2015 Year End Results

By March every year all companies with fiscal year end on Dec 31 should have announced their annual results. Six of my holdings are summarized below. Overall all results are reasonable and make all six stocks overvalued. But I don't know why the market trades these stocks so cheap. I am not one to think too much of catalysts so I have no clue when will it end.

	EUPIC	PFHO	SEC	KCLI	Soundwill	KARE
Price (April 1)	€ 1.49	10.15	CAD$ 125.70	9.20	HK$ 9.20	€ 240.00
Marketcap M	€ 40.98 ($ 46.71)	8.12	CAD$ 354.47 ($ 270.59)	384	HK$ 2616.20 ($ 337.57)	€ 662.40 ($755.14)
PE	3.66	4.84	loss	13.15	loss	12.40
ROE	0.14	0.33	-	0.04	-	0.15
PTBV	0.51	1.58	0.53	0.58	0.16	1.89
Div Yield %	0.00	12.32 (one time)	0.00	2.70	2.17	3.54
Vol (basis)	0.51	6.89	1.06	5.52	2.41	4.13

The table summarizes the key metrics. I mostly focus on PE and PTBV. And for each company, one or the other shows the company is cheap. The last row gives the average daily volume divided by the total shares. The fraction is showed in basis points units. So PFHO daily volume, which is 6.89 basis points, is actually 0.0689% of total volume. I have found most companies with healthy volumes should trade at about 20 to 30 basis points (0.2% to 0.3%). The table shows that all the six companies trade at extremely low volumes. None are at 20 or 30 basis points. This may explain why the stocks trade so cheap, they have extremely small interest.

European Reliance Insurance (ATH:EUPIC) continued its growth streak by increasing pre-tax profits by 6.6%. Even better is equity growth at 13.3%. The stock is still super cheap. I presume the reason is the ongoing crisis situation in Greece. Warren Buffett used to say he could find stocks that trade at 2 or 3 or 4 times earnings. They exist now and you just have to look. Well, I found one here trading at less than 4x earnings! On top of that it is trading at half of book. Now if only the market can cooperate.

Pacific Health Care Organization (PFHO) had a rough third and fourth quarter. The stock went from the high twenties to as low as $6.50 after announcing that they will lose their biggest customer Amtrust in Q4. But after their official annual report, the stock managed to recover to $10.15. Q4 results show that subtracting Amtrust's waning revenues in the quarter, the company still did $1.2M in business. So at that conservative trend, the company can do $4.8M for 2016. At their current profit margin of 20%, that is still more than $1 a share. The company said in the report that they employed 36 people in mid-March. That is still more employees than they've ever had except for their record year in 2014. And the company is continuing its IT expansion. I am cautiously bullish on PFHO.

Senvest Capital (SEC:TSX) reported FY15 EPS CAD$(35.39), which is pretty much expected. However, the book value per share increased because of a 19% rise in the Canadian dollar relative to the USD throughout the year. That would give per share book value of CAD$271 at year end. And also with estimated hedge fund losses from the company's 13F and its website, we can expect expect book value after Q1 to be about $237. Today it trades at $127. So the stock trades at 53% of book. That is too low even by Senvest standards. And one big reason for the huge discount is the market's view that the company charges excessive fees. This year has been kind of flat, and so there is little if any incentive bonus. The salary drawn should be all the employee expense on the books which is $12.5M. Other operating expenses, which may include costs for expanding their New York office is $16.8M. I am not thrilled about the expense. But for a company that manages about $1.4B in net money for common shareholders, minority interests and hedge fund holders. One can argue the cost is reasonable.

Kansas City Life Insurance (KCLI) reported for the first time after delisting from NASDAQ. The company revealed it bought back 1.1M shares for an average price of $51.13. The shares included normal buybacks and the odd-lot tender offer of 906,500 shares at $52.50. There are now 9.6M outstanding shares. The company earned $29.2M for the year, which is flat compared to the previous two years. However comprehensive income was $(9.0)M due to unrealized losses in fair value of securities. The comprehensive loss along with the 1.1M reduction in shares, minus the dividend, meant that the book value per share was flat from 2014 to 2015 at $68.55. I anticipate that unrealized gains will be much higher in 2016 because interest rates will be lower than expectations at late 2015. Lower interest rates mean a higher valuation on the company's stock portfolio, with the drawback that the company may receive less revenue as people avoid the company's products due to their low yield.

Soundwill Holdings (HK:878) is a real estate company that renovates and develops buildings as well as lease properties, primarily in Hong Kong. It is dirt cheap on a price to book basis. But last year it turned a small loss mainly due to fair value adjustments on its investment properties and almost no property sales.

Soundwill owns some of the best retail properties in Hong Kong. But rents were ridiculously high. I heard some of their properties were the highest retail properties in the world! But now that less tourists are coming from China, rent prices have fallen. Along with rents the fair value of Soundwill's properties have also fallen.

In 2014, the company sold HK$2.5B worth of properties for a $1B gross profit. But last year they had virtually none. But that could be a simply a quirk of timing. The following table shows the company's yearly property sales as well as the total money held as deposit on properties under development. The sales seem to oscillate every two years, with a high amount on year followed by a low. But the amount under deposit on the low years does seem to foreshadow good sales the following year. So, I expect 2016 to have significant property sales as in 2014.

	2015	2014	2013	2012	2011	2010
Property Sales (HK$ M)	10.40	2466.00	199.00	1310.60	483.20	591.20
Deposits	735.00	421.00	1277.00	482.00	529.00	422.00

Karelia Tobacco (ATH:KARE) reported year end earnings of € 19.35 versus € 22.44 a year earlier. Revenues were up 15% and gross margins, net of excise taxes, were up to 14% from 12.7% a year ago. The difference in the bottom line is from a previously mentioned € (14M) adverse tariff decision. The appeal is ongoing which, if successful, would return € 14M to income.

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.

Why I Bought Soundwill Holdings

The situation in Sears Holdings is sad. I have watched the confidence of Eddie Lampert and Bruce Berkowitz for 8 years. Meanwhile the situation at Sears is getting worse and worse. The company is starting to monetize its real estate holdings. But it seems to be swimming against the flood of losses quarter after quarter. In the most recent quarter, the company had about negative $500M of cashflow! Now by selling assets or rights to assets to a newly created entity Seritage, SHLD gets some badly needed cash. But to do what? Pay off the negative cash flow for a few more quarters?

I just cannot now see how this will end well for SHLD holders. Maybe it will end well for Seritage shareholders, but not for SHLD. The bullish narrative on SHLD is that the company's real estate is worth much more than the carrying value on the balance sheet. And this mispricing is not reflected in the stock price. I even wrote a piece on it. The underlying reason is that US companies use GAAP, whereas the rest of the world uses IFRS standards. GAAP accounting for the most part treats real estate property at cost, minus impairments. However, IFRS allows real estate to be revalued yearly. Any fair value gains becomes non-cash income. But I'll stop mentioning SHLD now because this post isn't actually about SHLD. I am writing about my latest purchase, Soundwill Holdings (HK:0878).

	HK:0878
Price	HK$ 15.080
Market Cap	HK$ 4245.02 M (USD $ 547 M)
P/E TTM	2.6 x
Div yield	2.0 %
P/BV	0.25
ROE	9.8 %
LT debt/Equity	0.1 %

Soundwill Holdings (HK:878) is a real estate company that has been around for more than 20 years. Today, this company's earnings are fantastic because of the hot Hong Kong real estate market and the use of IFRS accounting rules. As the side box shows, the numbers are fantastic. And it is primarily due to their real estate fair value gains.

Soundwill holdings develops and owns properties in Hong Kong. The company rents out retail properties in very expensive areas. Some prime real estate can fetch USD $5000 per sq ft per year! The company's flag ship location is Soundwill plaza. Occupancy is at or near 100% and rents have skyrocketed in recent years. This explains the real estate value gains. IFRS allows real estate values to be adjusted to the current fair value on the balance sheet. Current fair value is generally based on projected cash flows from rents and the prevailing discount rate.

The company also has another segment which develops property for sale in China, usually in partnership with other companies. This business is scary because many believe China is in the midst of a housing bubble. I don't really have an opinion and my opinion doesn't really matter anyway. Such macro issues are not what I dwell on. I think China is really a market too difficult for someone like me to understand. I don't want to participate in it, but it is the company's secondary business. The company has no more than 15% of their assets in China.

The company is 69% owned by Foo Kam Chu. Her daughter, Chan Wai Ling, is a major executive in the company.

I have annual reports going back 15 years. Fifteen years ago the company was into real estate as well as telecommunications. The company acquired a stake in another company called Vision Telecommunications. Interestingly, the stake was purchased from Mrs. Foo and Mrs. Chan in exchange for about 15% of Soundwill stock, which was priced at HK$0.63 a share. Other unscrupulous CEO's have similarly sold entities that they own to their companies at inflated prices. The inflated amount is reflected on the books as goodwill. I am not saying that the Vision transaction is one such case. I don't have much information about the transaction as it happened more than 15 years ago. However, the Vision purchase goodwill of HK$151M was enough of a concern that the company auditor Moores Rowland qualified the 2001 Annual report by stating that they cannot verify the goodwill. And in the next year, after the fiscal year had ended and presumably Moores Rowland had begun the audit, they resigned. And Grant Thornton came in as a late replacement auditor. Then the goodwill controversy diminished somewhat when the company wrote down the entire Vision goodwill in the 2002 financial statements. When I looked at this history, it certainly raised my eyebrow. Then it gets more interesting. In 2006, the management tried to replace Grant Thornton with a smaller firm. The management said they were only making the change for cost reasons. But then a month later, they backtracked on their decision and rehired Grant Thornton because the company bankers raised concerns over the succession of recent auditor changes. Well, at least the bankers are doing their jobs.¹

By 2003, Mrs. Foo owned 60% of Soundwill, and the company was suffering. The company lost close to HK$500M in each of the last 5 years! And in that year, the company did a 50:1 reverse split. Meanwhile, the company quietly dropped mention of telecommunications.

From 2004 onwards the company turned around. It quickly posted earnings with help from lots of capital injection mostly through loans. The loans were mostly made by Mrs. Foo and were convertable to stock. Of course with the stock fortunes improving, Mr. Foo quickly took advantage of the conversions to increase her stake in the company to 69%. I have tabulated data from the financial statements of the last 15 years.²

	op profit	gain from sales of subsidiaries	fair value gain	earnings	equity	cash flow
2001	(91,516)	0		(237,830)	460,800	234800
2002	(323,382)	4,712		(411,771)	293,500	(48,200)
2003	116,800	1,100		61,800	921,500	14,900
2004	76,100	(200)		28,300	1,805,500	36,800
2005	707,300	8,400	564,900	548,600	2,177,900	90,700
2006	570,000	101,900	361,600	423,100	2,602,500	(52,800)
2007	288,700	62,500	1,093	1,063,000	3,677,400	(521,500)
2008	266,900	33,600	(135)	159,400	3,873,000	(337,000)
2009	370,600	18,300	964,400	1,053,400	4,943,800	421,300
2010	467,233	16,400	1,769,600	1,738,900	6,716,800	457,700
2011	321,100	461	2,032,900	2,119,000	10,277,700	588,000
2012	915,000	3,311	2,692,300	3,321,300	13,802,200	878,900
2013	447,300	0	1,276,500	1,338,200	15,037,000	1,356,300
2014	1,376,500	114,300	638,800	1,644,600	16,662,000	1,801,000

The IFRS accounting rules did not take affect for all of the last 15 years, which is why there were no fair value adjustments in earlier years. As the table shows, most of the earnings are from fair value adjustments. However, in the last several years cash flow has been increasing significantly, which is very encouraging. Soundwill is obviously riding high on the real estate bull market in China and, to a lesser extent, Hong Kong. This cannot go on forever. But on the other hand, Soundwill is extremly cheap compared to its seemingly inflated assets. The company is still trading for a quarter of book! And it has zero long-term debt. Even if its assets drop by half, the company would still sell for less than book.

Over the three year life of this blog I have searched hard for bargain smallcaps. But it is getting harder and harder given the elevated equity markets. This is why, for the first time, I have exposure to mainland chinese real estate. Many wise investors advise to be disciplined and resist lowering one's standards when markets are elevated. Time will tell whether my choice to invest in Soundwill is a mistake because I couldn't find anything better.

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1. Today the company auditor is BDO because BDO merged their HK operations with Grant Thornton.
2. I copied this information from their yearly financials and the numbers very likely have some errors. Please read the disclaimer on the right.