On Capitaland's selldown, and keeping some powder dry

The Singapore market continued its descent today, a sixth straight day of decline. The STI closed 27 January 2010 at 2706.26, 6.6% below the closing level of 2009. The purchase of Capitaland on 25 Jan now looks like a "silly" buy, the stock closing today at $3.74, some 7.4% lower than our recent buy price.

Capitaland hit a recent peak of $4.38 on 20 Jan, after announcing the acquisition of Orient Overseas' Chinese property assets. Sell side analysts were in a rush to upgrade the stock, citing the transaction as "accretive to RNAV". Of course, the People's Bank of China's hawkish approach to lending subsequently led to a 360-degree reversal in sentiment on Chinese property stocks, leading to a sell down in Capitaland and other property companies with exposure to Chinese real estate.

As mentioned briefly in our prior post, we like Capitaland for its strong management and good track record of execution. Its ability to spin-off assets to the wide range of trusts and privately-held property funds under management is also a major selling point. The "premature" tightening activity by the Chinese central bank should be seen as a positive move to allow for more sustained growth in the years to come, rather than to have the economy grow too fast in the short term. After all, we are looking to hold our position in Capitaland for many years to come, to benefit from the Chinese growth story. So in a twisted sort of way, early measures by the Chinese central bank are generally positive in our view, but the resulting correction in markets presents a short-term opportunity.

Today we sold one non-core holding, Micro-Mechanics (7,000 shares, $0.40) and two lots of CapitaMallsAsia ($2.28). While Micro-Mechanics possesses a uniquely shareholder-friendly management, we think that it would be good to keep some powder dry in the event of a larger-than-expected market correction. Exposure to CapitaMallsAsia was obtained through the recent IPO at $2.12, and while we regretfully failed to take profits at the recent peak of $2.70 (!), the stretched valuations of the stock make it a low-conviction stock in the portfolio. The valuation of the underlying Chinese property funds are difficult to value, and even with recent revaluation done, the stock trades at about 1.3X book. We prefer exposure to the parent Capitaland, and have thus sold two lots to build portfolio cash reseves.

A market correction; bought Capitaland

Since opening at about 2,932 points on 20 June, the STI has corrected sharply to a low of 2,791 points at today's market open. The market has been impacted by worries of premature tightening activity in China, coupled with poor US market performance last Wednesday, Thursday and Friday, which wiped more than 500 points off the Dow Jones Industrial Average over the three days.

The US market has been hurt by Obama's statements on new regulatory moves to prevent banks from becoming too big to save in the future, as well as a proposed tax (for a decade at least) on the largest financial institutions to fund a potential US$100+ billion TARP shortfall.

Neither the tax nor the proposed restrictions on proprietary trading make much sense, considering that proprietary trading was hardly the reason why the financial crisis precipitated in 2007. A core portfolio holding, Wells Fargo, may be directly affected if new regulations dictate that the bank is too large in mortgage operations (considering that WFC swollowed Wachovia in late 2008, practically doubling its assets). However, given the lack of clarity at the moment, it is difficult to justify selling the stock based on uncertainty alone. As previously mentioned, WFC is easily worth $50 a share.

A market correction (current "threats" pose no obvious harm to the economic recovery) is a shame to waste, and one lot of Capitaland was picked up at $4.04 in early morning trade. Capitaland has a very strong management team, and its track record is almost impeccable. The many avenues for the developer to offload newly developed properties is also a huge (and rather unique) selling point. The recent acquisition of Orient Overseas Developments' Chinese property assets raises its China exposure to about 36%, making the company an excellent play on the Chinese market (without the usual corporate governance issues).

Added more Fraser and Neave

Picked up another 130 shares of F&N (80 at $4.24, 50 at $4.25) on the unit share market today. Note that stock is still cum-dividend (10.5 cents, ex-dividend on 1 Feb 10).

Wells Fargo worth at least $50!

Wells Fargo managed to post a small profit of US$0.08 per common share, against expectations of a loss: 4Q 09 earnings were impacted by the repayment of TARP (US$0.47 impact). WFC's results look decent; the bank posted record profit and revenue for 2009, helped by the Wachovia acquisition in 4Q 08.

Buffett was earlier quoted estimating WFC's pre-tax pre-provision profit (PTPP) at US$40 billion a year and the bank has not disappointed, with 2009 PTPP at US$39.7 billion, doubling 2008's US$19.3 billion. WFC took a US$21.7 billion provision for credit losses in 2009, up from US$16 billion in 2008. A quick sensitivity analysis using varying estimates for annual credit losses yields EPS estimates of between US$2.71 and US$4.74, which means the stock still looks a bargain. Credit losses under more normalised conditions could be closer to US$10 billion a year, which would translate to fair value at about US$52, more than 80% upside from current levels.

Quek Leng Chan raises Guocoleisure stake

Deemed Stake raised from 56.50 % To 65.53 % on 15-01-2010 via purchase through Guoco Group

New holding: Fraser and Neave

Added 120 shares of Fraser and Neave via the unit share market at $4.52 per share today. F&N's last reported NAV was $4.01 per share, so at about 1.13X price-to-book, the stock is not unreasonably priced. F&N traded at a large premium to NAV in the 2006-2007 market run up, but was priced at a huge discount to book in the 2008-2009 market downturn. At its recent low of $1.86 on 9 March 2009, the stock was trading at approximately 54% discount to NAV.

Of course, the stock has run up considerably, and valuations appear to be much less attractive. Nevertheless, the company is the clear market leader in beverages and beers, at least in South East Asia. The stability of the drinks business is complemented by the more volatile property business, and the two managed REITs offer opportunities for an asset-light approach (similar to Capitaland's). This is a quality company with a long track record, and could be a core holding within the portfolio. A dollar-cost-averaging approach will be taken via the POEMS sharebuilder programme.

Being the 18th of January, buying odd lots under the sharebuilder programme kicked in. Added 51 shares of SPH at $3.79 and 33 shares of STI ETF at an average cost of $2.98645.

QLC the buyer in Guocoleisure married deal?

A huge block of Guocoleisure shares were traded at 61 cents in a married deal just after lunch last Friday. The seller is likely Third Avenue Fund Management, which looks to have dumped its significant stake in the company at a substantial loss (shares were acquired at about $1.20 a few years back).

What is more interesting is the identity of the buyer, who may be Quek Leng Chan, the Malaysian billionaire who controls the Hong Leong Group. QLC is already the largest shareholder and previously attempted to privatise the company through Guoco Group at $1.25. Could another privatisation offer be in the works?

Hopefully not, as any offer at this stage would likely be closer to the recent trading range of 70-plus cents rather than the $1-plus figure most minority shareholders are hoping for.

With the company's shares still at a significant discount to book value, the shares remain an attractive investment. In particular, the Bass Strait Royalty is a gem of an investment, returning solid profit year after year and requiring no capital injections or operating costs. With oil prices remaining elevated, the royalty is expected to produce a significant contribution to overall profit in the years to come.

SAIZEN W120602 sold

Sold SAIZEN W120602 warrants today (12,000 at $0.085, 8,000 at $0.08), taking a small profit. The value of the warrants were just 1.5% of the overall portfolio. We are looking to boost the cash position through the sale of non-core holdings, which will be useful ammunition in the event of a market correction (which is long overdue).

Initial Portfolio Holdings

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.