Re-Looking Value Investing

I have been reading Howard Mark’s earlier book ” The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor” and his latest book “Mastering the Market Cycle: Getting the Odds on Your Side” lately.  First off, I would strongly recommend that all investors read both books.  It is the culmination of Mark’s 40 years of investment experience.  I find the first book especially relevant as it encapsulates higher level investment thinking perfectly in its manifold complexity and subtlety.  It is certainly thought provoking to read it now again as we enter into another period of turbulence and possible major correction in the markets.  It definitely helped me put all the current stock market volatility in context.  Incidentally, I had also been re-reading Benjamin Graham’s classic “The Intelligent Investor”.  Maybe because I’m getting on in age but now reading this classic again, I find the many examples given by Graham to be so relevant today even though he was talking about stocks in the 1960s and 70s and those decades before that.

In the same spirit, I have taken a re-look at Asian stocks.  I must say that to my surprise and bafflement, some of the stocks that I had previously not looked at or even considered, seem to offer quite a bit of “value”.  Here are some stocks to ponder about:

  1. China Machinery Engineering (1829 HK)China Machinery Eng FA

This stock is one of the greatest investment conundrum in my investing career so far.  Can a stock really be traded so cheap consistently?  As of 30 Jun 2018, according to Bloomberg’s data, the stock has cash worth USD4.2bn on balance sheet and debt (and related) of USD193m and a market cap of only USD1.9bn currently?!  This gives the stock a negative Enterprise Value (EV) of ~USD2bn!!  Ok I admit, this is the first time I have seen an example of a stock that is traded at a negative EV.  The most puzzling thing is this: that the stock has consistently traded below its net cash per share since 2014.  Indeed, it’s value had not prevented it from being further derated by the markets this year as its negative EV swelled from USD780m last year to USD 2bn currently.  What could have caused this to happen?  Isn’t it cheap enough for a stock to be traded below its net cash per share?  Isn’t that a big enough margin of safety?  Any investor thinking so would have lost money in the stock since 2014!  This is a sobering thought for many value investors and one for me to remind myself of.

This reminds me of another stock that I have looked at a long time ago called Hankuk Electric Glass listed in Korea but was subsequently privatised by its majority shareholder Asahi Glass in 2011.  It was the first time I had encountered a stock that was traded so close to cash per share.  The market cap at the tender offer price priced the company at ~KRW477m at that time, hence it was just a mid cap company back then.  Of course it was in a pretty unattractive industry at that time, producing glass tubes for CRT TV at that time.  Lousy sunset industry but generating good enough cash.  Enough at least for Asahi Glass to take it private at a EV/EBITDA valuation back then of 4x.  In this case, the case for value investing was upheld as stock was taken over at a premium of ~35% of last traded stock before the announcement.

2. Weiqiao Textile (2698 HK)


Weiqiao Industry is the other stock that I noticed that trades at a negative EV.  Cash on balance sheet of USD13 bn and debt of USD7bn which means a net cash of USD6bn.  The stock is now trading at a market cap of USD2.7bn??  Note that this is not a small/mid cap either.   If you look at the Historical Price to Book ratio of this company, it is absolutely baffling.  The stock spends most of its time below 0.4x PBR.  Indeed, it is currently trading at 0.15x!  This is not too far away from its GFC low of 0.12x.  Sure, the textile industry is not a very sexy industry but to trade at these valuations??



3. Tencent & MGM China

These 2 are not exactly value stocks but I happened to look at their PBRs this week and lo and behold, they are now trading below their GFC lows!  So is the current situation as bad as it was in 2008?  Maybe I’m really wrong but it certainly doesn’t feel this way to me!



During the current market correction in Asia, it certainly feels that the crisis hasn’t shown any signs of slowing down.  In fact, if anything, investors are just seeing companies reporting their first set of quarterly results since the Sino-US Trade war.  It seems increasingly likely that the Trump might continue to escalate it further.  The US market is also starting to break below their 200 day ma this last week.  If this is the beginning of a long overdue market correction in the US, it is unlikely that emerging markets will escape unscathed.  So are we headed for a crisis worse than the GFC in 2008?  I am not sure but certain stocks are already priced at those levels with quite a few stocks already trading at below net cash levels.  Let’s see how future events unfurl.


BAIC, Brilliance China & MyEG

This week, some updates on some of the stocks mentioned in my previous entries.

  1. Brilliance China

Stock had collapsed since my last update . BMW has announced that it will increase its stake in the JV from 50% to 75%.  It will pay Brilliance China about US$4bn  for the stake or 7.8x PER18.  This is slightly higher than the current depressed valuation of Brilliance China of 6.6x PER when the deal was announced on 11 Oct 18.  (Share price was at HK$10.76).  If the management pays out the entire proceeds in special dividends, shareholders would receive HK$6.60 per share in return for the sale of the stake.  In fact, before the news was announced, the management had promised to do exactly that.  In addition, it said that only minority shareholders would be allowed to vote on the deal.

However, as it turns out, when the deal was announced, the notice to the HKEx gave management the leeway not to pay the entire proceeds out in special dividends and it did not say that the major shareholders will not vote in the deal.  Shareholders were shocked at the about turn and sold down the stock.  Last close for the stock was HK$6.90.  The stock had lost 71% from it’s recent peak of close to HK$24 this year!  Not that the business itself is actually doing very badly.  Consensus estimates are expecting the company to grow 34% in 2018 and 22.7 % in 2019!

Lessons to self:  Valuations and fundamentals of a company is one thing but the possibility of being disadvantaged as a minority share holder is another.  These things happen in a random fashion and short of having insider information, it is not possible to foresee such outcomes.  That is why it is important to diversify.  Why should the major shareholders sell its crown jewels at a pittance?  Remember that the company is a State Owned Enterprise whose real motive is not to maximise shareholder returns but to serve their political masters.  In this case, Prime Minister Li Keqiang has promised the world that China was serious about opening up its economy to foreign countries and he has mentioned publicly that the test case would be the Brilliance-BMW JV.  The deal had to be done this year despite its very bad commercial timing.  And minority shareholders were not going to be allowed to vote the deal down.  BMW obviously realised this and pressed it to their advantage, promising to bring more investments into the country and increasing employment, especially in the North Eastern region of China where the economy was weak.

Would this repeat itself in the case of Daimler-BAIC Motor?  Here are the reasons why I think it might not happen the same way.  First, notice the shareholding structure of Brilliance China.  Unlike Daimler (which holds a direct stake of 30% at the listed entity level of BAIC Motor), BMW does not hold a direct stake in the listed entity and parent Brilliance China but instead holds the stake at the JV level.  This means that if the interest of BMW and the minority shareholders of Brilliance China are not aligned i.e. if the share price of Brilliance collapse, BMW will not feel the pain.  Second, BAIC Motor is owned by the central government (Beijing) whereas Brilliance is owned by the regional government.  It can be argued that the financial position of Beijing is much better than in the Liaoning province where Brilliance is based.  Therefore they should be in a much better bargaining position.  And finally, the showcase deal in the auto sector is already done and there as less pressure for the Chinese government to do another deal so quickly.


Brilliance China Growth Forecast Oct 2018Brilliance China Growth Forecast Oct 2018 - 2

2. BAIC Motor

Just a quick update on the stock.  The share price has declined since our last note on the stock.  This was dragged down by fears that the company might suffer the same fate as Brilliance China.  The entire auto sector has also entered into an unprecedented period of slowdown.  This is the longest stretch of negative monthly yoy decline in auto retail sales since the global financial crisis (6 months).  Even longer than during the stock market crash years of 2015-16. There are many possible explanations for this.  The first is that the rising property prices in the last 2 years have taken a toll on disposable income.  I have heard the same even from my younger friends working in the finance industry in Shanghai.  Many young people are forced to buy a piece of property as soon as they can raise the downpayment before home prices goes even higher.  Normally, if their parents could afford it, they would pay the downpayment amount for their kids (~30% of the value of the property) while their kids are responsible for the monthly installment.  Even then, many complain that more than half of their monthly salary is going into the installments, leaving precious little for everything else.  One interesting phenomenon we see this year is that while retail sales is hardly growing this year, luxury auto sales are growing at 15-25% YTD.  In other words, only the rich can still afford to buy cars.

A word on the valuations.  At the current share price (HK$4.48), the stock is trading at 5x PER18 and 3.5x PER19 and is expected to pay 7.8% in dividend yield.  What I find more extraordinary is that when you look at the cashflows generated by the company, the current valuation looks even more ridiculous.  The company is trading at 1.25x EV/EBITDA this year.  Last year, it generated free cash flows of roughly US$2.9bn.  Even assuming that the company doesn’t grow this year and the next and generates the same amount of FCF, this is ridiculous considering that the market cap is only slightly more than US$5bn!!  At the rate the share price is declining, they might as well give away the company for free.  Either the company is going to go bust or this thing looks like it should be priced a lot higher than the value that the market is giving it now.  I must say that this is probably the only really consistently cash generative stock that I have seen that it trading this cheap.  Most of the time you will see crappy small caps, unknown companies trading at these valuations.  But this is a real company, earning real cash paying real dividends.  To be honest, I’m pretty stumped by this.  I would be keenly following the subsequent developments in this company just to see if the market is really right in pricing the perceived risk with this company.  Indeed I have done a quick screen of all the companies listed in the Asia Pacific markets above US$1bn market cap and this was indeed one of the cheapest stocks at the current moment!  And remember, the company is not even forecasted to have declining profits this year and the next! Go figure…

3. MyEG

Finally, another quick update on MyEG mentioned in this last note.  The stock took another dive this week on 19 Oct 18 Friday closing down 25% in less than 2 hours before it was suspended. It was mentioned in a piece of news on the arrest of former Malaysian Deputy Prime Minister Ahmad Zahid Hamidi on charges of money laundering and corruption.  It appeared that bribes were paid to him by 2 companies Datasonic and MyEG to secure government contracts.  However, MyEG later issue statements to the exchange that it was not the one paying the bribes but it was someone paying the DPM the bribe in exchange for  a possibility to get a contract with MyEG. Subsequently they also issued another statement saying that the Malaysia Anti-Corruption Commission (MACC) clarified that the company was indeed not a target of the investigation.

Company statements clarifying link with ex- Malaysia DPM

MyEG Statement on MACC clarification



The All Weather Portfolio

As an investor who has only invested in equities all my life, it is nice sometimes to take a different perspective on investment.  Just last week, I had chanced upon the concept of an All Weather Portfolio as proposed by Ray Dalio (and subsequently simplified by popular motivational speaker Anthony Robbins).  I find the approach very common-sensical and worth spending some time thinking about.  I have also been thinking about how I can apply it to my own investment portfolio.

First and foremost, the basic assumption for such an approach is a sound one, and that is: we don’t know for certain if any asset class (most commonly equities, bonds, commodities, real estate etc) will do well for sure in the future.  Therefore we have to diversify our investment portfolio. So far so good.  One of the biggest question anyone has to answer then is: what qualifies as a diversified portfolio.  If you are solely investing in equities and you have a portfolio of a hundred stocks, is that diversified?  Back in the days, we were told that is why we are better off investing in a mutual fund rather than trying to pick a few stocks on our own.  “Don’t put all your eggs in one basket” is the old adage in investment.  In modern times, instead of putting money in mutual funds, you can get the diversification you need at a much lower cost by buying Exchange Traded Funds or ETFs.

However, as time went by, this was seen as being insufficient.  Investing purely in equities is clearly volatile.  Many people will have many a sleepless night if they were to track their daily investment portfolio performance (trust me, even after doing it for 2 decades, I am still affected by these swings in prices).  This in industry speak, is called “volatility”.  There are many things not to like about volatility in investment.  Other than the inevitable distress it causes, a short draw down in the size of your investment portfolio can mean that the money isn’t necessarily there when you need it.  Maybe you need to pay for an unexpected medical bill or other personal emergencies.  It is more than the inconvenience of it all.  You may have to sell your shares in a very bad market when prices are generally depressed and when it isn’t in your advantage to do so.

The solution?  A more “balanced” portfolio.  This was in vogue in the 1980s and are still being sold to institutional investors these days.  This means combining equities with fixed income (or bonds) investments.  Depending on the proportion of bonds vs equities, the volatility can be controlled and greatly reduced.  However, this comes at a cost – lower returns over the long run vs a pure equities portfolio.  This is because bonds have lower volatility and generally have lower returns than stocks in the long run.

This is where Ray Dalio’s All Weather Portfolio goes one better.  He recommends adding commodities and gold to the mix.  This is because there are certain conditions under which both bonds and stocks don’t do well and where commodity and gold shines  This is when inflation is generally high.  I have to admit that in the past 20 or so years that I have been investing, inflation had not been an issue.  In fact, it seems like we have been living in an age of deflation where commodity prices (bar the oil price) has generally been on a down trend and wage pressure have been all but absent.  However, as long term investors (and I mean investor who are planning for their retirement), we cannot say for sure that inflation will never return.

So …. after much rambling, here it is, Ray Dalio’s All Weather Portfolio:

  • 30% Stocks
  • 40% Long-Term Bonds
  • 15% Intermediate-Term Bonds
  • 7.5% Gold
  • 7.5% Commodities

And here are the relevant statistics for the 30 year period from 1984-2013 courtesy of Robbins:

  • 9.7% annual returns
  • You would have made money 86% of the time (so only four down years)
  • Average loss of just 1.9%
  • Worst loss was -3.9%
  • Volatility was 7.6%

Here’s more:

  • When back-tested during the Great Depression, the All Weather Portfolio was shown to have lost just 20.55% while the S&P lost 64.4%. That’s almost 60% better than the S&P.
  • The average loss from 1928 to 2013 for the S&P was 13.66%. The All Weather Portfolio? 3.65%.
  • In years when the S&P suffered some of its worst drops (1973 and 2002), the All Weather Portfolio actually made money.

Very impressive isn’t it? Needless to say I was super impressed.  However, the most important thing to note about the portfolio is that bonds make up 55% of the portfolio and that we are probably just coming out of the biggest bond bull market in our lifetime (and possibly in history?).  Interest rates were at a all time low not too long ago having gone down since the Greenspan years in the 1980s.  Although it is arguable whether we will go back to the times where interest rates were 20% or more (like in the 1970s), it is fair to assume that there is plenty of room for it to fall anywhere in between.  Even as we speak, bond markets made the headlines this week when 20 year US Treasury bond yields hit and held at 3.55%.  The long climb back up is probably just starting.

More importantly this means that in the next couple of years, bond prices will probably be down on average.  I am no bond expert but I am definitely looking into bond performance over a period of rising interest rates.  Might that affect the proportion of bonds I hold, it might.  Would I be considering a greater weight in gold and commodities?  Most certainly considering that!  In fact, remember what Jim Rogers said about soft commodities in particular (in my previous post)?  There are not many asset classes that are trading at 40-50% of their recent peak levels in the last 10-15 years and soft commodities is certainly one such asset class.

Now, going back to the All Weather Portfolio.  If you want to build your own All Weather Portfolio here’s how you can do it (courtesy of

  • 30% Vanguard Total Stock Market ETF (VTI)
  • 40% iShares 20+ Year Treasury ETF (TLT)
  • 15% iShares 7 – 10 Year Treasury ETF (IEF)
  • 7.5% SPDR Gold Shares ETF (GLD)
  • 7.5% PowerShares DB Commodity Index Tracking Fund (DBC)

You can consider substituting the above ETFs with your own.  Like I said, instead of DBC, I might consider adding in other soft commodities ETF to the mix above.  At any rate, the idea of diversification to the various classes in the proportion above is a sound and powerful one that all investors should consider.  Modify it by all means to suit your own risk profile.

dalio robbins 14102018

This time is different

OK, today is like a bonanza day.  I’m posting 2 entries a day to make up for what I missed the last week.  I have been contemplating a very fundamental problem in investing: should we be buying when things are down thinking that they should recover after a while (as they always have) OR do we really think that this time is different and that we are in a very unique world right now and what we are seeing here is unprecedented and we will not be going back to the old norms.  Believe it or not, despite having gone through this torture for more than 20 years, I still find myself having to go through this agony of self doubt every time this happens.

So in front of us is the opportunity to buy many stocks cheap, especially in China. However, many smart institutional investors that I speak to have warned me about investing in China, maybe ever.  I was told that the closer the investor is to China, the more pessimistic their views.  Investors based in China are very bearish about the future of China whilst investors in the US are most optimistic (because many of them have only seen Bull market corrections in their own markets in the last 20 years … every dip is a buying opportunity!).  My Chinese friends have pointed out to me that many of the smartest and most politically connected people in the country have been trying their hardest to move their assets out of the country despite the very tight controls that have been in place for very many years now.  Many prominent businessmen have moved to Singapore, I have been told.  In fact the families of many Chinese government officials have also emigrated to Singapore.  One would have thought that these are the guys most sensitive to what is happening on the ground and are the most astute analysts of China.  Who would you trust on their analysis of China, these guys or some analyst/fund manager based in the US?  My friends have pointed to deep seated NPL problems within the banking sector and the structural problems of the economy.  Where would the growth come from, they asked?  The factors that have contributed to the past success of the country is now gone: export growth fuelled by cheap Chinese labour and open international markets, government infrastructure spending that ensures that growth targets each year are met.  Now with a hostile US, suspicions on China and their intentions everywhere around the world and lack of further room for significant infrastructure build up compared to the past, where indeed is the growth going to come from?  The US-China trade war might have started a irreversible process of manufacturing moving out of China into other emerging markets (and even maybe back to the US).  So definitely one less source of FDI.

Speaking to another of my friend this week working in a senior role in a sovereign wealth fund, I was told that the fund is starting to contemplate the unthinkable: what if China were to take over Taiwan forcefully?  If the recent sanctions on ZTE showed the world anything, it was the fact that when it comes to technology, China was still at the mercy of US and its tech companies.  More specifically, China is seriously lagging behind in the semiconductor industry.  Indeed, most of its imports was in semiconductor related products.  And of course the easiest and fastest way to overcome that is to take over control of Taiwanese companies which are at the frontline of many technologies.  Anyway, I leave you to ponder the severity of what might follow if this scenario plays out.

So is this time really different?

Investor depressed 05102018

Another panic – YES Bank

yesbank 05102018

Yet another example of a panic.  This time, it is YES Bank in India.  This time the stock lost a whopping 50% in the space of one month.  The stock had already started declining together with the rest of the banking stocks in late August/early September. It will take a while to explain the chain of logic that led to this but here goes … the markets were increasingly worried about a sliding currency, this in turn is due to recent problems with EM currencies as USD appreciated (as the Fed is expected to raise rates and as 10Y Treasury bond yields break 3%).  This is further compounded by the fact that oil price was increasing due to geopolitical problems (US threatening sanctions on Iran).  And India being a country with twin deficits and heavy dependence on imported oil became an easy target for short seller on the Indian Rupee.  A weaker currency would then lead to higher import prices leading to higher inflation which in turn necessitates higher interest rates.  Higher interest rates is brought about by reducing liquidity in the system and is therefore bad for banks because it increases their cost of funds.  A caveat to this is that this applies largely to banks who borrow from the interbank markets (so called wholesale banks).  Banks who have their own depositor base have access to cheap sources of funds (like HDFC Bank for instance) and are therefore less worried about rising interest rates, which might ironically be goof for them since they can charge their clients more while paying their depositors just slightly more interest on their deposits to appease/retain them.

Now the problem with tighter liquidity and higher cost of funds started becoming a problem to the weaker financial institutions.  One such institution was a lender called Infrastructure Leasing & Financial Services (IL&FS) who started defaulting on its debt in early September.  On 22 Sep, another Housing Finance company Dewan Housing also defaulted on its bonds (its stock tanked 42% on the same day).  This in turn led to a panic sell in the whole Non-Bank Financial Companies (NBFCs) but the panic inevitably spread to the banks as well. The regulators compounded the panic by asking all local fund management houses to declare their exposure to NBFCs as a whole.  I can almost imagine many managers selling down their exposure to the sector before reporting to the authorities.

In the context of what had happened, the Reserve Bank of India (RBI) suddenly announced that it will not renew the term of Rana Kapoor, the Chairman/CEO and Co-Founder of YES Bank.  In fact, Rana Kapoor IS the face of YES Bank, a bank that had only been founded in 2004.  The company was at the right place at the right time and in the next decade or so grew its loan books like crazy and made it one of the biggest financial institution in the country.  There is another long and convoluted story about why the RBI refused to renew his term.  But the short version of it is that the new central bank governor is finally getting serious about dealing with the problem of hidden bad debts in the financial institutions in the country.  Yes Bank and some of the Indian banks were found to have understated their problem loans and have ignored RBI directives to reveal the extent of the bad loans in accordance with RBI’s guidelines and definitions.  RBI finally decided to take a hard line and refused to extend the term of various prominent CEOs to signal to the market that it means business.  This sent the stock down 25-30% on 26 Sep, and more in the days to follow.

My own hunch is that the problem is far from over.  As with all  companies, there are lots of stories surrounding a crisis and YES Bank is no exception.  If you scour the media for news on its founder and other major share holder Madhu Kapoor (Rana’s sister in law and wife of his deceased brother and co-Founder), you will no doubt know of the bad blood between the 2 and the struggle between the 2 for control of the company and the Board.  In the process, it has been speculated that Madhu might in fact be the whistleblower, informing the RBI of the malpractices that have been going on in the bank in the past decade or so.  This may lead to more disclosures of the extent of the bad loans on its books which obviously might cause the stock to take another plunge.

Now the question for investors considering whether to buy the stock, the first question they need to answer is if this company is still going to be around in a couple of years.  If the answer is a YES (no pun intended!), what is the competitive advantage of this company.  Has it built itself a valuable franchise over the years that others might consider taking over?  Finally, the most important question is when is the right time to buy into the stock.  Normally for the case of a stock in crisis (I have written about My EG, Gabungan  AQRS in my previous entries), I would prefer that the valuation is dirt cheap, it is paying a decent dividend (which is a sign that the business is still generating lots of free cash flow and paying them out) and that even the major shareholders think that it is too cheap and are buying back shares with their own money.  So far none of these are true for YES Bank, so I guess right now, we can only wait to see what happens.  Oh of course, we will be watching for the chart to tell us that they are ready to move on by showing a change in trend (50 or 100 days SMA cutting the 200 from below).

Gap Down Stocks

Recently there has been several interesting cases of stocks that saw a sudden collapse in share price.  This normally happens when a totally unexpected event hits the stock and the company is thought to be at risk of going under for some reasons.  Remember that this may not be the reality but because of extreme fear, investor suddenly think that a company that was perfectly viable in the last month is suddenly in danger of collapsing.  In most cases,  this would hardly be the case.  This is especially true the bigger the company (measured either by market cap or revenues). Here are a few:

  1. My E.G.


An IT solution provider with most of the revenue generated from government contract.  The company was assumed to be dependent on political favour from UMNO, the then ruling party in Malaysia.  This however changed overnight when the opposition party unexpectedly won the elections.  The once high flying stock declined from  RM2.60 to an intraday low of  RM0.66.  The stock promptly recovered but the initial recovery was fraught with uncertainty.  The first sign of confidence came with the major shareholder did a major share buy back.  Subsequently, the company also announced wins in new projects which dispersed the earlier worries that the new government might go on a witch hunt for supporters of the previous regime.  This turned out not to be the case.  As it turns out, the main reason why the company won contracts was  not because of their political connections but because they were offering these services to the government at or near cost which made it difficult for the government to say no to.  They were making money from the data collected which they subsequently sold to 3rd party like banks offering car loans.  Like they say, it’s hard to compete with free (or cost).

2. Gabungan AQRS

AQRS 23092018

This is a Malaysian construction company that again was thought be a major beneficiary of government mega projects given out before the elections.  After the shock election lost of the incumbent party UMNO, the new government said that they will review all projects given out previously and to cancel most of the projects which they thought were too expensive.  The new PH government was on a drive to cut back the budget deficit and government spending after years of being in debt and overspending.  The company was thought to be in danger of losing a few major contracts and being a small cap company, this could affect the company finances significantly.  Stock collapsed from RM1.55 to an intraday low of close to RM0.61.  As it turns out, even if they company didn’t add any of the recent projects signed before the election, it was already trading at a PER18 of 3.5x according to one analyst estimate with dividend yields of 5%.  The selling had been indiscriminate, needless to say.  Again, the first signs of turnaround took place when the major shareholders starting buying back shares.  Subsequently, there were increasing talks that the major projects will not actually be cancelled but will be modified so that it costs less.


3.  Beauty Community

beauty community 23092018

This is a Thai cosmetics company that had been a hot stock.  The company announced its first ever miss in earnings due to a slowdown in sales to China.  At the same time, the industry was also hit by cosmetics/supplement related deaths caused by unlicensed players using substandard material.  Right before this happened, major shareholder Suwin also said that he wanted to sell down his stake in the company from 70% to 20%.  Fears turned to panic when for another rumour was spread that the numbers announced previously had been faked.  The company came out to clarify that they are expecting sales to recover in 2H18.  The company also announced a share buyback.  Share price had declined from THB23 to a low of THB6.80.


The takeaway for me in these cases is to keep a look out for fallen angels.  Think about whether the company’s competitive strength is still intact after the recent event.  If it is, it might be a good chance to be greedy when others are in fear.



EM worries

Not much update this week. Markets continue to be worried about emerging markets currencies weakening.

In China this week Macau casino names continue to sell off even though monthly GGR numbers were better than expected and with Golden week coming up, numbers should improve further. Further evidence that fundamentals are not in the driving seat at the moment. Chinese autos continue their slump as Mercedes and BMW recorded teens growth yoy for the month of August. Not bad if you ask me especially with overall auto sales showing signs of weakness lately. Note to self: watch Geely. To be honest, didn’t pay much attention to the name before. Many years ago, the common conception was that the company was just padding itself up with local government subsidies which accounted for a significant chunk of their profits. But in recent years it did extremely well and became the darling of the market, which was the reason why I wasn’t inclined to look at it. But now it has become a fallen angel as well with share price down more than 50% from recent peak together with the rest of the Chinese auto stocks. 1H18, the company grew profits more than 40%. And the company is indicating that 2H18 should at least maintain the momentum if not be better. So why the slump? Wrong question. It is the way it is. Mr Market has decided to quote you a very low price so don’t argue with him.

What intrigues me at the moment is 3 tech related industries: DRAM, passive components, raw silicon wafers. Demand remains robust according to the companies. Supply remains in the hands of a few companies. This is the result of more than a decade of oversupply previously. So much so that competition has either gone out of business or have been acquired by the current big players. Remaining players have been reluctant to invest more money to buy more expensive machinery. They are increasing prices in the face of fast growing demand instead. And why not, after suffering for so many years? The interesting thing is no new competitor will add new capacity either. Otherwise they will be suffering from huge depreciation vs existing players who have fully depreciated machines now. Oh if that is if they can get manufacturers to provide them with machines. Apparently machines for some of the older technologies are no longer in production even though demand for the end product is still growing rapidly. One of the quirks in the current tech cycle – most of the older tech is sufficient to meet most of our every day needs. And yet share prices have halved in some cases and in the case of DRAM players like SK Hynix, it is now trading at a PER of 3x. I personally don’t forsee a scenario where demand for DRAMs will collapse in the next few years. We are dealing with demand for more data and more computing power and speed than the previous year, not less. So what is the market thinking? I don’t know. I would like to see how this plays out. This week famous hedge fund manager Tepper is on the record for saying that he is adding more Micron shares and that it is his largest exposure. Well, at least some one out there is expressing his conviction and sticking to it.

So if we were to be more charitable, we can say that the markets are possibly anticipating a slowdown when it has yet to happen, or when it has yet to show in any real world data yet. I wouldn’t argue that this would be the case. In fact it’s not hard to believe that things might slow down a little after a few years of heady growth. But the brutal sell down we have witnessed so far in Asia is something else. Like they say, every cycle is different and this one is no exception. I would definitely like to document this cycle as it unfolds. No one knows what will happen next after all. For all we know, something in the system might go horribly wrong (again there is no shortage of material in the current world for this to happen) and that might push us into the next deep crisis where markets go down another 50-70% from here. Why not? Let’s see.