Friday, September 25, 2015

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 development12.00
Other current Assets3.39
Investment property56.00
Other non-current assets1.00
Liabilities All Debt8.08
Other liabilities4.88
Equity to shareholders58.34
Minority Interest1.09
6 Month EPS1.02

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 investment6.6
Other current Assets1.3
Investment properties10.9
Other non-current assets1.5
Liabilities All Debt2.7
Other liabilities1.1
Equity to shareholders25.5

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.


  1. Any thoughts on Karelia's Q3 earnings? Growth slowed down quite a bit but was still more than decent imo. African, Greek and EU sales are still moving along nicely; Asia has been relatively weak but especially so in Q3, which surprises me since these are dollar sales that should benefit from the euro's weakness. The Balkan is also pretty weak because their currencies have depreciated. I am also a bit cautious about BAT moving into this area with the TDR acquisition. The strength of Greek sales continues to surprise, although this may reverse when additional excise taxes are imposed. Bulgaria's performance is unknown to me.

    1. Hi Timberwolf, thanks for bringing the report to my attention. I am glancing at it right now. I focus on the income statement. I see that taxes have gone up as well as the provision for the adverse tax/duty decision. The EPS is $14. If you strip out those two items maybe it would be $18-$19 for the 9months. Decent but not great.

      The bright side is they have improved margins from 11% last year to 14%.

  2. Yep, the gross margin improvement looks great but likely influenced heavily by currency effects. Corporate tax rate has increased to 29% in Greece overall so that one was expected. The Q2 legal charge is still being contested in the courts, which in Greece probably means it could still go either way (and take a really long time to resolve). Still; mid-teens growth on net revenue is very good given the disruption with the capital controls etc. The comparables with Q4 and fy2016 will be much tougher however since Q3-14 was a really weak quarter. In Q4-14 they had really great sales in Africa so I am curious to see how Q4 will unfold this year. Too bad it will probably take until March before we find out.