Bargain Stocks Inwards Hk/China; No-Brainer Investing; As Well As Dongfeng Motor
February 11, 2018
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Despite the putative universal overvaluation of global equity markets at introduce (although the electrical flow correction, which Jim Grant would depict every bit the 'value restoration project', is starting to mitigate that), in that location are all the same inwards fact a large number of extraordinary bargains to survive had for the industrious stock-picker. One precisely has to survive prepared to human face a trivial harder for them, inwards unusual as well as out-of-favour corners of the market. Obvious bargains receive got disappeared; non-obvious bargains receive got not.
Indeed, it is arguable that because nosotros are probable moving into tougher times for the broader indices (high valuations of index-heavy large caps volition hateful lower returns moving forward), this volition survive a genuine chance for talented stock-pickers to shine. Over the yesteryear decade, you lot could receive got made proficient coin owning precisely virtually anything inwards the US. Why pay for stockpickers? You could receive got loaded upward on bluish fleck dividend-proxies as well as rode the moving ridge of multiple expansion, as well as it was hard for a lot of stockpickers to practise a whole lot better. That volition non survive the instance moving forwards inwards my opinion. ETFs are probable to render disappointing returns over the adjacent decade, as well as genuine stock pickers are thence probable to survive inwards a seat to add together a significantly increased amount of value.
One of the advantages of buying real inexpensive stocks is that you lot don't receive got to survive real smart. The to a greater extent than expensive a stock is, the smarter you lot demand to be, as well as the to a greater extent than of import it is that you lot are able to predict the future, as well as predict it correctly. Is Amazon all the same a purchase at US$1,400/share? That's a hard enquiry to answer. Maybe, mayhap not. It depends on a lot of things. You could pass an entire twelvemonth doing null but studying all the relevant issues, as well as all the same survive unable to flat a bankably-accurate conclusion, because no amount of enquiry volition resolve genuine uncertainties. At the other terminate of the spectrum, some stocks are so champaign inexpensive that you lot sometimes demand an hr or less to decide that to survive the case. That is what I telephone telephone 'no-brainer' investing, as well as is what I travail to do. I prefer to stick to things that are obvious as well as where I don't demand to survive that smart: all that I needed is diligence (primarily sifting through large numbers of stocks), patience, as well as discipline.
One such house to human face for off-the-beaten-path bargains at introduce is HK/China, as well as inwards particular, amongst balance-sheet stories inwards depression growth areas of the market. The chance arises for 3 reasons: (1) global markets receive got been by as well as large inclined towards a bearish see of China's economical prospects over the yesteryear 5 years or so, on delineate of piece of occupation organisation human relationship of the country's rapid create upward inwards debt (although that bearishness moderated throughout 2017), which has left a lot of stocks discarded (many global investors concur the blanket see that 'I desire no exposure to China' as well as so they are non fifty-fifty prepared to look); (2) the Chinese names as well as operations of many of these companies are unfamiliar to Western investors, as well as this lack of intuitive agreement of the companies acts every bit a deterrent to look/invest; as well as (3) markets are less efficient inwards Asia, as well as most investors inwards the part are preoccupied with 'growth', as well as receive got trivial involvement inwards inexpensive stocks with lackluster growth trajectories - specially ones lacking a catalyst where patience powerfulness survive required. This creates a pregnant chance for value-oriented investors with a longer term fourth dimension horizon, that are prepared to practise the work, as well as wait.
One expanse of broadbased fail is the lack of attending paid to the residual sheet. Generally speaking, markets are 'earning obsessed' as well as tend to fail the residual sheet/book value, but this is specially the instance inwards Asia, where markets are all virtually earnings as well as earnings growth. This approach doesn't brand a non bad care of feel to me. After all, earnings are precisely the alter inwards a company's mass value (dividend as well as uppercase activity adjusted) from flow to period. The expected delta of the alter inwards shareholders' equity during 1 rotation of the globe to a greater extent than or less the Sun is given far to a greater extent than primacy than what a companionship already owns. At the same price, people would rather ain a stock expected to brand $0.20/year for 10 years than ain a stock that already has US$2.00 inwards cash, but no electrical flow earnings. In some cases that powerfulness brand feel (for instance where the governance is pitiable as well as the cash is unlikely to survive paid out, or wasted), but inwards a lot of cases it doesn't.
A non bad illustration at the minute are the shares of Dongfeng Motor (489 HK), which at the fourth dimension of writing, are changing hands for HK$9.44/share. Dongfeng owns stakes (typically 50%) inwards a number of automotive OEM JVs inwards China, inwards partnership with global players such every bit Honda, Nissan, as well as Peugeot, as well as is also a large regulation producer of commercial vehicles inwards Cathay every bit well. Through its diverse associate interests, the companionship commands an gauge 11% percentage of the Chinese automobile marketplace (the world's largest), producing to a greater extent than than 3m vehicles a year, as well as has a presence inwards every major Chinese automobile segment. It could good survive 1 of the largest global machine producers you lot receive got never heard of.
Dongfeng has 8,616m shares on issue, yielding a marketplace capitalisation of HK$81.3bn, or CNY 65.7bn at the electrical flow 0.808 HKD/CNY cross (the company's functional as well as reporting currency is Chinese Yuan). For those that recollect inwards USD, that is a marketplace capitalisation of slightly to a greater extent than than US$10bn (i.e. this is far from an obscure pocket-size cap).
A elementary exam of the residual sail yields some interesting insights. Firstly, the company, every bit at 1H17, had a consolidated internet cash seat of CNY 24.0bn, or 36.6% of its electrical flow marketplace capitalisation. In addition, the bulk of the company's assets, earnings, as well as value lies inside a host of articulation ventures with unusual automakers, which are associate accounted rather than consolidated. A unopen exam of the notes to the company's accounts inwards its annual study (these disclosures are non available inwards the company's interim reports) highlights that the company's major JVs are also inwards large internet cash positions. Summing upward Dongfeng's proportionate percentage of the cash held yesteryear its major JVs yields some other CNY 21.6bn (another 32.9% of its marketplace cap).
Lastly, the companionship also owns a 12.86% stake inwards Peugeot (UG FP, listed inwards France), which it acquired inwards 2014 for 800m Euros. At Peugeot's finally traded toll of east 17.98, that stake is at nowadays worth 2.1bn Euros, as well as at the electrical flow 7.74 EUR/CNY cross, that is worth some other CNY 16.2bn, or 24.6% of the company's marketplace cap. Summing upward these 3 sources of value lone yields CNY 61.9bn, or 94.1% of the company's electrical flow marketplace cap. Basically the stock's electrical flow valuation is already underwritten yesteryear existing cash as well as liquid assets, before considering whatever of the sources of current, recurring earnings, the companionship is all the same reporting.
How much are those earnings? In 2014, 2015 as well as 2016, Dongfeng earned CNY 1.49, CNY 1.34 as well as CNY 1.55 per share, as well as earned some other CNY 0.82 inwards the outset one-half of financial 2017 (the companionship is yet to study its full-year 2017 results). This includes solely real trivial amounts of involvement income as well as associate Peugeot income deriving from the itemised sources referenced above. You are buying these earnings at virtually a 5.0x PE multiple, but a less than 1x PE multiple backing out cash as well as Dongfeng's Peugeot stake.
I receive got read a handful of broker notes on Dongfeng. In all cases, they completely ignore the residual sheet, as well as focused solely on the outlook for Chinese auto sales; Dongfeng's marketplace percentage as well as model launch slate; as well as the outlook for Dongfeng's margins as well as earnings growth. Most conclude that given that earnings receive got stagnated; China's auto manufacture is maturing; as well as contest is increasing, that the prospects for earnings growth are lacklustre as well as hence a depression PE multiple is justified on delineate of piece of occupation organisation human relationship of the pitiable as well as uncertain earnings outlook. In my view, this makes trivial sense, given that the company's percentage toll is already underwritten yesteryear past earnings (that is where all the cash came from).
The truth is, at the electrical flow valuation level, none of those issues that the brokers are writing long reports virtually actually matter. Those issues would affair a non bad care if Dongfeng were trading at 10x earnings ex cash, because the enquiry of whether the stock was trading at a fair, likewise high, or likewise depression a valuation would hinge on the consequence to these issues. However, at its electrical flow price, nether almost whatever realistic scenario for the companionship from an operational standpoint, Dongfeng is cheap. So why waste matter the fourth dimension spending considerable analytical resources trying to figure out those (largely unknowable) questions? I would rather commit the fourth dimension to sifting through to a greater extent than stocks to respect to a greater extent than bargains.
True, Dongfeng - similar many Chinese/HK companies - likes to sit down on an unnecessarily large cash pile for an indeterminately long flow of time, as well as pays out far less of its earnings than it could (and should). Some discount is warranted on delineate of piece of occupation organisation human relationship of this reality. However, the electrical flow discount flat is extreme - specially because Dongfeng does pay a dividend, as well as a growing dividend to boot. Dongfeng has paid a dividend every unmarried twelvemonth since its 2006 listing (including through the GFC), as well as has increased its dividend steadily from CNY 0.04 per percentage inwards 2007, to CNY 0.23 inwards 2016, as well as inwards 2017, declared an first interim dividend of CNY 0.10. Expectations are for CNY 0.33 inwards total dividends for 2017 (including the upcoming finally dividend), which represents a dividend yield of 4.07% at Dongfeng's electrical flow percentage price.*
Futhermore, the companionship has tremendous latent capacity to either increment its dividend payout, and/or pay a pregnant special dividend, as well as at some indicate it may good visit doing so - specially every bit China's auto marketplace matures, as well as novel capacity expansion capex requirements moderate. The notes to its accounts demo that its JVs are at nowadays paying out a pregnant fraction of their earnings to their owners (Dongfeng as well as its JV partners), so this cash is already beingness upstreamed to the Dongfeng nurture as well as volition thus survive increasingly available to pay nurture dividends. If Dongfeng always announced a pregnant increment inwards its dividend payout ratio and/or a special dividend, the stock would soar, as well as inwards the meantime, you're paid a 4% yield to hold back - good inwards excess of what most banking concern accounts pay. And if they practise non increment the dividend farther then, well, that is already inwards the price.
This is a no brainer. However, importantly, it does non hateful you lot volition straightaway brand coin later you lot purchase the stock, or volition non receive got to suffer pregnant volatility or mark-to-market (or fifty-fifty actual) losses. Given the nature of markets, it is probable that if the Chinese economic scheme has a downturn/recession, as well as Dongfeng's auto sales drib yesteryear order 20%, Dongfeng's percentage toll volition in all likelihood all the same become downwards yesteryear 50% (indeed, it has dropped 5-10% over the yesteryear calendar week or so on the dorsum of the U.S.A. marketplace rout). The stock could also precisely drift sideways for years as well as years (this is some other substitution argue why the chance exists; most investors are non prepared to hold back or concur a stock with an indefinitely-long wages profile). Being inexpensive does non halt a stock going down, or guaranty a proficient outcome. The stock powerfulness drib 50% as well as and so survive taken over yesteryear an opportunistic bidder as well as you lot powerfulness all the same terminate upward losing money.
However, the of import thing inwards markets is expectancy of returns, non private outcomes. I firmly believe (and decades of marketplace history also backs this up), that if you lot tin purchase a diversified handbasket of Dongfeng Motor type stocks, as well as concur them through multiple marketplace cycles, overall you lot volition terminate upward with significantly better-than-market returns, delivered with lower-than-market levels of risk, as well as for a long term investor, that is the consequence that is of import - non the consequence on private stock positions.
Focusing on procedure rather than consequence is also a non bad agency to guard against the psychological pitfalls that the market's repeated ups as well as downs tin entail, which ofttimes corrodes investors' dependent acre as well as poise. If you lot larn the procedure right, the outcomes volition inevitably follow over time. Portfolios I care receive got an gauge 1.0% portfolio weighting inwards Dongfeng Motor.
LT3000
*Note that the dividends are CNY denominated, whereas the shares are denominated inwards HKD. The HK$9.44 percentage toll is equivalent to CNY 7.63 at electrical flow substitution rates. Equivalently, the 0.33 CNY dividend is equivalent to HK$0.41.
Indeed, it is arguable that because nosotros are probable moving into tougher times for the broader indices (high valuations of index-heavy large caps volition hateful lower returns moving forward), this volition survive a genuine chance for talented stock-pickers to shine. Over the yesteryear decade, you lot could receive got made proficient coin owning precisely virtually anything inwards the US. Why pay for stockpickers? You could receive got loaded upward on bluish fleck dividend-proxies as well as rode the moving ridge of multiple expansion, as well as it was hard for a lot of stockpickers to practise a whole lot better. That volition non survive the instance moving forwards inwards my opinion. ETFs are probable to render disappointing returns over the adjacent decade, as well as genuine stock pickers are thence probable to survive inwards a seat to add together a significantly increased amount of value.
One of the advantages of buying real inexpensive stocks is that you lot don't receive got to survive real smart. The to a greater extent than expensive a stock is, the smarter you lot demand to be, as well as the to a greater extent than of import it is that you lot are able to predict the future, as well as predict it correctly. Is Amazon all the same a purchase at US$1,400/share? That's a hard enquiry to answer. Maybe, mayhap not. It depends on a lot of things. You could pass an entire twelvemonth doing null but studying all the relevant issues, as well as all the same survive unable to flat a bankably-accurate conclusion, because no amount of enquiry volition resolve genuine uncertainties. At the other terminate of the spectrum, some stocks are so champaign inexpensive that you lot sometimes demand an hr or less to decide that to survive the case. That is what I telephone telephone 'no-brainer' investing, as well as is what I travail to do. I prefer to stick to things that are obvious as well as where I don't demand to survive that smart: all that I needed is diligence (primarily sifting through large numbers of stocks), patience, as well as discipline.
One such house to human face for off-the-beaten-path bargains at introduce is HK/China, as well as inwards particular, amongst balance-sheet stories inwards depression growth areas of the market. The chance arises for 3 reasons: (1) global markets receive got been by as well as large inclined towards a bearish see of China's economical prospects over the yesteryear 5 years or so, on delineate of piece of occupation organisation human relationship of the country's rapid create upward inwards debt (although that bearishness moderated throughout 2017), which has left a lot of stocks discarded (many global investors concur the blanket see that 'I desire no exposure to China' as well as so they are non fifty-fifty prepared to look); (2) the Chinese names as well as operations of many of these companies are unfamiliar to Western investors, as well as this lack of intuitive agreement of the companies acts every bit a deterrent to look/invest; as well as (3) markets are less efficient inwards Asia, as well as most investors inwards the part are preoccupied with 'growth', as well as receive got trivial involvement inwards inexpensive stocks with lackluster growth trajectories - specially ones lacking a catalyst where patience powerfulness survive required. This creates a pregnant chance for value-oriented investors with a longer term fourth dimension horizon, that are prepared to practise the work, as well as wait.
One expanse of broadbased fail is the lack of attending paid to the residual sheet. Generally speaking, markets are 'earning obsessed' as well as tend to fail the residual sheet/book value, but this is specially the instance inwards Asia, where markets are all virtually earnings as well as earnings growth. This approach doesn't brand a non bad care of feel to me. After all, earnings are precisely the alter inwards a company's mass value (dividend as well as uppercase activity adjusted) from flow to period. The expected delta of the alter inwards shareholders' equity during 1 rotation of the globe to a greater extent than or less the Sun is given far to a greater extent than primacy than what a companionship already owns. At the same price, people would rather ain a stock expected to brand $0.20/year for 10 years than ain a stock that already has US$2.00 inwards cash, but no electrical flow earnings. In some cases that powerfulness brand feel (for instance where the governance is pitiable as well as the cash is unlikely to survive paid out, or wasted), but inwards a lot of cases it doesn't.
A non bad illustration at the minute are the shares of Dongfeng Motor (489 HK), which at the fourth dimension of writing, are changing hands for HK$9.44/share. Dongfeng owns stakes (typically 50%) inwards a number of automotive OEM JVs inwards China, inwards partnership with global players such every bit Honda, Nissan, as well as Peugeot, as well as is also a large regulation producer of commercial vehicles inwards Cathay every bit well. Through its diverse associate interests, the companionship commands an gauge 11% percentage of the Chinese automobile marketplace (the world's largest), producing to a greater extent than than 3m vehicles a year, as well as has a presence inwards every major Chinese automobile segment. It could good survive 1 of the largest global machine producers you lot receive got never heard of.
Dongfeng has 8,616m shares on issue, yielding a marketplace capitalisation of HK$81.3bn, or CNY 65.7bn at the electrical flow 0.808 HKD/CNY cross (the company's functional as well as reporting currency is Chinese Yuan). For those that recollect inwards USD, that is a marketplace capitalisation of slightly to a greater extent than than US$10bn (i.e. this is far from an obscure pocket-size cap).
A elementary exam of the residual sail yields some interesting insights. Firstly, the company, every bit at 1H17, had a consolidated internet cash seat of CNY 24.0bn, or 36.6% of its electrical flow marketplace capitalisation. In addition, the bulk of the company's assets, earnings, as well as value lies inside a host of articulation ventures with unusual automakers, which are associate accounted rather than consolidated. A unopen exam of the notes to the company's accounts inwards its annual study (these disclosures are non available inwards the company's interim reports) highlights that the company's major JVs are also inwards large internet cash positions. Summing upward Dongfeng's proportionate percentage of the cash held yesteryear its major JVs yields some other CNY 21.6bn (another 32.9% of its marketplace cap).
Lastly, the companionship also owns a 12.86% stake inwards Peugeot (UG FP, listed inwards France), which it acquired inwards 2014 for 800m Euros. At Peugeot's finally traded toll of east 17.98, that stake is at nowadays worth 2.1bn Euros, as well as at the electrical flow 7.74 EUR/CNY cross, that is worth some other CNY 16.2bn, or 24.6% of the company's marketplace cap. Summing upward these 3 sources of value lone yields CNY 61.9bn, or 94.1% of the company's electrical flow marketplace cap. Basically the stock's electrical flow valuation is already underwritten yesteryear existing cash as well as liquid assets, before considering whatever of the sources of current, recurring earnings, the companionship is all the same reporting.
How much are those earnings? In 2014, 2015 as well as 2016, Dongfeng earned CNY 1.49, CNY 1.34 as well as CNY 1.55 per share, as well as earned some other CNY 0.82 inwards the outset one-half of financial 2017 (the companionship is yet to study its full-year 2017 results). This includes solely real trivial amounts of involvement income as well as associate Peugeot income deriving from the itemised sources referenced above. You are buying these earnings at virtually a 5.0x PE multiple, but a less than 1x PE multiple backing out cash as well as Dongfeng's Peugeot stake.
I receive got read a handful of broker notes on Dongfeng. In all cases, they completely ignore the residual sheet, as well as focused solely on the outlook for Chinese auto sales; Dongfeng's marketplace percentage as well as model launch slate; as well as the outlook for Dongfeng's margins as well as earnings growth. Most conclude that given that earnings receive got stagnated; China's auto manufacture is maturing; as well as contest is increasing, that the prospects for earnings growth are lacklustre as well as hence a depression PE multiple is justified on delineate of piece of occupation organisation human relationship of the pitiable as well as uncertain earnings outlook. In my view, this makes trivial sense, given that the company's percentage toll is already underwritten yesteryear past earnings (that is where all the cash came from).
The truth is, at the electrical flow valuation level, none of those issues that the brokers are writing long reports virtually actually matter. Those issues would affair a non bad care if Dongfeng were trading at 10x earnings ex cash, because the enquiry of whether the stock was trading at a fair, likewise high, or likewise depression a valuation would hinge on the consequence to these issues. However, at its electrical flow price, nether almost whatever realistic scenario for the companionship from an operational standpoint, Dongfeng is cheap. So why waste matter the fourth dimension spending considerable analytical resources trying to figure out those (largely unknowable) questions? I would rather commit the fourth dimension to sifting through to a greater extent than stocks to respect to a greater extent than bargains.
True, Dongfeng - similar many Chinese/HK companies - likes to sit down on an unnecessarily large cash pile for an indeterminately long flow of time, as well as pays out far less of its earnings than it could (and should). Some discount is warranted on delineate of piece of occupation organisation human relationship of this reality. However, the electrical flow discount flat is extreme - specially because Dongfeng does pay a dividend, as well as a growing dividend to boot. Dongfeng has paid a dividend every unmarried twelvemonth since its 2006 listing (including through the GFC), as well as has increased its dividend steadily from CNY 0.04 per percentage inwards 2007, to CNY 0.23 inwards 2016, as well as inwards 2017, declared an first interim dividend of CNY 0.10. Expectations are for CNY 0.33 inwards total dividends for 2017 (including the upcoming finally dividend), which represents a dividend yield of 4.07% at Dongfeng's electrical flow percentage price.*
Futhermore, the companionship has tremendous latent capacity to either increment its dividend payout, and/or pay a pregnant special dividend, as well as at some indicate it may good visit doing so - specially every bit China's auto marketplace matures, as well as novel capacity expansion capex requirements moderate. The notes to its accounts demo that its JVs are at nowadays paying out a pregnant fraction of their earnings to their owners (Dongfeng as well as its JV partners), so this cash is already beingness upstreamed to the Dongfeng nurture as well as volition thus survive increasingly available to pay nurture dividends. If Dongfeng always announced a pregnant increment inwards its dividend payout ratio and/or a special dividend, the stock would soar, as well as inwards the meantime, you're paid a 4% yield to hold back - good inwards excess of what most banking concern accounts pay. And if they practise non increment the dividend farther then, well, that is already inwards the price.
This is a no brainer. However, importantly, it does non hateful you lot volition straightaway brand coin later you lot purchase the stock, or volition non receive got to suffer pregnant volatility or mark-to-market (or fifty-fifty actual) losses. Given the nature of markets, it is probable that if the Chinese economic scheme has a downturn/recession, as well as Dongfeng's auto sales drib yesteryear order 20%, Dongfeng's percentage toll volition in all likelihood all the same become downwards yesteryear 50% (indeed, it has dropped 5-10% over the yesteryear calendar week or so on the dorsum of the U.S.A. marketplace rout). The stock could also precisely drift sideways for years as well as years (this is some other substitution argue why the chance exists; most investors are non prepared to hold back or concur a stock with an indefinitely-long wages profile). Being inexpensive does non halt a stock going down, or guaranty a proficient outcome. The stock powerfulness drib 50% as well as and so survive taken over yesteryear an opportunistic bidder as well as you lot powerfulness all the same terminate upward losing money.
However, the of import thing inwards markets is expectancy of returns, non private outcomes. I firmly believe (and decades of marketplace history also backs this up), that if you lot tin purchase a diversified handbasket of Dongfeng Motor type stocks, as well as concur them through multiple marketplace cycles, overall you lot volition terminate upward with significantly better-than-market returns, delivered with lower-than-market levels of risk, as well as for a long term investor, that is the consequence that is of import - non the consequence on private stock positions.
Focusing on procedure rather than consequence is also a non bad agency to guard against the psychological pitfalls that the market's repeated ups as well as downs tin entail, which ofttimes corrodes investors' dependent acre as well as poise. If you lot larn the procedure right, the outcomes volition inevitably follow over time. Portfolios I care receive got an gauge 1.0% portfolio weighting inwards Dongfeng Motor.
LT3000
*Note that the dividends are CNY denominated, whereas the shares are denominated inwards HKD. The HK$9.44 percentage toll is equivalent to CNY 7.63 at electrical flow substitution rates. Equivalently, the 0.33 CNY dividend is equivalent to HK$0.41.