More Buying For The Portfolio As Markets Remain Weak

We added CapitaMall Trust to our holdings today on general market weakness (3 lots at $1.73). We estimate that the annual dividend yield of 5.5% (based on $0.095 p.a.) is sustainable, and that rate has potential to expand as J-Cube completes and begins contributing to the trust. The recent acquisition of Illuma looks like a shrewd move - The mall's full potential was not being realised by the previous owners (thus they were selling relatively cheap), and CapitaMall's management should be able to ride on synergy between Bugis Junction and Illuma.

Recall that we sold CapitaMall Trust in July 2010 on the basis that a 4.5% yield was not a sufficient reward for holding the stock, despite the trust holding many prime assets. The stock has since corrected almost 15%, with the running yield now about 5.5%, 100bps higher than when we sold it.

We also added to Wells Fargo (50 shares, US$30.75) as the stock was slumping even as the broader market rose. There was no apparent reason for the sell-off, and with more clarity on the stock's ability to pay dividends soon to come, there could be some upside potential in the near-term. Nevertheless, the longer-term prospects for the bank continue to look bright, and we believe that the stock could trade nearer the $45-$50 range once bright sunny skies are upon us once again.

Japanese Nuclear Worries Roil Market - Adding to the Portfolio

Stock markets were roiled by concerns over a potential nuclear meltdown in Japan, triggered by the 9.0 Mw earthquake which hit the Sendai region of Japan last Friday. While the initial reaction of global stock markets to the earthquake was relatively muted (in contrast to the hefty declines posted by the Japanese stock market), concerns over the impact of the earthquake on several nuclear power plants sent global stock markets reeling on Tuesday.

Prime Minister Kan's live video telecast today (15 March 2011) did little to comfort the jittery global community, and as the PM revealed that the possibility of nuclear leakage was increasing and that those in a 20km radius around the Fukushima Daiichi nuclear power plant were being evacuated, stock markets in Asia plunged on uncertainty surrounding the situation in Japan. The STI fell by as much as 3.3% as selling intensified on concerns that nuclear power plants in Japan could suffer a meltdown, which would have dire and unthinkable consequences. The Singapore market ended the day 2.8% lower, with losers on the exchange outpacing gainers 610 to 59. 

Taking a step back from the frenzied selling and huge uncertainty, we see the sell-off as a manifestation of uncertainty and fear, rather than a rational adjustment of prices for various assets. The Sendai earthquake will likely cause a series of contractions in the Japanese economy, but will have limited impact on the global economy, given that Japan's contribution to overall growth has largely been discounted. As Japan embarks on its rebuilding process, this should boost economic growth (in a perverse way), and given sufficient time, we can expect the economy to emerge from this crisis on relatively firm footing. This will have some impact on select sectors in the near term, but ultimately should prove to be little threat to the overall growth of the global economy.

A 16% discount in the Japanese stock market over two sessions appears excessive, and it is increasingly tempting to punt the Japanese stock market now. The risk-reward tradeoff certainly appears in favour for those long the market, despite the heightened volatility, especially if a longer-term investment horizon is employed. Nevertheless, we remain unfamiliar with the situation with specific corporate names in the country and will not seek opportunities in that area.

For the local stock market, we think the selloff in blue chip names remains overdone, and we picked up 500 shares of OCBC at $9.115 and 1 lot of WBL Corp today at $3.90. Both are unlikely to face any severe reprecussions of the latest series of problems, and we will be looking to employ more cash should the irrational sell-off continue over the next few days. 

  

Further pain in the S-Chip sector; China Hongxing and Hongwei both suspended

Both Hongwei and China Hongxing are set to be suspended, following audit issues "regarding issues pertaining to the cash and bank balances confirmation" for Hongwei and "irregularities in the cash and bank balances, accounts receivables, accounts payables, and other expenses during the course of their audits of its subsidiary companies in the People’s Republic of China (“PRC”)" in the case of China Hongxing. Ernst & Young are the auditors in both cases.

We have highlighted our concerns over S-Chips in the past (see http://sgvalue.blogspot.com/2010/09/looking-at-cash-balances-of-s-chips.html and http://sgvalue.blogspot.com/2010/06/s-chipped-reprise-2010.html) and the latest audit problems in the case of Hongwei and China Hongxing serve to showcase that S-Chip companies are indeed poor quality companies which cannot be assessed based on balance sheet strength alone. We do not own any S-Chips and will continue to adopt a sceptical approach towards the sector, which is fraught with fraud (pun not intended). 

Added to Guocoleisure and OCBC

We added 5000 shares of Guocoleisure (at $0.685) today, and a further 250 shares of OCBC (at $9.12). Quek Leng Chan has been consistently buying back shares of Guocoleisure over the past few months, which indicates management confidence in the company's stock. In addition, oil and gas royalties have increased with rising oil prices, which should provide a boost to the company's profits.

Correction continues, adding more

Following the slump in US equity markets overnight, Singapore stocks continued to slide today. Having sold out of lower-conviction stocks in January, the correction in stock markets presents a "welcome" opportunity, and we added 2000 shares of Noble Group (at $2.00) and 1000 shares of Capitaland ($3.29) today amidst the selldown.

Market Correction - Time to buy?

In anticipation of technical downside risks in the market, we actually pared down our holdings in late January to raise cash levels to over 30% of the portfolio. This has worked out rather well as Asian markets have corrected sharply due to concerns over inflation, Chinese policy tightening, as well as fears of an oil shock sparked by tensions in the Middle East. 

We view such developments as short-term overhangs, and we have decided to add to the portfolio in incermental steps. A position was initiated in OCBC, which has a sizable insurance presence via its subsidiary Great Eastern Holdings as well as a strong private banking presence through its acquisition of ING Asia's private banking business in Singapore. While the stock is not cheap, we believe that OCBC will likely deliver the strongest ROE amongst the 3 local banks which should justify a slightly higher price-to-book multiple, and we picked up 250 shares at $9.25 today with a view to add more should the market continue to correct.

We also added 2000 shares of Tat Hong which delivered rather poor quarterly earnings for the most recent quarter. While the company currently faces some headwinds in China as well as Australia, we believe such issues are temporary and with the backing of $0.82 of tangible book value a share, we added 2000 more shares at $0.80.

Reduced Wells Fargo

From our 350 shares of Wells Fargo, we reduced our stake to 250 shares today (31 January 2011). The stock has run up a fair bit, and while we expect more upside for the stock, we believe it to be prudent to pare down one of the larger holdings in our portfolio at this juncture.