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Value-oriented Equity Investment Ideas for Sophisticated Investors
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Investing In The Tradition of Graham, Buffett, Klarman
Year IX, Volume IV
April 2016
When asked how he became so
successful, Buffett answered:
“We read hundreds and hundreds
of annual reports every year.”
Top Ideas In This Report
Mitsubishi UFJ Financial
(NYSE: MTU, Japan: 8306) ……. 62
Panasonic
(OTC: PCRFY, Japan: 6752) …… 70
UTStarcom
(Nasdaq: UTSI) ………………….. 94
Also Inside
Editorial Commentary ………………. 3
Insights by Padamadan, Saraogi ….. 7
Ideas by Kennan, Hu, Lee/Yong …… 9
20 Asian Investment Candidates … 22
Asian Equities in Ten Countries …..102
10 Essential Value Screens ……… 112
Highlighted Events — Join Us!
Asian Investing Summit 2016
April 5-6, 2016, fully online valueconferences.com
The Zurich Project Workshop 2016
June 8-9, 2016, Zurich SOLD OUT! zurichworkshop.com
Wide-Moat Investing Summit 2016
June 28-29, 2016, fully online valueconferences.com
Latticework 2016
September 14, 2016, New York latticework.com
VALUEx Munich 2016
September 20, 2016, Munich valuex.org
THE ASIAN
VALUE ISSUE
► Screening Asian Investment Candidates in Ten Countries
► 20 Companies Profiled by The Manual of Ideas Research Team
► Proprietary Selection of Top Three Candidates for Investment
► Investment Insights by Roshan Padamadan and Rahul Saraogi
► Ideas by Peter Kennan, Max Hu, and Chan Lee & Albert Yong
► 10 Essential Screens for Value Investors
Asian investment candidates analyzed in this issue include
Alibaba (BABA), BHP Billiton (BHP), City Developments (CDEVY),
Eros International (EROS), Fletcher Building (FCREY), Flextronics (FLEX),
Internet Initiative Japan (IIJI), InterOil (IOC), Kirin (KNBWY), Lenovo (LNVGY),
Mitsubishi UFJ (MTU), NTT DoCoMo (DCM), Panasonic (PCRFY),
Seaspan (SSW), Sharp (SHCAY), Softbank (SFTBF), Sony (SNE),
Telkom Indonesia (TLK), UTStarcom (UTSI), and Vipshop (VIPS).
New Exclusive Content
in the MOI Members Area MOI (log in at www.manualofideas.com
or email [email protected])
Ahmed Husain on Learning from Billionaires
Jeff Gramm on Activist Investing and “Dear Chairman”
PREMIUM: Ayaz Motiwala on Investing in India and Beyond
Register at ValueConferences.com
Join us at Asian Investing Summit
2016, the fully online conference
hosted by ValueConferences and
The Manual of Ideas.
Visit ValueConferences.com
Table of Contents
EDITORIAL COMMENTARY ......................................................................... 3
EXCLUSIVE ASIAN INSIGHTS AND IDEAS ................................................ 7
ROSHAN PADAMADAN: UNDERSTANDING EPISTEMOLOGY ............................................................. 7 RAHUL SARAOGI: A TRAIN WRECK IN SLOW MOTION .................................................................... 8 PETER KENNAN: INVESTMENT THESIS ON HALCYON AGRI ............................................................. 9 MAX HU: MACRO UPDATE ON CHINA, THESIS ON TENCENT ......................................................... 11 CHAN LEE & ALBERT YONG: UPDATE ON KOREA; HANKOOK TIRE, KOREAN REINSURANCE .......... 18
PROFILING TWENTY INVESTMENT CANDIDATES IN ASIA ................... 22
ALIBABA (NYSE: BABA) – SOFTBANK, JACK MA, TEMASEK, BAILLIE, SILVER LAKE, SANDS ........ 22 BHP BILLITON (NYSE: BHP, AUSTRALIA: BHP) – BNP, DFA, HSBC, JP MORGAN ................... 26 CITY DEVELOPMENTS (OTC: CDEVY, SINGAPORE: CIT) – HONG LEONG HOLDINGS, CITIBANK... 30 EROS INTERNATIONAL (NYSE: EROS, INDIA: EROS) – CAP RE, FULLERTON, TEMASEK ............ 34 FLETCHER BUILDING (OTC: FCREY, NEW ZEALAND: FBU) – HSBC, JP MORGAN, RBC ........... 38 FLEXTRONICS (NASDAQ: FLEX) – GLENVIEW, ROBECO, PRIMECAP, CAP RE, TEMPLETON .......... 42 INTERNET INITIATIVE JAPAN (NASDAQ: IIJI, JAPAN: 3374) – NTT, GS, MSCO, ITOCHU ............... 46 INTEROIL (NYSE: IOC) – CAP RE, POINT72, WELLS FARGO, MS, MILLENNIUM, FRONTIER ......... 50 KIRIN HOLDINGS (OTC: KNBWY, JAPAN: 2503) – MEIJI YASUDA, BANK OF TOKYO UFJ ............. 54 LENOVO GROUP (OTC: LNVGY, HK: 992) – LEGEND HOLDINGS, YANG YUANQING, FISHER ....... 58 MITSUBISHI UFJ FINANCIAL (NYSE: MTU, JAPAN: 8306) – REED CONNER, BRANDES, DFA ...... 62 NTT DOCOMO (NYSE: DCM, JAPAN: 9437) – NTT, BARCLAYS, RENTECH, LSV ....................... 66 PANASONIC (OTC: PCRFY, JAPAN: 6752) – NIPPON LIFE, SUMITOMO MITSUI, MOXLEY ............. 70 SEASPAN (NYSE: SSW) – DENNIS WASHINGTON, FAIRVIEW, MERRILL LYNCH, RENTECH .......... 74 SHARP (OTC: SHCAY, JAPAN: 6753) – NIPPON LIFE, MEIJI YASUDA, QUALCOMM, MAKITA ........ 78 SOFTBANK (OTC: SFTBY, JAPAN 9984) – MASAYOSHI SON, JP MORGAN ................................. 82 SONY (NYSE: SNE, JAPAN: 6758) – GS, PRIMECAP, GAMCO, RENTECH, DFA, ARLINGTON ....... 86 TELKOM INDONESIA (NYSE: TLK, INDONESIA: TLKM) – INDONESIA, LAZARD, ACADIAN .............. 90 UTSTARCOM (NASDAQ: UTSI) – SHAH, PHICOMM, INVEX, RENTECH, DASAN, CHOU................... 94 VIPSHOP (NYSE: VIPS) – ERIC YA SHEN, T ROWE, TIGER TECH, FIDELITY, LATEEF ................... 98
ASIAN INVESTMENT CANDIDATES IN TEN COUNTRIES ..................... 102
AUSTRALIA .............................................................................................................................. 102 CHINA ..................................................................................................................................... 103 HONG KONG ........................................................................................................................... 104 INDIA ...................................................................................................................................... 105 INDONESIA .............................................................................................................................. 106 JAPAN .................................................................................................................................... 107 MALAYSIA ............................................................................................................................... 108 NEW ZEALAND ........................................................................................................................ 109 SINGAPORE ............................................................................................................................ 110 TAIWAN .................................................................................................................................. 111
TEN ESSENTIAL SCREENS FOR VALUE INVESTORS ......................... 112
“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................... 112 “MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................... 113 “MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES .................................................. 114 CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE) ....................................... 115 CONTRARIAN: CHEAP FREE CASH FLOW GUSHERS .................................................................. 116 VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ..................................................... 117 PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS ............................................. 118 DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ..................................................... 119 DEEP VALUE: NEGLECTED GROSS PROFITEERS ....................................................................... 120 ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ........................................... 121
Value-oriented Equity Investment Ideas for Sophisticated Investors
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About The Manual of Ideas:
Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top
fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors.
Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset
to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.
Editorial Commentary
As the third annual Asian Investing Summit online conference comes up, we analyze
investment opportunities across Asia, including in Japan. Market volatility in some
Asian markets has been severe lately, and many investors have soured on Asia.
China’s economic health looms large, not only for Chinese and Hong Kong equities
but also for a wide range of commodities. This affects companies such as miner BHP
Billiton in Australia (profiled in this issue) and shipper Seaspan (also profiled here).
Instructors at Asian Investing Summit are finding opportunities in the treacherous
environment, both among small-cap and large-cap Asian equities.
Consider James Choa’s thesis on CK Hutchison (Hong Kong: 1):
With a market cap of US$50 billion, CKH is a holding company with core businesses
in retail, infrastructure, telecom, and ports. The company was founded by chairman
Li Ka Shing, recently named by Barron’s as one of the world’s best CEOs. Over the
past 25 years, Li has increased book value per share, inclusive of dividends, by
2,270%, a track record that is comparable to that of Berkshire Hathaway (2,315%).
Despite its outstanding performance, the company has traded at large discount to
intrinsic value in recent years. In 2015, the Li family embarked on a complex
reorganization under which Cheung Kong Holdings (the former holdco) will
purchase shares in Hutchison Whampoa that it does not already own, and merge the
companies under a new entity, CK Hutchison Holdings, while spinning off all real
estate assets into a separate company. The restructuring not only aims to unlock
value at the holding company but also to position CKH as a premier global
conglomerate and world class capital allocator. CKH trades at a 30% discount to
intrinsic value and at about 1x P/B, well below peers in developed markets.
Or, consider Sidd Mehta’s thesis on Piramal Enterprises (India: PEL):
Primal is a conglomerate run by one of India’s greatest capital allocators, Ajay
Piramal. The company has its roots in the pharmaceutical space, most of which
(generics) was sold to Abbott Labs in 2009 for an astounding multiple of nine times
sales. Ajay Piramal has used the funds to build what we believe is the Berkshire
Hathaway of India. Currently, the business has three verticals: information
management, financial services, and healthcare.
Clearly, quality companies run by talented, shareholder-friendly capital allocators
exist in Asia. We look forward to learning about additional compelling investment
ideas at Asian Investing Summit 2016 next week.
Also inside this issue, we present instructor Peter Kennan’s thesis on Halcyon Agri
(Singapore: HACL) and Max Hu’s thesis on Tencent (Hong Kong: 700). Peter
Kennan is Managing Partner and Chief Investment Officer of Black Crane Capital,
while Max Hu serves as Portfolio Manager at Tyee Capital Group.
In addition, we feature insights by fellow Asia Investing Summit instructors Roshan
Padamadan, Fund Manager of Luminance Global Fund, and Rahul Saraogi,
Managing Director of Atyant Capital Advisors.
Value-oriented Equity Investment Ideas for Sophisticated Investors
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turnaround (not without setbacks) is taking hold at UTStarcom, which maintains a solid balance
sheet with net cash amounting to ~80% of recent market value. Given management’s focus on
costs and shareholder returns ($40 million buyback announced in November), the company may
be valued on a sum-of-the-parts basis that takes into account (1) net cash of $78 million, (2) the
value of the broadband business, and (3) the value of strategic investments. With revenue of
$100+ million in 2015, the business could be worth $70-150 million, assuming a multiple range
of 0.7x-1.5x. While the strategic investments appear too speculative to warrant a fair value
estimate at this point (book value is $68 million), we arrive at an overall value estimate of $150-
230 million, materially above the recent market quotation. The risk-reward tradeoff remains
compelling.
The third installment of our fully online Asian Investing Summit is coming up! The
event, co-hosted with ValueConferences, will be held LIVE online on April 5-6, with
all sessions archived and available for replay for a period of six months. We would
be delighted to have you join us. As a member of The Manual of Ideas, feel free to
use code MOISAVE when registering at www.valueconferences.com
Instructors at Asian Investing Summit 2016 include Sid Choraria, Investment
Manager at APS Asset Management, Peter Kennan, Chief Investment Officer of
Black Crane Capital, Alexander Kinmont, CEO of Milestone Asset Management,
Chan Lee and Albert Yong, Managing Partners of Petra Capital, Isaac Schwartz,
Portfolio Manager of Robotti & Company, Jason Subotky and Stephen Yacktman,
Portfolio Manager and Chief Investment Officer, respectively, of Yacktman Asset
Management, and other fund managers with deep expertise in Asia.
It was a busy month across our global investing community. I attended a dinner on
mental models in Frankfurt, Germany, with Dr. Hendrik Leber of Acatis, one of the
leading German value investors, was the guest of honor. Notes from the dinner are
available at http://latticework.com/takeaways-from-discussion-on-mental-models
Shai Dardashti, our New York-based managing director, has interviewed numerous
investors, fund managers, and authors in recent weeks, and we look forward to bring
you some of those conversations in The Manual of Ideas Members Area. Previews
and highlights are available at http://latticework.com/diary
Finally, fellow members have been independently organizing gatherings in cities
around the world, including recent dinners in London, New Delhi, and Stanford.
Upcoming dinners take place in Philadelphia, Vienna, Los Angeles, and Berlin. For
more information, visit http://www.meetup.com/hashtagvalueinvestors
I take this opportunity to thank Ravi Nagarajan and Mate Cser for their valuable
contributions to this issue.
Sincerely,
John Mihaljevic, CFA
and The Manual of Ideas research team
Value-oriented Equity Investment Ideas for Sophisticated Investors
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