Tag Archives: mark-lin

Following The Smart Money For Asian Stocks Beyond 13Fs

Summary Filing form 13F, the reporting of holdings for institutional investment managers with investment discretion over $100 million or more in stocks, is unique to the U.S. It is possible to utilize a piggybacking strategy for idea generation in Asia, if you know who and how to follow. I utilize a 360-degree idea generation process via screens, insider trades, 13Fs, fund manager letters, analyst reports, blogs, forums among others. Following The Smart Money In Asia In the U.S., institutional investment managers with investment discretion over $100 million or more in stocks have to file 13Fs declaring their holdings (long only) with the U.S. Securities and Exchange Commission within 45 days of every quarter. This has indirectly made the investment strategy of cloning the portfolios of well-known and successful fund managers a reality. Even for investors who do not believe in replicating the positions of their favorite investors in full, they might still generate potential investment ideas by taking a peek at the investors’ holdings. Since I invest in both Asian and U.S. stocks, I have always thought about the possibility of applying certain aspects of this piggybacking strategy in the Asian context and this is precisely the focus of this article. In the sections below, I will provide a few examples of generating Asian stock ideas by following the smart money. That being said, it is intriguing that while I generated most of my stock ideas via quantitative screens, my investments and calls were validated to a large extent by similar positions that other fund managers and investors held. I will share some of these past and current stock ideas below. Following U.S. Investors Vested In Asian Stocks An increasing number of U.S. funds are investing in Asia-listed stocks. While they do not have to file 13Fs for these non-U.S. holdings, it is possible to uncover these hidden gems by reviewing mutual funds’ shareholder reports and hedge funds’ investor letters (assuming that they are accessible). Let me illustrate this with some examples. Oriental Watch Holdings Ltd ( OTC:ORWHF ) (0398.HK) was the first Asia-listed stock which I wrote about here on Seeking Alpha. Oriental Watch simply just appeared on my net-net screens one day, and it appeared to be attractive given its long-term profitability and dividend track record and the value of its self-owned properties. I was not alone in my views on Oriental Watch. Tweedy Browne, Benjamin Graham’s former broker which subsequently made its foray into fund management as a classic Graham value manager (read “The Little Book Of Value Investing” by Christopher Browne if you are interested about understanding the firm’s investment philosophy), first disclosed its stake in the stock in its Q3 2013 commentary , and referred to it as “a luxury retailer and a classic Ben Graham net current asset microcap stock, which at purchase was trading at two-thirds of its net cash and inventories.” As of June 30, 2015, Tweedy, Browne Global Value Fund and Tweedy, Browne Global Value Fund II held 7,364,000 and 3,348,000 shares of Oriental Watch, respectively. Other Hong Kong-listed stocks currently held by Tweedy Browne include Great Eagle Holdings Ltd ( OTCPK:GEAHF ) (41 HK), Hengdeli Holdings Ltd ( OTCPK:HENGY ) (3389 HK), Miramar Hotel & Investment ( OTC:MMHTF ) (71 HK) and Tai Cheung Holdings Ltd ( OTC:TAICY ) (88 HK). Tweedy Browne also holds shares in a Japanese net-net, Shinko Shoji ( OTCPK:SKSJF ) (8141 JP), which I briefly wrote about here . Besides reading investor letters and shareholder reports of U.S. funds investing globally, one can also follow individual fund managers on their social media platforms such as blogs. Travis Wiedower, Managing Director of Wiedower Capital, a small value-oriented investment firm, writes a blog (called Egregiously Cheap) and he recently wrote an article titled “Oriental Watch: Deep Value at its Finest”. In the article, Travis refers to Oriental Watch as a “company selling for ~35% of liquidation value that has a clear route back to profitability.” This is the first Asia-listed stock that Travis has written about, and I hope he can share more such ideas in the future! Following Asian Fund Managers Directly Asian mutual funds will disclose their holdings periodically in quarterly or semi-annual shareholder reports, which are typically available on their respective websites. For Asian hedge funds, I will be on the lookout for any interviews that the fund managers have done or investor letters that they have made available. Ronald Chan will probably be a familiar name to my readers. Ronald Chan is the author of the book “The Value Investors: The Lessons From The World’s Top Fund Managers, which I have quoted a couple of times in my previous articles. Ronald is also the author of another book “Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders,” where he interviewed the top managers of Berkshire Hathaway’s subsidiaries. It is obvious from these two books that Ronald is a value investor; he is currently the Chief Investment Officer of Chartwell Capital based in Hong Kong, which he started in 2007. In a Barron’s interview published in November 2014, Ronald spoke about some of his holdings, including Oriental Watch (I am using the same stock as an example to illustrate that implementing a piggybacking strategy in Asia is more difficult compared with the U.S., but not impossible if one knows where to look). Ronald has this to say about Oriental Watch: Oriental Watch is a classic Benjamin Graham example where its assets are trading much higher than its market cap. Its market cap is about HKD900 million. Its retail properties are worth HKD650 million. The watch inventory, which is 70% Rolex, has a value of HKD1.8 billion. Add cash, minus debt, I think it’s worth HKD2.4 billion. I can sleep at night because I know that it has good inventory and the retail locations that are worth a fortune. This is a classic asset-driven, asset-backed idea which no one looks at! In his interview with Barron’s, Ronald also highlighted the following Asian stocks: Hyundai ( OTC:HYMPY ) (005380.KS), Kia ( OTC:KIMTF )(000270.KS), Central China Real Estate (832 HK) and Dynam Japan Holdings Co. Ltd. ( OTC:DJPHF ) (6889 HK), a Magic Formula stock which I wrote about here . Cederberg Capital is another Asian fund that I follow. On its website , Cederberg Capital outlines its investment approach as follows: “Cederberg Capital utilizes a disciplined value-oriented approach in order to protect capital during periods of market declines and to maximize returns in the long run.” In Cederberg Greater China Equity Fund’s Q2 2015 letter, Managing Director Dawid Krige also commented on the firm’s investment philosophy: We are value investors at heart. However, we aren’t looking for Ben Graham’s “net-nets” or the “cigar butts” of the early-Buffett years. In our experience “cheap” often stays cheap in China, hence we are better off buying undervalued quality, i.e. good businesses managed by trustworthy people. We love growth, if through our research we can gain confidence about the likelihood it will be realised. However, we are careful not to overpay for growth, hence we always insist on a significant margin of safety, regardless of a company’s growth potential. Past and present investments that Cederberg Capital has profiled or commented on in its letters include Kweichow Moutai (600519 CH), which owns the top Maotai liquor brand in China, and Clear Media ( OTC:CRMLY ) (100 HK). Clear Media was a past investment of mine which I successfully exited with a 80% return in 14 months in August 2014, inclusive of a special dividend. Clear Media was an outdoor media company with dominant bus-shelter advertising network; it boasted an unique mix of deep value and wide moat characteristics. At the point of my purchase, Clear Media traded at 3x EV/EBITDA, with net cash accounting for close to half of market capitalization. Its business and attractive returns on capital were protected by high barriers to entry due to local regulatory approvals required for construction and maintenance of bus shelters. However, it is unfortunate (for investors like us) that Cederberg Capital has decided to “limit discussions of existing holdings to protect our intellectual property and to mitigate any behavioral biases, though we will continue to discuss investments we’ve exited in future letters.” Nevertheless, I look forward to reading Cederberg Capital’s future letters to learn about the firm’s past “case studies.” Replicating Guru Investors’ Potential Buys In Asia Via Quantitative Screening Walter Schloss is one of the deep value investors that I admire and seek to emulate, particularly considering that he has the longest and most consistent investment track records among his peers. However, it is regrettable that Walter Schloss stopped managing money in 2001 (partly due to the fact that cheap U.S. stocks became hard to find), and he never invested in Japan or Asian stocks given concerns over differences in politics, language and regulations. Nevertheless, I thought hard about what Walter Schloss could have potentially bought in Asia if he applied his stock selection criteria for U.S. In an article titled “Walter Schloss’ Japan Shopping List For Deep-Value Stocks” published here , I did a screen based on Schloss’ 16-point “investment checklist” and found 20 Japanese stocks and 299 Asian stocks that will meet his stock selection criteria of trading near historical share price lows, being valued at a discount to net asset value and having debt-to-equity ratios below 1. Looking ahead, I plan to try to replicate other investors’ investment strategies in Asia using screens and sharing the results with my readers and subscribers. Concluding Thoughts Personally, I don’t subscribe to the view of cloning any investor’s portfolio lock, stock and barrel, even for U.S. stocks. The reason is that there are various complications involved with piggybacking such as time lag, average purchase cost and portfolio sizing. In the Asian context, a complete cloning approach is even more risky, considering that it is more difficult to track any individual fund manager’s exact holdings and buy/sell history with reasonable accuracy. Instead, I advocate that investors use fund managers’ holdings as either an idea generation tool or an alternative form of validation of one’s original investment thesis. Note: I utilize a 360-degree process to generate investment ideas, including screens, insider trades, 13Fs, fund manager letters, analyst reports, blogs, forums among others. Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of deep-value & wide moat investment candidates and value traps, including “Magic Formula” stocks, wide moat compounders, hidden champions, high quality businesses, net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts.

How To Avoid Potential Value Traps With Net-Nets And Other Deep Value Stocks

Summary Rejecting ideas fast is a key aspect of making one’s stock research and investment process more efficient and effective. I provide several categories of companies and specific stocks that I rejected as potential value traps, as I ran through my raw stock screens. My exclusive research service, Asia/U.S. Deep-Value Wide-Moat Stocks, flags potential value traps with corporate governance issues, financial statement manipulation risks and other red flags. Background On The Idea Of Rejecting Potential Value Traps I have been a keen follower of Nate Tobik’s (Oddball Stocks) writings and work on deep value investing. In October 2014, Nate participated in a value investing seminar, where the video of his presentation was posted online here. In Nate’s presentation, he spoke about the process of finding and investing in oddball stocks. What caught my attention was this first bullet point on his slide titled ‘Evaluating Ideas’ where Nate wrote “Fail fast: Want to reject ideas as quickly as possible.” In the sections below, I outline certain (non-exhaustive) categories of companies and specific stocks that I rejected as potential value traps, as I ran through my raw stock screens. Past Dealings With Minority Shareholders Wong’s Kong King International (532 HK) operates under two segments: Trading and Manufacturing. The Trading segment is engaged in the trading and distribution of chemicals, materials and equipment used in the manufacturing of printed circuit boards and electronic products; while its Manufacturing business is involved in the manufacturing of electrical and electronic products. Wong’s Kong King is a net-net trading at 0.60 times P/NCAV. Based on its share price of HK$0.65 as of September 25, 2015, Wong’s Kong King’s share price is approaching its 5-year low, while its P/B ratio of 0.34 is close to the 10-year low of 0.32. In August 2006, Wong’s Kong King announced that Chairman Mr Senta Wong proposed to privatize the Company via a Scheme of Arrangement at HK$1.38 per share. The proposed privatization did not go through because it was not approved by the majority of independent shareholders (excluding controlling shareholders/interested parties) in October 2006. In April 2007, the Company announced that it will dispose of substantially all the operating businesses and assets of the Company to Mr Senta Wong and distribute the sales proceeds of approximately HK$1.17 billion or HK$1.65 per share to shareholders (“Proposal”); the Company will become an empty shell and subsequently be delisted. At the Special General Meeting in June 2007, the resolution relating to the Proposal was not passed by independent shareholders. Only 47.22% of the votes were cast in favor of the Proposal, falling short of the 75% required. Mr David Webb, a well-known activist investor, owned more than 3.16% of Wong’s Kong King’s shares at that point the Proposal was announced, and highlighted that he “would veto it at the shareholders’ meeting on June 28.” According to a South China Morning Post article dated June 7, 2007, Mr David Webb said that “We estimate that fair value of this stock to be around eight times trailing earnings, or over HK$3 per share. We would reject an offer below HK$2.50.” According to the circular issued by the independent financial advisors, comparable companies trade at mean and median P/Es of 9.64 and 8.84 respectively, compared with a 4.68 times implied P/E based on the HK$1.65 per share disposal value. While Wong’s Kong King is enticing as a deep value net-net stock at current valuations, the Company’s past actions indicate that it is less likely that an attractive or reasonable privatization offer will be on the cards anytime soon. Sub-Optimal Capital Allocation Miko International Holdings (1247 HK) is “a mid-to-high end children’s apparel brand in China. Its “redkids” brand is ranked second among mid-to-high end children’s apparel brands in China,” according to its company profile . Miko is a net-net valued by the market at 0.54 times P/NCAV. Net cash also accounted for approximately 124% of Miko’s market capitalization, implying the investors are getting the Company’s core business operations for free at current valuations. In June 2015, the Company announced it was issuing 85 million new placement shares (10.3% of the issued share capital) at HK$1.03 per share, or 10% discount to its closing share price of HK$1.15 on June 24, 2015. In the end, the placement was terminated in July 2015, due to “continued high volatility in Hong Kong and PRC securities market and unstable political and economic conditions in Europe.” Nevertheless, the proposed placement did not make sense considering the significant amount of net cash (HK$528 million of net cash on its books as at end-June 2015 versus HK$87.6 million to be raised) it has on its balance sheet and the stock’s low valuations (even at that point in time). Good companies engage in value-accretive capital allocation practices by placing out new shares when their stock is overvalued, and repurchasing shares when their stock is undervalued; companies which are potential value traps do the reverse. Target Of Short-Sellers China Zhongwang (OTC: CHZHY ) (1333 HK) is the world’s second largest and Asia’s largest producer and developer of industrial aluminum extrusion products.” China Zhongwang is a deep value stock trading at half of its book value, which is close to its historical P/B low of 0.46. Dupre Analytics (DA), a short-seller research firm, issued a report on China Zhongwang and disclosed its short position in the Company in end-July 2015. DA claimed that the Company’s “real revenues are much lower than reported,” and “overstated CAPEX expenses” among other allegations. China Zhongwang has since made clarifications in announcements here and here , rebutting DA’s claims. In the announcements, the Company’s Board “reiterates that the allegations in the DA Report are groundless, and that the DA Report contains various misrepresentations, malicious and false allegations and obvious factual errors.” I follow a couple of short-seller research firms and their work; I tend to avoid stocks highlighted by them as I prefer not to bet against the “smart money.” I also use the Beneish M-Score as a tool to filter for potential value traps. Takeaways I always liked the quote “Losing an illusion makes you wiser than finding a truth,” and I found that this applies equally to value investing. The earlier that one loses the illusion that all deep value stocks are unjustifiably cheap, and rejects certain potential investment candidates and adds them to his or her list of value traps to be avoided, the closer he or she will get closer to finding and picking the truly undervalued stocks. (Note: I am not a English major; I might have misinterpretated the quote and applied it incorrectly.) Note: I flag potential value traps with corporate governance issues, financial statement manipulation risks and other red flags as part of my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service. My subscribers get access to the list of value traps for both deep value & wide moat stocks, in addition to monthly top ideas, potential investment candidate profiles and potential investment candidate watchlists.