Zagro Asia released a formal proposal to seek the voluntary delisting of the Company which I think greatly undervalues the company.

I have sent an open letter to company reflecting my stance that the offer should be revised upwards to reflect the true intrinsic value of the company.

The original letter can be found here.

Open Letter to Zagro Asia about Proposed Voluntary Delisting

The proposed voluntary delisting at 30 cents came as a surprise to us. It deeply undervalues what is an intrinsically high quality business.

In our opinion, a conservative appraisal of Zagro Asia would yield a valuation of at least 35 – 40 cents.

First off, let me congratulate management for running a tight ship. For ten years, you have grown the earnings of the company consistently, even through tough times.

In the FY 2005, you earned $3.14 mil, and in the FY 2014, you earned a profit of $7.23 mil. In those ten preceding years, you have never recorded a loss, and have paid out a dividend in every one of those ten years.

More impressively, you have done so without the excessive use of leverage, and maintained an average Return on Equity (ROE) of over 11%.

These numbers are highly impressive, and few listed companies in Singapore can match your track record in the industry.

Summary of Zagro Asia Financial Results¹

The Offer Grossly Undervalues Zagro Asia



The current offer price of 30 cents pegs the companies P/B ratio at 0.87x.

In the preceding 5 years (Nov 2010 – present), your stock has traded at an average P/B of 0.95x.

In preceding 10 years (Nov 2005 – present), your stock has traded at an average P/B of 1.11x².

It is clear from the above charts that in the last decade, a P/B of 0.87x is close to the lowest end of the valuation range.

Given the sterling business record of Zagro Asia, there is no reason why it should not trade at least at least at book value.

This would imply an offer price of at least 34.58 cents.

A Look at the Underlying Assets
& Business of Zagro Asia

To add to the above point, I would like to highlight the high quality assets that Zagro Asia has.

The financial position of your company is in good shape, with significant amount of cash $27.9 million, representing 31% of your total equity. Furthermore, you also possess a freehold land valued at $5.4 million.

In addition, you have also pared down your borrowings by $4.6 million. There are no significant liabilities, either on or off the balance sheet.

It is safe to say that your balance sheet is at one if its strongest positions since its listing history.

Finally, in your latest half year results, the company recorded a significant improvement in net profits of 18%, from $3.3 million to $3.9 million.


The above points highlight improving business results, a strong unencumbered balance sheet and solid business record.

There is no reason why Zagro Asia should not trade at least at book value, or even a premium of book value indicating a fair value or 35 – 40 cents.

Shareholders who have received notice of your voluntary delisting have already expressed scepticism that the proposed offer of 30 cents reflects the true underlying intrinsic value of your business³.

We have in principle, no objection to a delisting offer, and strongly urge the directors of Zagro Asia to revise their offer as it grossly undervalues what is intrinsically a high quality business.

Tay Jun Hao
Director of Farrer Enterprise, Editor of The Asia Report

[1] Financial Results Summary from
[2] Data from Thomas Reuters

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I read a story on Kiplinger about a fund manager who closed up shop after fifteen years managing money due to his poor performance in the last two years.

He pretty much sums up the problem with concentration:

Magnifying the problem was my decision to put too much money into my favorite ideas.

I totally bought into the notion that it was foolish to invest in my 60th-best idea.

What I overlooked was how bad things could get if I was wrong about my second-best, third-best and fifth-best ideas at the same time.

This brings me back to one of my old post which I’ve reproduced (the original was lost in the migration).

My thinking on the subject hasn’t changed.

Is Diversification A Defense
Against Ignorance?

There’s  a train of thought among people that concentration is the way to earn out-sized returns in investing.

Buffett probably helped popularize this idea by focusing on his “twenty punch card rule”, citing that diversification is really a guard against ignorance.

Charlie Munger is as much a proponent of concentration as Buffett, and is famously known for saying that 3 stocks is enough.

Personally, I think 99% of investors are better off with a reasonably well diversified portfolio of common stocks (20 – 25) than let’s say a portfolio of 5 stocks.

One can only have conviction to hold on in persistent market declines by way of research that is both borne out of experience and hard work.

You Need 10,000 Hours

Source: Key Leadership Academy
Source: Key Leadership Academy

Malcolm Gladwell often takes about the 10,000 hour rule, and the same applies to investing.

The challenge is that one not only needs to understand a single business well, but to be able to look at it in the context of the big picture.

Investors cannot simply focus on single trees, and have to be weary of the going-ons in the forest as well. This requires concentrated effort and time to pull off – along with a sound framework.

My own personal feeling is to embrace that there are really many things that we do not know anything about, much less control.

Diversification is simply a way of me saying that there are plenty of unknown unknowns.

¨We are obviously only going to go to 40% in very rare situations – this rarity, of course, is what makes it necessary that we concentrate so heavily.

We probably have had only five or six situations in the nine-year history of the Partnership where we have exceeded 25%..“

Buffett Partnership Ltd 1966

What about Activist Investors?

Activist fund managers like Bill Ackman of Pershing Square Management, Carl Icahn of Icahn Capital Management and Jeffrey Ubben of ValueAct Capital run extremely concentrated portfolios.

Their top 5 positions often compromise of more than 50% of their entire portfolio.

But one thing to bear in mind is that unlike us, these investors are activists.

Most investors on the other hand, are minority shareholders, with very little say over managerial discretion.

Taking an activist stance allows investors to become the de-facto catalyst, bringing light to undervalued situations, liquidating positions to return cash to shareholders, re-vamping stagnant management and unlocking the “value” within.

Tracking 13-Fs of Activist Investors

One extremely efficient way of sourcing ideas is to track the 13-Fs of activist investors. The nature of how their portfolios are constructed means a good deal of research has taken place before an activist investor decides to commit.

Furthermore, the presence of activists means that change takes place quicker than slower.

This is not to say that they will always be right; there have been well recorded blow-ups such as Bill Ackman’s failed attempt at a turnaround in JC Penny.

Their overall track record (so far anyway!) has shown however that in aggregate, activists are more often right than wrong, and that their ideas are a good source of ideas that will out-perform the market.


I used to do these presentations regularly during my time in UCL (University College London). Its always great fun to share what I’ve learnt over the years. I get to review and re-look the concepts that deal I with daily.


Teaching has always been the best form of learning for me.

One of my favourite parts about these sharing sessions is the Q & A.

There’s a huge gap between theory and practise. Something which I struggled with when I first started too. I remember having an accounting related question on Free Cash Flow vs Owners Earnings that was unresolved for over two years.

I touched about how big that gap can be briefly in my podcast on the perils of index investing, and why its so hard.

You can check it out here:

One of the members of the audience had a great question which commonly comes up:

Is it better to buy cheap companies at good prices,
or wonderful companies at fair prices?

What Warren Buffett Thinks

He’s said this a number of times over the years in various interviews. Here’s the thing though.

I don’t think this is an end all be all statement that conclusively settles the debate. Let’s consider a few things:

  • Academic research shows that investors who invest in “wonderful companies” tend to under-perform “terrible value companies” 
  • Buffett’s track record running his investment partnership far exceeds his track record when he changed styles at Berkshire Hathaway in the last 2 decades
  • He has bought “cheap stocks” from time to time in his own personal account

I tend to find that wonderful companies are easy to spot. Markets tend to be very good at identifying such companies.

What they are not so good are at pricing them appropriately, and investors often end up paying too much for growth.

Not to mention that companies with true “competitive moats” are not easily identifiable.

The Only Thing That Is Constant Is Change

Industries change. Technology changes. What’s a moat might not be one 10 to 20 years from now. Buffett has invested in plenty of companies that have seen their moat being eroded over time.

That’s probably why Buffett tends to stick with things that tend to change glacially.

Like food & consumer products (Kraft, Gilette, Coca-Cola), transport (BNSF), and retail banking (not investment banking!) operations (Wells Fargo, Bank of America).

He’s gone out on a limb to say that he doesn’t invest in technological companies. IBM doesn’t count in my book. If you read his interviews, he tends to see it more as a service provider. But that’s a story for another day.

At the end of the day, I think the peril of investing like Buffett is that we are not Buffett.

He took decades before he slowly shifted to his current style of investing, has an unparalleled network, incredible intellect and a vast amount of knowledge accumulated from decades of non-stop reading.

So Why Does Buffett Buy Good Companies at Fair Prices?

My own opinion is that is a constraint he faces in his opportunity set. He has tens of billions to deploy, and billions more coming in yearly. A good problem surely, but his universe of stocks are limited to those in the S & P 500, and maybe some private companies.

Buying cheap stocks wouldn’t move the needle for him at all. 

His lack of investment opportunities at his size is really shows in his relative under-performance compared to his early days managing small sums of money.

Finally, I think there’s a huge distinction between buying a company and buying a stock. If I were a CEO, I wouldn’t want to buy a lousy run-down company too. Think about the headaches of turning it around.

But as the last post highlights, investing in stocks is very different from investing in a business.

Investing in “cheap cigar-butt stocks” might not be fanciful, but where they excel in are the relative ease in which a determined investor can succeed.

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.

screenshot (2)

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

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

Macau casino giant SJM Holdings sees profits plunge

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.