Wednesday, February 26, 2020

Just Further Thoughts On the Current Market Situation

Just wanted to do a quick run on the process thoughts and plans I have last night which came up to my mind.

The Covid-19 situation, what seemed to be just an Asia thing, has suddenly started to impact the Middle East and European continents to greater impact. Given the longer incubation period than Sars, this looks like it will likely double the time it takes on the Sars situation at least.

The Covid-19 started as an isolation temporary incident, just like any outbreak we've seen. Yes, we're likely seeing drastic impact to 1 or 2 quarters but it won't likely dent the overall capabilities of companies, at least those that has a strong pillar of balance sheet behind them.

This will look just like another phase of turbulence for them, and it is likely to pass than not. As investors, our job is to identify them and take this opportunity to get onboard with them because we want to sail together when the good time comes back.

Now, most of us didn't start the year with 100% cash in our portfolio.

If you do, then you're either a genius or you've been lagging the overall market for a long time by hoarding too much low yield assets.

Two extremes at the very end.

For the most of us, we've continued to hold on to whatever strong moat companies we already have in our portfolio and we are likely to hold them through this storm. That means just getting by this turbulence period and hope things are better so it can revert back to the valuation or share price before the whole Covid-19 started.

The opportunity lies for those investors holding cash or warchest as some would have liked to describe.

Since these investors have technically lose out in all other years by holding in to these cash yielding them very low returns, they would have to increase their conviction by picking the higher beta companies.

This means companies that are heavily impacted by the Covid-19 situation in the aviation, hospitality or retail sectors that has retreated heavily since the start of the year.

The idea is to convert them into opportunities and then sell them back when coasts are clearer and revert back those positions into cash.

You certainly don't want to be left with little or no positions in your portfolio when the coasts are clear when and not if they will come.

Thanks for reading.

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Friday, February 21, 2020

Feb 2020 - Portfolio & Transaction Updates

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
Powermatic Data
Ho Bee Land


February month has been an excellent month for the portfolio.

I sold off my Top Glove towards the end of January at almost the peak at $2.51 and then used that funds to board on the MTQ train, which has also done pretty well this month.

For those of you who missed my analysis on MTQ, you can find them at this link here and I have also used this opportunity to talk to their management which I have updated the information on the article. I was pleasantly pleased that the management took notice of my articles and are more than willing to share more about their business and future guidance, which I think they are at the start of a U-turn upwards, especially after disposing their more difficult business segments. They can finally start to focus on what they do best which is on the oilfield engineering downstream segments.

I have mixed feeling about divesting my position for Straco because I know they are a company that can easily come back once this whole episode of the virus is blown over. I do think their current valuation is unwarranted but there may be some better opportunities in the short term which I may conserve my cash for meanwhile. Nevertheless, I might consider re-entering my position for Straco if I cannot find a better deal out there (which is pretty unlikely if this virus persists).

In Feb, I have also taken the opportunity to load another potential catalyst company on Powermatic Data. This is a company which has done really well over the years since after the consolidation a few years ago. My interests in the company start when they decide to do a capital structure review announcement a couple of months ago on their investment property, which I believe the market has not yet priced into the current share price.

For the purpose of stripping out the value, their current cash (no debt) share is at $0.91, while the investment properties is valued at $131m, which translates to about $0.90/share. What this means is that stripping out the cash and investment properties, the business is only valued at $0.79, which translates into a PER of about 2.3x.

This has all along been the story so far for Powermatic for value investors so no real surprise of the value there but the real catalyst still lies in the capital structure which is my main interest and I think things could look really good if they manage to do a capital reduction out of that capital structure reorganization there. At my bear case, I am hoping the share price remains where they are today if the capital structure review fails.

So that is about all the updates for the month of February so far for me.

I started off the year with a portfolio of $102k, and I managed to close February off at about $134k, which means my portfolio has gained about 30% returns so far for me. During the period, I have no capital injection because I was out of job during the period.

This week, I have also started my new job which kept me really busy during the week. With such a busy schedule, I did not monitor too much on the market but kept a hard interests at looking at the market and following up on the news once a day.

There are some positions which keep me interests already such as the usual culprit of CDG, DFI, HKLand and some other positions which I previously mentioned for HK Stocks. These are really just trading positions because these companies are in all sort of troubles and they have no real catalyst for me to hold for longer term. For some reason, these positions work better for me as a trading than core position.

From the way the stock market closes today, and it appears more outbreak lurking around Korea, Japan and Iran, it does look seem that the worst is probably not yet over and we might be expecting a longer drag to this impact than what was originally imagined.

With that, stay healthy, careful, nimble and always care for safety first.

Thanks for reading.

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Thursday, February 13, 2020

Being At The Right Place At The Right Time

Being at the right place at the right time is always a desired scenario for many of us.

But how many of us can truly catch the right moment at the right time? Not many I would say.

Getting both the right place and time is a skill that we need to hone for precise pinpoint accuracy. It involves a lot of thinking, sometimes second level thinking, in depth understanding of the matters, psychology and some bits of luck involved.

In the investing segment, we called it the perfect "Buffett" moment. Okay, I don't know how this relates back to Warren Buffett but I figured out that since he is a role model to many of the investors out there, his name is constantly being mentioned.

Take an example of Genting Singapore (SGX: G13) for instance.

I wrote an article about a year ago (Link Here) when their share price was hovering around $1.03.

Back then, the story was themed around the organic growth come back of their VIP gaming segment, the expansion of RWS 2.0 and also the bidding for the Japan casino tender.

As you can probably sense from the news, most of the story was outlook positive and optimism starts to build up in the air. Genting shares gets a good traction over the next couple of weeks, pushing its share price higher each time.

The valuation back then was obviously underrated if we do a long term dcf projections assuming they completed both the IR expansion as well as the Japan bid. Many of us believed they should be worth much more based on forward earnings.

Investing in Genting was obviously at the right place but was it at the right time?

First, we know that the Japan bid outcome will only be known in the latter part of 2020 so between back then when they announced until the announcement of the result so there is probably 1.5 years in between. That 1.5 years a lot of things could have happened.

On hindsight, it is easy to see now that in between the announcement and now, we had a couple of trade wars and tariff fight and the big Wuhan Coronavirus which severely impact the business progression of Genting. We are not out of the woods yet at the moment so we don't know if things could go worse from here but I think at Code Orange, it is safe to probably say we have baked in at least half the impact here.

In my opinion, Genting shares at this moment would qualify under being at the right place at the right time.

Being at the right place is due to valuation which we already know back then in Mar 2019 how much their intrinsic value is worth after both events have played out.

Being at the right time is due to cheaper valuation due to black Swan events that have now assembled and played out that we have previously not baked into our projections. Nassim Taleb called this the unexpected turn for margin of safety.

But It Is Not Always Easy Being At The Right Time

Being at the right time usually involves plenty of luck and something that is outside of our control.

In investing, it is nearly impossible that you can always be at the right place at the right time.

So going back to the Genting examples, there are three options that you can take. Assuming you turn yourself back to Mar 2019, you can either:

Option 1: Acknowledge that Genting is undervalued but there may be macro events or uncertainties that have not played out (the more front line the industry is the more susceptible to macro headwinds and events). In this case, you forgo this investment and continued to wait for a better moment to arrive (duh, like now for instance). The downside to that is you may continue waiting perpetually and if bad events do not come then you are likely to miss the boat.

Option 2: You continue to buy for as long as they are undervalued and have long term gestation to outperform regardless of external events. When there are events that help push the share price cheaper, you increase your position.

Like the denoted cartoon below, you wait reading comic books while you wait. In investing, the comic book is also your dividends.

My only problem with this approach is we tend to distribute our fireshot too thinly. This is subconsciously knowing that you wanted to leave some powder behind in case things get worse and you get better opportunity to enter. In most result, the allocation is too minimal to make for such an impact back.

Final Thoughts

I have no answer as to which options work better in the long run as this depends on individual basis.

Obviously, my Straco position is a victim of it and just when I thought I am buying at the right place (undervalued) at the right time (margin of safety) when the flyer closed down, a second level event played out (Wuhan Coronavirus). With all attractions temporarily closed for now, I think it is safe to say that almost all the bad events have played out. The only thing I can think of is if this crisis were prolonged which means extension of the closure (third level) but hopefully we won't come to that.

I've been trying to refine my strategy and mould my positioning into something which considers plenty of upside potential with minimal downside scenario. Whilst it is not easy to do that, I'll continue to explore and share my findings if I learnt anything new that I haven't share in this blog yet.

Thanks for reading.

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Monday, February 10, 2020

MTQ Corporation - This Gem Returns Potential 24% Yield, 72% Upside Target In Next 12 Months

This is a quick bullet point takeaway on why I decided to get vested in this company after they announced their Q3 results last Friday and why I think there's further room to run for this company in the next 12 months and beyond.

For those who aren't familiar with this company, MTQ Corporation Limited (SGX: M05) is in the business of oilfield engineering and engine systems. A few of their main core services include OEM, drilling contractors, servicing, rig owning and others. Some of their main customers include Cameron, Halliburton, Seadrill, Total Oil, etc.

In 2015, they faced a huge challenge in their business after the company registered losses for the next 4 years from FY2016 to FY2019 due to oil prices plummeting and some poor M&A which doesn't work out well. In the latest Q3 results, we have seen a huge improvement from their organic business which further strengthen the thesis that the company could be a nice turnaround play for the next 12 months and beyond.

In any case, I have decided to put some money in this turnaround play which to me seems like a fairly cheap valuation at this point and rewards might point to a good decent upside in the next 12 months.

Without further ado, this is 5 key reasons why I decided to get vested in this company.

1.) Turnaround in Core NOPAT in Q3

The company released their latest Q3 results last Friday.

While NOPAT for Q3 was minimal coming in at $197k positive for this quarter, this compared favorably against losses of ($338k) in the previous year. Furthermore, NOPAT for this quarter was disrupted by the completion of non-performing divestment which they recorded a loss of $2.5m in this quarter. Excluding this one-off, NOPAT for this quarter would have been at $2.6m positive, which would translate to about $10.4 annualized under normal circumstances.

They have also made a $0.7m provision for the restructuring of the headcount for the Neptune segment that will contribute lesser from a salary overheads point of view. 

This result is not one-off spectacular in this quarter as it further confirms the thesis in Q2 where the oilfield segment has seen improving margins and business volume coming back in.

2.) Divestment of Non-Performing Neptune Segment

When MTQ announced its takeover offer for Neptune in Oct 2012, the Aussie subsea engineering company was incurring losses.

While it turned around and boosted MTQ's earnings in FY2013, margins was visibly lower due to the higher base of costs of goods and also higher headcount and capex required to maintain the operations. Since then, it has been struggling and pulling the Group's result downwards as demand and margins plunge and the company has been looking for alternative since to pull this segment back into profitability or divestment of this segment.

In Mid-2019, the company entered into agreement to divest its 87.1% of its stake in Neptune Marine to MMA Offshore Limited for $5m worth of cash consideration + share consideration as determined by the VWAP agreement.

What this agreement says is basically the shares consideration will depend on how the share price of MMA offshore is performing 30 days upon completion. If they are doing well in the market, then the implied value will be worth more. If not, it will follow the prevailing agreed implied value in the table below.

As of completion, the share price of MMA Offshore is somewhere in the 0.16 cents region, so it is likely that the company will get the lowest amount of shares consideration at 67.6m shares at A$13.5m implied value.

As of Nov'19, management has also informed that the Blossomvale residue entity will be entitled further A$2m for fixed asset and working capital adjustment, in addition to the above agreement.

3.) Oil Price Has Been Suffering Trough YTD

This is a company that on its good days, it has traded above $2 in their peak days.While we might never see oil goes back to $100 soon, and thus the company going back to their glory days of $2, I think we might probably see oil price going back to mid $60s after the coronavirus situation is over and demand is back to normal.

4.) Valuation Is Attractive

If we assume normal BAU operating profits of $2.6m per quarter for their oilfield engineering segment moving forward, this would translate into approximately $10.4m annualized or 4.8 cents earnings per share.

At 27 cents, this would translate into 17.7% earnings yield or a PER of 5.6x. I think this is ridiculously cheap given the company's turnaround fortune and history of building up this company. 

The company also has a strong record of generating positive operating cashflow, even when they were in the losses during FY2016 to FY2019. Operating cash flow before working capital tends to gyrate between $3m to $4m in each quarter, which translates to above 15% FCF yield annualised after capex. 

5.) Dividends Reinstated & Potential For Special Dividend

These are 2 separate things here but both a catalyst on its own.

First, I think the company would resume the reinstatement of ordinary dividend payouts in this year as the company looks into going back to the black for the first time this year since 2015. 

With forward earnings yield coming in at base 4.8 cents and FCF yield at double digit, we are likely to see the company resuming its dividend payout minimally to 50% at an absolute of 2 cents from FY2021 onwards. At the current share price of 27 cents, this would translates to about 7.4% yield.

For FY2020, we'll assume a more conservative payout at 1.5 cents, which would translates to 5.5% yield.

Second, the divestment of the Neptune segment is likely to benefit existing shareholder in terms of special dividend or dividend in species.

The management has guided that upon completion of the divestment (which was done in Nov 2019), the consideration shares will be distributed pro-rate to shareholders of Neptune as soon as completion and shareholder's approval was done after the AGM. This is likely to be announced together with the final ordinary dividend in their Q4 and full year results sometime later in May 2020.

At $11.5m, this translates to about 5 cents / share, and might be the next catalyst to propel the company share price to advance further in the next 3 months once they announce this in their full year results, subject to shareholder's approval.

Final Thoughts

At an expected conservative 1.5 ordinary dividends + 5 cents worth of special dividends / dividends in species, this would translates into a total of 6.5 cents dividend for FY2020, which translates to 24% dividend yield at the current share price of 27 cents.

This is a one-off due to divestment, so we are likely to see the dividend yield tapers off to a more reasonable yield at base payout from next year onwards.

Still, I think at forward earnings multiple of 5.6x and a potential bumper dividends to come in the next 3 months, we might see a turnaround in the share price (as it already did since the start of this year) and this positive development might further propel the company into the right direction.

For the longer term investors, you are likely to see the company embarking on potential M&A to propel the company into further growth but with their recent failed M&A, I think this is pretty much a black box for now until the management can gather sufficient confidence from its investors.

The company has a 15.4m warrants at an exercisable price of 22 cents, 5 years from the date of issuance which they issued back in 2018.

Target price: 40 cents at re-rating 8x PER multiple, 1.1x forward P/BV in the next 12 months (translates to 72% upside including 6.5 cents expected dividends this FY). 

P.S: Author is vested in this core position at 27 cents as of writing.

Update (14 Feb 2020):

Spoke to Edwin (FC) of the Investor Relation on 14th Feb 2020 to clarify some items pertaining to the staff costs, hedging and considerable shares.

On staff costs, there are increase in number of headcounts in Q3 (to wait for annual report for details breakdown) to support the increase volume of business. I see this as a good confidence turnaround sign given the company has let natural attrition go in the past couple of years and the Group starting to embark on hiring path and increasing headcount again.

On the considerable shares, the $11.5m investment stake in MMA is a strategic move to pass the subsea business to the larger players whom the Group believes can do a better job for them. Similarly, headcount handling the business has also been passed to MMA for day to day operations. The company has no intention to divest the stake yet at the moment even though this remains a possibility in the future.

Thanks for reading.

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Sunday, February 2, 2020

10 Watchlist Target I Have During This Coronavirus Incident

In my previous article, I mentioned that I am likely to buy some of these companies in my watchlist from this week given their attractive entry point as they have dropped quite a bit since the start of the year or since the impact from the coronavirus event.

Here are my top 10 Watch list at the moment:

1.) Hongkong Land Holdings Limited (H78.SI)

I don't think Hongkong Land needs further introduction as it has been a theme play since the HK riot last year.

Hongkong Land is a property investment, management and development groups with premium commercial and residential property interests across Asia. It owns and manages almost 800,000 sq. m. of prime office and luxury retail property in key Asian cities, principally in Hong Kong and Singapore.

For years, many value investors and smart analysts have been trying to figure out why share price has been languishing way below NAV for a long while. 

What is exactly the intrinsic value of HK Land and how it can bridge closer to the gap?

For one, we know that the NAV is USD16.50 and putting a conservative 40% discount to it we'll get USD9.90. If we want to go one step more conservative, we can further placed a 30% discount on the NAV revaluation since the HK riot is likely to impact the cap rate. If so, we'll get an intrinsic value of USD 6.93.

In my opinion, it is easier to play the range from the last 52 week low of USD 5.16 to USD 5.30 and sell it once it hits 10% upside (i.e in the range of USD 5.8) in the near term rather than waiting for value to converge to USD 6.93. The recent HK riot should be a good indication of where the market is pricing them in.

CFD Margin Requirement: 10%
Dividend Yield: 4%
Upside Potential (Minimally): 10%
Total Return Potential: 4% + 10% = 14% (with no leverage)
Total Return Potential: [(4% + 10%) x 2.5] - 3% = 32% (with 2.5x leverage)

2.) Greatview Aseptic Packaging Company Limited (0468.HK)

GA Pack's share price has been down close to 14% since the start of the year.

This is a company which my fellow friends in Value Invest Asia and Fifth Person's Dividend Machine has covered.

Greatview Aseptic Packaging offers an integrated packaging solutions, including provision of aseptic packaging materials and filling machines, mainly to the food and dairy industries across in China and International segment.

65% of the revenue comes from China and the dairy industry is struggling with demand, which probably signals why the share price has been impacted as of late. The International segment has been doing well and are exhibiting exponential growth, though it might take some time to pare against the China segment.

The company is likely to maintain their dividend payout at HKD 0.27/share, which translates to 8.7% yield at this price.

Dividend yield of 8.7% at a trailing PER of 7.2x, forward PER of 7.9x seems attractive enough for me. 

The company also has a relatively strong balance sheet to grow their international segment further.

CFD Margin Requirement: None available
Dividend Yield: 8.7%
Upside Potential (Minimally): 10%
Total Return Potential: 8.7% + 10% = 18.7% (with no leverage)

3.) CNOOC Limited (0883.HK)

CNOOC's share price has dropped about 8.5% since the start of the year mainly due to weak sentiment in oil prices and demand.

CNOOC is one of the largest national oil company in China.

What I like about the company is their ambition plans in the next 3 years strategy to increase production, pursue profitable reserves and continued exploration and production through increase in capex. Capex spent have increased from RMB 62.6bn in 2018 to RMB 80.2bn in 2019 and are expected to further increase to RMB 95bn in 2020.

Due to the strong cost structure and health margins, the company also generates plenty of operating and free cash flow that they have used to increase shareholders return, including increase the dividend payout over the years.

The 3 year rolling target is based on the project demand that has already been secured.

CNOOC is also a rolling theme macro play on demand for oil, so impact should be closely correlated to oil prices.

Dividend yield is at 5.9% and trailing PER of 8.8x, forward PER of 7.5X and 6.8x in the next 2 years.

CFD Margin Requirement: 10%
Dividend Yield: 5.9%
Upside Potential (Minimally): 10%
Total Return Potential: 5.9% + 10% = 15.9% (with no leverage)
Total Return Potential: [(5.9% + 10%) x 2.5] - 3% = 36.7% (with 2.5x leverage)

4.) Sinopec Shanghai Petrochemical Company Limited (0338.HK)

SSP's share price has been down 16.7% from the start of the year and is currently hovering near the 52 week low.

Sinopec Shanghai Petrochemical is one of the largest petrochemical enterprises in Mainland China. It has 5 distinct business units engaged in production of ethylene, synthetic fiber, resin and plastics, intermediate petrochemicals, petroleum products and commodities trading.

The company has been well on a battered run even prior to the Wuhan crisis since it announced its profit guidance that FY19 results was expected to decrease by RMB 2.8 to 3.2bn, representing a fall of about 55% year on year. Because of this, the company is expected to reduce dividend from the previous year of Rmb 0.25 / share to possible Rmb 0.20 / share, which still I think represent a good value at about 10% yield.

Management has provided guidance that refiner capacity production will continue to increase in FY2020 and assuming normalization of crude oil prices, could be key to maintaining the level of margins they had achieved in 2018.

Final earning results and dividend will be announced shortly so if we believe things are turning from here, investors could be buying the trough at this level.

CFD Margin Requirement: 20%
Dividend Yield: 10%
Upside Potential (Minimally): 10%
Total Return Potential: 10% + 10% = 20.0% (with no leverage)
Total Return Potential: [(10% + 10%) x 1.5] - 3% = 27.0% (with 1.5x leverage)

5.) Wharf REIC (1997.HK)

Wharf REIC's share price has retreated close to 18% since the start of the Wuhan crisis and is hovering near the 52 week low.

Wharf REIC is a spin-off from the Wharf Holdings a couple of years back and has a business model of a typical REIT. Their main jewel properties include the Harbour City and Times Square, both of which are freehold in nature and are enjoying good traction of occupancy as well as lease retention. 

Average current retail passing rent for Harbour City and Times Square are at HKD 508 / psf and HKD 290 / psf respectively. While HK retail sales are soft due to the riot and now the restriction of travel, lease rental outlook is stable and is expected to moderate at this level.

The company has a dividend policy of distributing 65% of the cashflow earnings and is expected to announce full year dividends at HKD 2.20 / share, which translates to 5.4% yield. At 100%, the company has a 8.3% strong earnings yield.

CFD Margin Requirement: 20%
Dividend Yield: 5.4%
Upside Potential (Minimally): 10%
Total Return Potential: 5.4% + 10% = 20.0% (with no leverage)
Total Return Potential: [(5.4% + 10%) x 1.5] - 3% = 20.1% (with 1.5x leverage)

6.) Bank of China (3988.HK)

BOC's share price has retreated by 10% since the start of the year and is hovering near a 6 months low.

Bank of China is a wholly state-owned commercial bank and has 11,752 outlets, of which 11,199 were in Mainland China.

BOC has one of the largest trade finance loan exposure among all the other big banks and is most vulnerable when there is uncertainties in the economy (e.g trade war, wuhan crisis, riot). NPL ratio has also risen in the last few quarters due to higher provisions though it started to get better in the 3rd Quarter when NPL ratio improved by 3 basis points.

The company currently has a dividend yield of around 6.8% and is trading at a P/BV of close to 0.5x, though further impairment is likely to impact the denominator. 

In 2016 China crisis, BOC share price went as low as $2.91, so that is approximately the level I am looking to be adding.

CFD Margin Requirement: 10%
Dividend Yield: 6.8%
Upside Potential (Minimally): 10%
Total Return Potential: 6.8% + 10% = 16.8% (with no leverage)
Total Return Potential: [(6.8% + 10%) x 2.5] - 3% = 39.0% (with 2.5x leverage)

7.) Bank of Communications Co. Ltd (3328.HK)

Bank of Comm's share price has retreated by 12% since the start of the year and is hovering near the 52 week low.

Bank of Comm is the fifth largest bank in Mainland China and has in recent quarters one of the few that reported good set of results.

In the latest Q3 results, the company has posted quarterly net profit of Rmb 17.4m vs Rmb 16.5m the previous year. All other unit economics such as CAR, NIM and NPL has also improved to 12.7x, 1.57% and 1.47% respectively, showing healthy results on the back of a trade war uncertainties.

The company yields a dividend of 6.8% yield and is expected to announce its full year results shortly.

One thing to note however is if we take 2016 as a reference point, the company still has further room to fall especially if the China worsening escalates. Still, I think banks will be a beneficiary in this sort of Wuhan crisis as the government will allow less room for reserve ratio and thus should able to boost the loan growth.

CFD Margin Requirement: 20%
Dividend Yield: 6.8%
Upside Potential (Minimally): 10%
Total Return Potential: 6.8% + 10% = 16.8% (with no leverage)
Total Return Potential: [(6.8% + 10%) x 1.5] - 3% = 22.2% (with 1.5x leverage)

8.) China Power International Development Limited (2380.HK)

China Power's share price has retreated by 10% since the start of the year, currently at the 52 week low and is hovering near the all time 2009 low of $1.39. 

China Power International is a core subsidiary for conventional energy business of SPIC and operates businesses in coal-fired power, hydropower, nuclear power and renewable energy resources mainly across the mainland China.

The company generates revenue through the sales of these electricity to different project pipelines.

In 2018, revenue increases by 16.1% to Rmb 23.1bn and this growth continued in 2019 as 1H revenue recorded a 27.9% increase year on year.

1H 2019 profits attributable to shareholders increased by 61.1% year on year.

The company has provided outlook for a favorable 2020 by increasing capacity for clean energy by 50% the current capacity.

Payout is near 100% with dividend yield at 8.3%.

CFD Margin Requirement: 20%
Dividend Yield: 8.3%
Upside Potential (Minimally): 10%
Total Return Potential: 8.3% + 10% = 18.3% (with no leverage)
Total Return Potential: [(8.3% + 10%) x 1.5] - 3% = 24.4% (with 1.5x leverage)

9.) Tencent Holdings Limited (0700.HK)

Tencent's share price has dropped close to 8% since the start of the Wuhan coronavirus incident.

Tencent Holdings is a conglomerate and leader in multiple promising companies, including gaming, communications and advertising.

The advertising segment, which has been struggling for a while now, has seen some good improvement in the last quarter while gaming and communication segment has continued to perform well.

Current valuation at close to 40x PER does feel a little high to me at this point but as a growing leader with moat advantages this temporary one-off event may be a weakness to add.

CFD Margin Requirement: 10%
Dividend Yield: 0.3%
Upside Potential (Minimally): 10%
Total Return Potential: 0.3% + 10% = 10.3% (with no leverage)

Total Return Potential: [(0.3% + 10%) x 2.5] - 3% = 22.7% (with 2.5x leverage)

10.) Wuxi Biologics (2269.HK)

Wuxi Biologics's share price has been resilient since the announcement of the Wuhan coronavirus incident.

WuXi Biologics is a Chinese headquartered organization that provides open-access, integrated technology platforms for biologics drug development.

A beneficiary in these sort of scenarios, the company said that they are exploring efforts to enabling the development of multiple neutralizing antibodies for 2019-nCOV with its integrated technology platform. The first batch trial is expected to be completed in 2 months, ready for preclinical toxicology studies and initial human clinical studies. Compared with the traditional timeline of between 12 to 18 months, Wuxi says they are able to complete their clinical antibodies by one-third the time given their extensive technology platform.

As a point of reference, the world first Zika virus antibody were completed in a record time of 7 months by Wuxi.

CFD Margin Requirement: None Available
Dividend Yield: 0%
Upside Potential (Minimally): 10%
Total Return Potential:10% (with no leverage)


These are some of the lists which I have been monitoring for a while, some of those are added recently due to the coronavirus incident while some have been in my watchlist for some time prior to the event.

Obviously, the lower the share price goes over the next couple of days or weeks, the more attractive the entry point is for me and I am likely to take a position in some of these 10 in my watchlist. When everything stabilizes, I think they have strong fundamentals to return to normalization.

P.S: No vested position yet as of writing but may take a position after writing.

Thanks for reading.

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Saturday, February 1, 2020

My Game Plan On The Wuhan Coronavirus Crisis

The dreaded China market will finally going to reopen tomorrow in what looks to be a massacre sell-off in the market after what most other markets had experienced in the last few days.

The China A50 futures are currently down 1000 points from the last closing of 13,800 on 23rd Jan 2020 to 12,700, so we should be expecting a trigger 8% to 10% sell-off when market reopens tomorrow. This should then goes on to continue likely over the next few days as we are likely to see margin calls coming in and sell-off accelerating.

For investors who are looking to take opportunity of this correction, there is no better time to get in than probably the last 4 years (last was 2016 China sell-off event) since the entry point is more attractive but given a more cautious outlook.

Still, if you do believe that the Wuhan crisis will one day blew over (which likely will given today's advance technology and countries better prepared to handle the epidemic), you should be looking at a very well decent return when market rebounds back later.

I am going to share a little bit about my game plan for next week.

This is something that is purely based on my own game plan so please do your own diligence and do not follow me (risk is your own). The game plan might also change and evolve over time depending on how things work out and the amount of warchest I have currently on hand.

1.) Gather as much warchest as possible

In times like this you want to exercise your options on your cash which have been sitting duck for a number of years.

Since the assumption is that cash has been underperforming your larger portfolio for a number of years in the past, it is time to make up for it now by going for extravagant returns (in excess of 20%) to balance out your overall irr you have on your cash returns.

For myself, I currently have close to 70% warchest at the moment after selling off Top Glove last week at $2.51, which helped push the overall portfolio upwards but net off by the sharp fall for Straco.

2.) Switch defensive to higher beta stocks

I've sold off my Comfortdelgro at $2.18, which I've taken a 3 cents loss on the position I've just bought last month.

This is again deliberately done in order to conserve more cash positions to take advantage of the current crisis and to generate higher returns by switching to a higher beta risk stock.

Comfortdelgro, being a defensive in the industry has been relatively unscathed by this crisis so it is not a good idea to continue holding or add them in the portfolio for now.

3.) Going for HK and China stocks

Exposure to HK and China stocks are obviously going to be the real value play here as they are those with the most direct impact to the current crisis, with China potentially shutting down almost all their activities for the last 2 weeks until when things get better.

Because of this, most HK and China stocks are being battered more and some valuations look more attractive since they have fallen more than what their business activities are suggesting. If we truly believe that China can handle this crisis and things would get better in a year, we can compute the earnings and cashflow exposure base scenario and then take the necessary positions from it.

For example, Straco, which has more than 67% exposure to China, have shut down their China operations and attractions until impending instructions from their local government. If we study their business and financials, the impact to this shut down (including the flyer) will be at around $10m of operating cash outflow in a quarter, which translates to about $40m in a year, less maintenance capex. This would translates to about 8 cents/share on the company. What this theoretically means is if the share price has fallen by more than 8% since the pre-crisis, it might be a good opportunity to add them since they have been oversold (Straco has fallen from 67 cents to 56 cents, indicating a fall of more than 11 cents). This is just one way of thinking.

4.) Back to Fundamentals

My entry point for HK & China stocks are also strict by default, which means they must pass the required criteria I've set based on the strong fundamentals they have in the first place.

The point I'm making here is that strong companies would eventually bounce back stronger in a crisis while weak companies mostly get weaker being exposed to such vulnerability. We don't want to pick China companies that has weak fundamentals and are unable to rebound when this crisis ends.

5.) CFD Margins

I will likely be utilizing my CFD margin account again in order to stretch the availability of the limited cash I have on hand.

70% warchest on a 10% margin requirement allows you to utilize up to 700% warchest but it is likely it won't come to that. If you've read my CFD articles in the past, I think a 2.5x to 3x leverage would be relatively safe for as long as your entry price is deemed attractive in the first place (i.e you don't average down too fast).

Still, a very disciplined approach is required in order to compute the amount of requirements you need to cover the least of the worst scenario.

6.) Look for those companies that require 10% or 20% margins requirement

There are companies which only requires a 10% margins requirement which means you are able to stretch your leverage further by allowing only 10% of your initial funds to buy a position. The leverage will have to incur an interest costs of ~ 3%/year.

There are also companies which are more illiquid and will have 50% or 70% margins requirement. In this case, the requirement gets stricter and it doesn't allow room for much leverage (for instance, Straco has a 50% margin requirement up until 8,500 shares and 70% margin requirement up until 15,000 shares).

7.) Holding period is short to mid-term (i.e 3 months to 1.5 years)

My holding period is likely to be short to mid term and I want to de-myth the notion that long term holdings will surely do well.

For a number of years, I have always believed that a strict entry requirement is more important than holding long term because there are always a number of factors that could impact the market. Still, if the company truly has a strong economic moat like Amazon, Facebook, Microsoft and alike, then I'd agree that it is better to compound them in the long run. 

What works well for you might not work well for me and vice versa so I think this is a debatable subject based on your own criteria.

Final Thoughts

My game plan is very likely to be different from yours but most if not all of us have the very same objective, that is to come out stronger in this crisis than when we've started it.

In the next article, I'd list down all the watchlists I am eyeing in this crisis and any of the positions I've taken next week.

Thanks for reading.

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