Happy Chinese NY to all HF&G readers. We took a publishing break in December but will be back every month in 2022. As always you can follow us on Twitter @GreedyHuat

Looks like the New Year has set off with a bang in the US: all major US exchanges have dropped more than 10% in one month. After a scorching 2021 performance for most US exchanges (+20-30% for the major ones) the contrast with Asia could not be bigger. HK was down 15% while most of ASEAN was very mixed. Only Vietnam stood out with excellent performance (+37%). Taiwan was also respectable (+21%).

Where to from here? It has been HF&G’s long-standing thesis (see elsewhere on our blog) that Asia is set for a period of outperformance. So far HF&G has been wrong (if you are a pessimist) or HF&G has been early (if you are an optimist). HF&G likes to think the latter.

HF&G continues to be a bull on Asia particularly as it comes to valuations in this part of the world…HOWEVER… for one-big-self-inflicted-Asian-party-pooper-dooper we have worries about Asia too: its continuous futile battle for Zero-Covid (HK and China) or some sort of alternate strategy which is entirely based on fear and pseudo-science in much of the rest of Asia. Take Indonesia: a country with so much going for it yet tens of millions of people do not have basic access to clean water, sufficient food, or healthcare. Yet it has instituted lockdowns and other non-sensical measures over the past two years fighting a respiratory illness where the IFR pales in comparison to all the risks most Indonesians have to live with daily.

Indonesia used to be a major tourist destination. The most important Indonesian tourism magnet, Bali, has just announced it will be opening to tourists. Hooray! No, hold on, it is opening to tourists “Asian style”: you can do 5 days of quarantine upon arrival. Not so Hooray after all.

With Mexico, the UK, Denmark, and Switzerland already having scrapped most requirements (you don’t even need a test to get in!) and more Western countries to follow in droves we can safely predict nobody will visit Bali for a long weekend from anywhere as long as there’s any quarantine left.

The second issue will soon become who is considered “fully vaccinated”. With Big Pharma running out of individuals to jab 2x and booster how will governments differentiate between the supposed unvaxxed and vaxxed? Will you be unvaxxed if you have not had your six-monthly shot? Will the QR code to follow your every move disappear and if so, for how long?

Remember, we still have many of the airport safety rules because one guy 20 years ago tried to bomb a plane with his shoe. Traveling by plane has become an exercise in checking never-ending flight regulations to gain access to a country. While in Europe most quarantine requirements are a joke, in Asia they take isolating healthy people seriously. With a little bad luck, you might arrive from a long flight to be promptly escorted to sit in isolation between 7-14-21 days. So…the question really is investing in Asia: will Covid insanity disappear as fast as it came or will governments stick with it for years to come? If you test people for Covid, how about Aids, Ebola, TBC?

There’s some hope as Singapore just announced it renewed its F1 night race contract until 2028.

Surely, this expensive contract has to take into consideration that there has to be free movement of people. In prior years the F1 weekend was one big party fest. Does this indicate Singapore will take a page out of the Dubai playbook going forward? Dubai essentially never closed as it could not afford to do so as a financial hub. Singapore’s F1 race is scheduled to take place on the 2nd of October. It will be fascinating to watch if it will resemble the 2019 edition or some masked-up Zombie event.

PORTFOLIO REVIEW

As usual, we have been publicly sharing stock picks since February 2020. The track record is self-explanatory. Clearly, our multi-baggers are massively outperforming our losers by a wide margin.

Over the last month, we did witness a sharp correction in our Crypto’s, Uranium plays and a further appreciation of our stake in Rex international as oil prices touched over 90 USD/barrel.

This month we are adding Singapore-listed AEM Holdings to the portfolio. AEM is not your usual tiny micro-cap but a company over 1 billion USD in market value.

Aem Holdings Ltd (AEM SP) has been listed on SGX since 2000. PE Firm Novo Tellus started to acquire shares in the company in 2011.

Novo Tellus was intrigued by AEM Holdings as its main executives (Tok Kian You and Ang Seng Thor) were convicted of bribery and corruption. Novo Tellus learned that the company was run by only one board member and most of its clients left. Much to their surprise, they learned that one client decided to stay. This client was Intel Corp (INTC US). Why would the world's largest semiconductor manufacturer stay with this tiny Singapore supplier? Novo Tellus started its due diligence and found strong relations with Intel that were forged over the years. Together with Intel, new management started work in 2013, on what is now its latest HDMT (High Density Modular Test) handler.

In 2014 Novo Tellus decided that it would restructure and streamline the company. It sold some non-core businesses, wrote off inventory, and appointed a new CEO Charles Cher. Charles stayed with the company for a number of years but has now been replaced by Chandran Nair since July 2020. Next to the CEO, the driving force has been Chairman Loke Wai San (a Novo Tellus executive).

AEM has two main divisions: design and manufacturing of equipment (ESS) and precision components (PCS). However, in reality, only the ESS division matters as it comprises 80%+ of revenues. ESS is basically the HDMT machine that was featured at Intel Developer Forum in 2016.

Intel also has a section of its corporate website devoted to HDMT. Interested investors can read about it there.

Reading the Intel website one can verify independently that the management of this 194B USD company is very bullish on HDMT and dependent on it. AEM and Intel developed this machine over a 4 year period and consequently, AEM is looking to become Intel's key supplier of HDMT machines. The HDMT machine is highly complex and patented. It is manufactured from 3,000 bespoke components which insulate it from the competition. AEM highlights that its machine is 5G ready and expects its share of HDMT machines at Intel to increase from 15% currently to 90% in the coming years. Once the installed base is there, the purchase of consumables should lift margins substantially thereafter. AEM estimates the total lifetime value for the test handlers is 20% (machines) and 80% (consumables).

AEM previously sold Intel over 700 machines (old HDMT version) over the years. Intel is estimated to have +/- 1,400 handlers in total which could, in theory, be replaced by HDMT. However, we should not assume that AEM will now sell 1,000+ machines to Intel as the old ones get replaced. Given the higher efficiency of the new HDMT handler, management thinks that less than 50% of the machines would need to be replaced. We know that a fully stacked HDMT machines costs +/- 3M USD.

Intel has recently announced it would be going on a massive Capex spree. While Intel used to spend 14-15 billion USD on CAPEX it will spend 25-28 billion in Capex in 2022. Intel needs to spend capital in order to catch up with its rivals. AEM is a major beneficiary of the Intel Capex spending bonanza as it has sole supplier status in HDMT. AEM provided guidance on the 11th of January 2022 that it will achieve 670-720 million SGD in sales during 2022. AEM has never missed guidance over the past five years and usually upgrades its outlook several times a year. HF&G thinks this will again be the case in 2022. AEM was recently sold off with the US technology space and trades around 4.5 SGD. Fair value should be closer to 8 SGD in our opinion as AEM grows along with Intel’s CAPEX spend AND is on the cusp of signing multiple new clients. AEM should publish its FY21 results in February.

That’s it for this month. Enjoy the year of the Tiger!

HF&G: Huat Fearful & Greedy

HF&G - JANUARY 2022 - PLAYING THE INTEL CAPEX…