Friday, March 26, 2010

Is the next bubble in Chinese real estate?

The global stock market has largely shrugged off troubles with Greek debt (its too disconnected from most economies, too small and insignificant, and members of the EU will have to bail out Greece before another financial crisis develops), US policy uncertainty (on healthcare and the banking sector), as well as early signs of tightening activity in China. The US recently hit new 18-month highs, with the Dow Jones Industrial rising for 8 consecutive sessions. Despite the moderate levels of optimism displayed by investors in general, we consider it prudent to focus on potential issues which could derail the stock market in the near future.

Unsettling reports out of China
Of particular interest at this juncture is the potential bubble in Chinese real estate, an issue which could have profound backlash on various risk asset classes, Chinese property developers notwithstanding. China's real estate prices rose 10.7% year-on-year in February 2010 (according to the National Bureau of Stastics), following a 9.5% gain in January, fueling worries that Chinese property prices have risen too fast and too furiously. Various "on-the-ground" experiences reflect the increasing bubbly nature of the property frenzy (Real estate: China’s god of fortune, CHINA PROPERTY: Aspiring tycoon makes killing in virtual home sales).

Official statistics of home prices in China are generally not a good reflection of actual on-the-ground conditions, making it difficult to assess the situation. These less-than-accurate growth figures are also difficult to relate to the entire property market, with varying nuances affecting different segments of the market. Generally, various reports suggest that first-tier cities (Shanghai, Beijing, Shenzhen and Guangzhou) are experiencing some semblance of substantial overvaluation, while the problem is less prominent in second-tier cities. Low levels of borrowings (generally, most Chinese buyers pay cash for a majority of their home purchase) are a positive indication, differentiating the Chinese property market from other property bubble crashes in the past (US, Japan) where large levels of mortgage debt were employed. However, "this time is different" is usually inconsequential at the end of the day, whether in the heights of an asset bubble, or in the depths of deep recession.

No one really knows if the property market will collapse, but we want exposure
We admit that we are not in a good position to judge the extent of disconnect between property fundamentals and prices being paid. On the other hand, we continue to believe in the long-term potential of the Chinese economy, which entails some of the best growth potential over the next decade or two, on the back of unparalleled potential consumption and spending power (driven by the continued trend in urbanisation and growing affluence), and Chinese property represents one of the best ways to benefit from this immense long-term trend. Yet, talk of speculative-like property prices in first-tier Chinese cities (and some second-tier ones) is rather unsettling.

Indirect plays
Given the uncertainty over Chinese property, we have incorporated exposure to the Chinese property sector via indirect plays, rather than investing in companies who are wholly-leveraged to the Chinese property market like Yanlord Land. Capitaland is a leading real estate developer in South East Asia with a view on increasing its assets in China over the long term, but retails large amounts of property assets in the region. WBL Corp holds extensive landbank acquired at much lower prices, but has a diversified mix of businesses which include automobile distribution as well as technology manufacturing. F&N is increasing operations in China, but retains its stronghold on the South East Asian drinks market with a dominant market share. None of these companies are expected to collapse in the event of a prolonged downturn in the Chinese property market, but are all well-positioned to benefit from the longer-term growth in this space.

Friday, March 19, 2010

Hotung - Tai Lung Capital increases holdings

Tai Lung Capital purchased 2,438,000 shares on the 17th and 18th of March at US$0.12 apiece (Tai Lung Capital is the founding Huang family's investment company), the second major purchase by Tai Lung Capital this month. Earlier on March 11 and March 12, the Huang's investment company purchased 3,000,000 shares on the market at an average cost of US$0.1183 per share.

This brings the Huang family's deemed interest in Hotung to 15.62%, or 172,893,979 shares. This includes (1) 147,888,008 shares held by Tai Lung Capital Inc. (2) 18,944,774 shares held by Chung Lung Investment Co., Ltd. (3) 6,061,197 shares held by Mr. Chin-Wei Chen (the husband of Tsui-Hui Huang, the Chairwoman). 

Thursday, March 18, 2010

Saturday, March 6, 2010

Jardine Strategic looking to buy back shares

Jardine Strategic, our largest holding in the portfolio yesterday announced its 2009 full-year results. No surprises in terms of profit, as the major subsidiaries have all reported earlier. With about 621 million shares outstanding (after adjusting for crossholdings in Jardine Matheson), total reported shareholder equity of US11,743 million means NAV per share is US$18.91, which means that the stock is currently trading at a discount to book. Reported NAV based on market value of underlying holdings is much higher, at US$32.64, almost twice the last traded price. We continue to view Jardine Strategic Holdings as a cheaper alternative to get exposure to a great pool of businesses, rather than to purchase the individual companies. 

What is interesting from the latest announcement is that Jardine Strategic is looking to buy back shares to reduce capital. The company is looking to spend up to US$250 million to repurchase 13.9 million shares in a buyback tender offer, pricing each share between US$18 and US$19. While this seems a paltry amount compared to outstanding shares of 1,107,130,421 (last reported), it must be noted that about 81% of the company's shares are locked up in Jardine Matheson, which will not be tendering any shares. This leaves about 210 million shares left to participate in the offer. Assuming all holders participate and a pro-rata offer results, this will result in a 6.6% decrease in free-float, leaving free-float at about 18%. This could have some negative implications on the weighting of the stock in the STI, and other major market indices which consider free-float as a key criteria. While the offer price appears tempting, it is unlikely that we will be able to sell our entire holding of 500 shares in the indicative US$18-19 range, and given that NAV is about US$18.91 a share, we will choose to keep our entire holding in the company, and benefit from the reduction in the number of outstanding shares.

Friday, March 5, 2010

New holding - Hotung Investment Holdings

Bought 15,000 shares of Hotung Investment Holdings at the market close on a matching trade at US$0.11 (we were looking to buy 20,000 shares). The company is a market leader in venture capital based in Taiwan, but is curiously listed on the Singapore Exchange, where it receives little investor interest. The company recently reported earnings, which have recovered from 2008 where write-downs were aplenty. More importantly, the company trades at just half of book value, which makes it rather interesting.

Wednesday, March 3, 2010

Sold JNJ for WBL

We sold our holdings in Johnson & Johnson (50 shares at $63.40) and purchased another lot of WBL (at $5.05), given our strong conviction on the latter. JNJ probably offers an excellent play on three areas of the healthcare sector - Pharmaceuticals, medical devices and consumer care, but the stock is more fairly valued (at a mid-teen PE and is unlikely to double anytime soon!). Also, the healthy dividend paid each quarter is not extremely attractive to us, especially after being net of tax (30%) and administration fees. We continue to retain some exposure to JNJ via our holding in Buffett's Berkshire Hathaway.

Monday, March 1, 2010

Portfolio flat in February

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD


TAT HONG W130802 9.1%





SPH 0.3%



WBL Corp -0.2%

STI ETF -0.4%



Capitaland -2.1%



SGX -3.5%


TAT HONG -8.6%