Monthly Review - December 2011

December saw the value of the portfolio edge slightly higher, largely in line with the movements in equity markets and favourable exchange rate movements.

Positive cash from on the properties (fully leased) and a healthy savings rate were enough to produce a respectable end to a very disappointing year.

Here are the details:

1. my Hong Kong equity portfolio appreciated, with China Gas being the standout performer. I purchased shares in VTech, Sino Oil & Gas, Sinopec, Cosco Pacific, GDI and NWS;

2. my AU/NZ equities declined;

3.my ETFs were mixed in line with the local markets, with Hong Kong being positive and the others being negative. I sold all my Lyxor ETFs (except for a small position in the Lyxor Commodity fund which inadvertently escaped the cull in response to news that the funds would be delisted). There were no ETF purchases this month;

4. my commodities fell, led by silver.  Most of my Lyxor Commodities Fund was sold;

5. all of my properties are occupied with all tenants paying on time. Some minor repairs this month;

6. currency movements were very negative, as the NZD and AUD fell sharply against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month;

8. I had no open derivative positions;

9. savings were good with high income and low expenses.  The Christmas holiday was fully provided for and had no impact on my net worth.

My cash position increased in spite of making net new investments. I currently hold 35.3 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).  This is an all time high.

For the month, my net worth increased by 1.76%. The year to date increase is a meagre 5.6
8% - which is less than my net savings and cash flow from properties, indicating that I have had material losses on investments this year.

An annual review will be posted separately.

Hong Kong property prices

The current state of the Hong Kong property market has generated a considerable amount of press coverage and public commentary during the course of 2011, mostly focused on two issues:

1. making Hong Kong housing more affordable for low and middle income groups;

2. the extent to which Hong Kong property prices either have fallen or will fall.

As to the affordability issue, as much as the politicians bleat about increasing affordability, the blunt reality is that they have taken steps which make housing less affordable. Specifically, they put through a large increase in rates earlier this year (at about the same time that our grossly overpaid civil servants where handed a substantial pay increase) and they have contributed to mortgage finance being harder to obtain and more expensive.  The effect of the special stamp duty is debatable in so far as prices are concerned but has obviously reduced liquidity in the secondary market.

As to current market prices, it is clear from looking at sales data and mortgagee valuations that prices today are lower than they were at the peak of the market (in early 2011).  Using HSBC's on line property valuation tool, the properties in our portfolio are now worth between 9% and 2% less than their peak valuations.  While you can obviously debate whether mortgage valuations accurately reflect the current market, it seems clear to me, both from the mortgage valuations as well as discussions with agents, that prices have fallen, but not by much.

As to the future, while sentiment is decidedly is bearish, given continued low interest rates, high employment, continued inflation, a degree of restraint by the government in supplying additional land for residential development and continuing demand from PRC buyers, it would be surprising if we saw a repeat of the 1997-2003 bear market.  At the same time, I still do not see value at current price levels.  Beyond that, I have no idea as to whether prices will continue to decline and, if so, by how much.  Accordingly, as an investor, I have no interest in buying additional properties at this time.

VTech purchased

This morning I added a few more VTech (HK:303) to the portfolio.  There has been no change to the reasons given for previous purchases.  I paid HK$80.00 for the additional shares.

I also neglected to post that I had sold my remaning shares in Kenford (HK:464) at a loss last week. 

Lyxor funds delisting - resulting portfolio changes

Lyxor recently announced that it would delist its ETFs from the Hong Kong Stock Exchange and also deauthorise them with the SFC.  Having decided that I do not wish to hold unauthorised funds (even though they would still be regulated in Europe and would be redeemable at NAV), I have sold my positions in the Lyxor India MSCI ETF (HK:2810), Lyxor Commodities ETF (HK:2809), Lyxor Taiwan ETF (HK:2837) and Lyxor Russia ETF (HK:2831).  Although irrelevant to my decision, all were sold at prices higher than my original purchase costs.

I have reinvested some of the proceeds into the iShares India ETF (HK: 2836) fund.  The balance is still looking for a new home.  A small amount has been added to my position in Vodone (HK:82) which today announced the launch of its online lottery business.  I paid HK$1.00 for the additional shares.

Between existing cash/near cash, the sale proceeds from the Lyxor funds, the possible sale proceeds from the possible general offer for China Gas (HK:384) and my end of year payment, I will have a considerable amount of cash on hand and be in need of some investment ideas.

Sino Oil and Gas purchased

This afternoon I added some additional shares in Sino Oil and Gas (HK:702) to the portfolio.  This is essentially an investment in China's increasing consumption of gas.  Sino Oil and Gas is now one of my ten largest positions.

I paid HK$0.295 for the additional shares.

Sinopec purchased

This morning I added a few more Sinopec (HK:386) to the portfolio.  My expectation is that Sinopec will benefit from a general trend towards a more market driven regulatory environment in the PRC as well as a general increase in energy consumption.  The yield is a decent if unexceptional 3.1% and the PE is well below 10x, making the stock a decent value play.

I paid HK$8.00 for the additional shares.

Sinopec is now my second largest individual holding.

China Gas - general offer

China Gas (HK:384) is one of my five largest individual shareholdings and is now subject to a general offer for all the outstanding shares.  The offer is HK$3.50 per share in cash.  Absent a higher offer (which I consider unlikely), I intend to accept the offer.

That will leave me with the nice problem of having to find something to reinvest the money into.  Current thinking is to look for two or three Hong Kong listed blue or red chips.  If nothing else, the yield on whatever I reinvest in will almost certainly be higher than China Gas's very low 0.65% yield.

CNOOC purchased

Yesterday afternoon I added a few more shares in CNOOC (HK:883) to the portfolio.  Like all my recent purchases, this was a small incremental purchase.  As CNOOC is my largest holding (by a meaningful margin), this will probably be my last purchase in this company.

I paid HK$14.80 for the additional shares.

Cosco Pacific purchased

This afternoon I also added some additional shares in Cosco Pacific (HK:1199) to the portfolio.  I paid HK$9.10 for the additional shares.

There is no change to my reasoning from previous purchases.

GDI purchased

This morning I added a few more shares in GDI (HK:270) to the portfolio.  The company is largely driven by its water business and has recently negotiated modestly higher increases in the revenue it will receive for supplying water to Hong Kong.  It wont be exciting, but should provide a steadily growing stream of dividends in the years ahead.

I paid HK$4.80 for the additional shares.

Off topic: Canon's lack of customer support

I have been happily using an original Canon EOS 5D as my camera of choice for about six years now. Six years of trouble free digital photography. Until now. Until I purchased a new laptop which came with Windows 7 at which point I discovered that the driver for the EOS 5D is not supported by Windows 7 and Canon has no intention of producing one.

This basically means that the automatic selecting and transfer feature which I have long accepted as a basic feature of using a digital camera no longer works. It also means that the ability to use the remote shooting feature through the laptop is gone as well. In practice I now have to use a card reader to select and transfer pictures from the camera's memory card to the laptop. It still works but is less efficient or convenient. There appears to be nothing I can do about remote shooting. (There were some highly technical work arounds but they were beyond my technical comfort level and appear to be even less convenient than using the card reader.)

It is very disappointing that Canon has no interest in supporting a camera that still enjoys widespread use and which I still hope to get several more years of wear and tear out of.

I've been drooling over the EOS 1D X as either a replacement for or an addition to the 5D but am now having second thoughts. It's a lot of money to invest in something which I expect to use for far longer than Canon apparently is willing to support that usage.

Off topic: a literary binge (2)

Carrying on from the October post on an out-of-character literary binge, since then, I've completed:

• Emma - Jane Austin. I found this mildly entertaining



• Walden - Henry David Thoreau. As much as I can appreciate the quest for simplicity in life, on the whole it came across as a snivelling, opinionated call for universal poverty and a rejection of human progress or dissenting opinion



• Metamorphosis - Franz Kafka. Entertaining



• Heart of Darkness - Joseph Conrad. Grim reading and a sad reflection on the time and place it was set in



• The Brothers Karamazov - Fyodor Dostoyevsky. Long. Just long. But well worth the read. Unquestionably the highlight of this batch

(These are in addition to other reading material.)

With the exception of Walden, I enjoyed all of these books. I'm not sure what's next for the literary genre, possibly something a bit more contemporary.

VTech purchased

This morning I added some additional shares in VTech (HK:303) to the portfolio. While their most recent result was adversely affected by a combination of reduced demand in Europe and North America for their products and increased cost pressures, both factors were less significant than I would have expected. My expectation is that revenues will continue to grow - the tablet for children product is particularly interesting.

The balance sheet is very sound with USD128.5 million in net cash on hand (about HK$15 per share) and the interim dividend was maintained at the same level as last year.

I paid an average of HK$78.10 per share.

Some contrary indicators

CNBC carried a report on hedge funds reducing their exposure to stocks . Given that hedge funds are supposedly managed by some of the best and brightest investors around, it's tempting to adopt the view that if these people are reducing exposure to equities (by around one third according to the report), maybe the rest of us should follow. I prefer to look at it as another contrary indicator - if so many people (including professionals) are underweight equities, maybe it is time to increase exposure? Of course, it would be much nicer if I'd been underweight during this year's bear market but that's another story....

I also received an interesting report on emerging market equities issues by one of the bulge bracket houses (which I can't link to for copyright reasons). Among the data points used to make a case for over weighting emerging market equities was the correlation between net fund outflows and market troughs. Over the last few months, net fund outflows from emerging markets have reached very elevated levels. If history repeats itself, this bodes well for median term equity performance.

Lastly, amid all the doom and gloom about falling property prices in the PRC its also worth noting that the volume and aggregate value of new home sales have held up well - indicating that while developers will be experiencing some pain (possibly a lot of pain), at least there should be plenty of cash coming in to cushion the downside for the developers and the banks which finance their developments. It's still not an attractive situation but, so long as they can keep shifting their inventory, the wider effects of the fall in prices may not be as bad as many fear.

I'm starting to sound like a permabull....which is not a good thing.

NWS Holdings purchased

I added a few more shares in NWS Holdings Limited (HK:659) to the portfolio today, paying an average of HK$10.95 for the additional shares. The company looks comparatively cheap on valuation grounds and is operating what I consider to be a mix or relatively low risk (toll roads) and strategically attractive (water) businesses. The trailing yield of 6.4% is attactive.