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Friday, December 27, 2024

Mid Year 2024 Review +10.5% / 9.3% a few new ideas…. – Deep Value Investments Blog


Quick update from me, havent had much time to myself over the last few months busy chasing low value nonsense…

Performance excluding / including Frozen Russian stocks is above. This is far worse than the S&P 500 (+16%), bettter than the FTSE All Share (+7.7%). Having said that on a 12m basis I am +23% but this is still below S&P at 24.5% (MSCI Global 20%). Its difficult to know the correct benchmark. If we assume a Russian write off I am about tracking S&P500 since 2008, (up about 20-30% vs S&P if we dont write off Russia), but this is very much a worst case, and doing *mostly* small cap UK value and keeping pace in a world where large cap growth has utterly dominated, (whilst working – albeit part time) is actually pretty good.

Its been a little disappointing – got shaken out of a good bit of my holding in HAUTO – Norwegian car shipping, that ultimately did well (+30%). Its still on a PE of 3/4, 30% yield, but there is a reasonable amount of auto shipping capacity coming online. Rates are high, but very volatile, there is also the complication of EU tariffs on Chinese vehicles. It all adds up to a very volatile stock that is near impossible to value – it could be very, very cheap, or fairly valued / expensive, still in profit on it but can’t hold it in the weight I would like I can’t really firm up a valuation – there are too many unknowns, I feel its cheap but can’t go heavily in just on this view.

New stock is 1681.HK – Consun Pharma, PE of 6, yield of 10% sells medicine in China half the market cap is cash less liabilities.. Number of tailwinds behind this the primary one being the aging Chinese population / Chinese culture’s veneration of the old. Almost all their revenue is from traditional Chinese Medicine liver granules. These (or similar) have been established as effective for over 20 years, their main product appears to be / is going off patent. In China, traditional Chinese Medicine isn’t fringe as it is in the west – it’s used in hospitals etc and is weaved in with ‘Western’ medicine. I lived in China for almost 3 years (2002-2005) , taught / spoke to Drs / others and this was my impression then, I doubt it has changed. I strongly suspect sales will continue, brand seems well known / sales are growing. China is a very low trust society (for good reason) people won’t switch grandpa’s liver granules to another / generic alternative, and grandpa almost certainly won’t agree to a switch. There is a bit of a tailwind in that the Chinese government is reducing co-pays. At this valuation I am willing to take a chance. Its a small weight (1.5%) at the moment – but I may increase, I am just getting used to Hong Kong stocks.

Another new HK stock is 3983.HK – China Blue Chemical, 10% yield, PE of 4, they produce DAP / NPK fertilizer, methanol, urea. the output prices are broadly flat. Share price has taken a dip since I bought it – down about 20% – on a small weight. It has more than the market cap in cash (about HK 11 bn vs 9bn MCAP. Its also earning decent margins c18% of course depends on pricing year to year, but it is far from burning cash. Yield is 11%. Its owned by CNOOC (883.hk – China National Offshore Oil corporation) that I also own. Hopefully it will go the same way as CNOOC – I made 60%+ on it – still hold some but have cut my weight very substantially @c20hkd.

Now talking about China there is concern it will go the same way as Russia, and having approximately 28% of my liquid net worth either frozen in Russia or potentially lost forever this is a risk that is very much on my mind. The major concern is a military adventure against Taiwan, there is also the possibility of conflict over the ‘nine dash line’ with the Philippines / Vietnam / Malaysia and potentially sanctions / other action if China arms Russia in Ukraine. These concerns are real and given the Russian situation we could easily expect the same here. Being in Hong Kong gives me a little comfort vs US listed ADRs -being legitimate in the eyes of China and *slightly*, if not arms-length then hands length from Chinese central government control. I believe response to Ukraine will deter China from action but if there is conflict I hope to be able to see it coming and get out.

I will also limit China exposure at around 10-15% (currently its about 7%). I am also looking at buying BYD (1211.HK) they appear to have a likely ongoing cost advantage largely through greater efficiency / integrated supply chain vs others. The China price of electric (and non-electric) cars is far below the rest of the world. Waiting for a bit more of a pull back before I buy. It’s on a far higher PE (20x) than most of what I am into, but given the way growth seems to be accelerating you can very easily argue its cheap. The west seems to be combating this via protectionism, but there are plenty of other countries which will welcome cheap, reasonable quality vehicles.

I have also bought in two new Romanian Funds – Evergent investments / Lion Capital, these are Romanian closed end funds trading at significant discounts to NAV. Evergent has a NAV of 3.2 RON vs a price of 1.46 RON so a 55% discount, 6% yield, 60% of the portfolio is in Banca Transylvania / Petrom, in total c80% listed / UCITS, or cash. The law was changed a few years ago so it is now possible to buy controlling stakes / liquidate these funds. Its a very similar trade to the one I did on Fondul Proprietea years ago, underlying economy / assets good at a significant discount, assets grow, discounts unwind and the hope is things go well. Banca Transylvania is itself cheap – PE of 8, 2x book, steady growth in earnings. Lion capital is very similar story – NAV of 8.4 RON/ share price of 2.8, 4% yield – so a 66% discount to NAV, but it has much more eclectic holdings – including other Romanian trusts – so you get the double discount, but its a little more risky. To get into this you need a Romanian broker – and unfortunately it is not terribly tax efficient so I have to limit how much I put in.

Final new holding I will briefly touch on is Playtech – PTEC.L, London listed bookie / gambling software co. In 2021, they were a bid target @680p/share, currently at 559 80-90p fcf per share, some disputes with partners. I don’t particularly like that they have offices in Israel (what settlers are doing in the West Bank is a disgrace) – but try not to let politics / ethics get in the way of making money. I have trimmed this a touch recently – I am nervous over tech valuations and this could get hit. I am waiting for a more highly rated US / other gambling company to buy this out.

In terms of winners over the last 6 months CMC markets (CMCX.L) has done well – up 140%, at a decent weight – which I have trimmed, think this shows the benefits of buying in cheap coupled with a bit of good execution. Still not entirely convinced about management.

Kurdish oilers – GKP / GENEL (GKP in particular) have done well – up 42%, buyback and a dividend has helped here. There is online talk of a GKP takeover – which I think is nonsense – no-one in their right mind would buy all of a company with an ‘iffy’ legal status at 3-5X current share price. Still it has a MCAP of $373m, $74m in cash, $151m receivable and my rough guess would be that it can return $50-$100m a year to shareholders at current pricing. The long run goal is fully legit contracts with a reopened pipeline, then I think the 3-5x+ takeover may happen. (some people will dispute what I am writing and say contracts are legit – we differ on this). Talks are ongoing and reports always say positive, then nothing happens. My understanding is lots of people are doing well from corruption, think this means any final agreement will take a long while. Suspect there could be a pullback on these in the short term, but will ride it out.

Another one I have raised weight on is Beximco – BXP.L – Bangladeshi Pharma, riots / shooting of protestors / somewhat likely regime change probably weighing on the share price, it’s got minimal debt, c10 PE but very solid revenue, FCF and earnings growth to me means this should be much higher. It’s also a valuation anomaly – 76p/share in Bangladesh vs 39p in London (due to capital controls). I have found a way of buying it once more in a UK ISA so as its tax efficient can raise my weight.

I mistimed $EBOX selling out just before talk of an offer was made. Think there is still a little money to be made in this – it isn’t much up vs before the offer so downside is limited, with 20%. NAV is about 79p vs a share price of 67p so even if we assume a 10% discount – could easily be a smaller discount, there is a reasonably easy 6%+ to be made here… Not that exciting really, but a place to park some cash till I work something else out – considering adding to SERE instead – but the quality is not as high.

Few notes on my errors – was too heavy in Uranium – down about 20%, last 6 months. Have bought some SBSW – again down 25%, but it is very cheap and has potential for a large rise. Biggest potential error was in JEMA, I sold out (@130 approx) before it fell from c150p to 80p – they had been named in a lawsuit involving JPM – but of course are an independent entity, I didn’t buy in on the ‘bad’ news, that I thought was nonsense – its now back to 150p. I sold out simply as I have far too much exposure already to Russia – which stopped me getting back in, though I was very, very tempted. Its rallying as people seem to believe a Trump victory will lead to a peace deal. I really dont think this is the case, Ukraine and Russia are too far apart in their views, both have a reasonable path to ‘victory’ and even if the US stops supporting Ukraine, it seems likely to me that Europe won’t. Most likely chance of a resolution in my mind is still another Russian mutiny of some sort – casualties are high, they are badly led and it isn’t really their country, but there are a wide variety of options.

Another loser was Ashmore – which is down 20% on the half year – very unconcerned about this, it has almost all its market cap in cash / investment funds. I recon, if you adjust for these you have a company which is trading at a PE of under 2 – though views differ on this – is ‘seed investment’ working capital that is needed to operate the business or just another asset? I tend to view it as a separate asset, though they have 548m in cash/ receivables (Dec 23). They have plenty of excess capital here – regulatory capital requirements are only £81m vs £705m available. To emphasise they have a £1.1bn market cap. There may also be a market / earnings tailwind, 82% of their AUM is EM fixed income, US rates / USD may have peaked and debt / GDP ratios / growth look a lot healthier in EM than in developed markets. My one concern is that I don’t like fixed income investment, its innately a bad idea to have money in fiat currency – as history has shown repeatedly. I don’t anticipate people waking up to this in the likely holding period. I think it is useful to bear in mind my weight to ‘paper economy’ stocks – brokers, insurers etc (PHNX) and real economy – I want an emphasis on the real.

AEP – Anglo Eastern Plantations has also lost me money – they have moved from inching towards being positive for shareholders – via dividend / buyback to their traditional habits of doing nothing useful. Have reduced, should probably sell the lot, better opportunities around but I loath selling cheap. Cut WCW – Walker Cripps – have held it since 2018 and its just gotten cheaper – I am nothing if not patient but there should be limits, hopefully Ashmore will do better – being larger and more able / attractive as a take over candidate / subject to shareholder action. I recently got some money back from the final liquidation of Renn universal growth . I worked out my return in annual percentage terms – it’s not good, the speed of return matters if I want to grow my pot – the whole point of me doing this….

Similarly, many of my natural resource co’s SQZ, KIST (small UK oil) haven’t done too well, still shocked how badly some of these (which had pretty much their market cap in cash when I invested) have done, both are down 60-70%. Never rated management in either – too keen to invest. When they win they are geniuses, when they don’t it’s the market. I have concerns about CAML being encouraged to invest also – they briefly considered a copper mine in Scotland (FFS), no need for it – better just to run as a cash machine / deplete resources, no need to invest in growth when you are trading at about book value / low multiple. May well be time to reconsider strategy on these small resource co’s – current one is not working. Having said that THS is up 38%, still terribly run. AAZ doing better up 24% but showing c-50% vs cost.

Out of interest – weights by company are below (as at end June), this is a little misleading as a few of the Uranium funds I have had to buy different share classes, returns are capital return – as pretty much everything I own pays a dividend this understates a bit.:

I find it interesting to note that the biggest losers tend to be those with my lowest weights

Then by sector and country – these are a little misleading some under UK are not entirely UK businesses…

Aims for H2 are to get more, better stocks in, there is *supposedly* rotation to small caps – I should be taking advantage of this. I also want to get performance up. It might be time to cut gold / silver / cash metals exposure if I can get better things in. What I am really keen to do is get performance up over the 20% amount – which I am tracking towards this year and has tended to be what I perform at year-in-year out. I think I just need more time / focus and to be able to look at more things in a more markets, in more detail. I also need to do a few more ‘opportunistic’ trades where I dont think things are priced right in the short term – rather than the slow burning, hopefully big wins I am attracted to now.

As ever, comments / ideas appreciated.

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