HK 第5部分; 7%+ dividend yield portfolio
On January 12th, 2024, I started writing about absurdly cheap Hong Kong stocks. Today, I reveal my initial HK portfolio, generating a 7%+ dividend yield.
HK portfolio characteristics
In the table below you find the HK portfolio characteristics. Please find full details in the (paid) section further below.
H price: historic share (cost) price, C price: current share price, DY: dividend yield, P/E: price-earnings multiple, FCF-Y: free cash flow yield, P/FAV: share price to financial assets value.
Dividend yield, P/E, and FCF-yields are strictly my rough estimates, and may of course be completely wrong. Nevertheless, it does indicate the incredible value provided in (certain) HK stocks. Most of the names I bought own their entire or even more than their entire market cap in financial assets value. The valuation multiples will look even more attractive adjusting these multiples for financial assets value.
Before, discussing the HK portfolio and its individual names. let’s have a look at yet another deep value HK stock, that did not make the cut.
Analogue Holdings
Analogue Holdings ($1977.hk) is a reknowned holding of famous HK stock investor David Webb. The stock is current trading at HKD 1. That price is currently more than covered by Analogue’s financial assets value, especially when including market value - as opposed to book value - for the 15.83% interest in Nanjing Canatal Data-Centre Environmental Tech Co., Ltd ($603912). On normalized earnings, Analogue probably trades around 5-6x P/E and a high-single-digit if not low-double-digit (hsd-ldd) % dividend yield, given the 50% or better dividend payout ratio.
Analogue is an electrical and mechanical (E&M) engineering services company. It makes and installs equipment, such as
heating, ventilation and air conditioning (HVAC) systems,
water and sewage treatement systems
infrastructure communications and security and access systems
lifts and escalators, under the “Anlev Elex” name
Why did it not make the cut? First and foremost, there is just a lot of incredible value to chose from in Hong Kong. Analogue has a lot of competition for capital.
Naturally, with companies trading in deep value territory, there should be reasons for it. Some of the company-specific reasons I found for Analogue include:
Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (NCA) accounts for more than half of Analogues’s market cap. NCA’s share price had done very well, on the back of the investment boom in data centers. In the past two years, however, operating results have come under pressure and recently NCA even incurred an operating loss. Analogue has (hesitantly) sold a small part of its position, but it may have missed the window to monetize the full stake at an attractive price.
Analogue does manage a very strong balance sheet, on first sight. However, most of the cash is actually trapped in working capital. HKD 200m is held outside of Hong Kong, and in Hong Kong itself management commented that it needs HKD 500m in cash for working capital. One feature of the working capital requirement (that I do not particularly care for), are ‘performance bonds’. “If the Group fails to provide satisfactory performance to its customers to whom performance bonds have been given, such customers may demand the banks to pay to them the sum or sum stipulated in such demand.” At the end of 2022, Analogue had almost HKD 600m of these performance bond (hidden) liabilities. I do not have the impression that project risks are very high in this industry….but still.
High client concentration risk, especially the top 2 clients
Historic results were beefed up with gains on proceeds from sales of the NCA stake
The international expansion strategy is still unproven. Initial investments, such as the 49% interest in TEI (New York elevator maintenance company) do not inspire confidence yet.
Back to the portfolio
HK portfolio
Below, you find an overview of the HK stocks I have bought so far after assessing many HK stocks on:
Business & economic model
Business momentum
Governance
Valuation
I deliberately did not select any of the ‘hottest’ HK/Chinese stocks, like BABA. Some of the fashionable ones are great in gaining ‘beta’ on overall index movements. That is, however, not what I am looking for. I prefer characteristics that lower my investment risk, such as the stability of the business (model), strong financial health, high dividend returns, and co-investing with reliable partners.
The largest positions are those where I have most conviction that
Risk of a permanent loss of capital is low, and
Investment return potential is considerable.
Naturally, that assessment is aside from the over-arching macro risk (geo-political risks, currency risks, et cetera) that apply to investing in Hong Kong (and Asia), in general.