Hong Kong and Greek Portfolio Update

I haven't posted the results from my holdings for a while. And there has been a slew of them. Almost all of them have not disappointed. But their stock performance has been disappointing. I guess that is the hard reality of investing in out of favour markets.

The Greek crisis that has resurfaced this year has stained my nerves. But my two Greek holdings have held up very well. European Reliance (EUPIC) reported H1 revenues up 7% yoy. Such revenue numbers are very encouraging considering how the Greeks are strapped for cash. On the other hand, I am not surprised that a consumer insurer does well in Greece because it fills a void left by the very cash strapped government. The H1 earnings are down slightly from $0.15 to $0.125. The difference was mainly due to higher operating expenses, in part because the company hired more staff. The company currently trades at 1.9x book and 4.2x TTM earnings. This company is one of the cheapest stocks I own. And I am very pleased that the company recently has begun to publish all their investor information in English.

Karelia Tobacco (KARE), also based in Greece, also did very well in H1. This one is less surprising considering that the company gets most of its revenue from exports. In addition, smoking is a mostly recession-proof industry. The company report H1 revenue up 15% yoy. Net revenue (without excise tax) was up an incredible 28%. Earnings went up only 3% mostly because of an adverse court decision regarding duties. The company said that they will appeal the decision even though they have already expensed the loss. Without this decision the H1 profit would have been around $12 per share instead of the $8.52.

In following Greek news through the crisis I also learned that Greece is a society with an all powerful elite. The Karelia family sure counts as part of that group and that is wonderful. They will defend their business interest from all the nonsense happening in the country. So that if the country somehow implodes, the company will find a way to do fine and protect its wealth, and by extension my shares also.

The Hong Kong stockmarket is down in sympathy with the turmoil in China's markets. I feel Hong Kong has some of the most undervalued stocks anywhere today. My two Hong Kong stocks are currently trading at very depressed values. Soundwill Holdings (HK:878), which owns some of the best retail properties in Hong Kong, reported H1 earnings that were similar to last year. Considering the China turmoil I am very happy it wasn't worse. Soundwill typically depends on the mainland China shoppers to to buy the luxury products and dine sumptuously at their prime rental locations. So, there will be downward pressure on rents now that the Chinese government has clamped down on illicit income and China's economy is slowing down. Anecdotal evidence says that some rents in prime locations are down 10-15%. That said Soundwill's rental income has actually increased yoy, albeit slightly. So, I don't see why the stock is trading at a ridiculous HK$9.50 today! Below I show how much the balance sheet is worth per share. Compare that with Hk$9.50 per share!

Soundwill		HK $ per share
Assets	Property under development	12.00
	Other current Assets	3.39
	Investment property	56.00
	Other non-current assets	1.00
Liabilities	All Debt	8.08
	Other liabilities	4.88
	Equity to shareholders	58.34
	Minority Interest	1.09
6 Month EPS		1.02

Someone who is still turned off by the stock can point to the overpriced real estate market. An overpriced real estate market means Soundwill's assets are overstated. Still the margin of safety is so big I believe Soundwill is a steal. And the company is regularly turning over its real estate. In the H1 report, the company said it will convert HK$0.75 per share of this investment properties into cash through a sale that is expected to close in the latter part of 2015.

My other Hong Kong stock is New Century Group (HK:234). The company is profitable and also has a tremendous balance sheet. It trades at 14.1 ¢! Below shows the balance sheet and note that the vast majority of the debt is an interest free loan from the majority owners.

New Century Group		HK ¢ per share
Assets	Equity investment	6.6
	Other current Assets	1.3
	Investment properties	10.9
	Other non-current assets	1.5
	Cash	8.9
Liabilities	All Debt	2.7
	Other liabilities	1.1
	Equity to shareholders	25.5

The company announced recently that it will acquire a cruise liner in addition to the two it already owns for about HK$170 M. That is approximately 1/3 of the company's available cash. But the purchased cruise liner has generated charter income of about HK$20 M in each of the last two years. So that is a greater than 10% return on investment if it continues. I think it is a very reasonable way for the company to deploy its cash.

My Recent Reading List

Study of Walter Schloss investing style. Walter Schloss is one of my favourite investors.

A really sad and poignant cartoon: The Employment .

A interesting interview with a small-time hedge fund manger.Torin Eastburn of Monte Sol Capital.

A good explanation of the implications of the Shiller PE ratio.

A unique view on taxes and their opportunity cost.

An article discussing why stocks consistently outperform bonds by a large margin.

Charlie Munger wise words at the Daily Journal 2015 annual meeting.

Howard Marks of Oaktree: It's Not Easy.

A list of practically all of Yahoo tickers for those that may find it useful.

Bronte Capital's John Hempton questioning whether Alibaba is being truthful with its numbers.

My 4th Annual Schedule of Investments

Wow, so three years on, I am still regularly posting. On each anniversary of my blog I list my dozen or so largest holdings.

Position	Category	Business
Wellpoint (ATHM)	US Large cap	Health insurance
Senvest Capital (TSX:SEC)	Canadian Smallcap	Investment Company
IEH Corp (IEHC)	US Microcap	Manufacturing
Seaboard Corp (SEB)	US Mid cap	Food Conglomerate
McRea Industries (MCRAA)	US Microcap	Footwear
Tachibana Eletech (TSE:8159)	Japanese Smallcap	Electronic Distributor
New Century Hong Kong (HK:0234)	Hong Kong Small cap	Hotel, cruise line
Installux SA	French microcap	Manufacturing
AIG (AIG)	US Large cap	Insurance
Bruce Fund (BRUFX)	Mutual fund	Mid-cap value
European Reliance (ATH:EUPIC)	Greek smallcap	Insurance
Pacific Healthcare Organization(PFHO)	US microcap	Healthcare services

My largest positions have a few changes from a year ago. I sold Hanover Foods and Putprop at a loss. I sold ITIC at breakeven. And Petsmart exited by going private. I normally hold on to winning position in non-retirement account as I prefer to avoid taxes. But the company made the decision for me by going private. My new investments on the list are Senvest Capital and Pacific Healthcare.

Anthem (formerly Wellpoint) had a great year along with other health insurance companies. Seaboard jumped to as high as $4640 per share early this year. But I hesitated selling because I was to attend the annual meeting in April. That was a big mistake because it didn't stay that high for long. Now it is back to $3330 today. My best position TTM was IEHC because I doubled my position after attending the annual meeting.

I have held the three largest stocks plus the Bruce Fund for a while. But all the rest were purchased within the last 3 years. And I am still waiting for a lot of them to breakout. For example EUPIC, Senvest and New Century are trading at nowhere close to book value. And these three are perfectly fine and profitable companies. So, I think this portfolio has a lot of potential energy to release, when given enough time.

Why I Bought Pacific Healthcare Organization

Pacific Healthcare Organization (PFHO) is a tiny company that handles workers compensation claims in California. It does not provide the funding and therefore is not an insurance company. The company got its start in this business 15 years ago by bringing in Donald Balzano to run Medex Healthcare, the company's main subsidiary. Workers compensation is a business fraught with regulation. And Mr. Balzano is a lawyer with extensive experience in this area. Mr. Balzano is less involved with the PFHO now but he owns 7% of the company. The main owner of the company is Tom Kubota, who owns 60% of the company. The company has a small buy back program which has reduced the float slightly. The company management appears to be only focused on growing the company and not taking advantage of minority shareholders.

Healthcare services companies like this are not exciting investments. They are companies that do labour intensive work and they increase business slowly by building relationships. They typically aren't going to have some breakthrough that will cause revenue to surge. On the other hand, PFHO earnings did take off from 2010 to now mainly because it started from a very small foundation. The company revenue went from $2M to $10M over that time.

The following chart shows the roller coaster ride that shareholders suffered. I think the underlying reason was the surging growth from 2010 to 2014. And when the earnings fell flat in the last twelve months overly optimistic shareholders sold at any price. The company lost some significant "overflow" business and one significant customer. The overflow business was temporary extra work that another company could not handle and the work ended in the first quarter. These things happen. The company will, from time to time, gain customers and lose customers. I don't know and I don't try to predict the company revenue, other than that I don't expect revenue to decrease.

PFHO Stock

I have never used workers compensation nor have I ever thought much about it. So I am learning about works compensation as I go. California has the highest workers compensation expenditures of any state, at 180% of the median. This is understandable to me because California is a egalitarian state with a very wasteful government.

Worker's compensation is a statutory requirement for all employers. But the government is not involved in administration. A company can use an insurance company or self insure. PFHO provides the administration for both types of insurance.

I sincerely believe that health insurance companies and companies that handle other benefits such as workers compensation benefit the user by providing reasonable service with less waste. The government cannot do a better job. Where there is benefit to all there is demand; so these type of companies constitute a growth sector. In fact, in one 10K management said that the greater the regulation and the pressure to cut costs the more these companies will benefit. And California can certainly improve.

	PFHO	Corvel
Price	$ 22.650	$ 30.490
Market Cap	$ 18.05 M	$ 636.94 M
P/E TTM	9.2 x	22.3 x
Div yield	0.0 %	0.0 %
P/BV	3.30	4.98
Gross Margin	28 %	20 %
LT Debt/Equity	0.00	0.00

PFHO trades at 9 times earnings. But a year ago it traded at 25 times earnings. It is hard to know what the schizophrenic market is thinking. So I looked at one of its competitors, CorVel Corporation, to get a reference for this type of company. CorVel (CRVL) also exclusively does workers compensation administration. However, it is a nationwide company. Interestingly, I cannot see which states it covers from its 10k. The two companies are similar in many respects. They both have no debt, have growing earnings, pay no dividends and have been buying back shares. But the stark difference is that PFHO trades at 9 times earnings and CRVL trades at 22 times. And PFHO has better margins.

PFHO had a lot of good press on Seeking Alpha last few years. Those articles expound in detail why PFHO is a great investment. So, I feel no need to repeat it here. But the interest is quite exceptional considering the company's market cap. And now unfortunately, I believe the enthusiasm for this stock is disappearing. It is capitulation.

I may be wrong of course. In fact,the stock bumped up a bit on the most recent trading day because management decided to pay a special one-time dividend of $1.25. The money was earmarked for share buybacks but the company cancelled it. Maybe the company felt it was too difficult buying back such a thinly traded stock.