2015

I am back from my visit to Macau & Hong Kong. The industry has definitely a beating with the general economy, and the corruption clampdown.

Many casinos rely heavily on VIPs to generate the bulk of their casino revenue, as opposed to the mass market audience.

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Interestingly enough, while flipping through my notes from the London Value Investor Conference in 2014, one of the presentations  touched upon the casino industry. You can really see how dramatically market sentiment has swung towards depression in less than a year. Optimism always comes at a cost.

The contranian in me is however optimistic.

Even in its current state, the casino industry is a highly profitable industry with most of the upfront capital expenditures (i.e. the casino already paid up for). Its a business tied to the general performance of the economy, and you can take a look at the businesses itself performed in 2008/2009 to get a feel for their profitability.

Despite the rally (and subsequent fall) in China stocks earlier this year, its worthwhile to note that the stocks were already beaten up.

Based on my conversations on the ground, the industry seems to be stabilizing. Still at current prices, I think many stocks will do well if the casinos simply survive this dry patch. The headlines have been overwhelmingly bearish over the last few months. Here are just some of them:

Macau Analyst Who Called Stock Drop Says Worst Yet to Come

http://www.bloomberg.com/news/articles/2015-03-04/macau-analyst-who-predicted-stock-drop-says-worst-is-yet-to-come

As Macau casino stocks sink, long-term investors look past the abyss

http://uk.reuters.com/article/2015/05/03/uk-macau-stocks-idUKKBN0NO0TO20150503

Macau casino giant SJM Holdings sees profits plunge

http://www.channelnewsasia.com/news/business/macau-casino-giant-sjm/2045860.html

Still, my gut feel is that a lot of its priced in. Of course, casino stocks could do even worst if the slowdown in China persists. On the bright side, the Hong Kong Zhuhai Macau Bridge will be completed at the end of next year, and the government is focusing its efforts on the Hengqin to further moves its revenue base from just gambling. At current prices, you don’t need a lot to go right for the stocks to rebound from their lows.

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What is Powermatic worth?

I primarily think that companies can be valued in two ways: based on cash flows in the future discounted to the present, or based on what a company has. An analogy is a household who has bought a property, car and paid off all its debts with some cash in the bank account. There are two parts to it, the future income stream, of which you can get a good feel based on their previous performance and work history, and what they currently own.

Their equity (total assets – total liabilities) act in the same way the “liquidation value” of a company is. A comment I hear often is that the “value” of these companies can only be realized if they liquidate… but in my experience this is not the case. Very few companies actually undergo liquidations, and there are a variety of ways for “value” to be realised outside of liquidation.

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The “Hidden Value” in Powermatic

Base Value of Powermatic

This is where Powermatic strikes me as being a compelling investment opportunity. Even on a conservative appraisal of their assets, the liquidation value of Powermatic comes close to $40 – $50 million, against a market capitalization at $30+ million. There is no reason in my view for a company of such a track record to trade at such a discount. You could literally buy out Powermatic out today at its current price for its investment property – and receive its business and other assets net liabilities for free.

I look at it as buying a $1 for 50 cents. The kicker in my view is that its like buying a REIT – since Powermatic pays a dividend yield of 5.35% at today’s price, and has done so for the last 9 years consistently. Management has a vested interest to keep this payout, with them owning 64% of outstanding shares.

The biggest differentiation with a REIT is that at this point Powermatic has not engaged in any borrowings. I pressed the point to management, and suggested they engage in significant share buybacks as one of the resolutions to be passed was a buyback mandate for up to 10% of their outstanding shares. After all, who knows the business best than management themselves… and they are well aware of the gross mismatch between price and value.

Some concluding thoughts:

Howard Marks once said that in investing, take care of the downside and the upside will take care of itself. Powermatic has something which I look for in my investments – an asymmetrical risk reward payout.

The worst case scenario provides an attractive return, and we get a free option on management turning around their business. The consistent 5% + dividend yield makes it all the more compelling.

Time is on my side too, as the value of the freehold property appreciates as the years go by. The current dividend is very much sustainable (costing the company $1.74 million per annum), and management has multiple ways to create value going forward.

Disclosure: The author is long Powermatic.

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I was at the AGM of Powermatic last week. Its not a well known company, but has a small following among the value investing community so I thought a write a post on it.

They operate in tough industry – and have done as well as anyone could have done faced with a similar situation. They’ve had 9 year of straight profits, and have paid dividends for the last 8 years which is impressive by my standards for a company listed on the SGX.

I had a chat with management after the AGM. They strike me as honest, down to earth people with an understanding of the current situation that the company faces. They have a vested interest in seeing the company succeed and turn its fortunes, with Dr Chen Mun & Ms Ang Bee Yan owning 64% of the shares.

So what makes Powermatic interesting?

What really strikes me is that Powermatic trades at 0.7x book value. There are many companies that trade at a huge discount to their book value, but plenty of them have assets which by measure are hard to value (intangibles, property, plant and equipment specific to their industry etc).

Powermatic on the other hand has a significant portion of its book value in current assets, and a freehold investment property that is stated at $18.6 million. 

Footnote details their investment property at  7,9 Harrison Lane. However, read deeper, and you will see that the property is in fact worth significantly more based on a independent valuation by Knight Frank, and is worth $35 million at the 31st of March 2014.

In order words, Powermatic really trades at 0.5x its book value.

More importantly, the property is freehold and not leasehold, making it all the more valuable. Rusmin Ang from the Fifth Person was kind enough to send me an interesting article on freehold industrial property, which you can check out here.

Here’s the relevant bit:

“The freehold property is a “rare commodity for an industrial site as most buildings released by JTC are on a 20-year lease”, said Ms Christina Sim, the director of investment (capital markets) at Cushman & Wakefield.”

Diving Deeper Into Their Balance Sheet

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Now I was quite curious about the make-up of the Thailand portfolio, but unfortunately wasn’t able to get more information on it.  Mr Yee Lat Shing, one of the directors who seems like a seasoned investor himself from his comments), has said that the equities are reasonably priced, and offer an attractive return going forward.

Still, I have my reservations given the considerable run-up in price of close to 60% in a year, and I wish the board had been more forthcoming about the portfolio.

A Closer Look at Remuneration Levels

ScreenClipA glance at their remuneration reveals that they are by comparison, very lowly paid compared to most boards in Singapore, with most of their remuneration coming in by way of dividends. This is an exceedingly fair arrangement if you compare it to most other listed companies in a similar position, with management taking ridiculous salaries despite the business going down hill (a story for another day).

Conclusion:

Part 1 concludes some of the “hidden value” that lies in Powermatic, and some points that I noted while running through its Annual Report. The next post will cover what I think Powermatic is worth, and why its a compelling investment opportunity.

I am heading to Macau to check the place out, and to take a look at couple of casinos listed on the Hong Kong Stock Exchange which I found compelling at first glance.

Everyone’s focusing on the headline news right now in China, and Macau hasn’t received that much attention with the crazy gyrations in the stock market. But for those keeping an eye on the situation on the ground, its not been easy days as the Government clamped down on corruption.

I think its all too easy to write off Macau now, but as the saying goes, within crisis lies opportunity. Howard Marks had a great saying:

“Rule No. 1: Most things will prove to be cyclical. – Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

Bloomberg has a great piece out yesterday which describes the situation that you can check out here.

Macau is at a critical juncture in its history now, transitioning to a more family friendly destination, and with a bigger focus on the mass market. Have we seen this before? Looking back in history, Las Vegas has faced similar circumstances, and has had to reinvent itself multiple times to stay relevant. Macau likewise has to do the same.

At the back of this however, are some positive points. China’s middle class is growing, and their taste of travel will be a big tailwind for the years to come. As an investor, I probably err on the side of being overcautious.

But that’s one thing I wouldn’t bet against – the desire of people no matter their circumstances to better their lives, to become richer, and to experience a great variety of things. Over the long run, betting against humanity has always been a bad idea.

Are there pre-existing problems within the Chinese economy (and the stock market if thats what you’re following). Yes! But people often forget that the US has been through 47 recessions (and one great depression) in the last 200 or so years. And they seem to have done just fine.

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What I am trying to get at is that its probably more worthwhile to take a more nuanced view of whats happening. I love what Howard Marks said about cycles, simply because there’s nothing more dependable in the financial markets than the pendulum swinging between greed and fear. The pendulum now has swung solidly towards fear in Macau.

The key as always is valuation and finding the right business to invest in. More on that in the next post!

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Updates:

While moving server hosts, I seemed to have deleted my entire website by accident. So much for sticking in my circle of competence. Hopefully I will be able to recover some of my older posts over the coming week.


I just came back from the Value Investing Conference in Italy. This was the 2nd conference I’ve attended (the first was the London Value Investor Conference in 2014). Both were useful in getting ideas from other investors across the globe.

I also had the pleasure of finally meeting Whitney Tilson. I remember watching his lecture at Darden University back in 2010 – the first formal introduction to value investing I had. He gave a presentation on the fundamentals of investing, and also his investment thesis on Berkshire Hathaway (which he presented again at the conference this year).

It has done very nicely since then, although I never did pull the trigger to buy it as I never fully understood the insurance component of the business.

Unsurprisingly, investors mostly think that the US is fully valued, and Europe has few interesting bargains at this point (most of the high quality companies are not that cheap… yet).

Surprisingly, China was not on the radar of many investors, nor was South East Asia despite the cheap valuations. Perhaps this was because the conference was held in Italy, with a strong European centric bias.

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There was an interesting presentation on TaeYoung Engineering and Korean Preferreds in general. I will try to post up some stuff – very interesting space for those with small sums of capital to work with.

Should You Come Next Year?

Would I recommend investors to come to it? Well it really depends on when you are located, and how cost effective it is for you to attend. Now that Tilson has ceased his bi-annually Value Investing Congress, there aren’t that many conferences for investors to attend that I would recommend. There are plenty of low hanging fruits in terms of presentations and online conferences (Manual of Ideas, Value Conferences) that you can attend from the comfort of your own home.

However, nothing beats the chance to network with other professionals and investors to tell our “war stories”, and to learn from each other. I picked up a lot of interesting things both related to, and unrelated to investing over the two days.

One thing which really strikes me is how off the radar many of the Asia countries are – specifically Singapore, Hong Kong, Malaysia, Thailand and Japan. Not a lot of people were talking about it (again, this could be the nature of the meetup!). However, I stand by my thesis that there are plenty of good opportunities for investors to exploit simply because of the informational edge you have by being on the ground.

It’s hard for investors sitting thousands of miles across the world to invest in small to mid-caps, where I find the most interesting opportunities. Some of my investments have been in the sub $50 million range, which larger funds cannot invest in simply because of their mandate, and because of liquidity issues. I looked up the top 20 shareholding list of many of these companies, and there just isn’t a lot of institutional ownership.

What Looks Cheap Now:

This is the topic of another post in the future, but what strikes me as “cheap now” are:

Hong Kong retail stocks
Singapore small to mid-caps (industrials, manufacturing, anything property related)
Japan small caps (perpetually undervalued?)
Oil & Gas related stocks (all around the world)

Malaysia looks pretty interesting with the ringgits’ subsequent decline, and the general negative sentiment pervading the country. I can’t profess to have done a lot of work in this area yet, but investors should check it out if you are already operating in the market there.