About time and vultures – Sun Hung Kai Properties Limited

‘The basic ideas of investing are to look at stocks as business, use the market’s fluctuations to your advantage, and seek a margin of safety.’ Warren Buffett
After all, truly profitable firms rarely go under unless they are hit by a sudden calamity.

What do Sun Hung Kai Properties Limited (SHKP), Olam International Ltd and Sino Grandness Food Industry Group Ltd have in common? Answer: They were in the news for the wrong reasons and their stock prices plummet. And boy, did SHKP share value plunge.

I shall digress a bit from my recent posts (away from the who, the why and the when). Typically I would keep a list of stocks in mind and wait for prices to drop, but every so often some stocks (which I didn’t usually care) present themselves to me, and I steer away from that practice.

I first bought Sun Hung Kai Properties Limited stocks in 2 May 2012. Prior to that period (Mar to May 2012), I have not heard of Sun Hung Kai. Yeah I know, they are the world’s second-largest developer by market and Asia’s largest developer. Where have I been :p

Often when studying a company, we tend to forget that behind the numbers are actually people (Chairman, CEO, Managers, Executives, even the Janitor…etc) who make the company what they are. And every so often the news remind us of that. Most CEOs / Chairman of companies are low-profile. Very little is know about their private life. But when you are one of richest guys in the world living in country like Hong Kong, it is hard to remain elusive.

To me the saga of the Corruption trial involving Thomas and Raymond Kwok, the billionaire co-chairmen of Sun Hung Kai Properties Ltd (SHKP) seems like the typical Hong Kong Soap Opera.

The reasons I bought SHKP is totally different from Riverstone. You won’t find in-depth technical analysis here. It is not a high growth stock and given its size will probably never be. So I didn’t really bother. Bearing in mind, I was holding on CapitaLand stocks since 27 Jan 2011 (bought earlier than SHKP). CapitaLand is another mammoth (largest listed property developer in Southeast Asia). I don’t know about you, I still find their annual reports too complex to digest.

However, I remember I did glance at SHKP’s financials prior to buying. In gist, their dividend per share has been approx. consistent through the years, cash & total asset have been increasing through the years. On the down side, debt has been increasing & cash flow is erratic. It is a cyclical property stock so the cash flow is expected. However, the key thing is the news (causing the sell-off) is not about the fundamentals of the company.

For a company like SHKP to operate, it takes much more than 2 brothers. If it was a small start-up, the influence of a star entrepreneur would be big. But at such scale, the company has got a life of its own, there would be so many layers, the sphere of influence becomes very small (unless they are another Steve Job).

Why didn’t I buy Olam? To be frank I don’t like the company fundamentals. I do have my doubts about what Muddy Waters mentioned (here and here): ‘The Company has simply borrowed too much money, and then invested in projects that will not generate sufficient returns to repay its debt obligations).’ But whether it is true or not, the news is about the value of the company.

And did I forsee Temasek coming to the rescue? Nope. In the case of SHKP – it would probably be too big to fail (hmm..would the HK government let this company fail? I doubt so). Would Olam be the best performer in STI component for year 2014 if not for Temasek? I doubt so and I don’t care. (Some data about Olam, albeit outdated) Operating Cash Flow: -345.88M, Qtrly Earnings Growth (yoy): -2.90%, Qtrly Revenue Growth (yoy): -0.50%, Total Debt (mrq): 9.33B, Total Cash (mrq): only 1.28B.

Why didn’t I buy Sino Grandness when there were news causing it share price to drop? Not bad financials. (Some data, albeit outdated) Revenue Growth Rate, 5 Year: 46.9221, EPS Growth Rate, 5 Year: 43.9551 (WOW!), P/E Ratio: 4.8571, ROE: 31.4194

Perhaps too good. Real? China Stocks (how reliable are they?). I am also not aware of their product (GARDEN FRESH’s beverages). Have you drank it? I didn’t. I haven’t heard of it. There is always this Peter Lynch phrase at the back the back of my mind: “own what you know“.

Is the annual report easy to understand? Does it lack transparency? To be frank, I didn’t manage to download it and pore through it.

Parting thoughts: There’s always something to worry about. As what Lynch would say: investing is more about stomach than brains.