Hazard investing? 10 stocks to buy, if and when Hong Kong’s street mayhem end

Hazard investing? Here are 10 stocks to buy, if and when Hong Kong’s street mayhem end, according to Morningstar
* A “V-shaped recovery” is possible for Hong Kong’s key stock index, which has fallen 12 per cent in six months
* Hang Seng stock index was the third-biggest loser out of 94 global benchmarks in the past six months, surpassed only by Kazakhstan and Zambia

Daniel Ren  
Published: 1:28pm, 16 Oct, 2019
Updated: 4:56pm, 16 Oct, 2019

The Hang Seng Index, the world’s third-biggest loser in the past six months, stands to recover its lost ground if Hong Kong can put a quick end to the four months of street protests that are pushing the city’s economy into recession, according to research by Morningstar.

“The question is how quickly the government can reinstate confidence,” said Morningstar’s equity research analysts Philip Zhong and Michael Wu, in an emailed report. “We believe that confidence can return quickly, and a V-shaped recovery is possible given past response.”

Morningstar’s bullish forecast is in stark contrast to the sense of doom that has gripped one of the world premier fundraising hubs, as the worst political crisis in Hong Kong’s history drives the city’s economy to a technical recession in the fiscal third quarter ending in December. Visitors have stayed away from the city, causing retail sales and consumption in the services-dependent economy to plummet.

The Hang Seng Index has fallen 12 per cent in six months, while the China Enterprises Index fell 11.2 per cent. Only the benchmarks of Kazakhstan and Zambia did worse than Hong Kong during the period, according to Bloomberg analytics. Real estate developers, which make up 11.4 per cent in combined weight on the Hang Seng Index, were the biggest drivers of the benchmark’s decline, Morningstar said.



More details in https://www.scmp.com/business/companies/...hong-kongs

For property counters, it may be worthwhile to refer to the following post where valuebuddies discussed the issue of the land lease expiring in HK come Year 2047.

BOC HK was also one of dreamybear's "picks"* (yes yes, I know, self-praise is a national disgrace). But seriously, imho, the Big 4 or Big 5 banks in China are better bets. Although they may not be as beated down, whatever happens to HK shd not seriously dent their financials. 

I am surprised HK luxury retail are not featured in the list, unless the list is purely HSI component stks.

*full list is a bear's "trade secret".

Since these are large-caps, and large-caps are priced more efficiently, investing in the broad index is likely a more attractive return/risk profile.

As a result of the trade war and pro-democracy protests, I believe there are much more cheap stocks within HK's smaller cap market, compared to SG.

For small caps I have found it useful to look in detail at 'Webb-chips' (his term): the companies in which David Webb holds 5% or more of the number of shares, and so has to disclose his holding. David provides a list of these on his web site at:

https://webb-site.com/dbpub/webbchips.asp

When I look at these small cap stocks in detail, I find that the financial statistics generally (but not always) fit many of the criteria that were characteristic of the types of small cap Singapore shares that used to be covered a lot in Valuebuddies i.e.:

• Low historic P/E
  
• High (and fairly consistent) dividend yield
  
• Large cash balances as a proportion of total market value
  
• Little or no debt
  
• Low Price / BV
  

Unfortunately, few small cap listings with those characteristics are left on SGX due to privatisation of so many of the quality small cap stocks.

David is well known for identifying Hong Kong listed shares that have questionable governance issues (issues that we are familiar with from the lamentable 'S-chip' saga), and clearly puts a lot of time and effort into vetting governance for those stocks that he does put money into - and we are talking of a lot of money: his disclosed holdings used to add up to over HK$1 billion, although they have recently fallen to just under the $1 billion mark. 'Webb-chips' have not been immune to the general fall in the Hong Kong market, and it is reasonable to assume that if there is a general recovery in the Hang Seng index, these smaller cap shares will also benefit. However, it is worth cautioning that there is not much sign of the protests going away yet, and Carrie Lam's policy address yesterday is being widely criticised as inadequate to address the issues and could make things worse, at least in the short term. Many of the 'Webb-chips' involve manufacturing in China, and I am uncertain how much of the drop in value reflects the general malaise in Hong Kong and how much the trade war + a general downturn in the Mainland economy.

I spend quite a lot of time in Hong Kong, and have a regular need for HK$, so the dividend yield is of interest to me, plus there is the chance of capital appreciation if the general market recovers. Over the last few months i have been dribbling some cash into selected Webb-chips, into half-a-dozen counters selected mostly from the top half of the table, as well as four counters that do not appear in the table. I intend to continue doing so over the rest of the year and probably into next. The total investment to date is, however, relatively small in comparison with my holdings in Singapore. There is a high likelihood of poor financial performance for many HK stocks in 2019/2020, so there is substantial risk in the short/medium term. However, one of the benefits that I see in selecting largely from Webb-chips is the substantial cash buffer for most of these stocks, which should help them ride out the storm.

I like Webb. He uses his smarts to promote corporate governance, highlight investment risks, and provide good stock tips without hawking them incessantly. Amidst all the self-proclaimed do-gooders on the internet with a professed calling for helping/teaching people get rich/financial independence through investments, here is a gentlemen with bona fide intelligence, results, and generosity.

Webb-chips indeed exhibit similar 'value investment characteristics.' But I thought that most of the Webb-chips, being manufacturers of generic products, do not appear to have any obvious and compelling competitive advantage. It is not clear whether Webb gave sufficient consideration to the competitive advantage of his Webb-chips, since this is not discussed in his picks, where the focus is on the company's financials and valuations.

For example, I looked at Ming Fai International -- one of the Webb-chips, which provides disposable toiletries to hospitality businesses -- and could not fathom why he would put his money in a seemingly 'no moat' business, cheap as it may have been. Though, I suppose, in a case of a rising macro tide where the markets are still growing rapidly -- the rise of China as an export manufacturing giant -- considerations for competitive advantage may be less of an issue. The competitive landscape is now crowded, so it is difficult to be certain if the Webb-chip manufacturers of generic products can still thrive, even without the negative effects of a trade war.

Nevertheless, some of them do look interesting. Unfortunately, most are at the moment, highly illiquid.

Although Webb no longer publishes his Christmas picks -- which is a shame -- there is still a great deal to be learned from perusing his Webb-site.

(18-10-2019, 08:53 AM)karlmarx Wrote: I like Webb. He uses his smarts to promote corporate governance, highlight investment risks, and provide good stock tips without hawking them incessantly. Amidst all the self-proclaimed do-gooders on the internet with a professed calling for helping/teaching people get rich/financial independence through investments, here is a gentlemen with bona fide intelligence, results, and generosity.

Webb-chips indeed exhibit similar 'value investment characteristics.' But I thought that most of the Webb-chips, being manufacturers of generic products, do not appear to have any obvious and compelling competitive advantage. It is not clear whether Webb gave sufficient consideration to the competitive advantage of his Webb-chips, since this is not discussed in his picks, where the focus is on the company's financials and valuations.

For example, I looked at Ming Fai International -- one of the Webb-chips, which provides disposable toiletries to hospitality businesses -- and could not fathom why he would put his money in a seemingly 'no moat' business, cheap as it may have been. Though, I suppose, in a case of a rising macro tide where the markets are still growing rapidly -- the rise of China as an export manufacturing giant -- considerations for competitive advantage may be less of an issue. The competitive landscape is now crowded, so it is difficult to be certain if the Webb-chip manufacturers of generic products can still thrive, even without the negative effects of a trade war.

Nevertheless, some of them do look interesting. Unfortunately, most are at the moment, highly illiquid.

Although Webb no longer publishes his Christmas picks -- which is a shame -- there is still a great deal to be learned from perusing his Webb-site.

I would love to find stocks in Hong Kong that meet the triple criteria:

• Good governance
  
• Excellent financials
  
• A great big moat/ competitive advantage
  

It can be argued that the big HK property and banking stocks do meet those criteria, but in their case the valuations are tied to the world's most insanely expensive property market. A property market that is so expensive that it is a factor behind riots in the streets. Having lived through, and profited from, the 70% collapse in HK property prices in 1998-2003 I am reluctant to bet big on HK property related stocks at these valuations, even though Carrie Lam's policies announced on Wednesday include some that immediately lifted property prices (and the aggregate wealth of the tycoons - by over HK$3 billion). I just don't see that it is sustainable in the long term, financially or politically. So I decided on a mix of HK companies, which inevitably have some HK property exposure, and Webb Chips, most of which don't and generally meet the first two criteria. I am keeping my total investment in HK relatively small because of the risks involved.

(18-10-2019, 04:45 PM)Dosser Wrote: I would love to find stocks in Hong Kong that meet the triple criteria:

• Good governance
  
• Excellent financials
  
• A great big moat/ competitive advantage
  

It can be argued that the big HK property and banking stocks do meet those criteria, but in their case the valuations are tied to the world's most insanely expensive property market. A property market that is so expensive that it is a factor behind riots in the streets. Having lived through, and profited from, the 70% collapse in HK property prices in 1998-2003 I am reluctant to bet big on HK property related stocks at these valuations, even though Carrie Lam's policies announced on Wednesday include some that immediately lifted property prices (and the aggregate wealth of the tycoons - by over HK$3 billion). I just don't see that it is sustainable in the long term, financially or politically. So I decided on a mix of HK companies, which inevitably have some HK property exposure, and Webb Chips, most of which don't and generally meet the first two criteria. I am keeping my total investment in HK relatively small because of the risks involved.

I will like to add one more to the triple criteria: cheap price. Most will say this is asking for too much. But well...

I don't have much insight and interest in HK property and banks, and being widely covered, my instinct is to avoid them. 

An aggressive land reform will hurt the companies with large holdings of investment properties. Though this has yet to take place -- the government is offering reasonable compensation for the recently announced land acquisition -- it is difficult to see that HK real estate prices will be allowed to continue its upward trajectory indefinitely into the future.

As for banks, since I do not have any way of knowing which of their loans are at risk of going bad, and how much of it is going bad, I have no reasonable way of measuring their potential risks. And this also includes our 3 local banks. If I were to put my money into any one of the banks, I am at best assuming that the management will do a good job and not screw up. I'm not saying they are bad investments, but I just don't feel comfortable basing my investments on things like, "they are cream of the crop professionals who have been in the business for a long time." A good number of the western names -- which were once perceived to be the cream of the cream in the banking industry just 10 years ago -- have either barely recovered, or are still struggling.

I think HK listed and managed companies with large exposure to the Chinese or APAC market will do well in the long-term, owing to, well, the Chinese and APAC growth story. It is a tired narrative. But given the growth potential of the Asian economies, it looks acceptable, vis-a-vis the cheaper valuations. 

HK listed companies which are wholly exposed to HK are less attractive to me. My opinion is that there is a high likelihood that HK may be sidelined in the future Greater Bay Area developments. It makes sense for PRC policymakers to speed the development of Shenzhen, to diversify away from HK. Hk is, after all, just a rock. And any city can serve as PRC's capital market, so long as the right ingredients are present. A relegation of HK will, of course, not happen overnight in the form of surprise announcements. But through a series of steps in deregulating the Greater Bay Area, and policies aimed at encouraging the migration of key (financial) institutions. 

As for capital allocation, I think it makes sense to diversify over time, as the economic prognoses seem to indicate a long winter.

(19-10-2019, 09:53 AM)karlmarx Wrote:

(18-10-2019, 04:45 PM)Dosser Wrote: I would love to find stocks in Hong Kong that meet the triple criteria:

• Good governance
  
• Excellent financials
  
• A great big moat/ competitive advantage
  

It can be argued that the big HK property and banking stocks do meet those criteria, but in their case the valuations are tied to the world's most insanely expensive property market. A property market that is so expensive that it is a factor behind riots in the streets. Having lived through, and profited from, the 70% collapse in HK property prices in 1998-2003 I am reluctant to bet big on HK property related stocks at these valuations, even though Carrie Lam's policies announced on Wednesday include some that immediately lifted property prices (and the aggregate wealth of the tycoons - by over HK$3 billion). I just don't see that it is sustainable in the long term, financially or politically. So I decided on a mix of HK companies, which inevitably have some HK property exposure, and Webb Chips, most of which don't and generally meet the first two criteria. I am keeping my total investment in HK relatively small because of the risks involved.

I will like to add one more to the triple criteria: cheap price. Most will say this is asking for too much. But well...

I don't have much insight and interest in HK property and banks, and being widely covered, my instinct is to avoid them. 

An aggressive land reform will hurt the companies with large holdings of investment properties. Though this has yet to take place -- the government is offering reasonable compensation for the recently announced land acquisition -- it is difficult to see that HK real estate prices will be allowed to continue its upward trajectory indefinitely into the future.

As for banks, since I do not have any way of knowing which of their loans are at risk of going bad, and how much of it is going bad, I have no reasonable way of measuring their potential risks. And this also includes our 3 local banks. If I were to put my money into any one of the banks, I am at best assuming that the management will do a good job and not screw up. I'm not saying they are bad investments, but I just don't feel comfortable basing my investments on things like, "they are cream of the crop professionals who have been in the business for a long time." A good number of the western names -- which were once perceived to be the cream of the cream in the banking industry just 10 years ago -- have either barely recovered, or are still struggling.

I think HK listed and managed companies with large exposure to the Chinese or APAC market will do well in the long-term, owing to, well, the Chinese and APAC growth story. It is a tired narrative. But given the growth potential of the Asian economies, it looks acceptable, vis-a-vis the cheaper valuations. 

HK listed companies which are wholly exposed to HK are less attractive to me. My opinion is that there is a high likelihood that HK may be sidelined in the future Greater Bay Area developments. It makes sense for PRC policymakers to speed the development of Shenzhen, to diversify away from HK. Hk is, after all, just a rock. And any city can serve as PRC's capital market, so long as the right ingredients are present. A relegation of HK will, of course, not happen overnight in the form of surprise announcements. But through a series of steps in deregulating the Greater Bay Area, and policies aimed at encouraging the migration of key (financial) institutions. 

As for capital allocation, I think it makes sense to diversify over time, as the economic prognoses seem to indicate a long winter.

We need to keep in mind the difference in law system between PRC and HK (socialist VS English common law)
And it seeems investors will prefer "common law" which implies companies will favor IPO at countries with "common law"

(20-10-2019, 12:29 AM)angelzsoul Wrote: We need to keep in mind the difference in law system between PRC and HK (socialist VS English common law)
And it seeems investors will prefer "common law" which implies companies will favor IPO at countries with "common law"

The fact that HK's so-called common law is ultimately subject to the whims of Beijing is not lost on investors. Yet, international money has been pouring in since 1997. Implicit is the trust that Beijing will not pull the carpet from under investors' feet. 

Investors only care about whether their property rights are protected. Not whether there is democracy, freedom of speech and assembly, and so on. And Beijing wants a supply of foreign capital to finance its development, so long as the capital does not wield economic and political clout. 

If there is a desire on both sides to engage in business, and willingness to accept each others' terms, my opinion is that it will take place regardless of the law of the day.

And if HK can practice what is known as "common law," how is it not possible for Beijing to enact similar legal systems in the Greater Bay Area, if it so desires?

(20-10-2019, 12:29 AM)angelzsoul Wrote: We need to keep in mind the difference in law system between PRC and HK (socialist VS English common law)
And it seeems investors will prefer "common law" which implies companies will favor IPO at countries with "common law"

I agree with karlmarx's view.

Imho, we need to start thinking abt HK being a part of China, rather than a sovereign country. It's a matter of time before HK is "normalised" with the other Chinese cities(i.e. laws in HK similar to other Chinese cities) - there may not be anything special abt HK in the future. I don't know what will happen in the future, perhaps one day the RMB will permanently replace the HKD(extinct).

I guess if we are looking at the shorter term, e.g. within 10 years from now, the rule of law(English based) will probably still apply, and an investor might be able to consider opportunities of mispricing within the current HK mkt. In the longer run, it's anybody's guess.

China would rather see Hong Kong lose its role as a financial gateway than ever cede political control