Tong Kooi Ong
Buying into China’s cleaner environmental theme
It has been another tough week for global stocks. The escalating trade rhetoric between the US and China is hurting investor confidence, especially for perceived riskier and export-reliant emerging markets.
My Global Portfolio fared comparatively well against this backdrop bolstered by gains for technology stocks, seen to be more insulated from trade conflicts. Shares for DIP rebounded strongly while Amazon and Alphabet also ended higher for the week.

Total portfolio value gained 1.08% in the past one-week even as the MSCI World Index fell 1.26%. This brings cumulative portfolio returns to 6.7% since inception.

My Global Portfolio continues to outperform the benchmark index, which is up 1.8% over the same period.
 
An investment theme that has played out well is one based on China’s tougher stance on environmental protection and stringent enforcement. Curbing air pollution is one of the top priorities under President Xi.
 
In an unprecedented crackdown starting last year, the authorities have rolled out environmental audits across the country and shut down thousands of factories found to have infringed emission standards.
 
Standard bearers of good environmental practice, on the other hand, have benefited greatly from the clampdown. These companies are enjoying higher selling prices due to the temporary supply restrictions and lessened competition and are well positioned to gain from any resulting industry consolidation.
 
Case in point, China Sunsine Chemical Holdings – one of our best-performing stocks – has reported sharply higher earnings as a result of the rise in selling prices. Similarly, Nine Dragons Paper too is enjoying more robust selling prices on more stringent requirements for imported old corrugated containers and reduced industry supply, especially from smaller players.
 
Sunpower Group, listed on the Singapore Exchange, is yet another company that we believe will benefit from the Chinese government’s strict enforcement of environmental protection measures. The stock has performed well, gaining 11.4% since we acquired the shares little over a week ago.
 
Industrial smog has affected almost half the entire population in China, infamously dubbed as the “airpocalyse”. The main culprit is the rampant use of coal-fired boilers for heat and electricity generation.
 
Coal is heavily relied upon because it is a cheaper energy source than natural gas and oil. The downside – coal burning emits soot, sulphur dioxide and nitrogen oxides. These residues collectively accounted for more than half of the total smog emission in China.
 
However, the total phasing out of coal usage is not feasible, at least in the foreseeable future, and will thus remain a fixture in the country’s energy consumption mix.
 
Prices for natural gas, the closest substitute, have soared to 3-year highs due to rising demand spurred by the disruptive switch from coal. As it stands, China has to import at least 40% of natural gas to fulfill household and industrial energy needs. Northeastern provinces are already facing natural gas shortage during heavy winter months.
 
The most pragmatic solution is therefore, the promotion of cleaner coal-burning boilers with lower emission and the use of centralized steam boilers to replace inefficient and heavy polluting smaller ones.
 
This is where Sunpower has first mover advantage and strong competitive edge. The company has 20 years of proven track record and is a leader in both thermal as well as clean emission technology. It employs a huge team of research and development engineers led by its chairman and founder, Guo Hong Xin who has a PHD in geo-technical engineering and an expert in his field.
 
For instance, Sunpower’s proprietary heat transfer technology can deliver steam to customers via pipelines at lower pressure with lesser temperature loss for up to 30km radius or about 5 times the industry’s average coverage. Its emission from burning coal is also much lower than the allowable national standards (see Table 1).
 
Sunpower operates two main business units: Manufacturing & Services (M&S) and Green Investment (GI).
 
The M&S segment provides one-stop integrated solutions for a wide range of energy saving, transfer and generation equipment. Sunpower serves 1,500 customers worldwide, including Fortune 500 chemical, O&G, power and clean energy companies. Over two-thirds of sales are generated from repeat customers, a testimony to its track record.
 
Buoyed by the ongoing transition to cleaner energy, Sunpower is enjoying strong demand and expects double-digit growth rates. Its M&S order book has grown from RMB1.1 billion in February 2017 to a record high of RMB2.2 billion in March 2018 – with some RMB662 million worth of contract wins for the year-to-date.
 
At the same time, Sunpower has big expectations for its newly established GI business unit as the future growth driver. The business leverages on its existing expertise and is synergistic with the M&S segment.
 
GI involves building centralized steam boilers and cogeneration plants – under BOT/BOO (build, operate and transfer/own) models. These projects typically have 20-30 years concession rights to operate the plants within key industrial parks/areas.
 
Sunpower aims to transform the segment into a mini utility – with steady and sustainable income stream over the longer-term.
 
As a first mover in the centralized steam boiler projects, Sunpower is confident of earning some 15% internal rate of return (IRR), even with conservative projections for coal prices and interest rates (higher than current prices and cost of debt).
 
Indeed, taking into account current and pipeline projects, GI is expected to overtake M&S as the bigger earnings generator in 3 years’ time (see Table 2).
 
At present, the company operates 4 GI projects with total investments of RMB606 million and active steam capacity of 3.5 million tons. In its maiden contribution, in just one quarter (4Q17), GI generated RMB152 million sales and about 21% of total earnings before interest and tax (Ebit) for 2017 (see Table 3).
 
By 2021, GI’s investment is expected to expand to RMB2.49 billion with portfolio assets totalling 18 million tons of active steam capacity and 12 million spare capacities. Of note, Sunpower receives additional incentive from the government for the supply of excess electricity to the national grid (see Table 4 and Chart).
 
Presently, its GI developments have projected utilization rate of 80%. Anything above this threshold will increase operating margins due to higher efficiency rate. The throughput is roughly 1 ton of coal to produce 8 tons of steam. It is envisaged that this ratio can be further optimised to improve yield by substituting a small mixture of sludge (Sunpower is paid to collect waste disposals from other factories) to reduce coal usage.
 
Sunpower has gross borrowings totalling RMB1.1 billion and net debt of about RMB358 million or 26.6% gearing as at March 2018 (excluding convertible bonds). Borrowings will rise given the expected capex for the GI business, estimated to total some RMB1.9 billion over the next few years.
 
Assuming all outstanding bonds and warrants are fully converted and exercised, gearing is estimated to increase to 80% by 2022. Whilst this may appear high, it is not unusual for utilities due to high upfront capex. Borrowings will gradually be pared down by the projects’ steady generation of cashflows.
 
Alternatively, Sunpower is also open to bundling and selling these assets to yield-seeking investors, such as insurance or pension funds, once they have achieved operational maturity. Proceeds can be recycled into developing other greenfield projects and/or reduce borrowings.
 
Sunpower raised money from two of China’s best-regarded private equities funds, DCP and CDH in 2017-2018 to finance its expansion programme. The two PE funds invested USD180 million via convertible bonds with a low 2.5% cost of debt. Some of their other notable investments include Ping An Insurance, WH group, Haier, Mengniu Dairy, etc.
 
The bond conversion price is fixed at $0.60 on maturity in 2022. Meanwhile, the exercise prices for accompanying warrants are set at $0.70 (by end-2019) and $0.80 (end-2020). Of note, all the conversion prices were fixed at a premium to average prices in the preceding six months prior to issuance, underscoring strong confidence in Sunpower’s future prospects.
 
Currently, the stock is trading at roughly 6.8 times estimated earnings for 2018. Valuations are set to decline further in 2019-2020 on the back of more GI projects coming onstream and strong M&S orderbook. Please visit www.absolutelystocks.com for more details on Sunpower.
 
Shares on the Bursa Malaysia continued to come under selling pressure from foreign funds mirroring the selloff in regional markets. The FBM KLCI dropped 4% for the week ended Thursday.
 
Capital outflows could persist in the near-term given prevailing trade tensions, geopolitical risks, rising interest rates in the US and slowing global economic growth momentum outside of the US.
 
Stocks in my Malaysian Portfolio held up fairly well against the broader market decline, beating the FBM KLCI’s performance for the past one week.
 
I disposed of all of my shares in Choo Bee and half of my holdings in Superlon, realising gains totalling RM3,130. I will recycle the proceeds into some new ideas in the next week or two.
 
Total portfolio returns now stand at 60.7% since inception. Again, the portfolio is far outperforming the benchmark index’s 7.5% loss over the same period.


Performance Comparison Since Inception (%)
%-7.560.7-20-10010203040506070
  • Tong's Value Investing Portfolio
  • FBM KLCI
SHARES HELDQUANTITYAVERAGE COSTCOST OF
INVESTMENT
CURRENT
PRICE
CURRENT
VALUE
GAIN /
(LOSS)
GAIN /
(LOSS)
SCGM BHD11,0661.75719,439.71.80019,918.8479.12.5%
AJINOMOTO (M) BHD1,50012.27818,417.522.10033,150.014,732.580.0%
PANASONIC MANUFACTURING MSIA60028.63717,182.037.68022,608.05,426.031.6%
SUPERLON HOLDINGS BHD6,0001.1757,050.01.5209,120.02,070.029.4%
KERJAYA PROSPEK GROUP BERHAD11,0001.02011,225.01.54016,940.05,715.050.9%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.48326,075.02.60027,300.01,225.04.7%
LUXCHEM CORPORATION BHD16,5000.71711,825.00.61510,147.5(1,677.5)(14.2%)
FORMOSA PROSONIC INDUSTRIES18,0001.54027,720.01.36024,480.0(3,240.0)(11.7%)
HONG LEONG INDUSTRIES BHD2,0009.27618,551.011.32022,640.04,089.022.0%
OKA CORPORATION BHD12,0001.54118,488.01.25015,000.0(3,488.0)(18.9%)
WILLOWGLEN MSC BHD20,0000.4959,900.00.53010,600.0700.07.1%
HOCK SENG LEE BHD14,5001.52022,040.01.40020,300.0(1,740.0)(7.9%)
MALAYAN BANKING BHD3,00010.50031,500.09.17027,510.0(3,990.0)(12.7%)
PANTECH GROUP HOLDINGS BHD43,0000.58024,940.00.58525,155.0215.00.9%
Total  264,353.2 284,869.320,516.17.8%
        
Shares bought       
No transaction.       
        
Total shares held  264,353.2 284,869.320,516.17.8%
        
Shares sold       
CHOO BEE METAL INDUSTRIES BHD8,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD6,0001.1757,050.01.5509,300.02,250.031.9%
        
Cash Balance    36,570.6  
Realised Profits / (Losses)    100,923.8  
        
Change since last update Jun 13, 2018       
Portfolio      (0.7%)
FBMKLCI      (4.0%)
        
        
Portfolio Returns Since Inception  200,000.00 321,439.9121,439.960.7%
Portfolio Returns (Annualised)      16.4%
        
Portfolio Beta      0.624
Risk Adjusted Returns Since Inception      97.3%
        
        
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,692.3(7.5%)68.2%
FBM Emas12,700.411,956.9(5.9%)66.6%
Footnote: 
*Current price is as at June 21, 2018. 
*Portfolio started on Oct 10, 2014 with MYR200,000. 
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

STOCKS SOLD IN THE LAST 12 MONTHS (Currency: MYR)
SHARES SOLDDATE BOUGHTDATE SOLDQUANTITYAVERAGE 
COST
COST OF 
INVESTMENT
PRICE SOLDSALES 
PROCEEDS
GAIN /
(LOSS)
GAIN /
(LOSS)
BATU KAWAN BHD15-Feb-1703-May-1720019.5003,900.018.9603,792.0(108.0)(2.8%)
BATU KAWAN BHD15-Feb-1704-May-1740019.5007,800.018.9007,560.0(240.0)(3.1%)
UNITED PLANTATIONS BHD13-Feb-1708-May-1750026.15013,075.028.42014,210.01,135.08.7%
UNITED MALACCA BHD08-Feb-1709-May-171,0005.8005,800.06.2006,200.0400.06.9%
UNITED MALACCA BHD08-Feb-1711-May-171,0005.8005,800.06.1906,190.0390.06.7%
WILLOWGLEN MSC BHD23-Nov-1630-May-1713,0000.7689,985.91.72022,360.012,374.1123.9%
YEE LEE CORPORATION BHD12-Jan-1729-Jun-176,0002.50015,000.02.48714,924.0(76.0)(0.5%)
CLASSIC SCENIC BHD26-Jan-1613-Jul-174,0001.4135,651.31.8157,260.01,608.828.5%
MIKRO MSC BERHAD01-Dec-1627-Jul-1742,0000.33113,920.00.54522,890.08,970.064.4%
CLASSIC SCENIC BHD01-Dec-1627-Jul-174,0001.4135,651.31.7907,160.01,508.826.7%
PANASONIC MANUFACTURING MSIA21-Jan-1627-Jul-1740026.12510,450.037.10014,840.04,390.042.0%
ELSOFT RESEARCH BHD30-Mar-1724-Aug-178,0001.84414,750.02.65021,200.06,450.043.7%
JOHORE TIN BERHAD - WA 12/1704-May-1724-Aug-1717,0000.65511,135.00.68011,560.0425.03.8%
FOCUS LUMBER BERHAD03-May-1730-Aug-176,0001.6609,960.01.5309,180.0(780.0)(7.8%)
WILLOWGLEN MSC BHD23-Nov-1630-Aug-177,0000.7685,377.01.43010,010.04,633.086.2%
WILLOWGLEN MSC BHD23-Nov-1628-Sep-177,0000.7705,377.01.1808,260.02,883.053.6%
LII HEN INDUSTRIES BHD14-Dec-1628-Sep-175,0002.82014,100.03.72018,600.04,500.031.9%
COMFORT GLOVES BERHAD28-Aug-1708-Dec-1725,0000.96024,000.00.93023,250.0(750.0)(3.1%)
JOHORE TIN BHD08-May-1708-Dec-179,0001.60014,400.01.18010,620.0(3,780.0)(26.3%)
THONG GUAN INDUSTRIES BHD12-Dec-1608-Dec-175,0004.24321,215.04.10020,500.0(715.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD12-Jan-1715-Mar-1811,0001.02511,280.01.54016,940.05,660.050.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/202308-Mar-1815-Mar-183,0000.0000.00.330990.0990.0-
LUXCHEM CORPORATION BHD30-Aug-1715-Mar-1816,5000.73212,072.50.72011,880.0(192.5)(1.6%)
WILLOWGLEN MSC BHD14-Dec-1722-Mar-1820,0001.01020,200.01.26025,200.05,000.024.8%
MUAR BAN LEE GROUP BERHAD26-Oct-1722-Mar-1813,5001.24016,740.01.17015,795.0(945.0)(5.6%)
CHOO BEE METAL INDUSTRIES BHD07-Sep-1716-May-188,0002.19017,520.02.44019,520.02,000.011.4%

A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong

http://www.theedgemarkets.com/aa/tong/portfolio