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Saturday, December 8, 2018

Tong's Value Investing Portfolio as of December 6, 2018

Tong Kooi Ong

Pay out excess cash to maximise shareholder value

Last Monday’s rally turned out to be short-lived, underscoring persistent volatility in equity markets, but the outlook for emerging markets may have just brightened some.

Of significance, US Federal Reserve Chairman Powell said that benchmark interest rate is now “just below” the neutral level. This is in stark contrast to his use of the words “a long way from neutral” in early October.

Although the Fed offered no further hints as to what is the neutral rate or if there even is any change in its policy considerations, investors cheered the language shift to mean a more dovish stance. One last 25-basis point rate hike in December is currently seen as almost a done deal but expectations for 2019 are being pared back.

This could be tacit acknowledgement that the US economy will slow into 2019, once the boost from tax cuts and fiscal spending wanes. Meanwhile, the anticipated pickup in business investments has, so far, been patchy, weighed down global economic and trade war uncertainties. Additionally, monetary policies typically take some time to filter down and the Fed will surely want to monitor the impact of this year’s rate hikes before moving more aggressively forward.

It has indicated that further rate decisions will be data dependent, including future readings on inflation. Inflationary expectations, at least, appear to have turned more modest. Benchmark US bond yields have fallen back below the 3% level and the yield curve has, once again, flattened.

If US interest rates were indeed nearing the peak, this would suggest a more stable greenback and good news for emerging market currencies and stocks.

US stocks have far outperformed the rest of the world for the better part of this year, underpinned by a strong economy and corporate earnings, rising rates and strengthening US dollar.

This has resulted in diverging valuations – whilst the S&P 500 index is now trading at around 16 times forward earnings, the MSCI Emerging Markets index is hovering at just about 11 times.

Forecasts for 2019 are more tempered. The International Monetary Fund estimates growth for the world’s largest economy at 2.5%, down from the projected 2.9% this year. Meanwhile, US corporate earnings are forecasted to grow in the high single digit compared with the projected 20.6% expansion in 2018. In anticipation of the slowdown, there is a small but growing voice amongst brokers for investors to switch to cash and treasuries, on the basis of risk adjusted returns.

All of the above could mean that the time is ripe for the return of portfolio funds into beaten down emerging markets. Indeed, we did see tentative fund inflows into select Asian markets last month, including Indonesia and Philippines.

There is an interesting point to note about prevailing stock valuations. Table 1 shows the average valuations for all companies listed on Bursa Malaysia, excluding financial institutions (banks and insurers) and real estate investment trusts.

Companies in net cash positions are trading at steep discounts, on average, compared to those with net borrowings. For instance, the former is priced at EV/EBITDA of only 8.8 times whilst the latter is accorded valuation of nearly 13 times.

Whether this is due to the sharp rise in passive investing (where underlying fundamentals become secondary) or some other reasons, market seems keenly focused on earnings but failing to attach as much value to balance sheet strength.

It seems to me there is one clear conclusion to draw from this; management can maximise shareholder value by paying out the excess cash and if need be, take on some borrowings. It will have minimal impact on profits but yields will boost investor interest and share prices.

The Global Portfolio ended in the red for the week, in line with the global selloff. DIP Corp was amongst the worst performing while Nine Dragons managed to buck the downtrend to close higher by 3.4% from the previous week.

Total Global Portfolio returns dropped to -11.6% since inception. The portfolio is under-performing the benchmark index, which is down by a lesser 2.8% over the same period.

The Malaysian Portfolio too finished lower for the week ended Thursday, falling 2%. This is slightly worse than the 0.8% drop for the FBM KLCI. Relatively thin volume further exacerbated price declines for low liquidity stocks like Ajinomoto and HL Industries.

I disposed of my entire holdings in Top Glove, locking in gains totalling 9.6%. This portfolio is now about 77% invested.

Total Malaysian Portfolio returns were pared back to 51.4% since inception. Nevertheless, this portfolio continues to outperform the benchmark index, FBM KLCI, which is down 8%, by a long way.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.73719,218.41.28014,164.5(5,053.9)(26.3%)
AJINOMOTO (M) BHD1,50011.81317,720.018.80028,200.010,480.059.1%
PANASONIC MANUFACTURING MSIA60026.30717,182.038.00022,800.05,618.032.7%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.68028,140.02,800.011.1%
FORMOSA PROSONIC INDUSTRIES18,0001.54027,720.01.75031,500.03,780.013.6%
HONG LEONG INDUSTRIES BHD2,0009.12618,251.08.94017,880.0(371.0)(2.0%)
WILLOWGLEN MSC BHD19,9000.5009,950.00.4659,253.5(696.5)(7.0%)
MALAYAN BANKING BHD3,00010.25030,750.09.44028,320.0(2,430.0)(7.9%)
MAH SING GROUP BHD19,0001.01019,190.00.99518,905.0(285.0)(1.5%)
ECO WORLD DEVELOPMENT GROUP BERHAD15,2001.23518,772.01.00015,200.0(3,572.0)(19.0%)
DIALOG GROUP BHD5,7003.45219,676.43.23018,411.0(1,265.4)(6.4%)
Total  223,769.8 232,774.09,004.24.0%
Shares bought       
No transaction.       
Total shares held  223,769.8 232,774.09,004.24.0%
Shares sold       
TOP GLOVE CORPORATION BHD3,6005.50019,800.06.03021,708.01,908.09.6%
Cash Balance    70,006.5  
Realised Profits / (Losses)    93,776.3  
Change since last update Nov 29, 2018       
Portfolio      (2.0%)
FBMKLCI      (0.8%)
Portfolio Returns Since Inception  200,000.00 302,780.5102,780.551.4%
Portfolio Returns (Annualised)      12.3%
Portfolio Beta      0.670
Risk Adjusted Returns Since Inception      76.7%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,683.3(8.0%)59.4%
FBM Emas12,700.411,603.3(8.6%)60.0%
*Current price is as at December 6, 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.

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%)
GENTING MALAYSIA BERHAD06-Sep-1828-Nov-183,8005.07019,266.03.06011,628.0(7,638.0)(39.6%)
TOP GLOVE CORPORATION BHD06-Sep-1806-Dec-183,6005.50019,800.06.03021,708.01,908.09.6%

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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