Tong's Value Investing Portfolio as of February 21, 2019

Tong Kooi Ong

Investing in late-cycle earnings growth

Positive news flow on ongoing US-China trade talks continued to buoy sentiment for global stocks over the past week. Following reported progress after days of negotiation in Beijing, further discussions have resumed in the US. Clearly, markets have now priced in some sort of deal to avert another tariff hike or at the very least, an extension to the March 1 deadline.

Volatility as measured by the CBOE Volatility Index (VIX) has fallen quite sharply since hitting a high on Christmas Eve last year. That said, many investors remain wary that volatility could return in the near future.

If so, this would not be at all surprising, considering that the global economy is very late in the current upcycle. There is bound to be greater uncertainties over the timing of the turning point. Unemployment rates have fallen far below levels seen in the last recession – US unemployment is near a 50-year low.

Analysts are already talking about an earnings recession. According to estimates collected by data provider, FactSet, US corporate earnings are now expected to contract 2.2% in 1Q2019, well off from an estimated growth of 4.9% less than three months ago, at end-November.

Currently, earnings are forecast to grow 1% in 2Q2019 but this could easily turn into a second consecutive quarter of decline, if analysts continue to pare back earnings estimates.

Of note, revenue is expected to grow at a faster pace, of 4.7% and 4.5% for the two quarters, respectively. In other words, the market is forecasting margins contraction, which is a symptom of late-cycle expansion when slack has been taken up.

All of the above, I believe, means greater opportunities for stock selection strategies as opposed to beta investing, which had gained increasing popularity in recent years of low volatility, liquidity driven rally.

We can expect a higher degree of late-cycle earnings dispersion and thus, should see more focus given to underlying fundamentals of individual stocks. It is more likely that value – and hence outsized returns – can be found in smaller companies. As such, we are actively looking for fresh stock ideas within these parameters to add to my Global Portfolio.

Granted, many smaller cap companies have low profiles and are not well researched. Hence, the information available could be limited, sometimes in a foreign language. As a result, their share prices too tend to be more volatile.

Case in point, shares for Shanghai Haohai Biological Technology, which we sold for a 34% gain, traded as high as HK$59.90 and fell as low as HK$34.05 before rebounding to the current HK$48.50 – all in the past one year.

Similarly, shares for Sunpower Group have rebounded quite smartly in the past couple of weeks, recovering almost all of its recent losses. Recall its share price took a sudden dive in October 2018, which was not reflective of its underlying business and earnings.

Inevitably, there are times when we would just be dead wrong. A good example is Towa Corp. Its share price reversed into a persistent downtrend soon after we bought back in December 2017. We took a loss of 16% in February 2018 and since then the stock has fallen by another 60%.

We rely heavily on data analytics in the search for stocks globally, which unfortunately does not usually give any nuance on localised issues. Losses are always a risk. Our aim is to find more winners than losers.

Share prices for China Sunsine and Ausnutria Dairy are performing very well, up some 23.4% and 23.2% respectively from our acquisition costs. On the other hand, our investments in DIP Corp and Nine Dragons Paper remain in the red.

I suspect price upside for Nine Dragons could be limited in the near-term on muted sentiment despite its valuation attractiveness. Demand for containerboard (for packaging purposes) has weakened, affected by trade conflict and China’s economic slowdown. There is evidence of de-stocking activities. The result is lower selling prices, which is also capping the ability to pass on higher costs.

Recently, there were speculations that after tightening impurity requirements for imported scrap paper, the government is mulling an outright ban in 2020. This would negatively impact margins given that local scrap prices are trading much higher currently.

In the long run, further industry consolidation would be positive for Nine Dragons, which is the biggest paper-packaging manufacturer in the country. The company has a head start in diversifying its feedstock and recently acquired pulp mills in the US. In other words, its business and longer-term outlook are intact. I am staying invested at the moment. However, I do not rule out disposing the stock in the near-term if there is a better investment alternative.

Elsewhere, shares for DIP have remained weak despite upbeat earnings. It is quite perplexing. With low unemployment rate – the labour market is the tightest in four decades – the number of job advertisement listings is on the rise and DIP has been expanding its operations.

Revenue is growing – by 10.2% y-y in 1QFYFeb2019, 10.3% in 2QFY19 and 10.9% in the latest 3QFY19 – albeit lower than previous years, due in part to larger base effect. Net income for 9MFY19 is up an outsized 24.9%, reflecting improving margins, despite lower ad rates. In addition to raising head count, the company is lifting productivity through the use of technology.

The stock is trading at PEG of less than 1 time with an estimated yield of 2.4%. DIP has forecast dividends rising to ¥49 per share for the current financial year, up from ¥43 in FY18. I like DIP’s business proposition but admittedly, it has been a drag on the portfolio. Perhaps the market is anticipating significantly greater competition – in an already fragmented industry – in the future. We are sticking with the stock and believe the market will catch up with our views.

Stocks in the Global Portfolio traded broadly higher last week, paring losses (since inception) to just 3.2%. Although the portfolio continues to underperform the MSCI World Net Return Index, which is up 1.2% over the same period, the gap has been narrowing in recent weeks as global stocks regained investors’ confidence.

Improved sentiment in global markets lifted stocks on the Bursa Malaysia broadly higher last week. Shares for Dialog rallied after releasing good earnings results for 4Q2018. The stock is another of InsiderAsia Top 10 stocks for this year. For more detailed financial information, please visit out www.absolutelystocks.com.

Total portfolio returns now stand at 56% since inception. The portfolio continues to outperform the benchmark index, FBM KLCI, which is still down 5.4%, by a long way.

Performance Comparison Since Inception (%)

• Tong's Value Investing Portfolio
• FBM KLCI

SHARES HELD	QUANTITY	AVERAGE COST	COST OF INVESTMENT	CURRENT PRICE	CURRENT VALUE	GAIN / (LOSS)	GAIN / (LOSS)
SCGM BHD	11,066	1.732	19,218.4	1.200	13,279.2	(5,939.2)	(30.9%)
AJINOMOTO (M) BHD	1,500	11.813	17,720.0	18.940	28,410.0	10,690.0	60.3%
PANASONIC MANUFACTURING MSIA	600	26.157	17,182.0	38.100	22,860.0	5,678.0	33.0%
Y.S.P.SOUTHEAST ASIA HOLDING	10,500	2.413	25,340.0	2.880	30,240.0	4,900.0	19.3%
FORMOSA PROSONIC INDUSTRIES	18,000	1.540	27,720.0	2.000	36,000.0	8,280.0	29.9%
HONG LEONG INDUSTRIES BHD	2,000	9.126	18,251.0	9.640	19,280.0	1,029.0	5.6%
MALAYAN BANKING BHD	3,000	10.250	30,750.0	9.530	28,590.0	(2,160.0)	(7.0%)
ECO WORLD DEVELOPMENT GROUP BERHAD	15,200	1.235	18,772.0	0.965	14,668.0	(4,104.0)	(21.9%)
DIALOG GROUP BHD	5,700	3.452	19,676.4	3.320	18,924.0	(752.4)	(3.8%)
SAM ENGINEERING & EQUIPMENT	3,000	7.380	22,140.0	7.690	23,070.0	930.0	4.2%
POH HUAT RESOURCES HOLDINGS	13,000	1.490	19,370.0	1.600	20,800.0	1,430.0	7.4%
SUPERLON HOLDINGS BHD	15,000	1.300	19,500.0	1.350	20,250.0	750.0	3.8%
Total			255,639.8		276,371.2	20,731.4	8.1%
Shares bought
No transaction.
Total shares held			255,639.8		276,371.2	20,731.4	8.1%
Shares sold
No transaction.
Cash Balance					35,690.3
Realised Profits / (Losses)					91,330.0
Change since last update Feb 14, 2019
Portfolio							1.9%
FBMKLCI							2.5%
Portfolio Returns Since Inception			200,000.00		312,061.5	112,061.5	56.0%
Portfolio Returns (Annualised)							12.8%
Portfolio Beta							0.668
Risk Adjusted Returns Since Inception							83.9%
Performance Comparison	At Portfolio Start		Current	Change	Relative Portfolio Outperformance
FBM KLCI	1,829.7		1,730.7	(5.4%)	61.4%
FBM Emas	12,700.4		12,083.9	(4.9%)	60.9%

Footnote: 
*Current price is as at February 21, 2019. 
*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 SOLD	DATE BOUGHT	DATE SOLD	QUANTITY	AVERAGE  COST	COST OF  INVESTMENT	PRICE SOLD	SALES  PROCEEDS	GAIN / (LOSS)	GAIN / (LOSS)
PANASONIC MANUFACTURING MSIA	21-Jan-16	27-Jul-17	400	26.125	10,450.0	37.100	14,840.0	4,390.0	42.0%
ELSOFT RESEARCH BHD	30-Mar-17	24-Aug-17	8,000	1.844	14,750.0	2.650	21,200.0	6,450.0	43.7%
JOHORE TIN BERHAD - WA 12/17	04-May-17	24-Aug-17	17,000	0.655	11,135.0	0.680	11,560.0	425.0	3.8%
FOCUS LUMBER BERHAD	03-May-17	30-Aug-17	6,000	1.660	9,960.0	1.530	9,180.0	(780.0)	(7.8%)
WILLOWGLEN MSC BHD	23-Nov-16	30-Aug-17	7,000	0.768	5,377.0	1.430	10,010.0	4,633.0	86.2%
WILLOWGLEN MSC BHD	23-Nov-16	28-Sep-17	7,000	0.770	5,377.0	1.180	8,260.0	2,883.0	53.6%
LII HEN INDUSTRIES BHD	14-Dec-16	28-Sep-17	5,000	2.820	14,100.0	3.720	18,600.0	4,500.0	31.9%
COMFORT GLOVES BERHAD	28-Aug-17	08-Dec-17	25,000	0.960	24,000.0	0.930	23,250.0	(750.0)	(3.1%)
JOHORE TIN BHD	08-May-17	08-Dec-17	9,000	1.600	14,400.0	1.180	10,620.0	(3,780.0)	(26.3%)
THONG GUAN INDUSTRIES BHD	12-Dec-16	08-Dec-17	5,000	4.243	21,215.0	4.100	20,500.0	(715.0)	(3.4%)
KERJAYA PROSPEK GROUP BERHAD	12-Jan-17	15-Mar-18	11,000	1.025	11,280.0	1.540	16,940.0	5,660.0	50.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/2023	08-Mar-18	15-Mar-18	3,000	0.000	0.0	0.330	990.0	990.0	-
LUXCHEM CORPORATION BHD	30-Aug-17	15-Mar-18	16,500	0.732	12,072.5	0.720	11,880.0	(192.5)	(1.6%)
WILLOWGLEN MSC BHD	14-Dec-17	22-Mar-18	20,000	1.010	20,200.0	1.260	25,200.0	5,000.0	24.8%
MUAR BAN LEE GROUP BERHAD	26-Oct-17	22-Mar-18	13,500	1.240	16,740.0	1.170	15,795.0	(945.0)	(5.6%)
CHOO BEE METAL INDUSTRIES BHD	07-Sep-17	16-May-18	8,000	2.190	17,520.0	2.440	19,520.0	2,000.0	11.4%
CHOO BEE METAL INDUSTRIES BHD	07-Sep-17	21-May-18	8,000	2.190	17,520.0	2.300	18,400.0	880.0	5.0%
SUPERLON HOLDINGS BHD	01-Dec-17	21-May-18	6,000	1.175	7,050.0	1.550	9,300.0	2,250.0	31.9%
OKA CORPORATION BHD	14-Dec-17	28-Jun-18	12,000	1.541	18,488.0	1.270	15,240.0	(3,248.0)	(17.6%)
SUPERLON HOLDINGS BHD	01-Dec-17	28-Jun-18	6,000	1.175	7,050.0	1.210	7,260.0	210.0	3.0%
WILLOWGLEN MSC BHD	14-Dec-17	28-Jun-18	100	0.500	50.0	0.540	54.0	4.0	8.0%
PANTECH GROUP HOLDINGS BHD	17-May-18	02-Aug-18	43,000	0.580	24,940.0	0.560	24,080.0	(860.0)	(3.4%)
KERJAYA PROSPEK GROUP BERHAD	10-Jan-17	06-Sep-18	11,000	1.020	11,225.0	1.400	15,400.0	4,175.0	37.2%
LUXCHEM CORPORATION BHD	25-Aug-17	06-Sep-18	16,500	0.717	11,825.0	0.655	10,807.5	(1,017.5)	(8.6%)
HOCK SENG LEE BHD	19-Apr-18	06-Sep-18	14,500	1.520	22,033.0	1.370	19,865.0	(2,168.0)	(9.8%)
GENTING MALAYSIA BERHAD	06-Sep-18	28-Nov-18	3,800	5.070	19,266.0	3.060	11,628.0	(7,638.0)	(39.6%)
TOP GLOVE CORPORATION BHD	06-Sep-18	06-Dec-18	3,600	5.500	19,800.0	6.030	21,708.0	1,908.0	9.6%
MAH SING GROUP BHD	28-Jun-18	14-Jan-19	19,000	1.005	19,095.0	0.930	17,670.0	(1,425.0)	(7.5%)
WILLOWGLEN MSC BHD	14-Dec-17	14-Feb-19	19,900	0.500	9,900.0	0.464	9,236.0	(714.0)	(7.2%)

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