Sunday 27 November 2016

My Roller Coaster Ride with GLP

There is a Chinese saying for relationships: "You come together because of misunderstanding, and you separate because of understanding". When it comes to stock investments, I find that this saying applies as well, at least for me. When I am thinking of buying a stock, the stock would tend to look attractive, even though I would study its financial statements carefully before buying. As the saying goes, the grass is always greener on the other side. However, after I have bought the stock, I would follow its announcements closely and realise that I have not understood the stock well enough. This is when I would regret buying the stock, regardless of whether the stock has risen or fallen in price. For Global Logistic Properties (GLP), which is the largest holding in my portfolio, the same pattern holds true.

GLP is a very attractive stock, which I blogged about it last week in The GLP Story. I find it so attractive that I built up a 22% concentration in the stock within weeks! In contrast, my next largest stock concentration is only 2.5%. Stock concentration is something that I have not attempted previously in my 18 years of investing with my own money. However, because I swallowed too much too quickly, indigestion soon followed.

Although I am very used to fluctuations in stock prices, almost all of my stocks are diversified, with concentrations of up to 2.5% only. GLP, with its 22% concentration, is a different matter altogether. Every 3-cent drop (equivalent to 1.5% drop) in the share price was enough to give me jitters. By Dec last year, I had realised that I could not hold on to such a large concentration and planned to reduce it come Jan, when stocks usually rise with the January effect. Unfortunately, stocks dropped in Jan instead, triggered by the meltdown in the circuit-breakers in the Chinese stock market. Furthermore, there were news of heavy capital outflows from China, triggering memories of the Asian Financial Crisis. I decided to reduce my risks and cut my concentration to 16% at a loss. But when the stock dropped further, it was too tempting and I bought back some shares, raising my concentration back to 19%. By this time, after experiencing the stock price dropping by more than $0.50 from my original cost price, I had more or less become accustomed to its stock price fluctuations. My target concentration for GLP (and any single stock) also stablised at between 15% to 20%, rather than going upwards of 20%.

Beside stock price fluctuations, there were other issues that caused concerns. Around the same time as the stock market decline in Jan, it was announced that the CEO had entered into some collar trades on GLP shares in 2012 & 2014 and the trades would be settled in Jan/Feb. A collar trade is a bearish trade, which left me pondering why was the CEO selling his shares. I also checked that when GLP sold a 34% stake in its China subsidiary in 2014, 3.7% was sold to members of the GLP employee team, which included the CEO. Thus, the CEO was selling shares in GLP and buying shares in the China subsidiary, which represents the majority of the company's net asset value but GLP only has a 66% stake. The interests of the CEO and shareholders are not 100% aligned. 

However, a bigger concern was the fact that GLP seemed to be overpaying for its acquisitions. The table below shows the acquisitions by GLP for the 1-year period from Aug 2015 to Jul 2016, just before its Annual General Meeting (AGM).

GLP Acquisitions from Aug 2015 till Jul 2016

As you can see, some acquisitions were made at Price/Book (P/B) ratios above 2 times. In particular, China X-G Technology was bought at a price of USD21.9 million when its book value was only RMB5,700, representing a P/B ratio of over 25,000 times! 

GLP's AGM on 29 Jul came at the right time. I took the opportunity to raise the question whether GLP was overpaying for acquisitions and what were the governance and controls in place to prevent overpaying. The CEO explained that the book values were historical values. The accounting rules in China required companies to depreciate the cost of land over time and the book value did not reflect the market value. In its due diligence, GLP had carried out third-party valuation surveys to determine the market value. The CEO further explained that there were independent teams within GLP to review and approve any acquisitions. Depending on the value of the acquisitions, approval might be required from the board. I accepted the explanation. In a subsequent acquisition announcement on 17 Aug in which the P/B ratio exceeded 2 times, the company added a statement to explain that the book value was based on historical cost. The statement read "The book value is based on People’s Republic of China’s Accounting Standards for Business Enterprises, which requires properties to be stated at historical depreciated cost. The consideration paid was based on recent third party appraisal of the value of the property, among other factors."

The AGM was a good outcome. Besides getting answers for the key concern above, I also got to see the CEO for the first time. Throughout the AGM, he answered most of the questions, demonstrating a good knowledge of the operations of the company. For readers who were not present at the AGM, you can refer to the earnings call transcript for the recent 2Q2017 financial results, which he again answered most of the questions raised by analysts. 

Coming back to the issue of less than 100% alignment in interests between the CEO and shareholders, the issue boils down to this: how much are you prepared to pay for an intelligent CEO? After seeing his handling of the questions raised at the AGM and in earnings calls, the business strategy and directions of GLP, I am prepared to accept that he has direct interests in the China subsidiary outside of his GLP shareholdings. 

Post-AGM, I sold some GLP shares again in Oct and reduced my concentration to 16%, but it was not because of price fluctuations or any of the above-mentioned concerns. The purpose of the sale was to create some headroom for averaging down in the event of any general market crash. But after the recent rumours of a group of Chinese investors planning to take over the company, I bought back what I had sold, using CPF funds.

Like human relationships, there will always be an initial rocky phase where each party understands more of the other. My relationship with GLP has gone past this rocky phase and I look forward to participating in the long-term growth of this company. 

See related blog posts:

Sunday 20 November 2016

The GLP Story

It has been about a year since I started to build a large position in Global Logistic Properties (GLP). The company initially caught my attention when it bought back a large chunk of its shares. For the Financial Year ended Mar 2016, it spent about SGD222 million in share buybacks. If a company could spend so much money in share buybacks, it must be doing something right. That set me to investigate and understand the company further.

GLP is a logistic property developer. However, it is not solely a property developer; it is also a REIT and a REIT manager. Broadly speaking, whether you like GLP or not depends on whether you like REITs or REIT managers more. REITs provide steady distributions, while REIT managers provide growth. While I like both REITs and REIT managers, between the two, I have a slight preference for REIT managers as I prefer capital appreciation to dividends.

REIT managers generally own a small percentage of the REITs that they manage. However, let us put aside their small ownership for a while and consider the theoretical differences between a REIT that owns the properties and a REIT manager that manages the REIT but does not own any properties. The returns on the REIT are from the rental income generated from the properties. The returns on the REIT manager are from the management fee paid by the REIT for managing the properties. The management fee is definitely much smaller than the rental income generated by the properties. However, remember that the REIT manager (in theory) owns no assets? When the earnings are some positive numbers and the assets are close to zero, the return on assets tends to infinity! Not only that, because there are almost no assets, there are no capital constraints to limit expansion. Just look at Uber, which owns no taxis but has expanded rapidly to become the world's largest "taxi company" within a short period of time. Likewise, through less than 100% ownership of the logistic properties, GLP has quickly established itself as the No. 1 player in China, Japan and Brazil and the No. 2 player in US.

Fig. 1: Market Position of GLP

Coming back to reality, REIT managers will never be like Uber, as they own some percentage of the REITs/ properties they manage. For GLP, the percentage ownership ranges from 10% in more developed countries like US to 66% in less developed countries like China.

Recently, GLP has been in the news as a group of Chinese investors was rumoured to consider buying over the company. While the takeover has not materialised, coincidentally, another REIT manager is the subject of another privatisation around the same time. The REIT manager being privatised is ARA Asset Management. The price is $1.78. Compared to its book value of $0.55 and 2015 earnings of 8.96 cents, the price represents a Price/Book ratio of 3.24 times and Price/Earnings ratio of 19.9 times. Just a few months back, in Jun, Croesus Retail Trust internalised its own REIT manager for SGD50 million. The estimated P/E ratio for that transaction is 126 times! Going back further in time, Capitaland privatised its REIT manager, CapitaMalls Asia (CMA), in Jun 2014 at a price of $2.35, representing a P/B ratio of 1.27 times and P/E ratio of 15.3 times. Thus, while more and more REITs are being listed, more and more REIT managers are being privatised. This gives a glimpse of just how valuable REIT managers are!

Having said the above, there are important differences between GLP and ARA. ARA is a pure REIT manager, while GLP is a combination of (1) property developer, (2) REIT (for the properties that it has not spun off to the REITs/ property funds) and (3) REIT/ fund manager. Thus, its valuation will not be as high as that of ARA. It is more similar to CMA than ARA at the current stage of development. However, GLP is still a work-in-progress. With the passage of time, more and more properties will be spun off into the REITs/ property funds. Thus, over time, GLP will look more and more like ARA and its valuation will approach that of ARA. Although it has a lower valuation than ARA currently, the key advantage of GLP over ARA is that it has a huge pipeline of properties to feed into the REITs/ property funds. The figure below shows GLP's growth in Assets Under Management.

Fig. 2: GLP's Growth in Assets Under Management

GLP will become more and more valuable with time. Thus, now is not the right time to discuss privatisation of GLP. It is definitely a stock for the long term.

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Saturday 12 November 2016

The Minions (Millions) Mentality

Last week, I blogged about the minions in my portfolio, i.e. small, speculative positions in loss-making companies with reasonable chance of turning around. Although small, they have the potential to become multi-baggers. I also mentioned the advantages of minions, which are: (1) they serve as incubators for further investment should further evidence of the company turning around emerges and (2) "risk-free" positions to counter the high risks involved in investing in some companies and industries, such as the Oil & Gas industry. You can refer to Meet The Minions for more info.

However, the minion strategy goes beyond these 2 advantages. I discovered the mentality of investing like the rich. Because the amount invested in minions are relatively small, typically 1/3 the size of a typical investment in a profitable company, any price changes are fairly insignificant. In fact, as mentioned in my last post, the investment is mentally written off the moment they are purchased. Because of the relatively small size and also because they are mentally written off, there is no emotional attachment to the share price. Whether the price is down 10% or 100%, I could not care less. Contrast this with the largest holding in my portfolio which takes up 15% to 20% of my capital. When I first held such a large position, every 3-cent movement (equivalent to 1.5% price change) was enough to make me feel jittery. There is only 1 word to describe the lack of emotional attachment to share price: liberating.

Because I could not care whether the stock is down 100%, I also could not care whether the stock is up 100%, 200% or 400%! That was the case with MIT, which I originally bought at $0.066 and it went up to $0.285 for a 332% return on the purchase price. I decided that a 332% return was inadequate and held on for a 1000% return. Unfortunately, the price came back down to $0.165, with further drops likely after a series of disappointing results recently. Nevertheless, I had no regrets not cashing in on that multi-bagger and locking in a gain of 332% plus bragging rights for a 4-bagger.

One of my problems in investing is the inability to hold on to winners. This problem becomes more obvious as the stock approaches a 100% gain, which is the threshold for a multi-bagger and comes with bragging rights. Watching the stock price fluctuating just above and below the line is nerve-wrenching. On one occasion, I decided that I had enough of the jittery and sold for a 163% gain, only to watch the stock climb another 118%! In other words, I sold for double my purchase price, and the price doubled again after I sold! It was not a minion position and the amount of "lost profits" was staggering. The stock was Riverstone.

This is why I said that when there is no emotional attachment to the share price, the feeling is truly liberating. When there is nothing to anchor the share price, such as the 2-bagger threshold, the sky is the limit. The minions mindset also gives me a peek into how the rich treat their investments. Whenever there is a stock market crash, newspapers would tabulate how much money the billionaires in the world have lost. Yet, they never seem to want to sell their massive shareholdings in the companies they founded or owned. When the stock market recovers, these billionaires made much more money that they had lost in the crash. They are in the top 10/100 billionaire list for a reason: they never sell. Had they sold at the top of the stock market, they probably would not be in the list for much longer. The dividends from the stocks they own are way more than sufficient to fund their lifestyles. There is no need to sell the stocks to protect the value from dropping in a stock market crash. In constrast, retail investors like myself are always looking to protect the value of our investments. If someone were to tell me with 100% accuracy that tomorrow's stock market would crash, I would sell a majority of my stocks. (Actually, if you read my blog, I do think that a crash is coming, and I'm 50% in cash. Thus, you can see that I am still a very long way from adopting the mentality of the rich).

The minions might be small and insignificant. But they have important lessons on how to make millions. I have certainly learnt a lot from them.

P.S. As I'll be overseas next week, I would not be able to respond to your comments until I return. Appreciate your understanding.

Sunday 6 November 2016

Meet The Minions

I have a bunch of speculative shares which I affectionately call "the minions". The characteristics of the minions are: small speculative positions in loss-making companies with reasonable chance of turning around. The idea behind the minions came about from a realisation that one source of multi-baggers is loss-making companies that manage to turn around. You can refer to How to Get a Multi-Bagger? for more info. The turnaround multi-bagger I had was Magnecomp, now known as Innotek. It was a chance occurrence because I usually avoid loss-making companies. However, one of the main problems with value investors is that we often buy too early into companies whose share prices are falling but the earnings are still good, without realising that earnings would soon follow the share prices down. In the case of Magnecomp, it reported a huge loss after I bought it and the share price continued to fall. At its lowest point, the unrealised loss on my purchase was as high as 55%. Subsequently, it managed to turn around and I sold it for a 3-bagger. See the price performance of Magnecomp below.

Magnecomp - A Turnaround Multi-Bagger

This multi-bagger is the only turnaround multi-bagger that I have. Due to my preference for profitable companies, it did not occur to me that even loss-making companies could be profitable investments! It was only when I blogged about it in 2014 that I began to seriously consider adding loss-making companies with reasonable chance of turning around to my portfolio. To manage the risk, the amount of money invested in them is relatively small, typical 1/3 the size of a typical investment in a profitable company. Not only that, the amount invested is mentally written off the moment they are purchased. Thus, there are no expectations of them returning an investment profit. In other words, there is nothing to lose on them.

Despite the fact that the amount invested is 100% written off mentally, these minions, as a group so far, have performed beyond expectations! Of the 11 minions, 2 were sold off at profits of 34% to 87% and 2 are unrealised multi-baggers! See the table below for the performance of these minions to-date.

Company Avg Cost Current/Sold %Gain Remarks
ASTI $0.055 $0.055 0%
Ellipsiz $0.283 $0.380 34% Sold
Food Empire $0.270 $0.305 13%
Grand Banks $0.275 $0.245 -11%
Grand Banks $0.260 $0.245 -6%
Hiap Seng $0.100 $0.142 42%
Interra $0.069 $0.068 -1%
Kris $0.145 $0.149 3%
MIT $0.066 $0.165 150%
MIT $0.130 $0.165 27%
Ramba $0.220 $0.160 -27%
Ramba $0.200 $0.160 -20% Rights
Ramba Wt - -
STATS $0.335 $0.625 87% Sold
Sunright $0.125 $0.340 172%


In fact, MIT (Manufacturing Integration Technology) went as high as $0.285, representing a 4-bagger on my original purchase price of $0.066! However, since it was considered a nothing-to-lose speculation, I held out for bigger gains. Unfortunately, it has come down to $0.165, with further drop likely.

The advantages of the minions go beyond returning a profit on the investment. They also serve as incubators for further investment, which is why you seen some minions have twice the amount invested in them. As the probability of turning around increases, a second investment is made, so as to reap bigger gains when the turnaround is realised. The best example of this is MIT, in which a second investment was made at $0.13, even though it had already doubled from the original price of $0.066.

The second advantage of the minions is that they are considered nothing-to-lose. Since there is already nothing to lose on them, it also means that they are technically "risk-free". This characteristic is very useful in making investments in high risk sectors, such as the Oil & Gas industry. From the list above, 4 of them are from this industry and they have performed admirably. When something extremely risky meets a nothing-to-lose mentality, the risk-reward balance tilts in favour of the latter. Minions are a key part of My Oil & Gas Fightback.

It is important to note that the minion strategy works only if the position is small enough to be written off. If it is too large, it is difficult to write off the full amount and adopt the nothing-to-lose mentality. Not only that, there is usually a need to diversify as much as possible to reduce the risk of individual stocks really losing money. However, this also presents one of the challenges of adopting the minion strategy. While $1,000 in 1 stock might be easy to write off, a total of say, $10,000 in 10 stocks might not be that easy to write off.

Moverover, although I talked about writing off the investment, nobody likes to really lose money. Thus, stocks selected under this strategy have some evidence of being able to turn around. If they have no chance of turning around, using this strategy will only mean losing more money.

In conclusion, minions may be small, but do not underestimate them. It is precisely because they are small that they are able to achieve big returns!