Another Dry week in San Diego

Last week found me installed in the massive Marriott, a convention hotel located on a lovely marina.  Some rooms had a view over the aircraft carrier Midway if you squinted sideways.  I was there to participate in a conference organised by my Canadian client, and since Thanksgiving comes early in Canada that US holiday provided the perfect time to enjoy one of the world’s most agreeable climates.  A terrific gathering was enjoyed by all.  Canadians are among the world’s most charming people, but do not get mislead by that laid back approach: some of the finest minds in the investment industry come out of Canada, a centre of investment acumen.  

The closing session was an expose by the renowned financial journalist and author Michael Lewis, he of Liars Poker fame, but more recently the writer of Flash Boys.  Interestingly the hero of this book who almost singlehandedly and without much help from the authorities exposed the devious machinations of the High Frequency Traders was a Canadian.  It took the head trader of RBC in New York to figure out what was going on.  This went down well with the audience.  As you can imagine Mr Lewis has won many plaudits but made not a few enemies for his efforts in shining a light into the murky corners of a part of the industry that the exploiters who inhabit this region would prefer remain murky.  He is also a terrific raconteur and extremely knowledgeable so if you ever get a chance to hear him speak it will be time well spent.

My client was re-launching its product line and strategy for some 300 advisors.  The reception seemed positive.  My role was to reprise a Recovery fund that I have been privileged to look after for them for just shy of sixteen years.  Over that period this Fund has won more than a few awards, and strongly outperformed its benchmark.

For me the big revelation of the conference was the nature of the breakout sessions: no more full on PowerPoint presentations with 5 minutes of Q&A at the end.  Portfolio managers sat at a table with 100 or 50 of the clients in the audience and used a fireside chat format intended to be more of a conversation than a lecture.

The organisers had secured the services of Eric Bergman to advise on how to handle this new approach.  He is a 25 year veteran in consulting on communications and the author of 5 steps to Conquer Death by PowerPoint.  Not to steal his thunder but there are a couple of key insights about how to make sure your main message gets across and does not disappear in a cloud of data and supporting periphery.  Set up a simple structure built around a very small number of key points; and then encourage a more open ended Q&A that enables those attending to ask about the things of interest to them rather than force feed your propaganda.  The book works out to be an excellent way to spend a five hour plane ride.

More Q&A had pluses and minuses.  You may get questions you do not want.  I got one zinger I could have done without in my first session; but generally it makes sense to embrace a more participative approach as people remember what they think they hear rather than what you say.  The human brain does not multitask well regardless of the current prevailing trend to try at all times to manage more than one activity simultaneously.  So less really can be more in terms of retaining the important points.  

That ties in with Eric’s guidance on how to handle questions.  PAS.  Pause, Answer, Stop.  Preferably keep your answer to 10 words.  It is a good discipline; but not easy to follow.  In fact I flunked, but the framework helped keep the flow on track.  My sense is that those who came felt better about the interaction afterwards.  A great learning experience that left me thinking about how to apply some of his ideas to other parts of my business.  I never tire of pointing out that the best part of this profession is that you learn something new every day.  Here I got a whole new education that lasted most of the week.

As for San Diego the part I saw was pleasant.  Downtown has a host of dining establishments covering almost every cuisine.  The weather was a treat, high 70’s – even rising over 80 in the middle of the day - and this at the end of November.  The air is clean: a welcome contrast to Singapore where the atmospheric norm is muggy.  Still it is rather off the beaten track and I suspect might be a dull place to live full time, however delightful the climate.  

One thing that definitely was not dull was the Midway.  Our conference included a dinner aboard the former aircraft carrier, now a museum, featuring a terrific 1950’s big band and superb period singers.  

The highlight though was the ship itself.  Whatever you have read cannot do justice to the reality.  Even if warships are not your thing you will find the Midway fascinating.  Do not miss the simulator; but definitely try it before dinner.

Also do not miss the zoo.  There seemed to be a lot of restoration in process so hold your trip for a year or so: a visit should provide a better experience come 2016.  

The Panda appeared apathetic and disgruntled but perhaps he was having an off day.  Otherwise an impressive collection of animals common and rare, and taken as a whole, one of the world’s best.

SINGAPORE : AN ISLAND OF STABILITY


Since I spend so much time on the road, it is a rare and agreeable experience to spend one complete week in the office.  Singapore does seem like an oasis of tranquillity given all that is going on in the world today.  The country is calm.  It is efficient, clean, and well run.  It is a good place to do business.  And I have an extremely nice view out of my window so any readers who want to stop by and see for themselves are welcome.
Seven days with no movement does not mean things are not going on.  Let me give you a snapshot of a normal work week for a fund manager.  Monday lunch with one of Singapore’s leading family offices included a deep dive into the world of almonds.  The Californian drought is creating a shortage of this nut; and if the water crisis continues in California - as seems likely - it will be hard to explain why so much water is effectively being exported because of the sale of a large amount of almonds abroad.  

Part of my view

We had visitors including a major Russian broker, the head of the leading independent investment bank in Myanmar, a New York Fund of Funds, a team from a leading Japanese bank to discuss a potential transaction in Indonesia, a London based fund management company, a manganese miner building a smelter in Sarawak, a manufacturer of solar powered water heaters operating in China, but listed in London, and a Hong Kong broker.  The point of belaboring the above is that Singapore really is one of the great financial centres.  People in the investment industry from all over the world come through.  Yes, the most valuable thing we do is to go out and meet companies on their home turf and see first-hand what is going on and tie that back to the financials; but we also get a lot of visitors.  These meetings are particularly useful with companies we have already met before as they are able to give us an update.

Our Office Building - OCBC Centre

It is increasingly obvious why more and more companies are making Singapore their regional hub.  Recent events in Hong Kong are likely to accelerate that trend.
My highlight was a lively debate with Rusal, the Russian aluminium giant, about market trends.  Aluminium has had a bad rap at least as an investment idea.  Chalco, the Chinese giant, is a Harvard Business School case study in shareholder value destruction, while Rusal’s IPO on the Hong Kong Stock Exchange, the first Russian company to list there, has not been a happy experience.  Still one does feel that things are turning.  Surprisingly some of the major players, Rusal included, have shown supply side discipline by mothballing expensive and inefficient plants, and shifting the cost curve down by at least 10%; and at a time when demand for aluminium continues to grow everywhere, notably of course in China.
Most people are probably unaware of just how widespread usage of aluminium is.  Combine that with some artificial supply side induced shortages largely as a result of the Indonesian ban implemented in January this year on the export of raw bauxite, and outside of China premiums over spot prices have gapped up dramatically this year while the large physical stocks in warehouses have been reduced by what looks like at least 25% with a massive backlog of withdrawal requests.
Inside China, things are more complicated.  Demand has continued to grow but so has supply in low cost power locations in the west (though high cost for transport when delivering one tonne of product to users on the east coast; effectively the material has to travel 9,000 km!).  For the record we are invested in China Hongqiao, the number 2 by capacity in the country but number 1 in molten aluminium an altogether different product with much better system economics that places it in the bottom decile of global cost, while delivering a product that also lowers its customer’s costs and creating a competitive bubble of a 50 km radius that is effectively as far as you can service without doing damage to the material.  Pricing in China is less robust but seems to be on the way back.  As do the share prices of all players in the industry as they have come off the bottom though still sit a long way below historical highs.
Rusal thinks things are only going to get better.  Of course they have a partisan point of view but the evidence does seem to be leaning their way and they did call the turn early.  Ford is launching a new line of SUVs that contain a great deal more aluminium.  This makes vehicles lighter and more fuel efficient.  Timing is perhaps unfortunate with rapidly falling oil prices; but the advantages persist and it is a greener and more environmentally friendly product.  The industry is watching the consumer reaction.  The potential increase in demand for aluminium could be material if this car category is successful.  You learn all about this sitting in Singapore talking to a Russian company.  




An interesting conversation with one of China’s leading auto retailers surfaced the surprising resilience of Japanese brands in terms of consumer sentiment.  The dealer space is changing rapidly with increasing emphasis on service and collateral products like car finance and insurance.  The sector is rapidly reflecting the US/UK model.  

Hong Kong : Just another Chinese City?

A couple of days in Hong Kong underlined for me just how the city is starting to lose its edge against Singapore as a place to do business.  Right from the start the airport got a B grade.  Admittedly our plane arrived a couple of minutes early so perhaps it is unfair to expect the exit stairs to be in place; but the bus ride to the Terminal was erratic and slow.  So it was nearly 20 minutes after landing before I got to immigration.  A small thing but not the best of beginnings. 

Getting around the city was harder and unpredictable due largely to the antics of Occupy Central.  This protest made some good points in the beginning, but has gone on too long and is now disruptive and counterproductive.  Its impact is adversely affecting the local economy.  I was only able to plan on five meetings a day instead of my usual six.  A recent poll showed 73% of residents want an end to the occupation.  Not one person I spoke to was in favour of continued demonstrations.  The sit-in has passed it’s sell by date. 

  

I could see one of the sites from my hotel room : roughly 40 tents and a rather smaller number of people closing off the most important road in Central.  Taking taxis, usually a reliable route to meetings, became something of a lottery from my location.  The MRT is great if it goes where you want, and very cheap; but unfortunately it does not go everywhere you want to go.

Signs in Hong Kong

I have been going to Hong Kong on business for over 20 years.  This time I was struck by just how Chinese the former colony has become.  Not only do fewer taxis understand English but last year for the first time ever I needed an interpreter at one of my meetings; as I did again on one occasion on this trip.  What really made an impact was dinner with the local head of RHB, a broker good at sniffing out underfollowed and undervalued stocks.  I was the only Caucasian in a large restaurant.  Yes it was Chinese cuisine, but the venue was the Square in Exchange Square, one of the main buildings in the financial district.  Over one hundred people enjoying fine food – I recommend the minced pigeon, really tasty – and I was the odd one out.  That has never happened to me before in the centre of Hong Kong.

Hong Kong is still a good place to do business and remains the primary centre where China meets the world; but if it is not very careful that crown could get lifted.  I have never felt concerned about its preeminent position before.

Meetings were a mixed bag, but several themes recurred even though the businesses I met comprised a cross section including shoe retail, property, orange plantations, textiles and TV manufacture.  020 is at the forefront of the strategic thinking of almost every management team.  Prime intangible real estate on the best platforms will matter every bit as much over the next five years as top city centre locations.  Go where the traffic is, even if it is in the ether.

The other refrain related to a complaint we had heard during the interim results season.  The Chinese anti-corruption campaign has much to commend it but is causing officials to slow down approvals for almost everything.  That has to be having an impact on the wider economy since several companies mentioned delays caused to their business.  No good deed ever goes unpunished.        

President Xi has proven masterful at gathering power and bringing things under his personal control; but investigators have touched a lot of people, some of them with powerful relationships and relatives.  He has been making a lot of enemies and will need to manage the impact of continuing this campaign carefully. 

Back to business and my one thought is the way different companies are approaching the Internet of Things and the smart product cycle.  As a value investor I am looking for angles that combine asset protection and some Margin of Safety with upside from participation in growth areas of the economy.  Mobile has been leading the way.  We all know e-commerce is exploding.  Yet as devices proliferate I wonder how many of the present models are already obsolete.  Do you really need so many devices to access all that an average Chinese consumption addict desires : a super smart phone for instant gratification on the move; but when at home a large screen TV with quasi 3D gives you access and a whole lot more especially for multiplayer games and multimedia delivery.  What is the point of tablets and hybrid notebooks?  A 46” or 55” screen is just about the max for the average apartment where all the family can participate, in separate segments simultaneously if that is the way to accommodate all tastes.  Perfect too for older and less mobile members of society who may be less tech savvy and also may have less good eyesight. 

So is a renaissance for the TV industry just round the corner?  Active interactive users are expanding at the rate of around 2 million a month and the community has achieved critical commercial mass.  Hisense, Skyworth and TCL are the local champions and all are exploring ways to monetise this growing captive customer base.  For the record we own shares in Skyworth.   

This Week in Hunan

Changsha, the provincial capital, has a population catchment of around 8 million, a serious city even by Chinese standards.  It is the national centre for the manufacture of equipment used in the construction industry : once a boom town, but now not the best place to be because local big boys, Sany and Zoomlion are both retrenching as their end user markets falter.

First stop a Zoomlion concrete truck assembly plant.  The share reflects hard times, off about 75% from its peak; but that is the whole point of visiting now.  No need to look when everything is going well; rare to find value when shares are at all times highs.  The factory is immense.  There is a reasonable degree of assembly work in process, though no-one looks especially busy.  There was a large number of the finished product in the back parking lot.  One to watch.

Wasion is the Chinese market leader in smart meters and data collection terminals; now gearing up to be a central player in the Smart Grid, a key priority for the next 5 year plan.  Lots of pictures of President Xi who was there last November as well as prominent photo display of a bunch of senior suitors from Siemens at a ribbon cutting ceremony.  Wasion has a J-V with the German giant.

This plant is a hive of activity.  Everyone looks relieved when the bell goes for a five minute break.  Impressed by the layout and workflow but slightly surprised at its labour intensity.  Liked the way management talk about the economic payback for clients who purchase their products.  Interesting extra: they have a corporate Code of Conduct that is first rate. 

Changsha itself is undistinguished architecturally though it sits (like Khartoum) at the meeting point of two rivers.  Airport street lights are solar powered : a nice touch.  The city has suffered from overbuilding.  Central Changsha seems fine but there are too many nearly completed tower blocks in the burbs.  A lunchtime meeting with Hopefluent, a leading real estate broker, confirms that there is excess inventory and prices are stagnant, though interestingly modern retail is in short supply and the CBRD has an office vacancy rate of only 5%.

Visiting Changsha has become easier and more agreeable with an increasing number of flights and several new hotels opening over the last 2 years.  I stayed at the Wanda Vista.  It has the top rating on Trip Advisor.  That seems deserved.  My room was spacious and comfortable.  Service was excellent.  A highlight was the tea selection in the lobby bar : over 30 varieties brewed on demand.  From white to red, the range has something for every taste; but skip the Haagen-Dazs ice cream.  It has freezer burn.

Lastly my brief encounter with internet censorship.  Struggled to get a good search engine connection.  BBC blocked.  Mail on line no problem.  What does that say about Chinese views on western media?  Essex girls good : Islington liberals bad?      

Introduction to Voyaging for Value

Starting in a few weeks, I will enter the blogsphere with a weekly submission.  The plan is to keep contributions short:  a few paragraphs once a week in a simple format.

The first two or three paragraphs will cover the most interesting aspects of the investment week including company interactions.  The last paragraph will highlight some other aspects of an investment manager's life that could be relevant to friends and colleagues with a similar lifestyle, such as airlines, hotels, restaurants or cultural events.

As you know I get around a fair bit, travel to many places and meet with interesting people.  You should find these insights and experiences are worth a few minutes of your time once a week.

There will also be a place for comments.  If you like what you see, please pass it on to a friend so they can sign up or let me have their contact details.  If you do not like what you see, please let me know and we will remove you from circulation.

James