Monthly Review - August 2011

August was not only another bad month for investments, in dollar terms it was the worst month I have experienced ever. Mark to market declines in asset values, particularly equities, were massively greater than the gains from rental income and were made worse by adverse FX movements. Even a healthy savings rate and positive cash flow from the properties were unable to offset the losses. My equity investments have produced negative returns this year (but are still ahead of cost overall).

Here are the details:

1. my Hong Kong equity portfolio declined sharply either in line with the market or due to industry or company specific factors. Some of my largest holdings (HWL, CCB, Hua Han, Yanzhou) recorded particularly large losses. There were few gainers. During the month I purchased shares in VODone, Tontine Wines, Sinopec, Sinopec, CNOOC, GDI and Varitronix;

2.my ETFs were down sharply in line with the local markets. There were no ETF purchases this month;

3. my commodities rose marginally, led by a gain in silver;

4. all of my properties are occupied, the tenants are paying on time. Two of my Hong Kong properties require minor repairs and one aircon unit needs replacing. I will have a single brief vacancy in late September/early October and will have to do the usual touch up and cleaning. One overseas property requires work on its roof. The collective bills are not significant but will temporarily dent cash flow in October;

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

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

7. there are no open derivative positions;

8. savings were moderate with high income and high expenses. My major expenses were for a short summer holiday and the annual premium for the medical insurance.

My cash position decreased due to new investments. I currently hold 21.4 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth fell by 3.23%. The year to date increase is now only 8.25%

VODone purchased

VODone (HK:82) put in a disappointing result for the six months to 30 June, 2011. EPS were down 4.5% to 4.3c cps. Other material negatives were:

• a substantial dilution in the share base through a combination of non-prorata new issues;



• one off expenses of HKD34 million for one-off fair value loss on deferred consideration shares and share-based payment expenses



• an explosion in selling and marketing expenses to HKD249.7 million (from HKD73.2 million)

It was not surprising that the shares fell sharply on opening - a continuation of a downward trend which has seen the share lose about 55% of their value since my purchase at HKD2.36 in September 2010. VODone is currently the worst performing investment in the portfolio.

However, the gross profit more than doubled on the back of a significant jump in revenue and the balance sheet remains clean with no borrowings and modest cash balance of HKD342 million.

IMHO, the second half profit has potential to be significantly better than the first half. The non-repitition of the one off items alone would produce a material lift in EPS (although not one that I can precisely quantify because of the effect of minority interests). More importantly, if there was a combination of further growth in revenue and a reduction in the selling and marketing expenses, then the bottom line profit could increase significantly.

Accordingly, I added to my position this morning paying HK$1.05 per share.

Tontine Wines purchased

This afternoon I added Tontine Wines (HK:389) to the portfolio, paying and average of HK$0.825 per share.

The company has just released its interim results, showing a 21.7% decline in net profit and a 32.7% decline in EPS for the six months to 30 June, 2011. On the surface, this looked like a very bad result and the share price fell 19% today.

My take on the results (available here ) is that the shares look attractive.

Firstly, the interim result included one off expenses/losses of RMB20.9 million relating to share options and RMB14.4 million relating to FX. If these items are treated as non-recurring and backed out of the results, the interim result actually looks a lot better - the EPS would be similar to the previous corresponding period. This is especially so when the 22.1% increase in revenue and 19.3% increase in gross profit show that the company successfully grew its business during the period.

Second, the balance sheet looks very healthy. The company is sitting on RMB1.2 billion (HKD1.4 billion) in cash and has no borrowings. It has shareholders funds of RMB1.68 billion (HKD2.0 billion). The market capitalisation is around HK$1.7 billion.

Like all companies, there are issues (e.g. the extended duration of the receivable, rising costs and absence of an interim dividend) but, on the whole, the company looks like an attractive entry point to China's growing domestic consumer market.