. Knowing and believing are two different things. I have read the book of the intelligent investor before I started investing, but I am only starting to grasp its core idea now.
I shall end this long post with my reasoning for last month's purchase. YZJ is the first STI blue chip that I bought at $1.5 last year (when I didn't know how to value this ship anyway) and sold at $1.18 in recent sell down for portfolio re-balancing. The price continued to go south and I was watching at the sideline until a long HSBC analyst report came out with a TP of $0.87 on 24th May and caused the ship to sink below $1.
At first glance, the report seems reasonable with detail analysis of YZJ's two main ship categories and its competitors, armed with figures and charts from Clarkson research that we don't have free access to. But the following things caught my eye:
1. It states that YZJ does not build liquefied natural gas (LNG)/floating LNG (FLNG) carriers, a segment of the shipbuilding market we are bullish on.
Fact: YZJ secured first LNG carrier contract (2 vessels 27,500 cbm for USD 0.135 bn) in 2015 and delivered in 2017, 4 months ahead of schedule. And it is mentioned in their FY2016AR that their R&D is already developing capabilities for 84,000 cbm LNG vessel.
2. It reduced new order estimates for 2018e from USD1.5bn to USD1.2bn.
Opinion: Most analyst reports use figure of USD1.8bn as this is what has been guided by chairman Ren. Why are they so pessimistic and use such a low-ball figure?
The most interesting part is why did HSBC release the report so late when YZJ 1Q18 results was out on end Apr? Below is the new ship order tracking based on publicly available info:
where key news are YZJ secured 5 units of 12000 TEU which worth about USD 0.5bn, and the LOI for 20 units of LNG (which well illustrates that YZJ has the capabilities of building certain range of LNG ships). All these information are available before 24th May. I don't think anyone could believe that HSBC analysts doesn't know about it.
3. Of the 123 vessels YZJ had in its order book at the end of 2017, 83 are not profitable, according to the company’s statement in 1Q18. Of these 83, the company has taken provisions on 63 vessels. Going forward, the company is booking 0% margin on 63 vessels, while 20 vessels still have downside risks, in our view.
Opinion: Firstly, this wasn't stated in 1Q18 report. Secondly, the provision that made on 4Q17 report was based on these two criteria: RMB strengthens to 6.15 and the steel price rises to RMB 4,800 per ton. So let's examine.
where current trends are far from the worst case (which means reversal of provision would be provided in the coming quarter, which in fact, some has already been written back in 1Q18 ). And then you look at their report, the trend of RMB vs USD:
where they basically masked away the recent uptrend of USD appreciation against RMB.
So, the 3 key assumptions to support this bearish TP are all based on false information and partial truths. I don't think we even need a conspiracy theory to guess what's the intend of this report. There are 5 upside risks at the end of it. By the way, a lot of these arguments were first pointed out by trader25yr in sharejunction, a supposingly inferior forum compared to IN. Thank him for sharing and pointing them out.
I don't mind to collect at $0.87, but I doubt YZJ wouldn't fight back. And two days after my purchase @$0.955, the company started its buy back and few days later they announced all the new orders.
This is how I think the baseline of YZJ should be:
- YZJ could consistently payout $0.045 dividend, even in year 2016; which translates to 5% yield at $0.90.
- All the cash and financial assets worth RMB5.12/share, or $1.07/share; so virtually all buy backs below $1 is a good buy for the company. And it is at least 50% profit since they issue placement shares at $1.515, if you look at that way.
And after many readings, I finally believe that discounted earnings and discounted cash flow should be most appropriate valuation methods. What you invests in the company is the discounted future sum of earnings. (I still don't know much about DCF and am aware of the big variation if different rates are assumed), where the acquire multiple EV/EBITDA is the one of the best ratio. But there are few steps of work need to done to get into this ratio. So with this in mind, I found an eureka moment on how I should interpret PE.
As 10-year sum of earnings is generally used, and PE is multiples of yearly earnings, we can use PE 10 as a dividing line. If a company's earnings can grow together with risk free rates for next 10 years, then using PE 10 is fair. If a company's earnings would stagnate for the next 10 years when risk free rates is at 3%, then PE 8 is fair. If I am not even sure that the company can sustain its earnings for the next 5 years, then even PE 5 is expensive.
Of course evaluating companies is much more than plugging qualitative figures, let alone a simple PE ratio; but by viewing PE as years needed to get back my investment, it helps me to put two crucial factors into perspective, which are sustainability and scalability; especially for those companies with PE more than 10. A cyclical stock with PE of 15, would need to have 50% growth in earnings and sustain it for next 10 years to come back to PE 10; or else it would be expensive. For a defensive stock that commands PE of 20, can its business lasts for 20 years?
Perhaps this is nothing new to most investors, but as a novice, I am really excited about this realization. So much so that I don't really care about Thanos's continual snap on stock markets this month, destroying companies' market caps and our fragile hearts.
This month is a transformative month for me not only for the above-mentioned. I have finally ventured abroad after weeks of preparation. Initially I targeted to do so after first year of investing (this August), but I have decided to fast track it; after seeing so many greener pastures abroad. If you think SG stocks are cheap and undervalued, you will be amazed that there are at least dozens more cheaper and undervalued stocks in HK and China.
What does this mean for my portfolio? Firstly, I will not invest any more on local stocks unless significant value mismatch happens. Secondly, I will slowly build up my oversea portfolio to 50%; which mean I will liquidate some of my current holdings that I deem less attractive (hopefully not at a loss). And my max allocation for a single stock will reduce from 20% to 10%, since I am not limited by choices. An ideal case will be 10 great stocks to hold, each at 10%. If not one 10% slot could be split into 2 good stocks with 5% each. Diversification is needed also because for HK&China exposure I could only rely on second hand information on sites like Xueqiu.
But I am really glad that I made the move. It has greatly enhanced my perspective on what to invest and how to invest. There is sheer number of great value investors in China that I could learn from, and I am surprised that there are countless retails investors in China that focus on FA. The reason is obvious, China is the largest economy of the world, and there are virtually unlimited potential for companies to grow continuously.
So what have I bought this month?
1. Xiwang Special Steel Co Ltd (1266.HK):
A Delong's little brother that pays dividend, is the first thought that came to my mind. A stainless steel company with PE of 2.x and juicy dividend of about 10% yield this year. To go in before the XD is why I have decided to fast track. As indicated by the company name, they sells special steels (30% of revenue) which is less cyclical and have a more sustainable profit margin (currently normal steel's margin is higher due to the supply-side structural reform). Moreover, they are adding 10% more capacity for special steels this year. This works as a natural hedge to my YZJ, though there are chances both could thrive at current stable steel price.
Talking about Delong, I have indeed learnt another great lesson in investing. If I hold onto my Delong (10% of portfolio at average price of 3.4), I would have 40-50% gain at the moment. Main reason for selling Delong was my doubt on management's interest alignment with shareholders. Without dividends and share buy backs, I don't know how management could reward shareholders. Delong is the only listed China steel company that doesn't pay dividend; and they have records on spending money on weird businesses. But with PE of 2.x, what it need to take is just 2 years+ of stable earnings, and you get free business afterwards. To give up on a remarkable steel company at such a cheap valuation just because I don't see how price could rally due to lack of dividends or buy backs, is a rookie blind-spot (of course no one can foresee that 2nd biggest shareholder sold all their shares at loss, but at a premium to current price back to CEO).
Anyway, I have found an equivalent and waiting for it to compete with AMAL to become my first real multi bagger.
Hint: A lot of China retail investors couldn't buy this because it is listed in HK, and its market cap is less than 5 bil HKD to qualify for Shenzhen-Hongkong connect (深港通); while a lot of HK local investors have a more serious S-chip bias than us and think this is a scam stock (老千股). At current market cap of 3.7 bil HKD, it is just a matter of time that it will qualify for the connect, and have its price soars by the northern force (北水).
More details on it:
https://www.gelonghui.com/p/176326
https://www.gelonghui.com/p/173078
2. Sunpower:
It caught my attention when UOBKH initiated buy call on it and then followed by Lim & Tan. After studying it, I have decided to put 5% stake onto it. I like this company for its synergy between new business - Green Investment and its original business in EPC that has grown big for the last 10 years. It also has good R&D capabilities and working culture (based on my search from internet).
Most details are covered in both initiation reports, but I have discovered one X factor that drives me to buy at 0.545 instead of staying at sideline first, despite Thanos looming around.
There are only 4.44%, or 32.7M shares outside of top 20 shareholders. This could mean two things: the price could be easily controlled; and the scarcity of liquidity would amplify price movement in both directions. But regardless whether these X factors exist or not, there is only one reason why top shareholders keep collecting and increasing their % of holding.
3. Wanhua Chemical Group Co Ltd (600309.SS):
At first I was evaluating Jiutian Chemical (PE 4), then I come to know about China Sanjiang Fine Chemicals Co Ltd (2198.HK) (PE 4, with 8% dividend yield). Interested to find out more companies in the same industry (chemical industry), I then checked through most listed chemical companies in HK & China, and found out Wanhua, a top chemical company in China. It is a popular white horse alpha stock (白马股) among China retail investors (much like AEM here) and yet one of the cheapest (PE 10); because of the 'perceived' cyclical nature of chemical industry. (I used the word 'perceived' here because it is generally true for most chemical companies, but less so for Wanhua)
By comparing these 3 companies, I have the first encounter of deciding between 'buying a wonderful company at fair price' and 'buying a fair company at a wonderful price'. I chose the first option and bought 5% of my portfolio at RMB46. In fact, Wanhua, is the first company that I think I should hold it for years; due to its fantastic moat, exciting foreseeable growth in next few years, astounding R&D capabilities, great management with interests aligned with shareholders (because staffs and managements hold about 20+% of shares). All in all, a wonderful company driven by the aspiration to become China's BASF, or world's Wanhua.
More details:
https://cen.acs.org/articles/94/i21/CEN-profiles-Wanhua-Chemical-Chinese.html
http://www.hysec.com/f/tsnr/[D2017]/2017-08/TSNR100/14/RR_3003768457.pdf
The most recent in-depth initiation report from Morgan Stanley has a TP of RMB58, with title of 'The stock could double within five years'.
I don't know how its price will perform in the future, but I am pretty sure a giant is in the making. Through this encounter, it firms up my belief in fundamental investing, and it has helped me to really look at things at long term, with patience. Looking in hindsight, most of my previous battles fought in April were perhaps unnecessarily impatient and doesn't look good at the moment. Firstly, with the new found perspective of PE, the previously perceived 'undervaluedness' in my holdings has dropped a lot. Secondly, if I am looking at long term holding, I shouldn't rush to finish my bullets given that Thanos strikes every now and then.
My portfolio return is the lowest since I started my investing journey, and yet I feel calm and know clearer about my journey ahead. If you asked me if I could get all these experience, principles, realization and paradigm shifts in a few thousand dollar course, I would definitely sign up for it. But I don't think any course can teach me this. Knowing and believing are two different things. I have read the book of the intelligent investor before I started investing, but I am only starting to grasp its core idea now.
I shall end this long post with my reasoning for last month's purchase. YZJ is the first STI blue chip that I bought at $1.5 last year (when I didn't know how to value this ship anyway) and sold at $1.18 in recent sell down for portfolio re-balancing. The price continued to go south and I was watching at the sideline until a long HSBC analyst report came out with a TP of $0.87 on 24th May and caused the ship to sink below $1.
At first glance, the report seems reasonable with detail analysis of YZJ's two main ship categories and its competitors, armed with figures and charts from Clarkson research that we don't have free access to. But the following things caught my eye:
1. It states that YZJ does not build liquefied natural gas (LNG)/floating LNG (FLNG) carriers, a segment of the shipbuilding market we are bullish on.
Fact: YZJ secured first LNG carrier contract (2 vessels 27,500 cbm for USD 0.135 bn) in 2015 and delivered in 2017, 4 months ahead of schedule. And it is mentioned in their FY2016AR that their R&D is already developing capabilities for 84,000 cbm LNG vessel.
2. It reduced new order estimates for 2018e from USD1.5bn to USD1.2bn.
Opinion: Most analyst reports use figure of USD1.8bn as this is what has been guided by chairman Ren. Why are they so pessimistic and use such a low-ball figure?
The most interesting part is why did HSBC release the report so late when YZJ 1Q18 results was out on end Apr? Below is the new ship order tracking based on publicly available info:
where key news are YZJ secured 5 units of 12000 TEU which worth about USD 0.5bn, and the LOI for 20 units of LNG (which well illustrates that YZJ has the capabilities of building certain range of LNG ships). All these information are available before 24th May. I don't think anyone could believe that HSBC analysts doesn't know about it.
3. Of the 123 vessels YZJ had in its order book at the end of 2017, 83 are not profitable, according to the company’s statement in 1Q18. Of these 83, the company has taken provisions on 63 vessels. Going forward, the company is booking 0% margin on 63 vessels, while 20 vessels still have downside risks, in our view.
Opinion: Firstly, this wasn't stated in 1Q18 report. Secondly, the provision that made on 4Q17 report was based on these two criteria: RMB strengthens to 6.15 and the steel price rises to RMB 4,800 per ton. So let's examine.
where current trends are far from the worst case (which means reversal of provision would be provided in the coming quarter, which in fact, some has already been written back in 1Q18 ). And then you look at their report, the trend of RMB vs USD:
where they basically masked away the recent uptrend of USD appreciation against RMB.
So, the 3 key assumptions to support this bearish TP are all based on false information and partial truths. I don't think we even need a conspiracy theory to guess what's the intend of this report. There are 5 upside risks at the end of it. By the way, a lot of these arguments were first pointed out by trader25yr in sharejunction, a supposingly inferior forum compared to IN. Thank him for sharing and pointing them out.
I don't mind to collect at $0.87, but I doubt YZJ wouldn't fight back. And two days after my purchase @$0.955, the company started its buy back and few days later they announced all the new orders.
This is how I think the baseline of YZJ should be:
- YZJ could consistently payout $0.045 dividend, even in year 2016; which translates to 5% yield at $0.90.
- All the cash and financial assets worth RMB5.12/share, or $1.07/share; so virtually all buy backs below $1 is a good buy for the company. And it is at least 50% profit since they issue placement shares at $1.515, if you look at that way.
Thanks for sharing the information. That’s a awesome article you posted. I found the post very useful as well as interesting. I will come back to read some more Stock market.
ReplyDeleteHey...Great information thanks for sharing such a valuable information
ReplyDeleteMotherson Sumi Systems Ltd
Bombay Stock Exchange
Motherson Sumi