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.  

Breaking my own checklist rules

Earlier, I revealed my Stock Buy Checklist on this blog. Today, I will review the stock holdings violating this checklist's rules. This gives me a chance to explain some rules in more detail and the reasons for violating them sometimes.

United Plantation Berhad is not in the consumer staples or infrastructure industry.

My most constricting rule is to only buy consumer staples and infrastructure-related companies. United Plantation Berhad is the only real exception to this super rule. It runs oil palm plantations, counting it as a commodity producer. They sell some consumer products like NutroPalm Golden Palm Oil through their associate Unitata, but these activities are minimal. I decided to buy United Plantation shares anyway because its operations are run very efficiently. There are only so many great companies on the Malaysian stock exchange.

Several Malaysian companies have a market cap below 100 mln USD

InNature, Able Global, HAIO/Beshom, Suria Capital, and Spritzer are all flirting with the 100 mln USD market cap threshold. All these companies were well above this threshold when I bought their shares. However, the Malaysian Ringgit has devaluated against the US Dollar since then. That's not enough reason to suddenly remove these companies from my portfolio. The purpose of the market cap rule is to avoid buying a company so small that a black-swan event like a fire, a flood, or a fraudulent employee might threaten the continuity of its operations. In that light, it is not really relevant that a market cap goes from 100 to 98 mln in USD when the actually used currency is the Malaysian Ringgit.

Natural Food International Holding Ltd has a market cap and book value below USD 500 mln.

This company produces cereals and other healthy food products in the Chinese market. The book value is not even 200 mln USD, which is far below my threshold rule for mainland Chinese companies. As I wrote above, the market cap rule is set for my peace of mind regarding the stability of a company. In the case of Natural Food, we have the presence of US food giant PepsiCo as a significant shareholder. PepsiCo is also represented by a board member. I will assume that PepsiCo did due diligence into Natural Food before buying its shares and will continue to keep an eye on developments within the company.

Camellia PLC depends on operations in India and Africa for most of its revenues.

I focus my research on Asia Pacific, Europe, and US-based companies. Although Camellia is based in Kent, United Kingdom, its lands, gardens and plantations are located worldwide. It owns a few brand names, like Jing Tea and Goodricke. However, the bulk of its production should be considered agricultural commodities. Finally, Camellia is a conglomerate. So, here we have three violations of my checklist rules: 1. geography, 2. conglomerate, and 3. commodity-related. I bought Camellia long before I compiled my checklist. Likely, my experience with this company's poor management and its collapsing share price inspired some of the checklist rules. I will sell this share to finance an investment idea that conforms to my checklist better.

Boustead Singapore, CK Hutchison, Saha Pathana, ABF, F&N, and LG H&H are conglomerates.

Talking about conglomerates, I have a few others in my portfolio, although my checklist encourages me to avoid them. Like Camellia, I bought most of these shares before I wrote my checklist. In those days, I still had a value-investing approach where you would calculate the sum-of-the-parts of the different businesses and assets and then compare the grand total with the market cap. You often see a big 'holding company discount' making the share seem like a bargain. Value investing blogs and fora keep pouncing on such 'deep-value bargains'. The problem with this approach is that the discount usually does not close. The management and majority shareholders are simply not interested in closing the discount. You will remain stuck in these poorly performing conglomerate shares until management changes its priorities and reorganises the company's structure and activities, if ever. 

This is not a concern for the six conglomerates mentioned in the title. I gladly hold them for the long term, even if they remain conglomerates. Saha Pathana, Associated British Foods (ABF), and LG H&H are primarily active in consumer staples which is my portfolio focus. The same goes for Fraser and Neave Ltd (F&N), which also has a printing and publishing division, but it is only responsible for 11% of the total revenues within F&N.

CK Hutchison has consumer staples operations through their retail activities (A.S. Watson) and infrastructure-related assets with their ports and mobile telecom operators. This fits within my 'consumer staples and infrastructure' philosophy, although CK Hutchison also has investments in sectors such as utilities, pharmaceuticals, media, and energy, of which I have no knowledge. 

The same goes for Boustead Singapore Ltd, which is active in software, energy, and medical services, besides developing business parks through the listed Boustead Projects subsidiary. This share is also a relic of my deep-value investing days, long gone. The share price has been going nowhere for the last ten years, but the dividend yield is reasonable, and I trust the management. Because of the Boustead Projects activities, the stock fits in my infrastructure bucket. Although Boustead's other activities do not fit my philosophy, they seem stable.

Ho Bee Land and Boustead are developers.

Adding to my Boustead objections: its most significant subsidiary Boustead Projects, is a developer, not a REIT. I typically prefer a REIT over a developer because developers tend to have very cyclical earnings, and it is difficult to get reliable profit projections on the properties still under construction. In contrast, properties in a REIT portfolio are already operational and easier to value. In addition, the various regulations governing a REIT limit the opportunities to abuse minority investors. In fact, Boustead Projects recently initiated a REIT (Boustead Industrial Fund), but unfortunately, it is not publicly listed. 

Ho Bee Land is also a developer, but most revenues come from renting out its existing investment properties. It owns an impressive portfolio of offices in London and Singapore. Shareholders have repeatedly pressured management to divest this portfolio into a REIT. At a minimum, this will yield tax benefits, but it might also benefit the share performance. However, management has yet to honour this request. Ho Bee Land does not have many development projects compared to its portfolio of investment properties, so the company is safe enough for me to keep holding. The company seems significantly undervalued too.

DFI retail group and Imperial Brands have more debt than equity.

Two companies in my current portfolio violate the debt/equity < 1 rule. However, the Interest Coverage ratio in both cases is more than sufficient. Dairy Farm (DFI) runs supermarkets and restaurants. Most of its debt is the liability for its future store leases. According to current account rules, DFI has to list these under 'debt', but store lease liabilities are much safer than actual debts resulting from loans. When a company takes out a regular loan, it is to finance a new factory or some new business activity where the ultimate payoffs can only be guesstimated. In contrast, the expected yields on long-existing retail store rentals are much more certain than a new factory or a new business activity. I don't worry much about these store leases for existing restaurants, convenience stores, and supermarkets.

Imperial Brands is a tobacco company. The balance sheet seems weak at a quick glance, but incoming cash flows from smoking-addicted customers seem reliable and will relieve the debt burden over time. The management sets a "target leverage towards the lower end of our net debt to EBITDA range of 2-2.5 times." They are at 2.4 now and still reducing debt. If they indeed reach a net-debt/EBITDA = 2, that looks pretty safe. Fitch rates their debt as BBB. I am not worried but will keep an eye on debt repayments.

Luckin Coffee pays no dividends.

I prefer my holdings to pay dividends, but it is not a strict requirement. For growing companies, it usually makes sense to skip dividend payments and re-invest profits into the business instead. Luckin Coffee invests in the fast expansion of its coffee shop chain. 

Luckin Coffee is listed as an over-the-counter (OTC) stock.

OTC and Pink Sheet stocks are hardly regulated. I had never bought an OTC stock before Luckin, and I don't plan to do that again. There is a high chance of running into fraudulent companies in these markets. Luckin Coffee had also admitted to committing fraud when I started looking at the stock. My research mainly focussed on whether the fraud could be even bigger, as was exposed already. So far, that has not proven true, and the stock price has been going upward throughout 2022.

When I bought my Luckin stock in May 2022, the fraud-committing people were already removed from management positions. Luckin was entering arrangements to compensate the defrauded parties. My thesis is that Luckin can successfully move on from this dark era. It was a gamble when I took my position, but I considered that the most prominent Chinese coffee shop chain should be in a portfolio called The Coffee Can APAC. As I am writing this in December 2022, we can witness Luckin Coffee solving its legacy fraud issues while growing its operations quickly. I hope Luckin can re-list soon on the Nasdaq, preferably with a secondary listing in Hong Kong.

ABF's Primark is a fashion brand. 

Even worse than being listed as an OTC stock is running a fashion brand. I am not a follower of fashion myself, but I am aware that brands come and go, sometimes very quickly. It is impossible to assess those cycles in advance. Hence, I usually avoid investing in fashion retail companies. Nevertheless, in the case of Associated British Foods (ABF), I got comfortable with their Primark business, which delivers about half the profits for the overall conglomerate.

ABF started the Primark clothing stores initially in Ireland, then Great Brittain, then Europe, and recently jumped over to the United States. I visited several stores myself. Primark sells cheap clothes, packed to the brim in large stores at city-centre, triple-A locations. Customers love it, judging from the Google Map reviews and the consistent queues to pay at the cashier registers. The Primark brand signals a low price level and straightforward buying process rather than style and fashionability. I am confident that Primark customers will keep going to its stores as long as Primark sticks to its approach. It may be successful in Asia and South America too.

Daiwa House Logistics REIT is active in Japan. 

I am still contemplating whether I want to invest in Japanese companies. The demographics in this country predict a terrible economic future. Japanese company managements are often not shareholder friendly at all. Dividend payments are low and charged with a steep 20.42% withholding tax. Japanese stocks are generally priced relatively high from a value-investing perspective.

Daiwa House Logistics REIT seemed reasonably priced at its IPO and has an impressive portfolio of large, modern warehouses. Despite all properties being located in Japan, the REIT is a Singaporean entity. This means there is no dividend withholding tax for individual investors. Also, the Singaporean REIT regime requires the REIT manager to pay out at least 90% of earnings. This restricts the REIT manager from hoarding excessive cash on the balance sheet as many Japanese companies tend to do. For these reasons, I bought the REIT a few months after its IPO. My doubts about Japan's demographics and economic future still stand. Is this a Coffee Can REIT that I can hold for decades while sleeping well?  

Dairy Farm and Hutchison Port have sizeable operations in Hong Kong.

I reduce my portfolio exposure to companies that generate a lot of their profits from within Hong Kong. The city's future has been clouded for a few years already. Let's not get into the political details here, but it looks like the role of Hong Kong as a gateway into China is diminishing. Currently, Hong Kong is still ranked very high on surveys that estimate the cost of living. However, measured over the medium and long term, I wonder if much of this wealth may disappear. 

My holding Dairy Farm derives a lot of income from Hong Kong consumers. The management does not disclose the exact amount, but by combining other metrics, I estimate it to be about a quarter of total earnings. On the other hand, Dairy Farm is also exposed to many retail opportunities in China and South-East Asia. These could balance out deterioration in the Hong Kong market.

Hutchison Port Holdings Trust derives a lot of income from its Hong Kong port. This is obviously based on the geographical location as a deep-sea port which will remain unchanged. Different demographical and political circumstances are unlikely to affect these port operations.

Conclusion

I do not use my checklist blindly. As illustrated in this article, I break my rules when there are good reasons to do so. It is more important to keep an eye on the underlying concerns behind the rules. I felt some of these concerns while preparing and writing this article, for example, in the case of my last remaining Japanese stock, Daiwa House Logistics REIT. In addition, I feel uncomfortable around companies where several rules are broken simultaneously, as with Camellia and Dairy Farm.