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 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

Stocks recently bought and sold

Bought: Haleon PLC (LSE:HLN)

Haleon provides over-the-counter consumer healthcare products such as Sensodyne, Centrum, Panadol, Advil, Voltaren, Theraflu, and Otrivin. Such products will always be bought to relieve pain or increase health. The business seems suitable for my Coffee Can approach. Haleon is a spin-off from pharmaceutical company GSK (GlaxoSmithKline), whose current management wants to focus on its prescription medicine business. The IPO of Haleon was in July 2022, so there is no annual report yet. I had to piece my information together from the prospectus, two quarterly reports and analyst call transcripts. While the share price doesn't represent deep value, Haleon is relatively inexpensive.

Bought: Reckitt (LSE:RKT)

This is the company formerly known as Reckitt Benckiser Group. It has a healthcare division comparable to Haleon with health-related products such as Clearasil, Strepsils, and Durex. In addition, they have hygiene-oriented products such as Dettol, Vanish, Air Wick, Calgon, Lysol, and Harpic. Then finally, baby and children's nutrition products Enfamil and Nutramigen. Like Haleon, the demand for these consumer products should be mostly non-cyclical. Reckitt is a much older company than Haleon. Its share price has been going nowhere for years because the company made some expensive mistakes with its acquisitions. The CEO responsible for those has left the company. I expect that the company has learned from these mistakes and will move forward more carefully in the coming years. 

Bought: Haw Par Corporation Limited (SGX:H02)

Another personal healthcare company with only one brand name: Tiger Balm. I use this product myself after visiting the gym. Not so much for 'pain relief' as advertised, but more to emphasise the 'after-glow' feeling following a good workout session. Tiger Balm is trying to expand its product range to plasters, lotions, and even mosquito repellents. Besides the Tiger Balm business, Haw Par runs the Underwater World Pattaya aquarium and owns four commercial properties in Singapore and Malaysia. Its passive investments are a 4.5% share in UOB Bank Singapore, an 8.5% share in UOL, a developer in Singapore, and 600 mln in SGD cash on the balance sheet. If you analyse this collection of assets in detail, you will learn it is organised around the Wee family from Singapore. Family holdings like these are standard in Asia. Such shares will not give you quick profits through share price movements. The thesis rather lies in the safety of the assets and a decent dividend. 

Bought: Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SGX:T14)

My final new buy in the consumer healthcare sector is a TCM company. A small position at not even 0.5% because the data I could collect about this business was minimal. The company is based in China. Unfortunately, its English 'Annual Report' is nothing more than the answers to the questions that the Singaporean Exchange provides as a framework for reporting. The answers provide a bare minimum of required data. It is hard to detect any tone of voice or indicator of mood from the management. Da Ren Tang is a 3 billion USD large-cap company, listed in 1997 and providing dividends all that time. Therefore, it is unlikely to be a fraudulent S-Chip. The goal of fraudsters is to collect money, not to distribute it. Finally, Da Ren Tang has no debts and a high ROIC. Its valuation seems decent, even low.

Sold: Okamoto Industries Inc (JPN:5122)

I sold Okamoto, a manufacturer of condoms. This company does not publish financial reports in English. Since I don't master Japanese, I always used Google Translate to gain insight into the views and strategies of the management. I did not get the gist of the limited comments they made. I am unsure whether the Google translations were poor or the words did not have much substance in the first place. While preparing my blog about family-owned companies, I discovered that the Okamoto family only holds 13% of the shares. That seems a relatively small commitment to support the 'skin-in-the-game' argument for family-owned companies. In summary, my conviction in Okamoto disappeared, and I sold it at a slight loss. 

Bought: WH Group Limited (HKSE:0288)

Another share where I only have just enough conviction. WH Group Limited engages in the production, wholesale, and retail sale of meat products in China, the United States, Mexico, and Europe. They have known meat brand names in all these regions. What are the advantages of such a worldwide approach? However, both the business and the share price are stable over time. 

Sold: Yum China Holdings, Inc. (HKSE:9987)

Yum China is the franchise holder for Pizza Hut, KFC, Taco Bell, Lavazza Coffee and a few local restaurant brands for Mainland China. Business is going well, and the share price has soared. When I bought this share, it was already priced high, but it has reached an extreme valuation by now. Just as an indication: the P/E is around 60. It is too optimistic. Let's consider that even when the expected growth occurs, there will be enormous workforce challenges. A restaurant chain does not scale up quickly and will need many workers. I decided to take my profits for now. I have put Yum China back on the watchlist and might purchase it again if it drops to an attractive valuation. 

Partially Sold: Luckin Coffee Inc (OTC:LKNCY)

My Luckin shares had a fantastic run. I bought my position for 9.95 USD per share, and it's nearing 30.00 USD now. Management is solving the issues related to the earlier fraud one by one while simultaneously growing the number of shops at a high pace. Let's hope they can soon re-list the shares on a regular exchange. Despite all the good news, I sold about 40% of my Luckin shares. The current share price represents a total market cap of 7.5 billion USD. The share may have reached a fair value by now. By selling 40% of my holding at almost 300% return, I am locking in my purchase price for the total holding plus some profits. Wherever Luckin's share price goes, I already made an overall profit. I will hold on to the remaining 60% and wait for a re-listing event before I decide on further actions.  

Shares in the most prominent Chinese coffee chain belong in a portfolio called Coffee Can APAC. However, at this stage, I am worried about the over-the-counter status of the stock. I also suspect that the meme-stock crowd is partly responsible for the recent share price rally. Luckin was mentioned on the WSB Reddit. Stocktwits and regular Tweets about Luckin are mostly meme pictures and hollow phrases cheering on the share price without providing any analysis of its fundamentals. That is all fine and well, but such uninformed investor herds can drop a share at a hat's tip again. 

Bought: Oriental Holdings Bhd (KLS:4006)

Oriental Holdings runs dealerships for Honda cars in Malaysia, Singapore and Brunei and for the Mitsubishi brand only in Malaysia. It also holds a 15% stake in the Malaysian assembler and distributor of Honda cars. In addition, it makes plastic products to support car manufacturing. The second most significant activity of Oriental Holdings is owning and managing oil palm plantations in Indonesia and Malaysia. Furthermore, it owns nine hotels which are marketed under the Bayview label. It also built and runs a hospital in Malacca, Malaysia, and trades building materials. Yes, it is a conglomerate entering my portfolio again, violating my checklist a few times. Yet, the long-term vision behind the management's approach gives this share a Coffee Can vibe. Oriental Holdings holds a lot of real estate and land, which seems undervalued on its balance sheet. This will be interesting to explore in future blogs. The stock is locally considered 'sleepy', but occasional announcements prove that the management is actively developing the business. Recently, some plantations co-owned with the Loh family, the majority owner of Oriental Holdings, were sold to the holding, which now has full ownership. This should raise revenues and profits in the short term.  

Sold: Suntec Real Estate Investment Trust (SGX:T82U)

I did some rethinking about my REIT holdings; let's call it REIThinking. Interest rates have been rising recently, which prompted me to look at the debt levels of my current REIT holdings. Suntec has a Gearing Ratio of 43.7%. The Interest Rate Coverage is 2.6, while only 53% of its debt is financed with fixed interest rates. As a side note, I rely on the excellent blog REIT_TIREMENT for financial summaries on all Singaporean REITs. Suntec was the weakest among all my REIT holdings on debt indicators. I don't think Suntec is in distress in any way. Nevertheless, it is my preference to switch to other investments.

Sold: ESR-Logos REIT (SGX:J91U)

A similar story to Suntec. Gearing is 41.8% with an ICR of 2.8. At least, ESR-Logos secured 72% of debts at fixed interest rates. The weighted average debt maturity is 2.9 years. Besides the leverage, I am worried about the involvement of ESR Group Ltd in several of my REIT holdings, as I expressed in an earlier blog. The fundamentals of ESR Group itself do not look rock-solid to me. Of course, it is just the sponsor and manager of my REITs, but with deteriorating financials, there might be an impact on the REITs they own and manage. For my own peace of mind, I will cut some exposure. 

Sold: Sunway REIT (KLS:5176)

Sunway REIT is Malaysian and not covered by REIT-TIREMENT, so I had to go out and collect the relevant data myself. Unfortunately, the leverage picture was not pretty. Gearing 41%, ICR is 2.8, with only 32% of the debt on fixed rates. On a different note, I don't like it when a REIT has one dominant party as its tenant. I recently wrote a new checklist item on that. In this case, that predominant tenant is Sunway Berhad, albeit through different legal entities. Can you really negotiate rents freely with such a dominant tenant? Again, there is no sign of immediate distress concerning this REIT. It's just me following my checklist rules.

Sold: Camellia PLC (LSE:CAM)

As I described earlier, this company violates three of my checklist rules. The business is commodity-based, organised as a conglomerate and primarily located in India and Africa. It is a problematic business sector, and the company needs better management. Lately, they have shown some willingness to dispose of non-core activities. They also vacated its posh headquarters to re-develop it for residential purposes. But it is too little, too late. I sold most of my holdings and will sell the remaining part when I need liquidity for another share purchase.

Sold:  JD.COM (HKSE:9618), Alibaba (HKSE:9988), Tencent (HKSE:0700), Meta Platforms (META)

I sold all my online platform shares, some of them at a considerable loss. I recently concluded that I find it impossible to truly understand these businesses. When I started my Coffee Can portfolio in early 2022, I defined three pillars to distinguish my shareholdings: 1) Consumer Staples 2) Infrastructure 3) Large online platforms. I came up with these buckets because most of my existing shareholdings were within these categories already.  

During 2022, we learnt that political developments strongly impact the profitability of large internet companies. Chinese government interferes in different ways than the US government, but government actions are hard to predict in both countries. Adding to the complexity, we also need to foresee whether the companies remain relevant from a technological and marketing perspective. For example, I read dozens of articles, tweets and blogs on the Metaverse, but I am still unsure whether this will pan out in any usable way. Following online businesses and thinking about the technology sector proved time-consuming and impractical. I opted for simplicity and dropped bucket 3) altogether. I should have a 'too hard' basket if Warren Buffett has one too.

Sold: Sun Art Retail Group Limited (HKSE:6808)

This sell trade is linked to the Alibaba sell-off mentioned above. Alibaba has a majority share in Sun Art Retail. Management is combining the operations of both entities. The share price movements of both listings correlate strongly. There will likely be a take-over offer by Alibaba for Sun Art at some point. I see no particular value in holding on to Sun Art.

Conclusion

As a buy-and-hold investor, I did an awful lot of trading. I chalk this up to the startup hurdles of the Coffee Can project. First, I sold some existing holdings that do not conform to the Coffee Can idea. Later on, I made the strategic decision to drop the technology bucket 3). This resulted in five sell trades as described above. Then I made some improvements to my buy checklist. I added requirements, such as a diversified tenant base for REITs. In addition, I sold off some weaker REITs in response to rising interest rate levels. Then finally, I took some profits with Yum China and Luckin. 

I held 75 shares at some point. I reduced this to 64 holdings, which is still too much to keep track of. I will likely sell some weaker shares to bring the total down. Furthermore, I will keep taking profits when share prices soar to ridiculous levels. Even with these two reasons to trade, I expect to slow my overall trading activity.

Disclosure: I hold Tianjin Pharmaceutical Da Ren Tang Group, Reckitt, Haleon, Luckin Coffee, WH Group, Oriental Holdings and Haw Par Corporation at the time of this writing

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. 

Coffee in my portfolio

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

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

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

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

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

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

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

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

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

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

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