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Friday, October 12, 2018

Tong's Value Investing Portfolio as of October 11, 2018

Doing the right thing often has a cost

Stock markets around the world succumbed to another wave of intense selling pressure. This time, the US market was not spared, which is not entirely a surprise given that its recent record run has further widened the valuation gap with the rest of the world.

Bellwether indices in the region are all in a sea of red. Chinese stocks caught up with the selloff after a weeklong holiday in the previous week. Stocks on the Bursa Malaysia suffered one of the worst weeks in years.

Aside from external pressure, sentiment on Bursa was likely affected by the ongoing tussle between the Ministry of Finance and the MMC- Gamuda consortium over costing for the underground construction of the Mass Rapid Transit 2 (MRT2) project. We have read and heard many opinions from both sides of the divide.

As a businessman, I fully empathise with the arguments for sanctity of contracts and its importance in maintaining investor confidence, the associated costs in terms of market losses for shareholders and potential longer-term impact on the capital market.

Gamuda launched an unprecedented campaign in the social media, calling for the government to reconsider or face the loss of 20,000 jobs. I don’t question that there will be pain.

But who are the stakeholders in this issue? Is it just the 12,000- and 8,000-plus shareholders of Gamuda and MMC Corp as well as the 20,000 employees whose jobs are on the line? Should we not take into consideration the interest of the 2.3 million taxpayers and 32 million Malaysians who will ultimately be footing the bill? Any cost savings will, after all, be for the benefit of all Malaysians.

There is no good solution that would satisfy everyone. But does that mean we do not do what is right, or more specifically, right what was wrong?

We know the previous government abused the system. Indeed, we voted them out for precisely this reason. The people stood up and made it heard that we want a clean government, transparency, accountability and ultimately, a better livelihood for all, not just the few.

The MRT2 project is just one of many infrastructure projects that were dished out since 2014. These included the ECRL and gas pipeline projects, which were the two high profile projects the government have cancelled because they were lopsided and highly inflated in costs.

Without going into the merits and demerits of the MRT2 contract dispute, how it is finally resolved could set the tone for all future re-negotiations. In this respect, while the government should handle the matter with care and fairness, it must also do its best to fulfil its promise to reform the system – a promise made to all Malaysians. Not an easy balancing act.

Without doubt, there will be a price to doing what is right, but I think the people will gladly pay that price. For investors, it is high time they look beyond just how much profit a company makes, to how those profits are made.

I added a few stocks to my Global Portfolio recently, namely US-based defence contractor Northrop Grumman, Hong Kong-listed Ausnutria Dairy Corp and China Sunsine Chemical Holdings, which is listed on the Singapore Exchange. The portfolio is now almost fully invested.

Northrop is one of the five largest defence contractors in the world, with a strong focus on aerospace solutions, unmanned aircraft (drones), autonomous vehicles on land, sea and undersea as well as missile defence systems.

Defence-related stocks are expected to benefit from a projected increase in government spending around the world. Defence spending, including in the US, has fallen sharply since the end of the Cold War, but appears to have turned the corner — especially given the rise of Russia and China as well as extremist groups such as the Islamic State.

The US, under President Donald Trump, has expanded significantly its defence allocation in the past two years. A higher US$716 billion ($988 billion) budget for 2019 was recently approved. The president has also been pressing allies, including North Atlantic Treaty Organization members, to step up their defence spending. Most currently have military budgets well below the 2% of GDP guideline, a target NATO aims to achieve by 2024. More than just expanding existing resources, countries cannot ignore new military technologies.

In May 2018, Congress approved US$11.5 billion for the Missile Defense Agency (MDA), its highest ever allocation. One of its core upcoming programmes is the Ground Based Strategic Deterrent system (GBSD). Northrop and Boeing are in competition to develop this system for the US Air Force.

GBSD is an overhaul of the existing intercontinental ballistic missiles system (ICBM). Over 600 new missiles are to be built, to replace the Minuteman 3 missiles, which were first introduced in the 1970s.

The acquisition of rocket and missile maker Orbital ATK in June 2018 further expanded Northtrop’s product portfolio and capability in manufacturing technologically advanced combat platforms and in particular, the space market (satellites, spacecraft components as well as commercial space-launch systems). Orbital is one of only two US manufacturers for solid rocket motors, which are used to power missiles and space launches.

While the US military is its biggest customer, Northrop also sells to other countries. In September, the US State Department approved the sale of up to nine E-2D Advanced Hawkeye Airborne Early Warning and Control System (AWACS) aircraft to Japan, a growing market for US defence contractors. Earlier in June, the Australian government announced plans to purchase the Northrop-built Triton unmanned aircraft system. Total cost for six of the long-range surveillance drones is estimated at US$5.1 billion. In April, the US approved the sale of four Tritons to Germany.
Northrop has a market cap of around US$54 billion and its shares are trading at a forward price-to-earnings of about 16 times. Current order backlog stands at some US$52.2 billion, a record high.

Ausnutria Dairy Corp is an integrated dairy products company. Its operations include milk sourcing, R&D, processing, blending, packaging, marketing and distribution of its own branded products — specialising in infant formula milk powder — and catering primarily to the Chinese domestic demand.

The company went through a series of mergers and acquisitions over the past few years, which underpinned its strategic transformation. These include acquiring production facilities (and intellectual property) and subsequent expansion in the Netherlands, Australia, New Zealand and China.

Crucially, Ausnutria expanded strategically from the highly competitive cow milk market segment into the niche market for goat milk. All of its goat milk formula products are produced in the Netherlands and marketed under the “Kabrita” brand worldwide.

China has very strict regulations for registration of infant formula — following a series of tragic scandals involving contaminated milk — which also serves as a barrier to entry. Ausnutria’s factories in China (for blending and repackaging) were among that first batch of factories granted the National Infant Formula Enterprise Production Permit. The factory in the Netherlands is also one of the first infant milk formula manufacturers to obtain import licences for overseas products.

Ausnutria adopts a multi-branding strategy to penetrate different market segments. Cow milk products are sold under its own brands such as A Series Gold, Allnutria, Augood, Puredo, Hyproca 1897 and Mygood. It has widened its product range to include older children and adults (including mothers-to-be) as well as nutrition products such as supplements and vitamins.

The company undertakes contract manufacturing for other customers, but this accounts for an increasingly smaller portion of total revenue, dropping from 55% in 2014 to less than 20% currently. This shift has underpinned Ausnutria’s margins expansion, despite intense competition in the cow milk segment. Nevertheless, the original equipment manufacturer (OEM) business is a good way to maximise utilisation at new factories at the start-up stages.

Its first-mover advantage into goat milk market is bearing fruit — Ausnutria’s sales (worldwide) have grown more than sixfold since 2014. There was a corresponding increase in return on equity, from 8% in 2014 to 28% in the trailing 12 months.

Net profit in 1H2018 of RMB327 million, or $65.2 million (RMB266 million excluding one-off gains) was significantly higher than the RMB153 million in 1H2017 and exceeding the RMB308 million for full-year 2017. Net gearing remains modest at 28%, after recent capacity expansions. Its shares are now trading at roughly 15 and 11 times estimated earnings for 2018-2019, respectively.

The Global Portfolio continued to lose ground amid the selloff. Total portfolio returns since inception dropped to -8.6%, underperforming the MSCI World Return index, which is up 0.9% over the same period.

Stocks in the Malaysian Portfolio also succumbed to selling pressure. Total portfolio value fell 4.7%, mirroring losses for the benchmark index, FBM KLCI, which declined 4.6%. We added RM55 dividends from SCGM to our cash holding, which now stands at RM36,268, or about 12% of total portfolio value.

Total portfolio returns fell to 55.3% since inception. Nevertheless, this portfolio continues to outperform the benchmark index, FBM KLCI, which is down 6.6%, by a long way.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.73719,218.41.21013,389.9(5,828.5)(30.3%)
AJINOMOTO (M) BHD1,50011.81317,720.021.14031,710.013,990.079.0%
PANASONIC MANUFACTURING MSIA60026.30717,182.037.88022,728.05,546.032.3%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.03.01031,605.06,265.024.7%
FORMOSA PROSONIC INDUSTRIES18,0001.54027,720.01.41025,380.0(2,340.0)(8.4%)
HONG LEONG INDUSTRIES BHD2,0009.27618,551.010.50021,000.02,449.013.2%
WILLOWGLEN MSC BHD19,9000.5009,950.00.51010,149.0199.02.0%
MALAYAN BANKING BHD3,00010.25030,750.09.28027,840.0(2,910.0)(9.5%)
MAH SING GROUP BHD19,0001.01019,190.01.00019,000.0(190.0)(1.0%)
ECO WORLD DEVELOPMENT GROUP BERHAD15,2001.23518,772.01.10016,720.0(2,052.0)(10.9%)
DIALOG GROUP BHD5,7003.47019,779.03.31018,867.0(912.0)(4.6%)
GENTING MALAYSIA BERHAD3,8005.07019,266.04.41016,758.0(2,508.0)(13.0%)
TOP GLOVE CORPORATION BHD1,80011.00019,800.010.70019,260.0(540.0)(2.7%)
Total  263,238.4 274,406.911,168.54.2%
Shares bought       
No transaction.       
Total shares held  263,238.4 274,406.911,168.54.2%
Shares sold       
No transaction.       
Cash Balance    36,267.9  
Realised Profits / (Losses)    99,506.3  
Change since last update Oct 4, 2018       
Portfolio      (4.7%)
FBMKLCI      (4.6%)
Portfolio Returns Since Inception  200,000.00 310,674.8110,674.855.3%
Portfolio Returns (Annualised)      13.8%
Portfolio Beta      0.672
Risk Adjusted Returns Since Inception      82.3%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,708.5(6.6%)62.0%
FBM Emas12,700.411,858.6(6.6%)62.0%
*Current price is as at October 11, 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.

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%
CHOO BEE METAL INDUSTRIES BHD07-Sep-1721-May-188,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD01-Dec-1721-May-186,0001.1757,050.01.5509,300.02,250.031.9%
OKA CORPORATION BHD14-Dec-1728-Jun-1812,0001.54118,488.01.27015,240.0(3,248.0)(17.6%)
SUPERLON HOLDINGS BHD01-Dec-1728-Jun-186,0001.1757,050.01.2107,260.0210.03.0%
WILLOWGLEN MSC BHD14-Dec-1728-Jun-181000.50050.00.54054.04.08.0%
PANTECH GROUP HOLDINGS BHD17-May-1802-Aug-1843,0000.58024,940.00.56024,080.0(860.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD10-Jan-1706-Sep-1811,0001.02011,225.01.40015,400.04,175.037.2%
LUXCHEM CORPORATION BHD25-Aug-1706-Sep-1816,5000.71711,825.00.65510,807.5(1,017.5)(8.6%)
HOCK SENG LEE BHD19-Apr-1806-Sep-1814,5001.52022,033.01.37019,865.0(2,168.0)(9.8%)
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

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