Coffee in my portfolio

I named my investment approach the Coffee Can Portfolio APAC after a buy-and-hold method developed by American analyst Rob Kirby. I tweaked the approach he suggested by focusing on infrastructure and consumer staples stocks. As a result, I have a bunch of coffee-related companies in my portfolio. I thought it would be fun to highlight those.

JDE Peet's is the unmistakable coffee king in my portfolio. The company offers many coffee brands all over the world: Peet's Coffee, Jacobs, Douwe Egberts, Campos, Tassimo, Senseo, L'OR, Super (Singapore), Old Town White Coffee (Malaysia), and tens of other brands. Some of those have cafe-type outlets which you can visit. The picture shows a pop-up store of Peet's Coffee in Shanghai.

Luckin Coffee is a Chinese coffee giant which runs cafes but has no packaged product yet. In some of their outlets, you can sit down to enjoy your coffee, but most are takeaway only. They have more stores than Starbucks in China, but in revenue, Luckin is still second because their products are cheaper.

Maxim's Caterers is a 50% participation of my holding DFI (Dairy Farm International). Maxim's has the license to exclusively run Starbucks stores in Singapore, Hong Kong, Macau, Vietnam, and Cambodia.

Maxim's Caterers has a joint venture with Fraser & Neave, another holding of mine, to run Starbucks stores in Thailand. This joint venture is also 50/50.

Staying with Dairy Farm International, its house brand Meadows offers instant coffee and 3-in-1 coffee mix in their supermarkets, such as Giant and Cold Storage as well as in third-party outlets (Foodpanda).

South-Korean consumer goods conglomerate LG H&H runs a beverage bottling operation that produces drinks from the Coca-Cola Company. The canned coffee brand GEORGIA is one of the Coca-Cola drinks they licensed for Korea. 

China Foods Limited is licensed to sell Coca-Cola beverages in 19 provinces of China. They don't offer GEORGIA, but they do have another canned coffee drink in their portfolio called Costa RTD coffee. Costa is a coffee shop chain acquired by the Coca-Cola Company in 2019. There are Costa coffee shops in China too, but it seems that China Foods is not involved in those. 

The strangest coffee drink from my holdings comes from Want Want China: Mr. Bond Coffee. I could not find any information about it. Are they referring to James Bond? The man shown on the can resembles detective Sherlock Holmes rather than master spy James Bond. Also, I am pretty sure Bond prefers Martini over coffee.

For the final two coffee servings, we leave Asia. British bakery chain Greggs sells coffee to go with their sausage rolls and sandwiches. Classics such as Mocha, Americano, and Latte, with special editions during holidays. Recently they added two canned coffee offerings: Caramel Latte and Original Latte, as the picture shows.

Associated British Foods offers various grocery items all over the world. In their long listing of those, I found Jarrah, which is an Australian brand of powdered coffee. You pour hot water over the powder to make it ready for consumption. Jarrah offers a hot chocolate variant too.

Family-owned REITs in my portfolio

Earlier, I discussed the pros and cons of investing in a family business. In the same post, I went through my own stock portfolio to identify all family businesses and the families behind them. Among them were a few of my REIT holdings too. Let's discuss those first.

A REIT is a property business which must be run according to a set of strict guidelines. Formal restrictions are meant to prevent the majority shareholder or REIT manager from taking advantage of the other, minority shareholders. Of course, abuse is still possible and we should be alert to it. A family that controls a REIT is able to dump their undesirable properties into it, for example when they also own a property developer which is in need of cash. This means the REIT does not buy the best properties available in the market. Additionally, the family could also be overcharging for such properties. It's a subtle form of abuse, but let's still try to determine if this could potentially happen in my current REIT holdings.

ESR-LOGOS REIT

ESR-LOGOS has a 6% shareholder in the person of Mr Tong Jinquan. He is the owner of Summit Group, a real-estate developer in Shanghai. I don't think there is any overlap in the activities of Summit and ESR. As a side note, ESR Group is a larger shareholder and Mr Tong recently sold a large part of his shareholding to them. ESR-LOGOS was likely just an investment to Mr Tong and he seems to be withdrawing his involvement.

AIMS APAC REIT

On the list of major shareholders in AIMS APAC REIT two private shareholders attract our attention: Chan Wai Kheong 5.83% and George Wang 9.28%. Mr Chan is a hedge fund manager, who was also involved in a recent boardroom drama within Sabana Industrial REIT. Besides Sabana, I could not find any other real estate interests of him. Mr Wang, on the other hand,  is not only a shareholder of AIMS APAC REIT but also Chairman of The Board of Directors of its manager. Furthermore, he is the founder of AIMS Financial Group which still has an interest of 7.61% in AIMS APAC REIT which they founded, as the name already suggests. All in all, a powerful position, but I could not find any cases where AIMS APAC bought properties in which Mr Wang had an interest. Also, in this REIT we find the ESR Group again with a shareholding of 12.82% to somewhat counterpoint his influence.

Frasers Centrepoint Trust, Frasers Logistics & Commercial 

The Sirivadhanabhakdi family has large stakes in Frasers Centrepoint Trust and Frasers Logistics & Commercial Trust through their stake in Frasers Property. All three entities are multi-billion dollar operations with their own business dynamics. Although they still share the same website, I did not see any suspicious transactions between them. Let us also note that Charoen Sirivadhanabhakdi did not set up this network of companies himself. He inherited this structure when he took over Fraser Property after winning the battle for its parent company the Fraser & Neave conglomerate in 2013. A battle that he mainly fought for the soft drinks division of Fraser & Neave rather than its real-estate holdings.

Sunway REIT

40.89% of the shares in Sunway Real Estate Investment Trust are owned by Sunway Berhad, which is controlled by the Cheah family. Sunway Berhad is a large Malaysian conglomerate with a lot of property development activities. As such, Sunway REIT taking over properties developed by Sunway Berhad is the whole idea behind the REIT. It owns malls, hotels, offices, a medical centre, industrial properties and a university campus, all developed by Sunway Berhad. I am not aware of any signals that these acquisitions were executed at any disadvantage to the minority shareholders of Sunway REIT.

Hutchison Port Holdings Trust

Hutchison Port Holdings Trust is not a REIT, but a business trust, which is comparable in nature. CK Hutchison Holdings Limited holds 30.07%, with the Li Ka-Shing family controlling CK Hutchison. Part of the port activities of CK Hutchison was disposed to the trust at its conception in 2011, more specifically the container terminals in the Pearl River Delta, China. I don't think any assets were added to the trust ever since, so there is not much to watch here. The share has been performing quite bad for other reasons. It looks like the valuation (P/E, P/B) simply deteriorated rather than the business performance. Maybe the stock is too boring to hold for a long time and consequently it can now be bought at a very low valuation, which I did.

The other REITs I hold have no family involvement. If I overlooked anything, feel free to alert me in the comments below. 

ESR Group Ltd

I am not invested in ESR Group, but I noticed their presence in AIMS APAC, ESR-LOGOS (obviously), Sabana Industrial REIT (20%) and Cromwell European REIT (28% through Cromwell Property Group).

Perhaps this should not surprise me because I prefer to invest in industrial and logistics properties and ESR considers itself a REIM (Real Estate Investment Manager) in this particular sector and focused on Asia too. This means they develop, buy, sell and manage logistics properties, similar to the recently transformed Capitaland Investment Ltd. I don't like to invest in REIM's, since it is basically trading and the profits come and go depending on economic cycles. It's also a key people-based business and those key people may leave. There is not really any moat. Besides all that, the balance sheet of ESR looks quite over-levered with debt.

ESR Group grew fast in recent years. In 2021, they took over ARA/LOGOS. Their holdings in Cromwell and ARA-LOGOS (now ESR-LOGOS) are the result of this acquisition. The last one is clearly within the focus of ESR Group, but I am not so sure about the office-oriented Cromwell Property Group, which is an Australian developer. Their Cromwell European REIT is 50/50 invested in offices and logistics properties in Europe. But note that ESR Group's focus is Asia rather than Europe. I wonder if Cromwell Property Group and Cromwell European REIT might be disposed of by ESR at some time. 

Maybe the conclusion from this review is that I should monitor ESR Group more closely rather than the family holdings in the REITs I own. 

Disclosure: at the time of posting this article, I hold shares in Sunway REIT, ESR-LOGOS REIT, AIMS APAC REIT, CK Hutchison, Hutchison Port Holdings Trust, Cromwell European REIT, Sabana Industrial REIT, Fraser & Neave, Frasers Centrepoint Trust and Frasers Logistics & Commercial.

Family-owned companies in my portfolio

I prefer investing in family-owned companies compared to corporations run by outside managers. It is comforting to know that the people running the company also own it for a large part. 

Pros of family-owned companies

• Skin in the game. The owner-family shares the same risks and rewards as outside investors.
• They typically run their business with a long-term view.
• They take less risk and keep leverage low.
• With significant family shareholdings or even a majority vote, they can withstand pressure from other shareholders for quick, non-sustainable profits.
• Owner-operators usually have more passion for the business than outsiders.
• The owner families develop deep industrial know-how in their area of business.
• Most owner-operators do not reward themselves with extravagant pay packages.
• They do more rational mergers and acquisitions.
• There is evidence that family-owned businesses outperform the overall stock markets.

For more details on these pros, I recommend the article Why Family Business Stocks Are Better – Why They Outperform (Owner-Operated Businesses Have Skin In The Game) posted on April 26, 2022, by Oddmund Groette. Unfortunately, this article does not address the disadvantages of family-owned companies. Let me try to make that list from my own observations.

Cons of family-owned companies

• Conflicts can arise within the owning family, sometimes crippling the business.
• The next generation of the family has little entrepreneurial talent. 
• The next generation is not close to politicians or other businesspeople who were critical to the company's success.
• Non-family managers and workers within the company may not be loyal to the new generation.
• Non-family managers may be better qualified for positions given to family members through nepotism, leading to tensions.
• The owner-operator family treats outside investors poorly by siphoning off money or assets through Related Party Transactions or excessive management compensation.
• There may be different classes of shares, limiting even a little bit of influence and feedback from outside investors.
• The family may attempt to de-list the share for a lowball offer at a time when the valuation of the company is low.

These red flags can sometimes be detected by careful observation of the developments around the company. As outside minority shareholders, we can at least attempt to flag possible corporate governance issues before it's too late. As a starting point for such an exercise, I went through all my current holdings to identify the family-owned companies in my portfolio.

As you can see below, more than half of my portfolio holdings fit the definition of a family-owned company. When I mention the name of one controlling shareholder, I consider him or her as the family behind the business. Often, it is also the founder. Where I put 'family' behind a name, more members of the family seem to be actively involved in the business. 

The ownership percentages mentioned are rounded off and may have changed somewhat since the last publication. This share count is a very rough indication in the first place since a portion of shares does not always represent the same portion of voting rights: voting rights can be split off, or there are different share classes. The main goal is to identify the key person or family behind the company and to measure their influence to some extent. Obviously, 60% ownership yields a lot more power than 11%.

Exotic Food PCL     60%    Jantarach family

VTech Holdings Ltd       37%    Allan WONG Chi Yun

QAF Ltd         69%    Andree Halim (Liem)

United Plantation Berhad      50%    Bek-Nielsen family

Frasers Centrepoint Trust      41%    Sirivadhanabhakdi family

Fraser and Neave Ltd           88%    Sirivadhanabhakdi family

Frasers Logistics & Commercial Trust   21%    Sirivadhanabhakdi family

Sunway Real Estate Investment Trust   41%    Cheah family

Saha Pathana Inter-Holding PCL    17%    Chokwatana family

Delfi Ltd                52%    Chuang family

Ho Bee Land Ltd       76% Dr Chua Thian Poh

InNature Bhd         75%    Foong & Cheah family

Able Global Bhd            29%    Goh family

PT Tempo Scan Pacific Tbk   82%    Handojo Selamet Muljadi

DFI Retail Group Holdings Ltd       78%    Keswick family

LG H&H       34%    Koo family

Vinda International Holdings Ltd  22%    Li Chao Wang

CK Hutchison Holdings Ltd            30%    Li family

CK Infrastructure Holdings Ltd        30%    Li family

Hutchison Port Holdings Trust          30%    Li family

Want Want China Holdings Ltd    52% Mr Tsai Eng-Meng

PT Ultrajaya Milk Industry & Trading Co Tbk    79%    Prawirawidjaja family

JDE Peets NV            55%    Reimann family

Yihai International Holdings Ltd    53%    Shi/Lee and Shu/Zhang families

Hai-O Enterprise Bhd          22%    Tan family

Thai Vegetable Oil PCL      49%    Vitayatanagorn family

Associated British Foods PLC   58%    Weston family

Boustead Singapore Ltd      43%    Wong family

Spritzer Bhd       45%    Y Bhg Dato’ Lim A Heng

Natural Food International Holding Ltd      42%    Zhang family

PT Uni-Charm Indonesia Tbk     21%    Widjaja family

AIMS APAC REIT     15%    George Wang, Chan Wai Kheong

ESR LOGOS REIT       6%    Mr. Tong Jinquan

With this list completed, a more significant task will now start. In the coming articles, I will go through these names and determine if there are any corporate governance concerns. In the next post, I will start with the REITs that have family involvement.

Disclosure: I hold all the stocks mentioned in this post at the time of writing.

My stock buy checklist

Here are all my current stock buy requirements. These are not listed in any particular order but are grouped by:

• Facts which can be checked quickly. 
• Mandatory requirements, no compromises here.
• Preferences and somewhat soft criteria, where at least a few should be fulfilled.
• Three sanity checks to execute just before buying.

I will just publish my checklist to keep this post manageable. Some requirements may need more explanation. I will add those later in separate articles. 

Quick checks 

• The company must be in the consumer staples or infrastructure industry.
• Market cap or tangible book value minimal USD 100 million. Higher threshold for Mainland China: a minimum of USD 500 million. 
• Market liquidity of the share is sufficient to support buying and selling by a small, private investor like me.
• Financial reports in English or at least a summary in English. 
• Not a turn-around, spin-off or other special situation. Keep it simple. Not a company which is mainly valued for its stake in another company, 'hidden' treasures on the balance sheet, supposedly undervalued properties, cash balances or other 'workout' situations. Only focus on the operational activities.
• Not an ETF, OTC, RTO, SPAC, IPO, fund, investing company, finance company, or venture capital firm.
• Does not rely on just one fashion brand in the clothing or cosmetics industry.
• Not a commodity producer or trader.
• Not a project-based income earner.
• No negative equity or book value. 
• There is at least one research publication of decent quality on the company, such as broker research,  rating agency debt report, or an industry publication.
• There are no (credible) short-sell reports on the company.
• Does not significantly depend on operations in Africa, the Middle East, Latin America, Japan, Hong Kong, India, Russia or any frontier markets. I am not familiar with these regions.
• Does not depend on a single customer or only a handful of customers.
• Not a real-estate developer or a REIM. A REIT is fine, but not when invested in mortgages or private residences. Also, no REIT's with just one party as a dominant tenant. 

Mandatory requirements

• Growth or a reasonable growth expectation. 
• Reasonable or low valuation. 
• I understand the business operations and significant drivers of business success. 
• Not over-leveraged with debt. Debt/Equity < 1. Or if it is larger than 1, then Debt/EBITDA < 3  or Interest Coverage > 3.
• The company is operating and performing right now. Not a story stock with promises for the future. The company is profitable or likely profitable soon. Free cash flow (FCFF) is also positive or will be soon. A temporary negative free cash flow might be acceptable if it results from sensible investments.
• No concerns about management ethics and honesty.

Preferences

• Pays regular dividends or dividend payments were temporarily stopped for a good reason. 
• Incorporated in a jurisdiction with no or low dividend withholding taxes.
• Activities with a competitive advantage (moat) as proven by good returns on capital.
• As non-cyclical as possible. 
• For the consumer staples: one or more brands, a large and diversified customer base. The company is making money from many daily, small and predictable transactions.
• Diversified. Does business in several countries, regions, and through different brands.
• Owned and operated by a reputable founder or founding family with skin in the game.
• The company has existed for a long time already.
• Not in a web of companies manipulated by some tycoon or syndicate of investors with unclear reputations and goals.
• No outsourcing of core activities.
• Conglomerates: only when the business operations were initiated, not bought, by the management. They have skin in the game and articulate a clear strategy. I will never count on a realization of value by breaking up the conglomerate. (It won't happen).

Pre-buy sanity check

• Am I relying upon a future catalyst to realize value? If so, consider another stock.
• Will I sleep well at night while holding this stock for the long term?
• Do I feel comfortable when I imagine being the majority owner? 

There may be some other red flag, not mentioned in this checklist, leading me to reject a stock. Also, I may still buy a stock even when it violates a requirement mentioned above. I always look at the complete picture surrounding a stock.

There are no political or moral judgements behind any of my criteria. They are based on practical considerations. To focus on specific areas, I want to block everything else out. Otherwise, I will go crazy from the information overload.