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Friday, May 31, 2019

Tong's Value Investing Portfolio as of May 30, 2019

A mixed bag of marriage, Raya, home and Mickey Mouse

How many bridegrooms get to introduce his grandchildren? Well, I did, on Monday. And Selamat Hari Raya to all our Muslim friends too. Now to the article for the week. Why home and Mickey Mouse?

The tense trade war standoff between the two largest economies in the world will keep markets on the back foot, until there is greater clarity. Emerging market stocks and currencies have, so far, bore the brunt of the selloff, as is to be expected. Investors tend to flock to safer assets when there are greater uncertainties.

Bellwether indices in Hong Kong and South Korea have lost 8.7% and 7.5%, while Singapore is down 7.6% and China’s Shanghai Composite index fell 5.6% so far in the month of May. By comparison, US stocks have fared slightly better, with both the S&P 500 Index and Dow Jones Industrial Average down 5.5% over the same period.

There is probably as good a chance the trade war will get resolved amicably as it will escalate. The ball, I believe is now in the US’s court. China appears to have drawn a line in the sand with the sharp state media ramp up in rhetoric, particularly when it comes to the country’s technology ambitions.

It is impossible to predict what President Trump will do next. Analysts and markets are still pricing in a ‘cooler heads will prevail’ scenario. Much hope is being placed on the possible meeting between the two presidents at the G20 summit in Japan next month. Make no mistake, should the situation takes a turn for the worse, there will be a lot more pain in financial markets.

Subdued inflation – driven in major part by competition and productivity gains from technological innovations – has allowed central banks to keep interest rates historically low this late in the cycle, thereby extending its life. The tariff war morphing into a full-blown tech war could, however, be a game changer.

The ban on Huawei Technologies has already sent global semiconductor and tech stocks into tailspin. More critically, it would push back the rollout of 5G networks worldwide by several years, and with it, the realisation of Internet of Things including autonomous vehicles.

Given prevailing risks, I believe the US market will fare comparatively better in the near-medium term, underpinned by corporate earnings growth – and low bar expectations.

According to data provider, FactSet, of the 97% of companies in the S&P 500 having reported their 1Q2019 results, 76% have beaten market expectations on earnings, slightly above the five-year average of 72%. Earnings are now expected to decline by just 0.4% for the quarter, compared with projections for a 4% drop before the start of the reporting season.

One key takeaway is that US consumers are in pretty good shape, even if they are somewhat reticent in spending freely due, perhaps, to prevalent narratives on the global economic slowdown and trade war uncertainties.

In fact, the Conference Board’s index for consumer confidence surged in May, and is now hovering near the highs of 4Q2018 and previously last seen in 2000. Another survey by the University of Michigan also indicated consumer sentiment at the highest level since January 2004, albeit taken before the latest flare up in trade talks.

To be sure, companies have cautioned uncertainties as to the actual impact of higher tariffs (on Chinese imports) on pricing for goods over the coming months. I believe that consumers can absorb any price increases reasonably well, underpinned by strong labour market – with unemployment rate at 50-year lows and wages growth gaining traction. The average US household debt to GDP has been declining since the peak of 98.6% in 2007, now at 72.3%, while debt servicing as a percentage of disposable income has dropped multi-decades low.

The three consumer-related stocks I have recently acquired – Disney, Home Depot and Builders FirstSource – all reported solid 1Q2019 results.

Home Depot
Revenue for Home Depot, the largest home improvement retailer in the world, was up 5.7% y-y to US$26.4 billion in the latest 1QFYJan2020. This is on the back of 3.8% increase in customer transactions and 2% increase in average ticket.

In fact, revenue growth would have been stronger if not for the deflation effect of significantly lower lumber prices from a year ago. Meanwhile, margins were similar to that in the previous corresponding quarter. Net profit was up 4.5%, after deducting slightly higher effective tax rates.

Home Depot has delivered consistent earnings growth since 2010, and has rewarded shareholders with higher dividends each year. For the current financial year, the company raised dividends by 32% to US$5.44 per share, underscoring management confidence in future earnings. This is equivalent to a payout of about 55%.

The company will continue to benefit from healthy US consumer spending, resilient housing market and low mortgage rates. New home sales are being capped by the lack of homes being built, due in part to rising labour and material costs. Demand, nonetheless, remains robust, leading to home prices trending higher. Statistics indicate that more than half of homes in the US are over 40 years old, the oldest on record. This and rising home equity bodes well for the home remodelling and improvement industry.

The bulk of Home Depot’s revenue is US-centric – with 87% of total store located across the country, with the remaining in Canada and Mexico. Meanwhile, direct impact on cost of goods sold from higher tariffs on Chinese imports is relatively minimal, estimated in the low single digit range.

It is interesting to note that whilst US retailers reported mix results in 1Q2019, almost all have cited relatively robust consumer spending. Departmental stores fared poorly, mainly because they failed to adapt to structural changes for how consumers shop. Case in point, Walmart, Target and Home Depot, have all done well by investing in digital platforms and fulfilment infrastructure, including the popular same-day store/locker pickup options.

Builders FirstSource
The investment thesis for Builders FirstSource is similar to that for Home Depot. The company is one of the largest suppliers of structural building materials in the US, catering to professional homebuilders and sub-contractors for new residential construction as well as the repair and remodelling market.

Its shares rose sharply immediately after the company reported stronger than expected 1Q2019 results. Sales declined 4% y-y to US$1.63 billion, mainly because of the slump in lumber prices. Volume sales were in fact up 6.8% y-y while sales for value added products were up 10%.

As a result, adjusted EBITDA grew by 22.2% to US$100.9 million from the previous corresponding quarter while adjusted net income was up 44.2% over the same period, from US$27.6 million to US$39.8 million. Its balance sheet strengthened, achieving management target leverage ratio between 2.5x and 3.5x – the ratio was reduced from 4.6x in 1Q2018 to 3.0x in 1Q2019.

Moving forward, Builders FirstSource intends to increase its market share, which could include strategic acquisition of other companies along the value chain to increase its geographic reach and enhance economies of scale.

Walt Disney
Our investment in Walt Disney too has performed well, up 13.6% since our recent acquisition. The company is a strong proxy of consumer spending on entertainment with its integrated studio, theme parks and resorts as well as merchandising businesses.

Disney has put in place the building blocks for growth for the next five years, including the important transition to streaming. Investor confidence surged after the company disclosed details for streaming service, Disney+, slated for launch on November 12. The package is priced very competitively at only US$6.99 a month or US$69.99 for a year. By comparison, Netflix packages range from US$8.99-US$15.99 a month.

In addition to the huge catalog of content from both Disney and recently acquired Twenty-First Century Fox, Disney+ will have exclusive rights to stream all of its new studio releases starting with Captain Marvel. It also unveiled plans for a series of exclusive original content based on franchises under the Mouse House’s stable including Star Wars and Marvel.

Disney recently gained full control over another streaming provider, Hulu, after it acquired AT&T’s 10% stake and inked a deal with Comcast to buy its 30% share in five years’ time. This gives Disney the option of bundling Disney+, ESPN+ and Hulu, an attractive package for would be subscribers.

The company’s 1Q2019 results beat market expectations for both top and bottomline. Revenue rose 2.6% to US$14.9 billion, boosted by a 4.5% increase in parks, experiences and consumer segment while the decline in media networks stabilised.

Disney is estimated to spend some US$24 billion for parks, resorts and cruise ships over the next five years, with new attractions planned for all six of its theme park resorts. Star Wars: Galaxy’s Edge, the biggest expansion in Disneyland history, is set to open May 31 in California and Florida in August.

Studio entertainment saw 14.6% y-y decline due to timing of releases but the company has a very strong slate of movies for the rest of this year, including Toy Story 4 and The Lion King. Avengers: Endgame (released in April) is currently the second-highest grossing film of all time. Incidentally, this movie will stream exclusively on Disney+ starting December 11.

Looking ahead, Disney will sacrifice some short-term profitability to invest in Disney+, which is projected to breakeven by 2024. But strategically, it would put the company in a much stronger position in the global entertainment industry.

Northrop Grumman
Government military spending could be counter-cyclical and relatively unaffected by the trade war. Northrop Grumman is the fourth largest aerospace and defence contractor in the world and a leading player in the drone market.

The company reported a 22% increase in revenue in 1Q2019, taking into account contributions from Orbital ATK, acquired in 3Q2018. Net profit was up by just about 3% y-y, after adjusting 1Q2018’s results for differences in treatment for pension costs. Nevertheless, Northrop raised its full-year guidance slightly following this latest result.

Global military budget reached new heights since 1988 last year, against the backdrop of increasing geopolitical tension as well as rising threat from extremist militias and intercontinental ballistic missiles (ICBM).

After falling from 2010 to 2015, US defense spending has risen every year since – from US$586 billion in 2015 to a budgeted US$716 billion in 2019. The Trump administration has proposed total spending of US$750 billion for 2020.

The US spending for defense is already larger than the next 6 biggest spending countries combined, including China, Russia, Saudi Arabia and UK. Military spending is the second largest component after social security in the US Federal Budget. Defense spending may well continue to rise, for critical modernisation programmes as well as investments in next generation technology and weaponry to counter the improving military capabilities of Russia and China.

A core programme from the military budget is the Ground Based Strategic Deterrent System (GBSD) – to overhaul 400 aging missiles and their supporting infrastructure estimated to cost north of US$100 billion over a decade. Northrop and Boeing are the two primary contenders. Northrop boosted its prospect by acquiring Orbital ATK, one of only two US manufacturers of solid rocket motors used to propel the ICBM.

Northrop reported net awards totalling US$12.3 billion in 1Q2019, increasing its order backlog to a record high US$57.3 billion. The company has generated positive free cash flow in each of the past 10 years, which totaled some US$2.6 billion in 2018. It expects to maintain this level of cash generation in the current year – estimated at between US$2.6 to US$3 billion – which will be supportive of more share buybacks and dividend payout.

Dividend per share has risen every year since 2009, by a compounded annual growth of 12% to US$4.70 in 2018, with average payout of just about 29%. Dividends will rise further to US$5.28 per share this year.

My Global Portfolio slipped 0.6% this week, better than the MSCI World Net Return Index’s 2.2% loss. This pared total returns to 2.7% since inception. Nevertheless, the portfolio is still out-performing the benchmark index, which is up 1.1%, over the same period.

Local institutional funds offered support to the local bourse as foreign investors continue to sell down on emerging market assets amid rising uncertainties. The FBM KLCI clawed back some recent losses, closing 2.2% higher for the week ended Thursday.

Stocks in my Malaysian Portfolio, however, remained under pressure, paring total returns to 46.8% since inception. Still, this portfolio continues to outperform the benchmark index, FBM KLCI, which is down 10.6% over the same period, by a long way.


Performance Comparison Since Inception (%)
%-10.646.8-15-10-505101520253035404550
  • Tong's Value Investing Portfolio
  • FBM KLCI
SHARES HELDQUANTITYAVERAGE COSTCOST OF
INVESTMENT
CURRENT
PRICE
CURRENT
VALUE
GAIN /
(LOSS)
GAIN /
(LOSS)
SCGM BHD11,0661.72919,190.70.8709,627.4(9,563.3)(49.8%)
AJINOMOTO (M) BHD1,50011.81317,720.017.58026,370.08,650.048.8%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.44025,620.0280.01.1%
FORMOSA PROSONIC INDUSTRIES18,0001.44025,920.01.74031,320.05,400.020.8%
POH HUAT RESOURCES HOLDINGS13,0001.47019,110.01.51019,630.0520.02.7%
SUPERLON HOLDINGS BHD15,0001.28919,327.50.95014,250.0(5,077.5)(26.3%)
CIMB GROUP HOLDINGS BERHAD6,0005.14030,840.05.21031,260.0420.01.4%
Total  157,448.2 158,077.4629.20.4%
        
Shares bought       
No transaction.       
        
Total shares held  157,448.2 158,077.4629.20.4%
        
Shares sold       
No transaction.       
        
Cash Balance    135,453.4  
Realised Profits / (Losses)    92,901.6  
        
Change since last update May 23, 2019       
Portfolio      (0.2%)
FBMKLCI      2.2%
        
        
Portfolio Returns Since Inception  200,000.00 293,530.893,530.846.8%
Portfolio Returns (Annualised)      10.1%
        
Portfolio Beta      0.903
Risk Adjusted Returns Since Inception      51.8%
        
        
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,636.5(10.6%)57.3%
FBM Emas12,700.411,487.5(9.6%)56.3%
Footnote: 
*Current price is as at May 30, 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 SOLDDATE BOUGHTDATE SOLDQUANTITYAVERAGE 
COST
COST OF 
INVESTMENT
PRICE SOLDSALES 
PROCEEDS
GAIN /
(LOSS)
GAIN /
(LOSS)
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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