The porfolio is up 18.7% year to date, as compared to the Hang Seng Index’s 17.4%. The current porfolio composition is as follows:
| Symbol | Name | % of portfolio |
| CASH | 7.70% | |
| 2333 | Great Wall Motor | 27.48% |
| 2020 | Anta Sports | 8.79% |
| 0010 | Hang Lung Group | 7.18% |
| 3799 | Dali Foods | 4.56% |
| 2018 | AAC Technologies | 4.15% |
| 0823 | Link REIT | 3.96% |
| 0101 | Hang Lung Property | 3.15% |
| 0020 | Wheelock | 2.45% |
| 0004 | Wharf Holdings | 2.45% |
| 0531 | Samson Holdings | 2.14% |
| 1234 | China Lilang | 2.10% |
| 3389 | Hengdeli | 1.77% |
| 0688 | China Overseas Land | 1.73% |
| 1528 | Red Star Macalline | 1.63% |
| 1880 | Belle Intl | 1.62% |
| 0887 | Emperor Watch | 1.61% |
| 0985 | Netmind Financial | 1.50% |
| 0242 | Shun Tak | 1.36% |
| 0398 | Oriental Watch | 1.31% |
| 6188 | Beijing Digital | 1.27% |
| 0450 | Hung Hing Printing | 1.24% |
| 2777 | Guangzhou R&F | 1.15% |
| 1366 | Jiangnan Group | 1.10% |
| 0210 | Daphne International | 0.99% |
| 0083 | Sinoland | 0.97% |
| 0709 | Giordano | 0.96% |
| 1051 | G-Resources | 0.83% |
| 0733 | Hopefluent | 0.83% |
| 0420 | Fountain Set | 0.75% |
| 0841 | Asia Cassava Resources | 0.74% |
| 0330 | Esprit Holdings | 0.59% |
| 1155 | Centron Telecom | 0.58% |
| 1023 | Sitoy Group | 0.54% |
| 0113 | Dickson Concept | 0.45% |
| 0296 | Emperor E Hotel | 0.36% |
| 0703 | Future Bright Holdings | 0.32% |
| 0532 | WKK International | 0.16% |
The overall market performed strongly,
Great Wall Motor (2333.HK) remains my largest position and was the largest contributor to performance, as it went up from HKD 7.19 at the start of the year to HKD 9.64 as of 30 Jun 2017. GWM is a remarkably efficient and low cost company operating in the highly competitive industry of automobile manufacturing.
GWM raised HKD 1.6b in its IPO in 2004, and increased revenues from RMB 3.7b in 2003 to RMB 98.4b in 2016, with a corresponding 20 fold increase in net profit. The growth was achieved mostly by internally generated funds , and the only other time capital was raised was in 2011 to the tune of about RMB 3.9b by issuance of new shares.
GWM had industry leading operating margins of around 12% in 2016, and it had been earning more than 20% returns on equity on little to no debt. This has gone down in the past few years due to increased competition, in the production of SUVs, which is what GWM specialises and had traditionally done well in. Increased price competition is a problem in an industry with low barriers to entry. Other threats in the future include the potential of autonomous vehicles and the gradual shift to electric vehicles.
China is already the biggest automobile market in the world, with sales of about 25-30m automobiles annually. Car ownership in China is about 2 cars for every 10 people, compared to around 8 cars for every 10 people in geographically vast countries with developed transport systems and high GDP per capita. I believe that there is much more room for growth for automobile sales in China because I think China will continue to prosper economically and continue to spend significant money on developing its infrastructure.
In summary, owning GWM is as much a bet on the continued growth of automobile sales in China as it is on the management team. At the current PE of about 10x, I think that I am getting very reasonable odds on the continued growth of the company despite the potential downfalls.
I sold off the 13% position in Biostime (1112.HK) completely because I thought that the business was not going to perform as well as expected and the company’s debt load was geting too high. This was explained in detail in this post earlier during the year.
The performance of the basket of statistically cheap companies was satisfactory, with more winners than losers. Positions sold during 1H 2017 include China Ting (3398.HK) (69% gain), Chen Hsong (0057.HK) (24% gain), HK & Shanghai Hotels (0045.HK) (68% gain). I sold Sitoy Group (1023.HK) at a 13% loss, as their 2016 results was significantly worse than expected.
AAC Technologies (2018.HK) is a new, decent sized position. AAC is a component supplier of iPhones and I had been following the company since a few years ago. Despite its high margins, growth and return of equity, I never bought the shares due to a perceived lack of understanding of the industry and general skepticism to Chinese companies with very high profit margins. From experience, a decent amount of companies with such characteristics have turned out to be frauds.
In May, a short seller report alleged that AAC was overstating profits by offloading costs to previously undeclared, related entities. Its price dropped by around 20% thereafter. In the meantime, AAC had earlier reported 1Q 2017 revenues and profits were up by around 70%.
After reading the report, I thought that there was one crucial point that was wrong. If costs were being offloaded to related entities, these entities would be making heavy losses. However, the report showed these entities as having positive operating margins. Then, a few weeks later, another short seller came up with a report attacking the first short seller, providing evidence as to why their due diligence process and conclusions were wrong.
The stock price went up after resuming trading but did not recover fully. I bought a position at about 17x 2017 estimated earnings because I was convinced that AAC’s huge margins compared to their competitors was real. And the reason AAC is able to maintain such high margins is because their product is protected by intellectual property rights, and each of the components (acoustic, microphone, and haptic) represent a small percentage of the total cost of production of a smart phone. When you are buying an important component of a product, and that component makes up a small percentage of the total cost of the product, you tend to go for the best quality component, and not the cheapest. This makes the product rather price inelastic, especially if it is patented.
C is for Compounding 