My position sizing system

• 5% initial position for a company incorporated in a developed market
• 2% initial position for a company incorporated in an emerging market

My old position sizing system was a two percent initial buy plus an additional two percent later for companies incorporated in a developed market. I usually did this second buy after a few months of holding the first portion. The purpose of this lag was to get comfortable with the company in the meantime. Sometimes, I did not get such comfort and sold the share. Similarly, I bought half percent positions plus a half percent later on in emerging market companies. It was a careful start because I started a whole new portfolio. However, I ended up holding 75 shares. There is no way to follow 75 companies as a part-time private investor. 

There is a lot of research addressing the proper diversification of a stock portfolio. I believe the picture below illustrates somewhat of a consensus conclusion.

We can see that a portfolio with only one stock results in a huge standard deviation of its annual returns. Adding one stock reduces this standard deviation considerably. Assuming that the added stocks are equally weighted, the variability of the total portfolio goes down as we add more stocks. At some point, let's say at 25 stocks where the arrow is placed in the graph, adding stocks does not reduce variability in any significant way. 

The graph is compiled by looking at a large number of portfolios. We are looking at reality, not a theory. Nevertheless, this perspective on diversification is debated. Many value investors argue that variability does not represent risk; only permanent loss of capital does. The number of shares does not matter either, but rather how confident you are about the business prospects of the underlying companies after intense research. Charlie Munger was not afraid to hold only three shares. However, I do not have the quality of information, insight, experience, and advisors that Charlie Munger had access to. For now, I will go with the traditional concept of risk as expressed by the diversification graph above. 

In any case, I was severely over-diversified, holding 75 shares. It will be nearly impossible to beat an index fund with so many shares. I already experienced that a very successful 0.5% position, such as my triple return with Luckin Coffee, will barely affect my overall portfolio performance. I concluded that my 1% positions in emerging markets China, Thailand, Malaysia and Indonesia did not make sense. I decided to take 5% positions in Malaysian companies from now on. For China, Thailand, Indonesia, and other emerging markets I will allocate 2% per company. That is still a small allocation, but I currently do not have the confidence to take a 5% position per company in these markets.

The reorganization

After deciding on my new position sizing rules, it was time to take action. I sold off a bunch of shares where I did not have the conviction to top them up to 5% or to 2% for a range of different reasons. This was a useful exercise in itself. I increased the allocations of all the remaining holdings, except for Greggs, ABF, Reckitt and Haleon, which already got too expensive. In the case of turn-around situation LG H&H, I want to wait for the Q4 2023 results. With the reorganization mostly done, I own 25 shares now. 

Further concentration?

Looking at the chart above, I could reduce my 25 positions further to 10 positions. The variability of the portfolio as a whole would not increase that much. I could start with taking 5% positions to 10% where I feel confident that a company is extremely undervalued, such as Boustead Singapore and Ibersol. However, from my past experiences as an investor, I have learned that my ex-ante level of confidence is often misplaced and irrelevant. There is no correlation between my level of confidence in a share pick and the subsequent performance of that share. 

As an example, my current best performers are Exotic Food PCL, Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd and Associated British Foods PLC. I would never have guessed these picks as being my winners two years ago. I would probably have guessed Alibaba or Tencent then. Without a mechanical allocation system, I would have doubled down on these two stocks. This doubling-down behaviour is known as Get‐Evenitis or, more officially, loss-aversion bias. A mechanical sizing system is an antidote to this bias. It saved me from a bigger disaster in the Chinese tech space. 

Hence, I will stick to my mechanical allocation system. Should I ever change the current 5% and 2% sizing numbers, it will be wise to apply the new rules to all my shares, not to a selection.  

Disclosure: long position in all the shares mentioned, except Alibaba, Tencent, Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd and Luckin Coffee, which I sold off

Sold: a bunch of consumer staples stocks

 I sell a stock for one of the following reasons:

•  I discovered a mistake or omission in my earlier analysis of the business. The issue is so serious that I do not want to own the share any longer. See below for the cases of TVO, SPI, BATS, IMB, JDEP, 00506 and 00288. 
• The valuation of the share looks very high. I prefer to take my profit. See below for 01475 and Luckin Coffee earlier.
• Management changes the direction of the company. I disagree with the new plans.  
• The business circumstances for the company changed. This could be a macroeconomic change or political developments as described in the cases of 4137, 01475, 00220, and 00506 below. 
• I found a better risk/reward opportunity with another stock. I need to free up cash to buy it.

For some shares, it could be more than one factor. Let me go through my recent consumer staples sells.

Sold: Chlitina Holding Ltd (TPE:4137)

I mentioned this Taiwanese company as a buy in a recent blog. After posting that blog, I came across a few in-depth media articles about the upcoming Taiwanese elections and the political tensions with Mainland China. I am not sure whether Chlitina is considered a Taiwanese brand within Mainland China, where most of its revenues are generated. If so, it might face a consumer boycott at some point. Businesswise, the prospects of Chlitina seem good. However, I am unable to assess the political risks.

Sold: Nissin Foods Co Ltd (HKEX:01475)

Nissin Foods sells instant noodles, beverages and other food products in Hong Kong and China. The brand names it uses are originally from Japan. The majority shareholder Nissin Foods Holdings Co Ltd is located in Japan. Like Chlitina, Nissin could be prone to a consumer boycott following political tensions. Apart from this concern, the Nissin Foods share price seems to be quite high, both in terms of P/E and according to my value estimate based on a DCF calculation. I had a good run with this share, with +24% gains in price appreciation and dividends. I lean more towards value investing since buying this share two years ago. In addition, I started to focus on family-owned companies. Neither Nissin Foods Co Ltd nor Nissin Foods Holdings in Japan are family-owned. Nevertheless, I put both shares on my watch list. I may buy in again at a very low valuation.

Sold: Uni-President China Holdings Ltd (HKEX:00220)

Uni-President is a competitor of Nissin Foods in the instant noodles and beverages markets. The company is about 70% owned by its parent company, Uni-President Enterprises Corp, a major conglomerate based in Taiwan. Alas, there are political concerns again. Otherwise, the business is stable, albeit with low ROIC averages of 5% and not much growth. Dividend yield is high at 7.5%. However, the payout ratio has been above 1 for a few years already. It may not be sustainable to keep this up. Eventually, funds will be needed to re-invest in the maintenance of the manufacturing and distribution infrastructure. All things considered, there are not enough reasons to hold on to this share. 

Sold: China Foods Ltd. (HKEX:00506)

This company is the bottler of Coca Cola in 19 Chinese provincial markets that cover 81% geographically of the land mass and 51% of the population of Mainland China. It is a joint venture of state-owned enterprise (SOE) COFCO Corporation and The Coca-Cola Company, USA. Besides Coca Cola, China Foods sells other brands of The Coca-Cola Company, such as Minute Maid, Powerade, Fuze Tea, and Monster. Most of these drinks contain high levels of sugar, which has attracted the attention of certain Chinese authorities. The Shanghai Municipal Center for Disease Control & Prevention started a labelling system in supermarkets to alert consumers to the health risks of sugary drinks. 

You may conclude that the Chinese government intervenes in every aspect of its citizen's life and that China is uninvestable. This may be true, but the labelling system is based on a similar campaign in Singapore. As another example, the Malaysian Health Ministry introduced an extra tax on sugar-sweetened drinks in 2019. I agree with attempts to reduce the consumption of sugar. I am mindful of my own sugar intake, too. However, as an investor in China Foods, I can sense the foreboding of extra taxation. 

On another note, the margin numbers and return-on-investment ratios for China Foods are consistently low compared to other Coca-Cola bottlers, such as Coca-Cola Consolidated, Cocal-Cola HBC AG, and Coca-Cola Femsa SAB. Possibly because China Foods transports their beverages into a large number of very remote areas that have low populations with little spending power. As a SOE, China Foods may not be the most efficient company in the first place, although the profitability numbers are improving somewhat. 

In summary, it is not the best company to hold unless the share becomes extremely cheap. I put it on my watch list for that reason. 

Sold: Thai Vegetable Oil PCL (BKK:TVO)

As investors in high-quality shares, we should seek out companies with high return-on-investment numbers, such as Thai Vegetable Oil. However, there is a catch. High ROIC has no purpose when a company does not re-invest in expansion. It looks like the Thai vegetable oil market is saturated. The company may actually be correct to avoid investing in growth when there are no good prospects. It also means there is little upside to the share price. Thai Vegetable Oil may interest a dividend investor. Mature companies like these can also be interesting at a very low share price. I placed Thai Vegetable Oil back on my watch list for this reason.

Sold: Saha Pathana Inter-Holding PCL (BKK:SPI)

This is a conglomerate that invests in Thai consumer products, often in joint ventures with Japanese partners. It also develops industrial parks. There is not much growth, but the company seems to be well-run. Hence, I tried to double my investment from 0.5% to 1.0% of my portfolio. However, the liquidity of this share is extremely low, at least for non-Thai investors. I failed to buy any shares for a reasonable price. After some further digging, I learned that the already low liquidity is even decreasing more. I don't mind buying shares with limited liquidity. I have several of those in my portfolio. However, in this case, I could get stuck forever without any opportunity to get out of the share if necessary. Therefore, I made a 180-degree turn and sold off Saha Pathana. While selling, I also faced the low liquidity issue, but I managed to get rid of the stock without any overall losses. I recommend staying away from this share until the liquidity issue has been fixed.  

Sold: British American Tobacco PLC (LSE:BATS), Imperial Brands PLC (LSE:IMB)

Warren Buffett has three baskets for investment proposals: yes, no and too-hard-to-understand. Lately, I have come to realize that tobacco shares should be in my too-hard-to-understand basket. Governments seem increasingly concerned about the effect of tobacco on public health. In 2022, New Zealand passed a law forbidding those born after January 2009 to ever buy cigarettes. British PM Rishi Sunak suggested a similar law for the UK, as well as the Malaysian Health Ministry for Malaysian youths. While all three proposals have been withdrawn, the writing is on the wall. 

Tobacco giants like British American Tobacco PLC are working on non-cigarette products like vaping. However, we are learning that these alternatives are not healthier at all. They are increasingly becoming a target of strict regulation too. 

I concluded that the future of tobacco companies is too hard to predict with any confidence. I like to invest in consumer staples for the relative predictability of their business. That argument does not fly for tobacco companies. I will not buy any shares in the tobacco industry again.

Sold: WH Group Ltd. (HKEX:00288)

I also put WH Group on the too-hard-to-understand pile. WH Group is a meat processing company with operations in China, the US and Europe. It has brands like Nathan's Famous and Smithfields. However, meat sales is not really a brand-based business. It is very cyclical, driven by factors such as cattle diseases and droughts, which require specific expertise to analyze. Recently, I invested in cultivated meat through Agronomics, partially for ethical reasons. In that light, it feels right to forgo this bet on traditional meat production.

Sold: JDE Peet's (AMS:JDEP)

JDE Peet's is a worldwide seller of coffee to consumers using a range of brands. OldTown and Super are its regional brands in Southeast Asia. The share price has been stable, as we can expect from this type of business. The dividend yield is a modest 2.65% because the company is still paying off debt and making acquisitions. I had a 2% portfolio position for over a year in JDE Peet's. Following my mechanical allocation rules, I considered adding another 2%. However, I found myself lacking the confidence. At a P/E ratio of 18, the shares look somewhat expensive. A quick discounted cash flow valuation confirms this impression. I decided not to add to this position.

Next, I found myself questioning my original purchase of JDE Peet's. I might have overpaid for my initial position and decided to sell off my existing JDE Peet's position. I still like the company. It just was - and still is - too expensive. I will look at this share again should the price drop -25%, for example, during a general market collapse.

Sold: United Plantation Berhad (KLSE:2089), Spritzer Bhd (KLSE:7103), Ajinomoto (Malaysia) Bhd (KLSE:2658), Apex Healthcare Bhd (KLSE:7090), Oriental Holdings Bhd (KLSE:4006)

These are all well-run companies. I only sold them off because I reorganized my Malaysian portfolio. After careful consideration, I decided that I have sufficient confidence in the Malaysian business environment to take 5% positions in Malaysian shares instead of 1% positions. I already take 5% positions for all my European, British and Singaporean shares. For Malaysia, I decided to top up InNature Berhad and DKSH Holdings Malaysia Berhad to 5%. Both shares seem undervalued. 

I sold all my other Malaysian 1% positions. Apex Healthcare, United Plantation and Oriental Holdings did not really fit in my consumer staples strategy in the first place. Healthcare, palm oil and automotive are not within my circle of competence. I find Spritzer (bottled water) and Ajinomoto (condiments) easier to analyze. However, both stocks seem fairly valued at the moment. I placed them on my watch list. 

Disclosure: Currently no positions in any of the companies mentioned, except for Agronomics Ltd, InNature Bhd, and DKSH Holdings Malaysia Bhd, which I still hold.  

Weird WMP trading by Yihai International

Chinese wealth management firm Zhongzhi is going under. Zhongzhi was a prominent broker of Wealth Management Products (WMPs). These are uninsured financial products sold to the public, including retail customers and companies. The proceeds of these sales are often invested into property projects, but other asset classes, such as shares and bonds, are also standard. The yields of these asset classes are then passed on to the WMP holder after commission. The WMPs are contracts in themselves and can be bought and sold among the holders.

Alarmed by the news about Zhongzhi, I decided to check whether the Chinese companies in my portfolio invested in WMPs. Indeed, I found references to WMPs in the reporting of Yihai International Holdings Ltd (HKEX:01579), the soup and sauce maker for Haidilao. Yihai's investments in WMPs are significant. It provides very little information on the nature of the WMP contracts and actively trades in and out of WMPs. To show what I mean, here is a snapshot from Yihai's most recent Cash Flows from Investments statement (30 June 2023)

As the notes to the HY 2023 report explain, the financial assets at fair value through profit or loss are WMPs. There is no information on the issuer(s) of the WMPs, the nature of the contracts, the risks or any other details. Yihai bought 442,557,000 RMB worth of WMPs and sold 443,288,000 RMB within the first half-year of 2023.  The amount is double the operating cash flows. In HY 2022, a similar trade was almost sevenfold the OCF. This is possible because Yihai has accumulated large amounts of Cash and Cash Equivalents through the years. 

Yihai owns the brand names and production rights of the condiments that its sister company, Haidilao, uses in the hot pot restaurant chain it runs. Yihai does not only sell its soup bases and sauces to Haidilao but also directly to the public in branded packages through supermarkets. The sales of these exploded when the Covid lockdowns started. Consumers suddenly had lots of time for home cooking. Many Haidilao regulars wanted to make their beloved hot pot meals at home. When the lockdowns ended, Yihai's sales figures started to dip, and its stock price crashed. I bought the share after this crash because the condiment business will stabilize again. Condiment makers are high-margin businesses and attractive to invest in. Even more so, the share looked cheap.

Let's return to the almost 2 billion RMB cash balance Yihai accumulated. Every financial half year, Yihai spends much of this money to buy into WMPs. Within six months, those are then liquidated back into cash. This cycle starts after 1 January / 1 July. It finishes every time before 30 June and 31 December, which means that Yihai's public reporting will show bank balances instead of WMPs on the balance sheet. It's like continuously driving your car over the speed limit, only to slow down in front of police checkpoints to demonstrate that you are a responsible driver.

Let me be clear that the strange WMP trading does not indicate fraud. On the contrary, the value of a bank balance is easier and more certain to obtain than the value of a WMP product. Yihai accommodates its auditors rather than evading them unless the auditors are in on some kind of scheme and the financial reports do not tell the whole story. Does Yihai try to hide the true nature of the WMPs from its auditors? I don't think so, either. The auditors are aware of the WMPs. We must assume they did at least a basic check on those, even though the WMPs are not held at the reporting dates.

When comparing the disposal value of the WMPs with the purchase value, you calculate a profit of 0.17% resp. 0.86%. First, Let's acknowledge that WMP is a general term in Mainland China. There are different categories of WMPs based on fixed-income, equity, commodity, derivatives, and other asset classes, all with their own risk/reward profiles. WMPs are not, by definition, linked to real estate investments. There is also a wide range of WMP issuers with different degrees of reliability and reputation. The meagre yields that Yihai earned suggest that the WMPs were invested in low-risk assets, for example, government bonds. Why not simply put the money into term deposits with a reputable bank? The whole picture is just weird.

I already sold off my Yihai holding to be on the safe side. The recent news concerning failing WMPs alarmed me. The trading patterns with Yihai's WMPs amplify my concerns. Thirdly, Yihai should disclose the nature of the WMPs in its financial reports, even when WMPs are not held during the reporting date. Uni-President China Holdings Ltd, for example, keeps a small percentage of its cash in WMPs. In the audited portion of its 2022 Annual Report, Uni-President makes clear that it buys its structured notes only from major financial institutions and with focus only on low risk wealth management products (Note 3.3.1). Should Yihai improve its disclosures or stop investing in WMPs, I will consider buying back into the stock.

Disclosure: no position in Yihai International Holdings Ltd or any other company mentioned in the blog at the time of publishing

Sold out: post-fraud, triple bagger Luckin Coffee Inc ADR (OTC:LKNCY)

Bought 31 May 2022 at 10 USD

Sold 40% on 6 Febr 2023 at 27 USD 

Sold 60% on 16 Nov 2023 at 31.40 USD

At the time of my buy, the insiders responsible for doctoring the fraudulent sales figures were already identified, removed from the management team and in negotiations to sell their shares. Luckin was involved in several legal procedures to settle damages with early investors, who were disadvantaged by the stock price collapse after the fraud was exposed. To be frank, I have no legal background and did not fully understand all the procedures and documents involved. Every time a case was settled, another procedure was revealed, or some new legal milestone was mentioned. 

Yet, I could sense that a clean-up operation was ongoing, driven by the Chinese fund Centurium Capital, which also became the majority shareholder. Unfortunately, Centurium prefers to operate behind the scenes; there was (and still is) little information available about Centurium Capital and its intentions. The rapid development of the Luckin coffee business itself was much easier to observe. Although I do not speak Chinese, I was able to collect information about Luckin and its successes from online sources like Baidu Maps, YouTube clips, social media reviews and news articles. 

From the incomplete information and my anecdotal impressions, I concluded that the company was genuinely working on its come-back as a legitimate company. In addition to that, the coffee shop network was clearly growing at a fast pace. I decided to buy the share, which seemed cheap at 10 USD. Considering the risk that I was wrong and fraud was still ongoing, I limited the Luckin holding to a few percent of my total portfolio. Still anxious about fraud risks, I sold 40% on 6 Febr 2023 at 27 USD, which meant I secured the return of my initial investment.

I held my remaining Luckin shares for 1.5 years, during which my trust in Luckin's legitimacy increased. Two extensive research reports, Quo Vadis Capital, Inc. and Snow Lake, both recommending a buy, solidified my conviction. In May 2023, I visited the three Luckin outlets that were opened in Singapore at that point. I am not crazy about Luckin's signature coconut latte, but I enjoyed its Americano, brewed of beans from the Yirgacheffe, Ethiopia region. It is a lot better than Starbucks' Americano. (Which is not a high threshold, to be fair). However, neither Luckin's coffee nor the shop experience is exceptional in any way.

I sold out my remaining holdings last week. I noticed that some company insiders are selling their Luckin shares at an increasing scale and pace. 

Especially the selling done by Mr. Reinout Hendrik Schakel gave me pause for thought. In 2019, Luckin hired Schakel as CFO to manage the NASDAQ listing. During the recent Q3 2023 financial results presentation, Schakel announced that he will depart from the company at the end of 2023 for personal reasons. I have two concerns with this development:

1. Schakel's departure could be a sign that Luckin is not planning a relisting from the OTC market back to NASDAQ (or any other official market for that matter). It looks like Schakel concluded that, as the financial markets guy, he has no role left at Luckin. Or, to invert this observation, it would be very strange if Schakel left just before the company finally gets listed again.
2. Besides leaving the company, Schakel sold all his shares. As an insider with a corporate finance background, Schakel is obviously in a better position to value the Luckin stock than me. It looks like he believes that the share is currently overvalued. It also looks like he is not expecting any take-out offer on the shares from Centurium Capital. 

I usually avoid holding stocks in unregulated or lightly regulated markets like OTC. In Luckin's case, I was holding out for a relisting to an official market. After losing my confidence that this will happen any time soon, I see no other catalysts worthwhile waiting for. 

As in the case of my buy, I also made my sell on the basis of impressions and incomplete information. Luckin does not communicate any details besides the bare minimum required. There is just not enough information to go on. 

I applaud the current management team for running one of the fastest-growing businesses in the world. Luckin generates a lot of positive press with innovative marketing actions. Its customers love it. Should the company relist at an official exchange, I might be interested in buying the shares again. 

Disclosure: no positions in Luckin Coffee or Starbucks at the time of publishing this blog

Bought: a bunch of consumer staples stocks

I described how I liquidated my infrastructure-related stocks and REITs in earlier posts this year. I bought several companies in the consumer staples sector to replace these holdings. In the post about my L'Occitane buy, I clarified that I consider brand-based consumer staples stocks as inflation hedges. I let Warren Buffett present the reasoning through one of his quotes. Soon after buying L'Occitane, I also added Creightons to my cosmetics holdings. After these two, I bought several other consumer staples stocks, which I didn't describe yet. Time for an overview.

Bought: Italmobiliare SpA (ITM.IT)

Starting with yet another cosmetics company, at least partly. Italmobiliare is the majority owner of the oldest cosmetics brand in the world: Santa Maria Novella. It also owns the Italian coffee brand Borbonne. Both Santa Maria Novella and Borbonne are snowballing and developing their international expansion. Italmobiliare itself is the holding company for the Pesenti family, which has a long entrepreneurial history in the cement business, among other activities. The family runs Italmobiliare as an investment holding with a wide range of activities, where Borbonne and Santa Maria Novella are now by far the largest holdings.  

The idea was presented in the blog Value and Opportunity. This is the best European equity investment blog, in my opinion. I have been reading it for years, although I never had an investment in common with blogger memyselfandi007. Italmobiliare is the first. Another German blogger, Jonathan Neuscheler, followed up with his own analysis of Italmobiliare. Overall, Jonathan agreed with the findings of Value and Opportunity, and he bought the stock too.

Bought: Compagnie Du Bois Sauvage (COMB.BE)

Another family holding in Europe. This time in Belgium with the Paquot family in charge. The company makes and sells luxury chocolates under several brands: Neuhaus, Jeff de Bruges, Corné Port Royal en Artista Chocolates. Besides the chocolate business, the holding has minority investments in Umicore (batteries, recycling), Noël Group (extrusion of synthetic and bio-based materials), Berenberg Bank (German corporate banking), Ÿnsect (mealworms as alternative food), real estate in Europa and the US. Two smaller industrial holdings, Futerro and Galactic, are also involved in sustainability-related engineering.

There is not much public information about Compagnie Du Bois Sauvage, but I was still able to dig up some facts and draw conclusions from those. I will most likely share these soon in a separate blog posting.

Bought: Agronomics Ltd (LSE:ANIC)

This buy also deserves a separate blog post. Let me give a brief introduction for now. Agronomics is a venture capitalist investing in cellular agriculture. This means that Agronomics invests in companies that cultivate meat, but not by breeding, raising, and slaughtering animals in the traditional way. Instead, stem cell tissue is taken unobtrusively from an animal, transferred to a bioreactor and supplied with nutrients to grow it. Under the right conditions, the cells will grow into steaks and other meat products, sometimes within days. Note that the result is the same as a 'real' steak up to the molecular level. We are not talking about meat alternatives, where the experience of eating meat is simulated with plant-based ingredients such as soy, peas and gluten. (I find these disgusting, by the way.) Agronomics has a few older investments in such plant-based meat alternatives, but management decided to go all-in on cellular agriculture at some point.

Biotech companies are already producing edible, cultivated meat products, albeit in laboratories on a small scale and at very high costs per kilogram of food. Similar methods can also produce dairy, egg whites, seafood, chocolate, pet food, human breast milk, cotton, leather, and palm oil. Agronomics is involved in some of these initiatives too. Similar to cultivated meat production, the production is still at a small scale and has a very high cost per unit of end product. We are only in the beginning phase of this food revolution. Biotech startups are working on the consumer staples of the future. I found it suitable to include a company from this new food industry in my consumer staples portfolio.

Top-up: InNature Berhad (5295.KL)

InNature holds the rights to sell The Body Shop cosmetics in Malaysia (except Sarawak), Vietnam, and Cambodia. These rights are exclusive and apply to real-life shops as well as online stores. The bulk of sales is in Malaysia, where it is going well: high margins, high ROIC, and hardly any debt. I bought this family-owned company a year ago and have been following it ever since. The company's engagement with its target audience seems excellent. Over 70% of the group’s transactions come from its loyalty program members. 

There are definitely challenges to the business. Tourist visits to Malaysia have disappointed ever since the COVID-19 pandemic, and consumer sentiment is subdued among local shoppers. In response, the stock price dropped quite a bit during the last few months. However, I am optimistic about The Body Shop for the long term. If that optimism is warranted, the stock is cheap at 0.40 RM. I decided to take this opportunity to top-up my initial InNature Berhad holding and take it to a full 4% position.

Bought: DKSH Holdings Malaysia Berhad (5908.KL)

I bought another Malaysian company, albeit a subsidiary of DKSH Holding Ltd Switzerland. The company connects consumer brands such as BOH Tea, Kalbe Farma, and Horlicks with retail outlets, primarily supermarkets and convenience stores. Similarly, it distributes medicines from drug manufacturers to pharmacies and clinics. 

Can these manufacturers not organize their own distribution? Sometimes, they do, but specific skills, a good reputation and a network of business connections are essential. A supermarket operator is usually not interested in offering new, unproven products on its limited shelf space. It needs to be convinced that enough advertisement and promotion will be done. On a more practical level, some types of food and medicine need a cold supply chain and reliable transportation. I believe DKSH enjoys a competitive advantage, even a moat, with its position between these parties. Just like in the case of InNature, my attention was drawn to the falling share price. DKSH Malaysia's share price looked cheap when I pulled the trigger.

Bought: Chlitina Holding Ltd (4137.TW)

One last cosmetics company. I promise. Chlitina (pronounced: kelitina) is a cosmetics brand that started in Taiwan but now gets the bulk of its revenue and profits from Mainland China. This family-owned and operated company is a franchisor of beauty salons. It trains franchisees in the beauty business and helps them set up their own beauty salon. Chlitina makes its money from collecting franchise fees, but more importantly, by selling Chlitina-branded skincare and beauty products to the franchisees who re-sell those to their salon visitors.

This franchise model does not require much capital for Chlitina. Hence, its ROIC is typically between 20% and 30%, except during the COVID-19 lockdown periods during which the beauty salons were forced to close. Assuming a return to the pre-pandemic profits, the stock price seems low at a P/E = 17 and a Shiller P/E (where E is the average E over the last ten years) = 13. 

The Chlitina salon network is already quite extensive in China and Taiwan; about 5,000 under the Chlitina brand, and another 600 under the RnD Nail and Eyelash name. We can not expect hyper-growth here, but there are still geographical areas to expand into. Recently, the company launched its concept in Vietnam. In addition, it built an e-commerce platform to sell Chlitina products directly to end consumers. We can expect revenue growth here. However, management must avoid cannibalizing the business of its franchisee's salons too much. That would create a conflict of interest. 

Bought: Mega Lifesciences PCL (MEGA.BK)

Mega Lifesciences sells branded health supplements and herbal products, mostly over-the-counter products, but some prescription pharmaceutical products as well. In 1982, it started the Mega We Care brand in Thailand. Over the years, the company introduced Mega We Care all over Southeast Asia and in several African countries. 

In Myanmar, the company also has a distribution business, which markets primarily third-party pharmaceuticals. The revenues from Myanmar are 40% of Mega's total revenues. If you consider that risky, I agree. I decided to accept this risk because Mega seems an attractive investment on most other metrics: no debt load, very high ROIC, growth, and high free cash flows resulting in dividends and sensible re-investments. The relative contribution of the Myanmar-based business to Mega's total revenues is shrinking because of its fast growth in other markets. I also considered that neither the Myanmar government nor the rebellious forces would have any rational interest in destroying a pharmaceutical distribution network. Still, the different conflicts within Myanmar could seriously disrupt Mega's business. I managed this risk by allocating it just 1% of my portfolio.

Bought: PT Industri Jamu dan Farmasi Sido Muncul Tbk (SIDO.ID)

Sido Muncul provides herbal medicine, beverages, vitamins, supplements and pharmaceutical products. The business is comparable to Mega, but Sido Muncul has limited itself to Indonesia, where it has a widely-known brand name. The high margins, high ROIC, low debt burden, and growth figures are similar to Mega. We often see favorable financials with companies that provide over-the-counter personal care products, especially when their brands have been around for a long time and are trusted by consumers. People are generally quick to self-medicate with trusted products when they are in pain or feeling under the weather. It's a widespread habit, even among people who also consult a doctor when feeling bad. For that reason, I also have sector peers like Haleon, Reckitt, Haw Par, Da Ren Tang, Tong Ren Tang, Baiyunshan, PT Tempo Scan, and Kotra Industries in my portfolio. 

Bought: Kotra Industries Berhad (0002.KL)

As mentioned above, I bought shares in Kotra Industries, also known as Kotra Pharma. The reasons are similar to Mega and Sido Muncul. Kotra sells health supplements under the brand name Appeton. These supplements are sold over-the-counter and based on Western science, i.e. vitamins, omega-3, prebiotics, etc. Kotra has been selling these for decades, but only in recent years sales figures are taking off. The marketing is straightforward: supplements for children show pictures of children on the packaging, and those for the elderly show the elderly. There are also products for toddlers, pregnant women, athletes and skinny people who want to gain weight. Prices are low compared to competing products. Kotra has started selling Appeton in other Southeast Asian markets, as well as in several African countries.

Kotra Industries sells about 200 other pharmaceuticals in the over-the-counter market, as well as prescription-based. These products are lesser known than Appeton, but generally yield good sales numbers too. Prescription pharmaceutical sales are almost half of Kotra's total revenue. I find the prescribed medicine category harder to analyze than the over-the-counter sales. The first depends on regulatory developments, while the latter depends on excellent marketing. Therefore, I took a small (1%) position in Kotra instead of a full (4%) position. I may top up this position as my understanding of Kotra increases.

Disclosure: At the moment of publishing this blog: Long L'Occitane, Creightons, Italmobiliare, Compagnie du Bois Sauvage, Agronomics, InNature, DKSH Holdings Malaysia, Chlitina Holding Ltd, Mega Lifesciences, Sido Muncul, Haleon, Reckitt, Haw Par, Da Ren Tang, Tong Ren Tang, Baiyunshan, PT Tempo Scan, and Kotra Industries. No positions in Interactive Brokers, DKSH Holdings Ltd Switzerland, and Kalbe Farma.

Sold off: infrastructure assets

When I started this blog, I bought shares in three categories: consumer staples, infrastructure-related companies and online portals. Nowadays, I only entertain the first category. First, I sold off all my tech companies during their wild share price movements in early 2023. The volatility made me realize that I don't fully comprehend what drives the valuations of these tech giants. In the case of Alibaba and Tencent, for example, the Chinese government has a particular interest and involvement, which seems impossible to gauge. In the case of Meta Platforms, there were concerns about the costs of its Metaverse, which I found equally impossible to evaluate.

Mid 2023, I also started selling off my infrastructure-related companies and REITs. These types of stocks are easier to understand than tech. However, another reason to avoid this sector emerged: increasing debt burdens. Hard assets are almost always bought with leverage. I believe that interest rates will be higher for longer. I started by selling off particularly vulnerable companies like Ho Bee Land. Over the months, I grew increasingly uncomfortable with leverage, even for my holdings with relatively strong balance sheets. I scrutinized all my infrastructure-related holdings individually and made the following sell decisions.

Sold: Anhui Expressway Co Ltd (HKSE:00995), Qilu Expressway Company Ltd (HKSE:01576), Jiangsu Expressway Co Ltd (HKSE:00177)

The 'higher interest rates for longer' mantra may not apply to China, at least not for now. These toll road operators are not under immediate debt pressure, but I had other concerns. Chinese toll road operators generally do not disclose their concessions' end date. However, we can compare the total yearly amortization of the concession value with the total remaining concession book value. We then realize the average remaining concession is often only 10 - 15 years. After expiration, the toll road operator has no assets left unless it negotiates renewals for its concessions or gets new concessions. It's hard to gauge whether concessions will be renewed and at what price. Consequently, it's hard to establish a valuation for these operators. It's like a discounted cash flow formula with or without a terminal value. As I argued in the industrial S-REITS article, that means a huge difference in the DCF calculation result.  I find the valuation calculations too uncertain to hold on to these toll road operators. 

Sold: Qingdao Port International Co Ltd (HKSE:06198), China Merchants Port Holdings Co Ltd (HKSE:00144) 

Qingdao Port announced a restructuring of its ports in the form of a combination with sister companies. They issued a 32-page document describing the transactions in legal language. Honestly, I could not get the gist of it. Qingdao Port is a Chinese state-owned enterprise (SOE). The transaction may have some political purpose rather than a business optimization goal. But again, I am puzzled about what was going on in the first place. I found that reason enough to sell. In the same light, I sold off China Merchants, also an SOE with investments outside China that I found hard to justify business-wise.

Sold: Suria Capital Holdings Bhd (XKLS:6521) 

Another port operator, but this time in Malaysia. It is also an SOE, majority-owned by the state of Sabah. The holding contains all ports in Sabah and, as a monopoly, is doing well. However, the growth thesis is based on a large development project next to the port of Kota Kinabalu, which will offer residential and commercial properties. I have no particular insights into the Malaysian real estate sector. Frankly, I should have thought of that before buying the share. Suria Capital has no debt and may be an interesting share for investors who do have detailed insights into the sector.

Sold: China Tower Corp Ltd (HKSE:00788)

Back to mainland China. China Tower Corp is a joint venture of the three leading telecom operators within China: China Mobile, China Telecom, and China Unicom. These three operators sold their telecom towers to China Tower and leased them back. This is a standard construction within the telecom industry, but in this case, all four parties involved are SOEs. The construction makes sense, but there are also opportunities for transfer pricing. If not now, then in the future. It's hard to determine whether your interests as a foreign minority investor will always be considered.

Sold: CK Hutchison Holdings Ltd (HKSE:00001)

Well-known Hong Kong-based holding linked to the Li Ka-shing family. I held the share for over five years, during which its price dropped consistently. Thankfully, my overall loss is limited to only a few per cent, thanks to the high dividend payouts. 

The interest coverage ratio (ICR) of the holding is around 4. The debt burden is not an immediate threat. Still, you could calculate a worse ICR depending on how you account for associate companies' income and debts. CK Hutchison's multiple holdings structure is complex. In any case, however you calculate the ICR, it has been dropping recently. It could fall further, considering CK Hutchison was still borrowing at an average interest rate of only 2.7% until recently. The credit ratings from Fitch and Moody's for Hutchison's debt are still solid, resp A- and A2. Even so, at the moment of selling, CK Hutchison had the highest debt levels among my portfolio companies. 

Sold: Hutchison Port Holdings Trust (SGX:NS8U)

Together with CK Hutchison, I also sold its associate Hutchison Port Holdings Trust (HPHT), a business trust listed in Singapore. Its debt burden is increasing. I calculated an ICR of about 3.7 on 30 June 2023, but a lot of debt has to be re-negotiated soon, which will be at higher rates in the current interest rate environment. Profits will increasingly be re-directed from dividends to interest payments and debt repayments. 

Let me also address the assets' life expiry issue for this trust. HPHT indicates that the concessions for its ports expire from 2038 to 2055. They don't provide the details to calculate a weighted average expiry, but in the case of its Hong Kong ports, it is June 2047. (I assume this date is related to the expiry of the Special Administrative Region status of Hong Kong.) On the other hand, HPHT currently offers a dividend yield of more than 10%. The investor seems sufficiently compensated for the risk that the port concession will not be extended to HPHT. The debt burden, rather than the concession expiries, turned me away from the stock.

The low ROIC of infrastructure stocks

To conclude this blog, an observation about another issue: low return-on-invested-capital (ROIC) yields. Almost all infrastructure-related stocks have low ROIC yields; let's take 4% as an example. This does not immediately seem a big issue when you buy the stock at a price-to-book lower than 1. Infrastructure-related stocks are often quoted at P/B < 1, meaning that the return-on-investment of your recently invested dollar is higher than 4%, for example, in the form of a 10% cash dividend yield, like in the case of HPHT.   

So far, so good, until your new company starts making new investments to either expand into new assets or refurbish existing assets. These new investments are most likely again at the typical low 4% yield for infrastructure and real estate. The free cash flows for the high dividends you enjoyed will be redirected to investments with a 4% ROIC, which you probably do not appreciate. In the long term, your low P/B bargain becomes a trap. I believe this is the mechanism Charlie Munger referred to in the following quote.

Over the long term, it is hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you re not going to make much different than a six percent return even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result. So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects. How do you get into these great companies? One method is what I'd call the method of finding them small - get 'em when they're little. For example, buy Wal-Mart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And it's a very beguiling idea. If I were a young man, I might actually go into it.

(Charlie Munger, Poor Charlies Almanack, 3rd Edition, Page 206. "The art of stock picking")

Disclosure: No positions in Alibaba, Tencent, Meta, Anhui Expressway, Ho Bee Land, Qilu Expressway, Jiangsu Expressway, Qingdao Port, China Merchants Port Holdings, Suria Capital, China Tower, China Mobile, China Telecom, China Unicom, CK Hutchison, Hutchison Port Holdings Trust, and Wal-Mart 

Sold my last remaining REIT: Daiwa House Logistics Trust (DHLU)

In my 21 June post, I list all the REITs I sold. In the final paragraphs, I explained why I kept Daiwa House Logistics Trust (SGX:DHLU) in my portfolio. However, after some thinking, I also sold this last remaining REIT.   

On 3 August 2023, Daiwa House Logistics Trust presented its financial results for the first half-year of 2023. Link to the PDF of their presentation. The REIT is doing well, with 100% occupancy of its properties reached. The income growth looks satisfactory in Japanese yen terms, while the already low leverage has dropped even more. We can almost conclude that DHLU is a worry-free REIT until we reach the last part of the presentation. Management presents 28 pipeline properties suitable for inclusion into the REIT: 16 in Japan, 12 in Vietnam, Malaysia and Indonesia. These properties are all built by the REIT sponsor Daiwa House Industry Co., Ltd. This is the first time management included such a detailed list of potential acquisitions in its presentation. The message is clear: we can expect acquisitions from this pipeline shortly. This realization made me reconsider my holding. 

As we know, REITs have to finance new acquisitions by issuing new debt or equity. I am not excited about the idea of a rights issue. The share is currently priced at P/B = 0.74, which means a rights issue near the current stock price will be dilutive for the existing shareholders. Let's start with a general observation about P/B ratios. The book value of equity is often prone to manipulation by management, for example, by not writing down goodwill or inventory entries to reflect reality. However, DHLU's assets are modern, fully tenanted warehouses with straightforward valuations. Therefore, I consider DHLU's book value per share a good estimation of the value per share. 

Consequently, when DHLU would issue new shares at P/B = 0.74, it essentially sells a dollar for 74 cents. Warren Buffett buys back shares of Berkshire Hathaway when they are below his estimation of intrinsic value in order to create value for the company. Issuing shares below intrinsic value is the exact opposite and destroys value. Of course, I could participate in a DHLU rights issue to profit myself. However, my existing shares will still be diluted in value. My net benefit will be negative unless I buy a whole bunch of new shares. That would equate to doubling down, a dangerous psychological rabbit hole which I always avoid.

Will management wait until P/B = 1 before expanding the REIT? I doubt it. DHLU was initiated by its sponsor, Daiwa House Industry Co., Ltd., a prominent Japanese developer. The latter's incentive is creating a vehicle to purchase the warehouses it builds. The developer can then use the sales proceeds to build more properties, which is its primary business. The sponsor is not in the business of offering an optimal financial product for third-party investors. Of course, this observation applies to most REITs, and legal restrictions are in place to regulate the resulting conflicts of interest. However, it's good to be clear about the sponsor's incentives. Daiwa House Industry Co., Ltd has a stake of only 12.5% in the DHLU. The Related Parties Shareholding is one of the few weaknesses REIT-TIREMENT flags in its analysis.

Lastly, I have some concerns about this REIT's momentum. The REIT is among the last to be listed during a long Singaporean REIT glory period. The overall sentiment around REITs has turned more negative lately. DHLU's investors are mainly Singaporean private retail investors. We know this from the Annual Report 2022, in which a list of the Twenty Largest Unitholders are mostly nominees connected to retail brokers in Singapore. Private retail investors generally don't hedge currency risks. This means DHLU's share price is susceptible to the JPY/SGD exchange rate. Exchange rates are impossible to predict.

Adding to its fragility, DHLU has a modest SGD 400 million market cap. It's hard to see how DHLU would leap to the premier league of large REITs suitable for institutional investors other than by issuing shares and acquiring warehouses. Lots of them. Perhaps all the 28 pipeline properties. However, as explained, I do not support such rights issues. Not to even talk about issuing debt, which can be even more risky considering the current interest rate environment. 

In summary, we have a paradox. DHLU needs to grow, but I don't want them to expand. Damned if they do, damned if they don't. I chose to step aside.

Disclosure: Sold out Daiwa House Logistics Trust (DHLU)

More cosmetics: bought Creightons PLC (LSE:CRL)

My journey into micro-caps has started. Creightons could even be called a nano-cap with a market cap of only 22 million GBP. My market cap rule is not to buy companies below 100 million USD. I am scared that an incident such as a flood, a fire, theft, or a fraudulent employee would disrupt a small business too much and damage it permanently, even with proper insurance in place.

I decided to take a chance with Creightons anyway. The company has been under sensible and conservative management for at least 20 years. If you want to get an impression, YouTube provides an online presentation delivered by the current management. Financially, the company offers everything a value investor could wish for: insider ownership, high ROIC, free cash flow, little debt and consistent growth. The company is too small to be investable for professional funds. That may be the reason why the stock valuation seems low. I bought at an average of 0.32 GBP between June and August 2023, during which I accumulated a 4% position in my portfolio. Based on my DCF calculation, I estimate the stock's fair value to be 0.55 GBP.

Creightons invents, produces and distributes cosmetics and personal care items. They supply British supermarkets like Tesco, Sainsbury's and Boots with their house brands in these categories. They also do contract manufacturing, which means they can deliver one-off inventory orders placed by third-party personal care brands. For a detailed description of Creightons, I refer to this blog of Eddie Lloyd. A year later, Eddie wrote an update which includes a valuation model.

Another long-term shareholder is Adrian Ford of the Overlooked and Undervalued substack. Adrian highlights an important change in Creighton's strategy. The company bought and developed several own brands: Feather and Down, The Curl Company, Balance Active and Emma Hardie. These brands have the potential to grow.

Especially Emma Hardie is interesting. I did a quick and informal online review of this premium skincare brand. Emma Hardie's presence on TikTok is small compared to large brands like L'Occitane, but there are still a few dozen reviews, instruction clips and promotional clips. Emma Hardie has 63,000 followers on Instagram. The Amazon user reviews of their top-selling products are overall good. Creightons understands it has to work with these new media channels. It is nothing like the cases of HAI-O and Able Global, where the lack of presence on social platforms is unsettling.

I am betting that Emma Hardie or one of the other brands will break through internationally and drive Creightons' revenues upwards. Should the team fail, the house brand and contract manufacturing business will still be there. Heads, I Win; Tails, I Don't Lose Much.

Disclaimer: This investment is risky because of Creightons' small market cap and illiquidity. Do not invest without doing your own research first. The share trades under the SETSqx trading system of the LSE. This means there is only trading at 8am, 9am, 11am, 2pm and 4:35pm UK time. 

Disclosure: Long Creightons. Sold HAI-O and Able Global earlier this year.

Bought: L'Occitane International SA (HKSE:0973)

In an earlier post, I described how I disposed of almost all my REIT investments. I had initially intended these REITs as inflation hedges. History shows that real estate is a relatively stable asset class during (hyper) inflation. Turns out that a REIT is not the greatest wrapper for real estate holdings. It often comes along with a lot of debt. I decided to abandon my REIT strategy.

That does not mean my worries about inflation are gone too. I switched my attention towards consumer staples stocks to address those worries. 

The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently, so you don't face the problem of continuous reinvestments involving more and more dollars because of inflation. That's one reason why real estate, in general, is good during inflation. It's a one-time outlay and you also get the rise in value as well. A brand keeps increasing in value and is a wonderful thing to own during inflation.

In contrast, the utilities and rail road business keep eating more and more money. Your depreciation charges are inadequate and the real economic profits poor. Any business with heavy capital investment tends to be a poor business to be in during inflation and in general for that matter.

(Paraphrased from Warren Buffett, Berkshire Shareholder Meeting 2015)

L'Occitane is a cosmetics company that offers several brands: L’Occitane en Provence, Elemis, Sol de Janeiro, Grown Alchemist, Melvita, Erborian, and LimeLife. Most of the products are targeted towards women. Let me disclose here that I am male and not familiar with any of these brands. Thanks to social media, I did some basic vetting of these brands. The Instagram page of L'Occitane has 947K followers, Sol de Janeiro has almost the same amount. Elemis has 533K, Erborian 219K, Grown Alchemist 167K, Melvita nearly 100K and LimeLife 68K followers. These numbers are for the general pages of these brands. Most have additional country pages with localized content and separate communities. To calibrate these numbers, let's look at competitor and market leader L'Oreal which has more than 10 million Instagram followers just for its leading brand. However, L'Oreal has a 241 billion USD market cap, whereas L'Occitane clocks in at 4.3 billion. This quick sanity check tells us that L'Occitane has a good position in the cosmetics universe but also has room to grow.

Stock researcher Morningstar considers the core brand L’Occitane en Provence as mature. It expects growth to come from Elemis and Sol de Janeiro. The Morningstar analyst also expects sales to shift from retail stores to e-commerce. The analyst is optimistic about L'Occitane's brand equity and attributes a narrow moat (= competitive advantage) to the business. In conclusion, Morningstar considers the share significantly undervalued. I don't want to reveal more details because this Morningstar research report is behind a paywall. I am a subscriber and find their research occasionally insightful. In this case, Morningstar's report was very helpful for my research.

Adding to my conviction is the family ownership of L'Occitane. Mr Reinold Geiger holds 72.82% of the shares. He is not the original founder of L'Occitane but has developed the group from a local French operation to an international business. At age 74, he is stepping back from the company, but two of his sons remain active.

L'Occitane sells its products on a worldwide scale. Its headquarters are in Luxembourg and Switzerland, while the listing is on the Hong Kong Stock Exchange. The dividend withholding tax is taken by Luxembourg, where it is 15% of gross dividends. This will be hard to claim back. If L'Occitane increases its dividend payout ratio from 0.2 to 0.4, as was common before the Covid lockdowns, we are looking at a 4% dividend yield. This is good for a growth company. At the moment of this writing, the share still seems cheap. 

Last minute addition: as I was finishing this post, news came out that Mr Reinold Geiger is considering de-listing L'Occitane by bidding on the shares listed in Hong Kong. He may then list L'Occitane on another exchange. This news is unconfirmed, but it is likely true, as such a move is common sense considering the circumstances. I am only holding L'Occitane for a few weeks, so this might become a quick profit for my portfolio. On the downside, I need to find a suitable replacement for L'Occitane, and I have not seen many bargains recently.

Disclosure: Long L'Occitane International SA, when publishing this blog

Sold out: Beshom Holdings Bhd aka Hai-O (No more confidence)

I have held this share for over two years and have watched it decline slowly over that time frame. Last week, I cut my losses at -22%, including dividends. Beshom breached my minimum market cap rule of 100 mln USD long ago. I don't think that it will ever grow back to that amount. Beshom sells TCM (Traditional Chinese Medicine) products under the Hai-O brand name. It also targets the Malay/Muslim population with consumer staple products under the brand name Sahajidah. Hai-O is mainly sold through physical stores and e-commerce, while Sahajidah products are distributed through an MLM scheme.

There are always controversies surrounding multi-level marketing schemes. I realize that not every MLM is a Ponzi or pyramid scheme. However, legitimate MLM companies like Herbalife and Amway occasionally raise legal and ethical questions too. There is another concern. MLM seems to be disappearing slowly. People have no more time and desire to meet up and sell pots, pans, and Tupperware boxes to each other. We now have e-commerce sites like Amazon, Shopee and Lazada, which offer much more transparency on the value and quality of everyday products. Gathering information about products and ordering them is much more efficient through these websites.

Let me be clear that I did not discover any legal or ethical issues surrounding Beshom's MLM operation. It looks like they sold a popular water filter in 2017. Revenues and also the share price peaked that year. Unfortunately, it has been only downhill from there. I guess that end-users don't need a new water filter every year. The Covid lockdowns have been a factor here too. However, we do not see Beshom recover like most retail stores now that these lockdowns have ended.

Perhaps Beshom should drop the MLM component altogether and focus on its wholesale and retail operations. There is room for improvement in its e-commerce business. I noticed a significant presence of Hai-O products on Lazada and Shopee, but the monthly sales numbers are low. The Hai-O brand can be found on the packaging of vermicelli, bird's nest, tea, coffee, medicine and many other categories. When you spread your brand so broad and thin, it is not much more than a seal of approval. It becomes like a house brand of a supermarket. This type of marketing will not allow you to charge higher prices than your competitors. Hai-O does have an Instagram presence, but it looks like a message board rather than a lifestyle destination. It has less than 2,000 followers. Hai-O seems clueless in the modern world of retailing. I don't see where the brand is going. 

To end positively, let me note that Beshom has no debt. In fact, 30% of its market cap is in cash. The balance sheet is solid, and there are resources to turn the business around. I do not like to bet on turnarounds, but this might be an interesting opportunity for other investors.

Note to self: no more investments in MLM-related companies.

I sold all my REITs except one

I started my REIT selling spree in early 2023 with the disposals of Suntec Real Estate Investment Trust (SGX:T82U), ESR-Logos REIT (SGX:J91U), and Sunway REIT (KLS:5176) as described in this blog.  My two main concerns are rising interest rates and the relatively short weighted average land lease expiry (WALL-E) that some REITs in Singapore and China are facing. I didn't stop at these three REITS and eventually sold all my REIT holdings for the same reasons. Except for Daiwa House Logistics REIT. Let's go through the details case by case. 

Sold out: CapitaLand China Trust (SGX:AU8U)

Well-run REIT with diversified properties in Mainland China. The WALL-E is below 25 years. I heard that land leases are usually extended in China, but that is anecdotal information. There is still a possibility that a property will lose its underlying land lease holding and must be demolished. Even if a land lease is extended, there is still uncertainty up to the moment of that decision. Suppose a property's land lease expiry is 8 years away and needs some renovations or enhancements. Management can not spend much money because it potentially has only 8 years to earn that investment back. This uncertainty is hard to quantify. The Capitaland China Trust currently has a dividend yield near 7%. It is too low for me to compensate the investor for these land lease expiry risks.

Sold out: China Merchants Commercial REIT (HKEX:1503)

This REIT is also active in Mainland China and has a dividend yield of 14%, which is appealing. Yet, I exited this HK-listed REIT with a -13.23% loss (including dividends received). Like Capitaland China Trust, the WALL-E of the land under the properties is below 25 years. Furthermore, its debt is higher than its equity. The interest coverage rate (ICR) of 3.2 worries me too much. Also, this REIT's debt repayments are not staggered over the years. It agreed on just one revolving loan facility, which is renewed every three years. This seems risky to me. I should have noticed this detail before buying this REIT. In 2022, I bought too many REITs in a short time period. At the time, I naively assumed that REITs are an ultra-safe asset class and don't need deep-dive research.

Sold out: Cromwell European REIT (SGX:CWBU) 

I like this REIT with its good logistics and office properties all over Europe. Almost all of its properties are on freehold land. The ICR is 4.9, which seems very safe until we realize that Cromwell has been borrowing at an average interest rate of only 2.4 %. One can no longer borrow at those rates in the new interest rate environment. This means that when Cromwell's debt agreements expire, it has to refinance at higher rates; 2.4 % becomes 5%, for example. The ICR will drop from 5 to only 2.5 in that example. Of course, Cromwell can raise the rents on their tenants to prevent that, but can they double the rents to keep up with doubling finance costs? I doubt that. 

ESR Group Ltd ultimately owns a large stake in Cromwell European REIT (HKEX:1821). I have expressed worries about the leverage of this group. In addition, I observed that Cromwell European REIT does not seem to fit their profile. By now, ESR Group has indeed announced its desire to sell Cromwell Property Group and Cromwell European REIT. But who will buy this in the current commercial real estate environment? The REIT seems somewhat orphaned now. I believe it is better to side-step these developments for the time being. However, I will keep an eye on Cromwell European REIT and possibly reinvest in the future.

Sold out: Axis REIT (5106.KL) 

This is a well-run Malaysian REIT with industrial and logistics properties. However, the price-to-book value has risen to 1.2 by now. I do not see a reason to pay more than the REIT's self-published net asset value. If anything, we should pay less, assuming the property value estimations ordered by management are likely to be too optimistic. With interest rates rising, capitalization rates are rising, and NAV calculation results will decrease. I am not sure why the market is paying more than the published NAV per share. I held Axis REIT for about a year and earned a decent 6.4% yield in price appreciation plus dividends. I am putting Axis back on my watch list for potential re-investment, for example, if the P/B drops back to 1.

Sold out: AIMS APAC REIT (SGX:O5RU)

Another well-run industrial REIT, but there are some leverage concerns. This REIT has issued a lot of perpetual bonds (perps). The holders of these bonds get paid before the unit holders get paid. In the case that AIMS APAC experiences liquidity issues, they can skip a perps coupon payment at a moment where they also skip the dividend payment to regular unit holders. They have two lines of defence, so to speak, and hence there are two ICR numbers to publish. AIMS APAC lists an ICR of 3.8, excluding distributions to perpetual bondholders and 2.3, including distributions to perpetual bondholders (As of 31 March 2023). I believe that a regular unit holder should use the second number. An ICR of 2.3 seems really low. AIMS APAC has been enjoying a debt funding cost of only 3.4%. Permanently higher interest rates will eventually affect this REIT. 

Sold out: Frasers Centrepoint Trust (SGX:J69U)

This REIT has nine retail malls and an office building in Singapore. Its ICR = 4.4 as of 31 March 2023. When an ICR dives below 1, it becomes problematic as the operating income (EBIT) does not even cover the interest payments, let alone dividend payments. This is unlikely to happen with Frasers Centrepoint, but an increase in finance costs will still have to be financed. This can only be done by a decrease in dividend payments unless it can raise rents drastically. Looking at a weighted average debt maturity of not even 2 years, we know that Frasers has to renegotiate a large part of its fixed-rate debt agreements. 

Instead of repeating my interest rate worries again, let me introduce two Youtubers with similar concerns. SingvestingDiary is worried about higher interest rates for the long term and finds the dividend yield of Frasers Centrepoint insufficient to compensate for this. Gabriel Yap is even more bearish on Frasers Centrepoint and believes the management is too aggressive with its acquisitions for the REIT. Note that the production quality of these Youtube clips is poor, but both have some worthwhile analysis to share. Finally, this article may be interesting if you prefer a similar analysis, although not specifically about Frasers, in written format. 

Sold out: Sabana Industrial REIT (SGX:M1GU)

Sabana has 18 industrial properties, all located in Singapore. All my fears come together in this one REIT. The WALL-E is only 30 years (1 January 2023). That means we lose 3.33% in value to the decay in the remaining land lease value. Hence, of the current 7% dividend yield, only 3.66% is of real value to us. Looking at the debt, we see an ICR of 3.8 on 31 March 2023. Not disastrous, but not very good either. 

To complete my nightmare, ESR Group is involved in Sabana too. ESR attempted to merge Sabana with ESR REIT (Now ESR-LOGOS) with a lowball payout offer. Since it holds only about 20% of Sabana, other shareholders were able to block this transaction. The feuds between the shareholders didn't end there. News of disagreements between Sabana plus ESR management versus other shareholders keeps popping up in the local business media. I want to have no part in this.

Sold out: Frasers Logistics & Commercial Trust (SGX:BUOU)

The disposal of Frasers Logistics & Commercial Trust at a small loss concludes my REIT sell-fest. The ICR of this REIT is 8.4 (31 March 2023), and the WALL-E is 88 years (30 September 2023). My two pet peeve concerns are non-issues here. The REIT is conservatively managed with regard to debt. The properties are mostly located in Australia, where freehold land holdings are the norm. 

So why did I sell? The share price seems high compared to different valuation estimates. Also, I have no insights at all into the Australian commercial real estate market. A few articles suggest that this market is in bubble territory, and weakness is to be expected here. When I came across a cheap consumer staple stock, I sold Frasers Logistics & Commercial Trust to free up funds to buy it. 

I will write about my consumer staples stock buy-fest in the next posting. First, let me wrap up this blog by featuring the last remaining REIT in my portfolio.

Hold: Daiwa House Logistics REIT (SGX:DHLU)

This REIT has 16 large logistics properties in Japan. These warehouses are, on average, only 5 years old. The WALL-E is 67 Years (1 January 2023), and the ICR is 11.4 (31 March 2023). No concerns here. With a Price to FFO of 14.07 and a dividend yield of 9.4%, the REIT seems very cheap considering the quality of the assets. 

The consistent drop of the Japanese Yen against the Singapore Dollar since late 2021 could offer an explanation for the low share price of Daiwa House Logistics REIT. Its share price decline correlates with the Yen decline. The REIT is listed in Singapore, and most of its unit holders are also based in Singapore. The weak Yen means that the REITs' dividend will be lower when converted into Singapore Dollars. It looks like the REIT's share price dropped because unit investors seek a higher dividend yield to compensate for this currency loss. 

Besides the currency rate issue, I don't see any fundamental reason for Daiwa House Logistics REIT to be priced so low. Its logistics business does not seem distressed or irrelevant in any way. We know that Japan is facing an ageing and declining population, but this would first affect labour-intensive sectors such as shops and restaurants rather than e-commerce. If anything, remote areas in Japan will depend more on e-commerce to receive necessities. 

Daiwa House Logistics REIT does not face typical Japanese corporate governance issues. Management consists of Japanese and Singaporean individuals, as does the board. IR materials are in English. Strategy and operational issues are clearly described. I went to the REIT's first AGM. Board members and management seemed frank and open towards investor questions and feedback. The payout ratio of dividends out of income is mandated at 90% by the Singaporean REIT regime. Hence, there can be no hoarding of cash on the balance sheet. Unlike in Japan, there is no withholding tax on dividends in Singapore. Enough reasons to hold on to Daiwa House Logistics REIT.

Disclosure: Long Daiwa House Logistics at the time of this writing

Sold out: Ho Bee Land Ltd (too much debt)

 I liquidated my Ho Bee Land (SGX:H13) position on 18 Apr 2023 for SGD 2.21, realizing a loss of ~20%, including dividends received. Considering the rising interest rates, I fear Ho Bee Land's debt is too high. 

Ho Bee Land is almost a REIT considering the high amount of investment properties compared to the projects they still have in development. Like a REIT, its net debt level is also relatively high at almost 13 times EBITDA. The interest coverage rate is 2.9, which is low but not immediately alarming. However, when you flip through the Ho Bee Land 2022 Annual Report, you learn that it was borrowing at rates of only 1.02 - 1.61 % (page 74) in 2021. Already in 2022, this range expanded to 1.05 - 5.05 %. What would eventually happen if all their loans were charged a 5% interest rate or higher? When your finance costs rise fivefold, the lease payments of the tenants will also have to grow five times just to keep the interest rate coverage stable. 

Raising rents fivefold is highly unlikely, even in an inflationary environment. However, Ho Bee Land has another trump card to play: their borrowings are currently hedged with interest rate derivatives. In 2022, we can already see these derivatives creating value (annual report page 75), and they will keep working for them if interest rates stay high. Unfortunately, we must consider what will happen after these hedges expire. All derivatives are tied to specific loans, which mature from 2023 - 2026 (page 74). These loans will have to be refinanced, and obviously, you can not continue to lock in a 1% interest rate with derivatives when the general interest rate environment is already much higher. Thus, Ho Bee Land can only pray that the interest rates will drop again in the coming years. Here, we arrived at the crux of my fear.

Most of Ho Bee Land's investment properties are in the UK. I could not find a reliable source for historic commercial real estate lending rates. The graph shows the historic Bank of England Bank Rates. It is the interest rate that banks receive for holding money with the BOE. This data will also prove my point.

(Source: excel data from https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp)

We can see three different clusters of interest rate levels.

• Fluctuating around 11% from 1973 till 1993

• Fluctuating around 5% from 1993 till 2009

• Near 0.5% from 2009 till 2022

Apart from the transition years (1993 and 2009) and 1978, for some reason, there are no years where the rate significantly differs from the year before or after.

From observing this pattern, the current 5% rate is unlikely to be followed by a reversal back to the 0.5% regime. Apart from another 1978 type of exception, it is likely that we will see the 5% level sustained over a longer term. In other words, it looks like there is a new regime of mid to high interest rates. This is a bit of an engineering type of pattern recognition. If you have strong economic reasons to disagree that interest rates remain elevated for longer, there is no reason to worry about Ho Bee Land. Their balance sheet is quite strong now. They will gracefully survive a short period of high interest rates. However, if you agree that there might be an interest rate regime change, the coming years look bleak for Ho Bee Land. Not only for them but also for many REITs and other real estate holders facing the same issue: lots of debt with low interest rates, locked in for a few years but expiring in a potentially higher interest rate environment.

One remedy for leveraged property owners is to simply sell off properties and repay the debt until it is no longer a burden. But who is going to buy those properties from them? Even if it is a high-quality office in London? Most other real estate investors are also leveraged and facing the same rising interest rate issue. Adding more fuel to the fire, cap rates generally rise together with interest rates, so estimated values of properties will go down. Ho Bee Land actually started selling off some properties in Singapore. However, I wonder if this strategy can reduce the debt burden enough to stop worrying about it. (NB: Ho Bee Land stated that those property sales are unrelated to debt pressures.)

Disclosures: I am not a real estate professional. Nothing written here is investment advice. I sold off Ho Bee Land and all my REITs except Daiwa House Logistics REIT. I will give more details in future blogs.

WALL-E; Industrial S-REIT's dirty little secret

An S-REIT is a REIT listed on the Singaporean stock exchange. This article concerns industrial and logistic REITs listed in Singapore and also owning properties there. Most of such properties are built on land leased from the Singaporean government. These land leases are relatively short, 30 to 60 years, and part of that time has already passed. The remaining time is expressed as the Weighted Average Land Lease Expiry, which I will shorten as WALL-E, like in the namesake movie. 

When the land lease of a particular property has expired, the REIT owning that property has to demolish it and return the land to the government. The REIT may also manage to extend the land lease, but it must pay a large lease payment. It is really a lose-lose dilemma for the REIT. This WALL-E issue does not get much exposure in the media. This may be because the weighted expiry is still 30 years or more in the future, which is an eternity for most of us.

Still, it is the elephant in the room for me. Imagine the worst-case scenario where a REIT can not extend any of its land leases after 30 years. The impact on the REIT valuation is like a discounted cash flow calculation without a terminal value. If you are unfamiliar with these calculations, let me assure you that it dramatically decreases the value. Another way to think about it: you should at least get a 3.33% dividend yield per year just to be compensated for the fact that a year of the properties' earnings potential has been lost. Only the yield above 3.33% is what you truly earn. 

The best Singaporean finance blogger Kyith Ng wrote about this issue in 2011  and concluded:

"It will be prudent to value a REIT as if this is a non-perpetual asset with a finite lifespan and calculate the internal rate of return as accordingly."

As Kyith Ng mentions in this article, the JTC Corporation is responsible for either extending a land lease or terminating it on behalf of the Singaporean government. Looking at historical cases, it seems that JTC will usually renew a land lease, but it might not do so when there are redevelopment plans for the area where an industrial property is located. Thus, JTC's decisions seem to be driven by urban planning motives rather than attempts to maximize profits. It may not be as bad as it looks for the REITs. 

Even so, I am annoyed by the WALL-E issue. I do not feel I really own an asset if it must be returned within 30 years. Funny enough, I don't have this concern when a lease expires in 60 years or more. The expiring land lease issue could get increasing media attention as we get closer to the expiry dates of more and more properties. In a few years, the threat might be felt as more pressing and could influence the share prices of REITs. At least one S-REIT manager seems to share this concern...

5. Rebalancing of portfolio to freehold assets, whilst not compromising on growth:

a. With our Singapore properties, accounting for 60.5% of our portfolio by valuation, held through Jurong Town Corporation (JTC) on a leasehold basis, it is prudent that we progressively rebalance AA REIT’s portfolio to longer tenure or freehold properties to minimise the future impact of a shortening land tenure.

(AIMS APAC REIT, Annual Report 2022, page 8)

The WALL-E issue affects S-REITs with industrial properties in Singapore, like ESR-LOGOS REIT, AIMS APAC REIT, and Sabana REIT. It is much lesser an issue for S-REITS with offices, hotels, and malls, which are sectors where land leases tend to be much longer. It is also not an issue for industrial S-REITs like Daiwa House Logistics (Japan) and Frasers L&C (Australia, Europe), which, although listed in Singapore, are active in countries where land lease expiry is very long or properties are typically on freehold land. That said,  there are other countries, such as Vietnam and China, where land leases are also relatively short. S-REITs like CapitaLand China Trust and EC World REIT may be impacted in these cases. 

In my portfolio, the WALL-E issue concerns ESR-LOGOS REIT, AIMS APAC REIT, Sabana REIT, CapitaLand China Trust and China Merchants REIT in Hong Kong. I sold all of these.

Sold out: Able Global Berhad (KLS:7167)

Able Global Berhad sells milk under the brand names Able Farm and Tarik Tarik. I had purchased a 0.5% position to feel out this stock. My rule is to double the starting position or sell it off when I don't feel confident about the company's prospects. The company has low debt, a good ROE, and a decent dividend yield. The stock price seems low compared to these fundamentals. So, why do I not feel confident?

Able Global is expanding its dairy business into Mexico. Analysts applaud their spirit of entrepreneurship, but I am confused about the reason for choosing this particular country. I have reviewed the company's publications but did not find any rationale for this choice. When a company expands its operations, it is typically done at the edge of its circle of competence. It would, for example, expand into a neighbouring country or a product line that supplements the current products. It is unclear why a company would jump from Malaysia into Mexico. Able Global increased its debt burden to support this effort, raising the stakes even higher.  

My second area of doubt concerns Able Global's digital brand strategy. There is no active presence of Able Farm on Instagram, TikTok, Twitter, or Facebook. But even worse, a search on Shopee does not even yield 25 listings of their products. You may argue that offering milk on a trading platform makes no sense because it would get spoilt during shipping. Let's clarify here that Able Farm offers condensed, evaporated and UHT milk variations, which you don't have to refrigerate. F&N and Dutch Lady provide similar products in the Malaysian market. Searching these brand names lists hundreds of results on both Shopee and Lazada. Where are the Able Farm products? Let me be clear that the products do exist. I have seen those used in various street food hawker stalls for which Malaysia is famous. There is likely a long-time functioning supply chain behind these products, possibly with third-party wholesalers. They might not see the need to advertise to the ultimate consumer. 

For my portfolio, I am looking for consumer staples where the brand name is the moat. Brand names must be supported by modern advertisements and other marketing efforts. The absence of modern marketing efforts for Able Farm and my reservations about the future Mexican operation made me conclude that the stock does not fit my requirements. I should have caught these objections because both already existed when I bought the stock. My lack of research and reflection was a mistake. By the way, selling the stock may also be a mistake when the Mexican operations take off successfully. I will be keeping an eye on the developments. Sold Able Global at 1.29 RM.

Disclosure: Long Fraser and Neave (F99 in Singapore)

Sold out: DFI Retail Group Holdings Ltd aka Dairy Farm

I regard Alibaba as one of the biggest mistakes I ever made. In thinking about Alibaba, I got charmed by their position in the Chinese internet and didn’t stop to realize, 'they’re still a gawd-damned retailer.'

(Charlie Munger, Daily Journal annual shareholder meeting, 15 February 2023)

Charlie Munger is unhappy about his Alibaba purchase. I can relate to that; I sold off mine last January already. But let’s notice his dim view of retailers in general here. Is retail such a lousy business? 

Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around? 

[...] in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day. [...]

We would rather look for easier things to do.

(Buffett, Student Visit 2005)

Buffett is also pessimistic about the prospects of retailers. He seems to suggest that investors try to identify the smartest player in the sector, such as Wal-Mart, which is one of the success stories within Berkshire’s investing track record. 

Value investor Pat Dorsey is more specific in his book The Five Rules for Successful Stock Investing. 

Not surprisingly, we generally don’t find a ton of great long-term stock ideas in retail and consumer services because most economic moats for the sector are extremely narrow, if they exist at all. The only way a retailer can earn a wide economic moat is by doing something that keeps consumers shopping at its stores rather than at competitors’. It can do this by offering unique products or low prices. The former method is tough to do on a large scale because unique products rarely remain unique forever. It’s rare to find a retailer or consumer service firm that maintains any kind of economic moat for more than a few years.

Retail is generally a very low-return business with low or no barriers to entry. [...] The primary way a firm can build an economic moat in the sector is to be the low-cost leader. 

Let’s start our survey of DFI Retail Group here. Is it a low-cost leader, or does it offer something unique to survive the retail battlefield in the long term? I think neither. DFI has been struggling for several years, starting years before the Covid pandemic. It recently sold its supermarket operations in Malaysia and wrote down its investment in The Philipines.

An excellent introduction to DFI was written by Global Stock Picking. This blogger bought the stock in December 2017, traded in and out a few times, but sold it off in 2022. The blogger’s quote about DFI’s parent company Jardine Group drew my attention.

In a city like Hong Kong there are many examples of businesses that are protected due to vested interests from business owners, who are allowed to influence politics.

Globalstockpicking argues that DFI built its retail business in Hong Kong under the protection of a duopoly with Hutchison. We could theorize that DFI’s operations outside Hong Kong enjoy less success because they lack such a moat. In the latest FY2022 report, the Chairman remarks about DFIs’ future: “The Group’s overall results will largely depend on the recovery in Hong Kong of its Health and Beauty and Restaurants businesses, and an improved performance by its associate Yonghui on the Chinese mainland.” 

DFI’s focus is still on Hong Kong. However, I hesitate to rely on a strong economic come-back of Hong Kong for any investment success in the foreseeable future. Besides Hong Kong’s economic prospects, we can question whether DFI’s moat there is still intact, considering the political developments. The retail duopoly might be disrupted by new players entering the market.

A more pressing concern is DFI's debt which fails my criteria. In its FY2022 report, DFI discloses its interest cover at 3. However, there are several ways to calculate Interest Cover Rates. RHB Research sets it at 2 in their latest report, which is also my estimation. Moreover, 60% of the debt consists of floating-rate borrowings instead of fixed-rate agreements. DFI associate Yonghui, which runs supermarkets in mainland China looks quite leveraged too. Yonghui’s FY2022 financials have not been published yet, but its operating profits have been negative for a while. Considering the Chinese 2022 lockdowns, we can expect Yonghui’s 2022 performance to be poor again. On the bright side, China re-opened in 2023. From now on, earnings and operating cashflows for both DFI and Yonghui will recover at least somewhat. In that light, although leverage looks worrying it is not an immediate threat to the continuity of either company.

DFI was already a turnaround story before the Covid pandemic. In early 2020, Blogger CS Jacky pointed out the challenges and warned us, “The transformation plan to reshape DFI is a long-term endeavour”. Fast forward to 2023, and we can ask whether the turnaround is ongoing or has failed. To quote Warren Buffett again, “turnarounds seldom turn” (1979). Hence, I dislike relying on a business turnaround for my investment returns.

DFI reported its FY2022 financials in the same week as Haleon and Reckitt. I couldn’t help noticing how much easier their challenges seem compared to DFI. Why make an uncertain bet on DFI when more straightforward choices are around? KISS = Keep It Simple, Stupid. DFI also fails several of my checklist items. I am taking my loss at about -15% (including dividends), sold at 3.14 USD. Admittedly, at this price, DFI looks cheap on the surface, yet I am more confident making back my loss with another stock. To echo Buffett's quote from 2005 again... 

We would rather look for easier things to do. 

Disclosure: Sold out DFI and Alibaba. Currently long CK Hutchison, Haleon, and Reckitt.