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Traineeinvestor's diary - HK and Far East Focus

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Traineeinvestor's diary - Far East Focus

 

(HK and Antipodean Equities and Real Estate)

========================================

 

I thought I'd post some of my investment ideas here in the hope that if I do anything really stupid with my retirement savings ....

 

First up - China's banks.

 

1. If the Chinese banking sector is as bad as some of the perma bears claim, I would have expected at lest some Chinese banks to have raised more capital - none of the larger ones have done so recently. This suggests that while liquidity has been something of an on again/off again issue in China, solvency is not an issue (so far).

 

2. Chinese banks are required to keep a 20% deposit ratio with the PBOC which is very high by any standards. This is a huge solvency buffer.

 

3. the state remains a controlling shareholder which means there is very substantial support behind each of the major banks.

 

4. share prices have been severely beaten - to the point where they are trading below book value. Historically banks trading at below book value have often been excellent investments (if they don't go broke - but see #1, #2 and #3 above).

 

5. I'm a sucker for cheap.

 

I added some more shares in China Construction Bank (HK:939) to the portfolio last Friday @ $5.02 per share.

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They have certainly generated some great profits in recent years

 

But I would be worried that they have not reserved enough for (likely) loan losses.

 

On the other hand, the state may wind up eating most of the losses in the SOE sector, one way or another

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My guess is that while the loan loss reserves are substantial, they understate the extent of the problem. The great unknowns are by how much and over what time period will the additional losses be realised/recognised? I don't know and I doubt if anyone else does either.

 

Another example of problems with China's banking system: http://www.bloomberg.com/news/2014-03-24/china-banks-drained-by-funds-called-vampires-seek-rules.html

 

This would not be permitted in any regulated market (like Hong Kong) - in order to take money off people either the person taking the money must be appropriately regulated (e.g. banks taking deposits) or the product must be accompanied by a registered offering document (e.g. a prospectus for shares or debentures) or the offer may only be made to sophisticated investors who are able to bear the loss (e.g. a placement to HNWIs). These internet investments fall under none of these headings. In HK (and many other places) they would be illegal.

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Added some shares in Dynam Japan Holdings (HK:6889) to the portfolio. I purchased some last year, watched them soar to $36.70 and did nothing which makes me feel like a complete idiot.

 

The share price has now fallen back to around $22. Although the core pachinko business is facing some headwinds (declining industry, Japanese consumption tax), there is an outstanding law suit, the company's investment in Macau Legend has declined in value and the JPY is expected to weaken further, the shares still offer a trailing yield of 4.8% (less NRWT) and the balance sheet and cash flow are very solid. The big possible upside is the legalisation of casinos in Japan. IF that happens, I would expect Dynam Japan to be one of the first movers and the shares to get a substantial pop. In effect, shareholders are being paid to wait for Japan to legalise casinos.

 

I paid HK$22.00 for the additional shares.

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That sounds like a bargain.

 

But people have talking to me about the "value trap" of investing in Japan.

 

Maybe we are past that now (?)

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If it wasn't for the possibility (probability?) of getting a lift when Japan legalises casinos, I would still have purchased back at $16.XX per share as it offered a 6+% dividend yield but I would not be buying them now.

 

Unfortunately, I am a sucker for value traps - Sinolink (HK:1168) being one of my larger investments. The shares are trading at less than cash backing with PRC real estate assets on top of that (NAV is around $2.12). I purchased a few more at HK$0.63 yesterday but with no yield, I am feeling a bit impatient about this one. If it pops up to HK$0.65/HK$0.66 I will probably sell a few for a small profit and hold on to the balance.

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Sinolink (HK:1168) ... update : 1-year

 

HK_zps62627db4.gif

 

If the (purple) uptrend does not hold,

it could drift down to $0.57 - $0.60, where there should be stronger support

 

(Note: I have added a Title in the Header - see below - if you want me to remove it, I shall):

 

Traineeinvestor's diary

 

(HK and Antipodean Equities and Real Estate)

========================================

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I have applied for shares in the IPO of Genesis Energy which is to be listed on the NZX. Although the company has a number of negatives (see below), the combination of high forecast yield (8.3% annualised for 2014 rising to 10.3% in 2105 fully imputed) and loyalty bonus (1:15 after 12 months) has been enough to get me on board.

 

The negatives:

 

1. low growth - per capita energy consumption in NZ is actually falling and there is possibility of a significant drop in demand if an aluminium smelter shuts

 

2. one of the major assets is an offshore oil and gas field with an estimated 10-15 years of peak production left in it

 

3. political risk if this year's election results in a change of government (unlikely based on current polls)

 

4. the chairwoman is a former NZ politician with a poor business track record.

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We signed a provisional lease agreement for our vacant unit in Mid-levels East last night.

 

The rent is 6.7% lower than what the previous tenant was paying. The vacancy between rental receipts is about 3.5 weeks. The only repair work needed was to repaint the interior and replace some locks.

 

We rejected several lower offers (10-15% below the old rent), an offer at a slightly higher rental starting in late May and an offer from someone who had a large dog (concern over the damage that the dog's nails would do to the wooded floor which is still in very good condition).

 

It is nice to be back to full occupancy again.

 

My conclusions from this experience are:

 

1. increased supply is pushing rents down but not by nearly as much as either the media or the agents are claiming;

 

2. keeping properties occupied is not a problem for landlords who are willing to be realistic about the asking rents. Two identical units on higher floors in the same building which have been on the market with much higher asking rents since at least a couple of weeks before our old tenant moved out (i.e. since at least early March) are still being advertised. I do not understand the owners' strategy but fully support other investors who make my life easier.

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TI: What do you make of the slightly lower rent?

 

+ Are Housing allowances being cutback?

+ Are there fewer Expats seeking property in Midlevels?

+ Are they moving away from ML, or are there just fewer expats coming to HK at all?

 

If these trends are occurring, do you expect them to persist?

What might reverse them?

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All good (and important) questions. Bearing in mind that this is coming from a very small sample size:

 

1. Housing allowances: At my end of the market, I think housing allowances are a non-issue. While some of my tenants ask for receipts, I don't know whether this is because they get a housing allowance or becuase their salary is structured to take advantage of the tax deduction. I have only had one person try to use their housing allowance as a pretext for a low-ball rental offer (I declined). Real estate agents have almost never mentioned it to me. Proximity to work comes up a lot.

 

2. The people viewing were a mix of nationalities. Some were obviously expat but it's not always easy to tell so I can't say say whether expat demand is rising or falling but I can say that if expat demand has fallen off, it is being replaced by increased local demand. Add in the increased supply, and I think it is more likely that total demand for rental accomodation in Mid-Levels is rising (but at a slightly slower pace than new supply) than falling.

 

3. HK's total population is increasing. I couldn't find data on the number of people holding employment visas (and that will not tell the full story anyway because of the growing number of people who hit seven years and become permanent residents and then cease to need a visa) but using SFC registrations as a stab-in-the-dark proxy for expat numbers, it is more likely than not that the expat population is growing. I realise that SFC registrations may not be the best proxy in the world but given that a lot of expats work in the finance industry, it was the best I could think of this morning. http://www.sfc.hk/web/EN/files/SOM/MarketStatistics/c01.pdf

 

4. given general population growth I would expect demand for accomodation to be rising in HK generally. I would not expect that demand growth to be even across the territory so it may be a case that demand in Kowloon West is rising faster than demand in Mid-Levels?

 

Given the limited stats and small sample size, this is all somewhat speculative. As we rely our investments to pay the bills I'd rather be corrected than left thinking I may have got it right.

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"given general population growth I would expect demand for accomodation to be rising in HK generally.

I would not expect that demand growth to be even across the territory so it may be a case that demand in Kowloon West

is rising faster than demand in Mid-Levels?":

 

I think Demand MAY be rising faster here, since Olympic Station (but maybe not Kowloon Station) is still a bargain relative to ML.

And more and more expats seem to be discovering it.

 

That alone might help to stabilise Rents here.

 

If you add on Extra Demand (if it does materialise) from the XRL, when it is completed at the end of next year,

you could see Rents rising in TKT / Olympic, while they are falling in Midlevels, and maybe most of HK.

 

I don't think that it is easy to predict these sorts of trends, but the elements that I am seeing point me towards that conclusion.

 

I wish it was possible to have more of this sort of discussion on AX, but it never seems to go anywhere, since it quickly leads to knee-jerk reactions from diehard Bulls or Bears

 

The proposed development at Nam Cheong station (see artists impression, below) will be one to watch

 

namcheongproject.jpg

 

If SHKP can manage to convince people to pay 70% or more of Kowloon station prices (by building a first class mall there), it may extend the "preferrred part" of the Tung Chung Line from: KowloonStation/Olympic/NamCheong... then, the future development in the direction of Cheung Sha Wan ("Four Little Dragons") will be something to watch.

 

cheung-sha-wan.gif

 

Four Little Dragons, recently became Five Dragons, I think, with the completion of...

 

79916303.jpg

the mis-named One West Kowloon, from Cheung Kong

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While the case for increased demand in TKT/Olympic is well made, there is also the supply side to consider. If supply rises faster/the same/slower than demand, then that will have an influence on prices. I'm not sure what the supply pipeline is in TKT/Olympic, but my belief is that in the Mid-Levels/Kennedy Town (the two areas I follow most closely), it is rising a little but faster than demand growth - hence the slightly lower sales prices and rentals.

 

As far as implications for my own investments are concerned, I would have to believe that rents will fall a lot before I would consider selling and buying elsewhere - the transaction costs and loss of the sub 1% mortgages make the cost of switching (or even cashing out) prohibitively high.

 

As an investor who like his cashflow, the fact that it my last two vacancies were filled very quickly is also encouraging. The last vacancy was 3.5 weeks - and it could be been down to around 10 days if we had taken a low offer and, for the previous one, I had a new tenant lined up before the old tenant had moved out (a very short vacancy) in spite of having to compete with a lot of units just down the road in a brand new building that had been handed over by the developer shortly before.

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The main project coming to the TKT / Nam Cheong area is SHKP's project at Nam Cheong:

 

As above : http://www.hkchcc.org/namcheongproject.jpg

 

(Very little beyond that, which I am aware of)

 

I think the 3,000+ flats with expected completion of 2016-17 will be easily absorbed because:

 

+ It is right on Top of the MTR station at Nam Cheong, only 3 quick stops from HK Station

+ The completion of the nearby XRL in Q4-2015 will add to demand

+ The proximity to the WKCC, which comes a few years later will not hurt

 

But the really big "Plus Factor" would be a high quality mall of the sort that SHKP has built at:

Elements, Wings, and in Tuen Mun.

 

en-US_250_400_78-v2-r1_high-b492ce49-b11 : : vega_suites_rendering_1_2_40603.jpg

 

Wings in TKO, with its nice shopping mall, has been a big success

 

If SHKP do a good job with that, I think the project will sell as easily as The Avenue did in Wanchai,

and the price would/should be a discount to Wanchai.

 

A good mall there might also help The Long Beach, which is a short-ish walk away,

and even the 38-39 year old Cosmopolitan Estates.

 

There should be a cinema perhaps, and a different variety of restaurants and shops

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Sold my shares in Shanghai Petrochemical (HK:338) at $2.10 after they announced a surprise loss in Q1. I paid HK$2.14 (including transaction costs) so a small loss was incurred.

 

I also sold some of my shares in Sinolink Holdings today at HK$0.65 compared to the purchase price of HK$0.63. I am still sitting on far too many of these.

 

What the market gives with one hand it takes away with the other .....

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Back in HK after a holiday and a digital detox session - keeping time on the internet to a minimum.

 

I've purchased shares in:

 

1. National Australia Bank (ASX: NAB) this is the smallest of Australia's big 4 four banks and sells on the cheapest multiples largely on account of issues with its assets in the UK. With a dividend yield of around 6% (tax free to me) and the possibility of an uplift if/when they sort out the UK problems the intention is to put this one in the bottom draw and forget about it

 

2. Hellaby Holdings (NZX:HBY) - this is a small company running a number of businesses in NZ. Auto parts and related products is the biggest. With the NZ economy performing well and population growth expected to continue, I am hopeful that the trailing dividend yield of around 4.7% (tax free to me) will inrease over time.

 

Updates on the other shares purchased since I started this thread:

 

1. CCB - up from HK$5.02 to $5.33

2. Dynam Japan - down from HK$22.00 to $20.40

3. Sinolink - sold most of the shares purchased recently at HK$0.63 for $0.65. The balance are still held at $0.60 (along with ones purchased earlier)

4. Genesis Energy - up from NZ$1.55 to $1.885

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Hi, TI.

 

I changed the Title to "Traineeinvestor's diary - Far East Focus"

 

I hope that is okay.

It seems to fit your trading and posting style slightly better

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Hi, TI.

 

I changed the Title to "Traineeinvestor's diary - Far East Focus"

 

I hope that is okay.

It seems to fight your trading and posting style slightly better

 

That sounds about right :D

 

A data point on HK properties. I got a cold call from an agent asking if we wanted to sell our home at a price which was about 6% above the most recent bank valuation. It has been a while since we've had one of those.

 

Hutchison Wampoa (HK:13) ex $7.00 per share special dividend.

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Over at Asia Expat, there has been an exchange of view on the merits of investing in US real estate: http://hongkong.asiaxpat.com/forums/hong-kong-property/threads/140894/buying-us-property/

 

I have been putting small amounts of money into some of Walton's US syndicates for a few years now. Essentially, this is an investment in:

 

(i) favourable US demographics

(ii) rising total household income

(iii) delayed household formation due to GFC

(iv) expectation that longer dated US interest rates will remain low

(v) under investment in new housing stock

(vi) shrinking real inventories (especially in the areas doing best economically)

 

I chose Walton syndicates over buying an individual house or two directly to avoid the issues of long distance management, simplified taxation and easier asset selection (my knowledge of the best ares to buy in is limited). The negatives are the lack of control on exit (not up to me), no cash flow and no gearing. Costs are probably a wash - what I am paying Walton is unlikely to be more than I would end up paying agents and tax advisers and others if I purchased directly. Walton has an excellent track record - backed by an auditor's report.

 

If I had purchased the right properties at the right time using gearing, I would have done better than I would expect to do with Walton but the point is that I did not believe I was in a position to select the right properties. In effect, I have gone for a lower risk/lower return investment.

 

None of my syndicates have exited yet (they are typically 4-6 year land banking and rezoning and utility supplying deals) but I would expect the first ones in either 2015 or 2016.

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Is saw your comments on AX.

 

I can see those demographic factors may play out, if we are headed back to "business as usual",

but personally, I think the US is on a different path, and the risks of that "new path" will become apparent year-by-year.

 

What is clear already is that the US Job-creation part of the economy is broken, and you can see it in the falling rate of participation by the population in employment:

=

THiS also comes from the HipCrime Blog...

 

Dirty Secrets About The U.S. Economy (That They Don't Want You To Know)

 

bls_labor_force_participation.png.CROP.p

It's a day of dirty secrets about the economy today, motivated by this excellent article by Umair Haique: 5 Dirty Secrets About the U.S. Economy (HBR). Go read it now.

Since we're on the subject, I thought I'd contribute a few dirty secrets of my own that Umair missed.

Here's the first one - there are not enough jobs for everyone and there are never going to be.
. . .
Meanwhile, the unemployment rate tumbled 0.4 points to 6.3 percent. That's where the iffy news comes in—much of the drop happened because the labor force shrank by 800,000, driving the participation rate down to 62.8 percent. It hasn’t been that low since 1978, when women were still in the process of joining the workforce.

. . .
Here's the second one - the majority of jobs created are abysmal.

 

(The lack of JOBS is one problem for the US, an even bigger one is the sheer waste imbedded in the crazy American way of doing certain things.)

EXAMPLES follow:

 

Healthcare spending in US dwarfs the OECD (DailyKos): "In other words, we’re spending more on government-provided health care than most countries where government-provided health care is pretty much all there is."

So "we can't afford it" is patently untrue, "we" are already paying for it, and with relatively low tax rates compared to other wealthy industrialized nations. In addition, we pay far, far, far more for health care than anyplace else on earth, yet have a sicker population:

LifeExpectancy.png

The Singular Waste of America's Healthcare System in 1 Remarkable Chart (The Atlantic)


'Paying Till It Hurts': Why American Health Care Is So Pricey (NPR)

=

 

The rate has fallen to an all-time low, and it is exactly the wrong time to hit the economy with an expensive new program like Obamacare. New businesses will not want to start up, when they have to bear extra costs.

 

Meantime, the elite 1% are grabbing a bigger and bigger share of the pie - assisted by the Congress which is now almost wholly controlled big corporations, and the Israel lobby.

 

I fear that the US is headed towards a civil war, and if not that, higher and higher rates of taxes as the government and elites try to hold onto their rising share of a shrinking pie.

 

You might find Martin Armstrong's comments of interest:

=

Greg Hunter's first interview with Martin Armstrong

 

Martin Armstrong-People Ask, Where Do I put My Money-They're Afraid

 

+ Bubbles start from the Core and spread outwards

+ Empires collapse from the periphery towards the core

+ The USA will be the "last man standing"

+ Hyperinflation is not how empires collapse

+ The challenge now is to do with taxes - govt getting more and more aggressive

 

GOLD will start to move higher fast after the cycle turns down in (Sept.?) 2015

+ First resistance is $2,300, and then once thru that, could move quickly to $5,000

+ People will buy collectibles, etc, to escape taxation and govts

=

 

(If you have no objection, I might post an edited version of this comment on AX.)

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Yes, of course. Please post whatever you wish. The more views and analysis the better.

 

More than a but frustrated with Ed's approach - I assume his repeated confusion between aggregate household income and median household income is deliberate but I see no point in calling him on it.

 

Thanks for the Martin Armstrong link - very interesting. The issues I have with collectables are that (i) they are very expensive and (ii) they generate no or negative income and (iii) they are illiquid and (iv) many of them are vulnerable to theft, damage or other loss.

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As someone from AX said in a PM to me:

 

"I cannot understand why Ed is Trolling on his own Forum". (haha)

 

I agree with your comment on collectibles, but there is at least some pleasure to be derived from hanging paintings on a wall.

 

But as "Israel's richest man" told be years ago:

"Some paintings are too valuable to hang on the wall."

The insurance costs are so high, they store them in a vault, and hang copies on the Wall.

 

==

My REVISED comment is now posted on the AX thread ("Buying US property"):

 

http://hongkong.asiaxpat.com/forums/hong-kong-property/threads/140894/buying-us-property/

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Hi T.I.

 

I am trying to "spiff-up" the website, by getting everyone to use Avatars.

I have even started a thread about this.

 

If you do not have one in mind, I have two suggestions for you:

 

(Warning, I like silly puns):

 

(1)

train_zps9dbd12fb.jpeg

 

... and the less obvious one: Do you like coffee?

(2)

traincup_zpsd48e9ac2.jpeg

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No problem. I will dig something out. What is the size limit?

 

Don't drink coffee - horrible stuff.

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