HF&G - MARCH 2022 - TWO YEAR REVIEW

It has now been two years since HF&G started publishing this monthly blog. It started before Covid was a real thing. Most observers thought it was going to be contained in China and we did not need to worry. An epic failure to forecast correctly. HF&G remembers vividly listening to a CLSA organized conf call with HK professor John Nicholls (pathology expert in the field of coronaviruses) who predicted with great certainty “it would all be over by summer 2020”. The exact CLSA exec summary was:

Look at the fatality rate outside of Wuhan - it’s below 1%. The correct comparison is not SARS or MERS but a bad cold which kills people who already have other health issues. This virus will burn itself out in May 2020 when temperatures rise.

We are now almost April 2022 and China & HK are still in a rolling lockdown situation. They are fighting the “rona” as if it is ebola. Two years onwards it is clear the “rona” is not Ebola but there’s something about “losing face” in Asia which seems to be so ingrained in Chinese leadership it’s as if they can’t change course whatever the facts are. According to Western media outlets Chinese citizens are starting to riot. We have also seen images about shortages of food in cities such as Shanghai which are in a strict lockdown as we speak. Many have predicted China would relax and allow inbound/outbound visitation to return but that seems unlikely until well into 2023. Fortunately, the rest of Asia has seen “the light” and even tiny Singapore has opened its land border with Malaysia and scrapped on-arrival testing.

With this backdrop, our selection of stocks has been a mix of defensive, re-opening and commodity plays. HF&G has written on numerous occasions about the fallacy of the green transition and how the transition from fossil fuels to green energy would take much longer than anyone expects. Why do we say this? Because we can read archives of past predictions of how quickly renewables would take over. These forecasts were always too optimistic. In a nutshell: battery technology still s*cks and storing energy remains immensely complicated, hence renewables can only serve as intermittent energy sources and can’t supply countries with baseload supply. Uranium, gas,coal and oil have brought much good to the world and will continue to do so for decades to come.

Below is an update on our entire selection, please go back to the HF&G archives for our original thesis on each sector or stock:

HF&G has been a big bull on uranium, the key ingredient for nuclear power plants. Our basket of uranium stocks has blown the lights out. HF&G sees more upside ahead as the overall uranium market value is minuscule in a global context. A major risk to the entire uranium thesis is a new major nuclear accident such as Fukushima. The war in Ukraine is obviously also adding bullish elements (no more supply of Russian uranium to the rest of the world) and bearish elements (a nuclear accident or war) that could again shift the narrative.

Some of our defensive plays have done gone absolutely nowhere (Haw Par) or been hard hit (Dairy Farm). Gold has held its own and is up slightly over the past two years. Gold is a store of value and has performed its role brilliantly. A derivative of gold has been our gold juniors: Tesoro Resources and Rincon resources. Both have followed different paths: Tesoro rallied all the way from 3cents to 52 cents in less than 12 months. Subsequent overpromising and underdelivering by management has seen the stock make a round-trip back to just 9c. For those who bought two years ago, it has still been a profitable endeavor, but for those who bought in December 2020 at 0.27 AUD it has been a trainwreck. HF&G continues to believe Tesoro is significantly undervalued and an update resource update in 2Q22 could be a catalyst to re-rate the stock. Rincon resources has fallen back sharply because of a complete lack of newsflow. If you are a gold junior exploration company you are supposed to drill holes in the ground and hope for the best. Rincon has drilled very little for a variety of reasons. HF&G recently spoke to the CEO and our patience will hopefully be rewarded by May when drill results are supposed to be announced. Hope springs eternal in the junior mining space. Please recall: 95% of junior exploration companies in the mining space never become a mine! Buyer beware.

Our Singapore re-opening play was SATS. The company has a monopoly at Changi airport for catering and related services. Its fortunes are heavily linked to those of Singapore Airlines. The stock has performed well but unfortunately, 4Q21 lost its CEO Alex Hungate. Hold onto SATS as traffic to Changi airport recovers over time. Our second Singapore re-opening play was mm2. The cinema and concert organizer should come back to life now that Singapore is allowing more economic activities to resume. mm2 also owns a significant content library which could be valuable to various larger media groups. mm2 could easily double from here onwards.

Our domestic China play which performed beautifully has been Oriental Watch. The company has been around for over 50 years importing luxury watches to HK and mainland China. While historically 70% of their business was conducted in HK, the pandemic shifted this to 70% in mainland China. Oriental is the biggest distributor of Rolex and Patek Philippe watches in China. Selling watches is not a sexy or complicated business but a very lucrative one. Management has also rewarded shareholders with generous dividends over the years. Another domestic China play has been Greatview packaging: this stock recently scrapped its entire dividend and the stock got slammed. We suspect management is playing games with investors such as Jardine in an effort to privatize the business on the cheap. Sunpower, is an SGX listed pure-play in China. While we looked like geniuses for a while with the stock hitting 1 SGD and paying large dividends after the sale of its MS business division. The core GI business was however severely hit in 2H21 once coal prices spiked in China and Sunpower was not able to pass on these higher prices to its industrial park users. Nasdaq listed Kuke Music was another poor pick: the company was supposed to roll out its Smart Piano system across Chinese schools but has been a perennial disappointment. 4Q21 results just released even showed declining revenues and profits; never a good sign for a supposedly fast-growing business. Our latest addition as a domestic China play was China Shineway; this TCM player has an incredible cash hoard which as per 31/12/21 makes up 100% of its market cap. HF&G was attracted to the company’s new dividend policy announced in July 2021. Unfortunately, in December 2021 the new dividend policy was already axed because of the “common prosperity” drive in mainland China. There’s no doubt Shineway is cheap but without returning more cash to its shareholders this is likely dead money.

Another energy winner was Rex International. We were so bullish on the company we recommended it twice: in July 2020 and May 2021. Since then oil has rallied and Rex has followed. The stock is now over 100% higher since our recommendation and the company will start to pay quarterly dividends as of 4Q22. Rex is currently trading at a dividend yield of 6% in FY23.

Our biggest winner in HK is PC partner: this GPU chip supplier to Nvidia has been raking in cash as its sales of graphics cards have exploded. The company just announced FY21 results which showed revenue growth of 99% but profit growth of over 1,047%! We added the stock when it was 1.62 HKD and for FY21 it declared a 2.45 HKD dividend! That’s a crazy return since September 2020.

A sleeper stock has been SUTL: the operator of the marina in Sentosa (Singapore). SUTL had an aggressive expansion plan across Asia but covid has stopped most progress. Fortunately, the stock was extremely cheap and management declared a special 0.10 SGD dividend which helped push up the stock slightly versus our entry point.

As for our crypto tulips selection we have had mixed performance: Chainlink has been flat, while Bitcoin and Ethereum have done very well. Just as with uranium our approach to invest in a “basket” of crypto tulips has paid off. HF&G doesn’t have a strong conviction how crypto’s will trade going forward but having some exposure is probably not a dumb idea.

In Indonesia, our little “rocket-ship” ISSP has been performing steadily. Hat tip to Wickhams Hill for flagging this idea to us. ISSP reports FY21 results next week and we expect strong results and dividends to continue. A public works bonanza in Indonesia should drive this business for years.

Finally, our most recent addition has been AEM holdings. This company is heavily linked to Intel. Since the start of 2022, the American tech giant has announced tens of billions in CAPEX over the coming decade. AEM is a sole supplier of HDMT machines for Intel and should benefit as Intel continues to spend. AEM issued bullish FY22 guidance and has a track record of beating it.

Overall our big winners have more than compensated for a few dogs in our selection so far. Let’s hope this continues going forward.

Just like last month HF&G is not adding a new name to the selection. We continue to look for new ideas and hope to present a compelling risk/reward situation in late April.

Enjoy April Fools day and as always you can follow us on Twitter at @GreedyHuat.