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Monday, May 27, 2019

Tong's Value Investing Portfolio as of May 23, 2019

Tong Kooi Ong

A tech war will be the end for this bull market

Investors should probably brace for protracted impasse on trade talks between the US and China. After the latest round of tariff hikes by both countries, China appears to have hardened its stance, with state media ramping up nationalistic rhetoric. The US blacklisting of Huawei Technologies raised tensions further and has widespread repercussions for many companies that are part of the complicated global supply chain.

In fact, should the tariff war turns into a bona fide tech war, it will very likely spell the end of this bull market.

A tit for tat will stop the export and sharing of technological innovations and materials that will, in turn, negatively impact the future growth of technology. This is critical as many tech businesses are valued on the basis of exponential growth from network effects and continuous innovation. A tech war must surely mean major collapse in prices for tech stocks, which translates into huge losses for not only traditional funds but also private equity funds.

We are holding on to the stocks in our portfolio, for now. It is hard to tell if President Trump is serious about checkmating China’s future technological challenge or that he is merely grandstanding.

Stocks in my Global Portfolio traded broadly lower in line with declines in global markets. Last week’s losses pared total portfolio returns to 3.3% since inception. Over the same period, the benchmark MSCI World Net Return Index is up 3.4%.

Shares for Alibaba Group Holdings and Apple Inc were some of the worst affected as the scope of the trade war widened into the technology sector. Alphabet Inc too found itself entangled in the ban on Huawei. Meanwhile, shares for Sunpower Group too came under heavy selling pressure amid weakened sentiment. Shares for Ausnutria Dairy, on the other hand, have held up better.

Shares for Alibaba declined sharply in the past few days as sentiment deteriorated on the back of heightened tensions between the US and China. But we believe its underlying fundamentals and future prospects remain intact.

Alibaba owns the world’s largest retail platform by gross merchandise volume (GMV), totalling CNY5,727 billion (about US$829 billion) for FYMar2019. That dwarfs Amazon’s GMV of some US$277 billion in 2018.

The company reported a good set of earnings in the latest 4QFYMar2019, weathering both the trade conflict and global economic slowdown. Total revenue for FY2019 was up 51% y-y to CNY376.8 billion and 39% y-y if we exclude newly consolidated ventures, which is unrivalled by any company above the US$450 billion market cap threshold.

Sales for core commerce, which accounted for 86% of total revenue, grew 51.1% with healthy Ebitda margin of 42.1%. In the near-term, Alibaba intends to capture user and merchant acquisitions in lower tier cities and strengthening the “O2O” Online to Offline model by promoting stronger alignment between vendors and customers.

On the other hand, the rest of its businesses, including cloud computing (which expanded by 84.5%), digital media and entertainment as well as a host of other investments remain in the red. This dragged overall Ebitda margin from 38.8% to 28.4%.

Investments such as Alibaba Pictures and food delivery platform, are cash burning ventures that are still in infancy stages. They form part of Alibaba’s strategy to fortify its leading presence across multiple sectors of the economy.

These expansions are supported by the company’s strong cash generation. Free cash flow increased by 4.5% y-y to CNY104.5 billion, despite the 60% increase in capital expenditure.

Net profit totaled CNY87.6 billion, up from CNY64 billion in FY2018. The company has provided revenue guidance for CNY500 billion in FY2020, implying an impressive 32% y-y growth despite its size.

Alibaba is well-positioned to gain a greater share of the growth in consumer spending, monetization through enhancing value and cross selling opportunities and leveraging on its deeply entrenched ecosystem as China transitions from an export driven to consumption-based economy.

Apple is widely seen as one of the US companies most exposed to deteriorating relations with China. Revenue fell 5.1% y-y in 1Q2019, which the company blamed on weak iPhone sales in the world’s second largest economy. China contributed to roughly one-fifth of total sales in FYSep2018 but only 16% in 1HFY19.

The company indicated improvement in more recent sales trend, aided by lowering of iPhone and accessories prices in China. However, that was before this latest round of altercation, which could trigger anti-American sentiment.

Its shares will likely remain volatile in the near-term, dictated by the unpredictability of how the trade war progresses. We are keeping a close eye on the evolving situation and are prepared to sell the stock if tensions escalate further.

Over the longer-term, Apple will benefit from upselling to its 1.4 billion users on all devices worldwide. Services – seen as the future growth driver – continued to grow strongly, up 25% y-y to US$11.5 billion, in the latest quarter. This encompasses sales from the App Store, cloud storage, Apple Care, Apple Pay as well as rising subscription fees. The company has unveiled several subscription services that will be its key focus areas going forward, including for gaming, news, video streaming and music.

Alphabet Inc
Alphabet (the parent company for Google) remains the dominant player in search engine, accounting for some 90% of worldwide searches from desktops. The bulk of revenue is derived from advertising where it controls about one-third market share in global digital advertising revenue.

The company disappointed in its latest 1Q2019 results, with revenue falling slightly short of market expectations. This was attributed to intensifying competition from Facebook and relative upstart Amazon. Still, ad revenue was up 15.3% y-y to US$30.7 billion for the quarter. By comparison, ad revenue for Facebook grew 26.4% in 1Q2019 but from a much smaller base (about 17.7% global digital advertising market share).

Positively, other revenue including cloud services, hardware and app sales increased at a higher 25.1% clip to US$5.4 billion in 1Q2019. Total turnover was 16.7% higher for the quarter at US$36.3 billion.

Alphabet has unique market positioning and global dominance across various businesses, many of which it has yet to fully monetise. For instance, it has 8 products exceeding 1 billion in monthly active users, including YouTube, Gmail, Google Maps, Chrome, Android and Google Play Store. It is also well ahead of the competition in self-driving and autonomous vehicles.

The company is sitting on more than US$105 billion net cash and generated some US$7.3 billion free cash flow in 1Q2019.

Sunpower Group
Elsewhere, shares for Sunpower succumbed to broader market selling pressure – despite the company reporting upbeat results for 1Q2019. Smaller cap stocks do tend to suffer more under investor risk-off environment.

The company’s green investment (GI) segment continued to register good growth, on the back of strong ramp-up in utilisation. GI revenue almost doubled from CNY125 million to CNY287 million while Ebitda grew from CNY35 million to CNY87 million.

There are currently 7 projects in operations, earning double-digit IRR. Two more projects are under construction, targeted for completion later this year. In addition to organic growth, Sunpower aims also to secure new customers following the mandatory closure of small “dirty” boilers and relocation into industrial parks.

Sunpower has invested and committed CNY1.3 billion in equity to build up its GI portfolio to-date, and is on track to raise this amount to CNY2.5 billion by 2021.

Meanwhile, its manufacturing and services arm is operating at full capacity and will focus on higher quality orders to improve yield. Orderbook stands at roughly CNY2.5 billion. Underlying net profit for both business segments was up 30.7% y-y in 1Q2019.

Ausnutria Diary
Shares for Ausnutria held up comparatively well in the market selloff and is the best performing stock in my portfolio. The company’s integrated business model from raw milk collection, processing to end-market sales continues to benefit from growth in Chinese consumer spending.

To quickly recap, Ausnutria operates 10 milk powder processing factories (in China, the Netherlands, Australia as well as New Zealand) and markets them under its own brands, mostly in China where imported milk formula enjoys better reception than locally sourced milk formula over safety concerns and taste.

Ausnutria is the largest importer of infant formula goat milk, representing 62.5% of total import volume in China. Known to have less allergenic protein, more digestible fat and less lactose compared to cow milk, goat milk infant formula market is enjoying strong double-digit growth, albeit from a small base.

Total revenue grew 29% y-y to CNY1.5 billion in the latest 1Q2019, of which 82% is contributed by sales of its own-brand milk products. The shift away from OEM business is translating into better overall profitability as margins for own-brand products are double that for OEM sales.

The company is also focusing on higher price point products. For instance, ultra-premium infant formula product now represents 62% of sales, up from 38% in 2017, while mid-range formula products have declined from 32% to 5% of sales. Net profit (adjusted for one-off items) was up sharply, from CNY104 million in 1Q2018 to CNY195 million in 1Q2019.

Regional markets remained under pressure on the back of rising trade uncertainties, underlined by intensified foreign selling over the past two weeks. Investors are cautious on the potential fallout, especially from the Huawei ban. Stocks in the technology sector were amongst the worst hit. The FBM KLCI closed 2.7 points higher at 1601.9 for the week ended Thursday.

Stocks in my Malaysian Portfolio also ended lower, mirroring weakness in the broader market. Total portfolio returns now stand at about 47.1% since inception. Nevertheless, this portfolio continues to outperform the benchmark index, FBM KLCI, which is down 12.5% over the same period, by a long way.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.72919,190.70.8959,904.1(9,286.6)(48.4%)
AJINOMOTO (M) BHD1,50011.81317,720.017.52026,280.08,560.048.3%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.48026,040.0700.02.8%
FORMOSA PROSONIC INDUSTRIES18,0001.44025,920.01.72030,960.05,040.019.4%
POH HUAT RESOURCES HOLDINGS13,0001.47019,110.01.51019,630.0520.02.7%
SUPERLON HOLDINGS BHD15,0001.28919,327.51.00015,000.0(4,327.5)(22.4%)
CIMB GROUP HOLDINGS BERHAD6,0005.14030,840.05.15030,900.060.00.2%
Total  157,448.2 158,714.11,265.90.8%
Shares bought       
No transaction.       
Total shares held  157,448.2 158,714.11,265.90.8%
Shares sold       
No transaction.       
Cash Balance    135,453.4  
Realised Profits / (Losses)    92,901.6  
Change since last update May 16, 2019       
Portfolio      (0.7%)
FBMKLCI      0.2%
Portfolio Returns Since Inception  200,000.00 294,167.594,167.547.1%
Portfolio Returns (Annualised)      10.2%
Portfolio Beta      0.905
Risk Adjusted Returns Since Inception      52.0%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,601.9(12.5%)59.5%
FBM Emas12,700.411,209.7(11.7%)58.8%
*Current price is as at May 23, 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.

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%
MAH SING GROUP BHD28-Jun-1814-Jan-1919,0001.00519,095.00.93017,670.0(1,425.0)(7.5%)
WILLOWGLEN MSC BHD14-Dec-1714-Feb-1919,9000.5009,900.00.4649,236.0(714.0)(7.2%)
SAM ENGINEERING & EQUIPMENT14-Jan-1914-Mar-193,0007.38022,140.07.90023,700.01,560.07.0%
PANASONIC MANUFACTURING MSIA16-May-1818-Apr-1960026.15717,182.037.87022,722.05,540.032.2%
HONG LEONG INDUSTRIES BHD14-Dec-1718-Apr-192,0009.12618,251.010.64021,280.03,029.016.6%
MALAYAN BANKING BHD16-May-1818-Apr-193,00010.25030,750.09.13027,390.0(3,360.0)(10.9%)
ECO WORLD DEVELOPMENT GROUP BERHAD28-Jun-1818-Apr-1915,2001.23518,772.00.92013,984.0(4,788.0)(25.5%)
DIALOG GROUP BHD06-Sep-1818-Apr-195,7003.45219,676.43.11017,727.0(1,949.4)(9.9%)
HARTALEGA HOLDINGS BHD28-Mar-1818-Apr-1911,0004.61050,710.04.75052,250.01,540.03.0%

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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