#1 Investment Weekly – Property higher using two cows

I have been posed an interesting question: how can Hong Kong residential property-prices continue to rise (+36% in three years), even though local equities are in a bear market? I answered this valid question with some “you have two cows” jokes.

You have two cows. You sell one to buy a flat at Sino Land’s Palazzo pre-sale. Having lost half your cashflow and assets, you realize that the flat is the size of a very small cow pat, and it’s nothing like the bull shown in the advertisement[1]. In the end you live with the stench (of the one cow, the sewage works and the Shing Mun open drain), because the cow/sewer/drain produce enough flammable gas, which you sell, to recover any losses. (Hong Kong property prices (even those sold on false promises) will continue rising because of gas-induced price/wage inflation, low funding costs and because cattle are slower than cheetahs (or is that cheaters?)).

  [1] What possessed the designer to put two pictures of Newlands Rugby Stadium in South Africa in the ad?

 Hong Kong residential property index, HS Index and Hibor (rebased – 100) 

 

You have two cows. They are identical in all aspects (being clones). One is priced in Renminbi and the other in Hong Kong dollars. The cow priced in RMB is increasing in value, while the other is declining. You figure that the value of the parts is greater than the value of the whole. With equities in a bear market, you double up on RMB by slaughtering the HK$ cow and selling its parts to RMB owners. (China’s two undervalued currencies (by about 40% according the latest Big Mac Index) and straight-line, managed appreciation will continue to attract investment dollars into hard assets like property).

I have decided to double up on Dore (0628.HK), which I still believe will continue to benefit from Mainland high-rollers piling into Wynn’s casino in Macau. I recommended the stock at HK$0.78, which was the closing price on Friday May 2nd, ahead of its suspension and share placement the following Wednesday (May 7th). I have doubled-up using the closing price of Friday again (which is the standard practice of this newsletter). The new average price happens to be below the downside of HK$0.65, which was the placement price.

Part of my optimism about the stock (i.e. apart from the 2x PER, 20% dividend yield, recession-proof VIP Macau gaming revenues) stems from the shareholder roster of the company. For a HK$1 billion company, it has some interesting institutional shareholders.

The most interesting recent addition is Mr. Mark E. Kingdon, founder of the US$3 billion hedge fund, Kingdon Capital. Mr. Kingdon has been around the financial markets for a long time (30 years) and doesn’t buy 5% of a company unless he’s confident about it. He doesn’t flip, either. We know that 224 million shares were issued to Chen Yi Ming two weeks ago. The shareholder roster shows that Mr. Kingdon joined Chen at the same time. Therefore, his portion of the 322 million shares was bought in the open market. I believe he bought his shares from some of the smaller minority shareholders such as Farallon, Indus and PMA around April 14-17th. He topped his holding over 5% when Deutsche sold on May 6th. Based on stock market records, Kindon probably bought at prices ranging from 52 cents to 71 cents, at an average of about 60 cents. I’m happy to follow him in. 

I’ve been following the corporate family stories at SHK Properties and TVB with great interest. SHK Properties is currently sponsoring a program on local TV station, TVB, called CEO Connection. Bearing in mind the complete lack of communication between Chairman and CEO Walter Kwok and his two brothers, I would say that is quite ironic. I was amused to read that the children of TVB’s owner Run Run Shaw don’t want to inherit the centenarian’s business (because they don’t want to end up fighting between themselves?), thus opening the way for a potential sale of a stake in the broadcaster. My advice to anyone thinking about buying a piece – don’t. The quality of programming is terrible, the library of old movies/serials is not worth a jot, and TVB’s days have been numbered for years (Shaw’s children know it). In order to ensure control stays local (for propaganda purposes), someone (with a favour to give) will be reluctantly roped in to buy it. Pity them, but lucky us because we added TVB’s shares in June 2001. Back then I considered it “cheap”. I was right: it was cheap, but for a reason – it’s rubbish. Its 8% compound annual growth rate of return since 2001 is proof, because that is only half the performance of the whole portfolio, and less than the HS Index’s 10% CAGR. We will be glad to hear offers over HK$70 a share, so that, with dividends included, I can exit the position at the average return for the portfolio. 

I will be looking for greater returns than TVB from Hong Kong residential property and, eventually, the US$ (the two most undervalued assets around at the moment). Dore will be cherry on the cake, as I reconfirm the HK$1.30 target (+88%).