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.  

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.