THE SEVENS IN HONG KONG

Most people flying to Hong Kong last week were going for the rugby.  Once upon a time I was a winger, and fairly fast.  My rugby career ended ignominiously in the emergency room of a South London hospital having my upper lip stitched back together, rather badly as it turned out leaving a permanent record of the clash, after colliding with my own fullback.  He too has an eternal remembrance of the encounter with my teeth mark on his forehead.  We both foolishly allowed ourselves to be dragooned into a team playing under the banner of Bertram Mills Flying Circus.  It was supposed to be a friendly match, but I can still recall the moment when we saw the opposition, a Midland Bank team; one look and it instantly dawned that we had been set up.

While the Jockey Club and the China Club did not have a spare table for lunch or dinner, some of us were there for an entirely different reason : 2014 year end results season.  The second half of March is a must for any equity, and indeed fixed income investor, serious about investing in China.  You have to be in Hong Kong as several hundred companies open the kimono for a biannual ritual.  It is one of the few times you can get access to senior management at serious Chinese companies as most recognise they do have a duty to put in an appearance even if only once or twice a year and allow a smattering of the foreign managers who own their shares to ask troublesome questions. 

Some handle this ritual with good grace; others less so.  I walked away seriously impressed with the top management team at Qingdao Port and the new president at China Communications Services also gave decent answer to most of my questions.  Among serial abusers of their listing status are the big banks who only recognise one shareholder.  That said when a business has such a bad rep and top management regard the markets on which it is listed with contempt the market responds and rates the share accordingly.  So what you end up is the Bank of China - assuming you believe the numbers - on 0.8x NAV and a P/E of roughly 6x and a yield in the region of 6%; and even if you do not believe the numbers, and few do, scepticism is amply rewarded by these bargain multiples as a starting point.  You can then adjust the reported and alleged audited financials to suit your own personal taste and risk profile and decide if the end result is still to your liking.  I have and at HK$4.40 I do.  So while the CEO would not speak to me if we were trapped together in a faulty elevator, the value proposition is sufficient.

With so many companies reporting we are spoilt for choice.  I try to sidestep the extravaganzas put on for analysts in favour of one or ones if I can get them, and small groups if I cannot.  The fully monty show and tell is a last resort.  I crammed in 23 sessions that week, making the most of what was an offer assisted by several brokers notably CLSA, DBS, Haitong and OSK.  Strangely in the midst of this corporate mayhem Credit Suisse decided to hold a conference; presumably the dates were chosen by a rugby fan. 

Earnings season as always has been a mixed bag; but what struck me more forcibly than many of the previous rounds is how strong the market reaction tended to be when a company delivered a surprise : positive or negative.  A 5% movement was the least of it.  10-20% was not uncommon.  Two to three days tended to be the norm for the amount of time it took to factor in the full response, with the first 50% almost immediate, or in more than one instance a few hours before the relevant announcement : no mean move. 

Sinosoft, a small software house we own with specialties in export tax and pollution control, plus a JV with Alibaba, delivered the goods.  I am not sure that the share quite deserved the 30% uplift that followed.  I am even more sure that Goldpac, the market leader in security cards, did not deserve the over 20% downdraft that followed really rather respectable 2014 numbers.  Yes the company made a mess of downgrading earnings guidance for 2015 on the conference call.  Still at the low that followed the share was on a current year P/E of around 5x ex cash for a market leader that was still targeting 15-20% growth.  Did everyone forget the strategic relationship with worldwide number 1 and technology leader, Gemalto?  For what it is worth, and please note I am not making a recommendation merely reporting facts, we averaged down during the rout.  We will have to see if our contrarian stance reaps the rewards it should.

The other question I feel compelled to ask is what does Yuzhou Properties have to do to attract buyers to its shares.  Yes, it is a Chinese developer and all the world hates Chinese property, but it is the market leader in Fujian with a preeminent position in Xiamen, one of the nicest and more important one of the wealthiest cities in China and owns some of the best properties on land poor Xiamen Island.  Xiamen was one of only 2 of the top tier cities in China to record an increase in ASP per square metre last year.  The company is a very reliable dividend payer : the dividend was raised yet again for 2014.  The current yield is now around 9%.  The P/E multiple if such a thing is relevant for a property company, limps along at around a derisory 3x; and that with 2015 numbers numbers largely locked in already.  Lastly we think, as does Australian broker, Macquarie, that the company is available to investors at over 60% off its liquidation value.  The Chairman must despair of the market.  Oh, and on top of all that good stuff its home base should be one of the biggest beneficiaries of the maritime element of President Xi’s pet policy, One Belt One Road. 

All work etc so it was a nice change of pace to get a night off at the Bolshoi Ballet, courtesy of Rusal the Russian aluminium giant, one of the sponsors of the event; and the evening was enhanced by a reception before and during that avoided the scrum and afforded a suitable sip of champagne and delectable canapés.  Rusal’s debut on the Hong Kong Stock Exchange had not been a happy one, but after a major restructuring, and capacity rationalisation, along with a weaker rouble and cheaper power prices, earnings and hence the stock price have begun to rebound.

Back to the ballet.  I have only seen the Bolshoi twice before : at Covent Garden in London and at the Mariynsky in St Petersburg.  Sorry to say the HK Cultural Centre is just not up to snuff as an arts centre for a serious city.  The ballet on the other hand was exceptional, a reminder why the Bolshoi once had the reputation and for a long time, as best of breed, a crown that slipped somewhat in the 1990s.  Here they were back to world class form in every way : not just the main dancers but many of the bit parts were superb.  A captain in the army with a brief cameo and a cannon stood out for me.

I had not seen The Flames of Paris by Boris Asafiev before that evening.  If you can get past the factoid that apparently Stalin loved it, this was a revival long overdue.  The set and costumes enhanced a score that provided all the variation needed for dancers to strut their stuff.  Outstanding choreography ensured there was never a dull minute.  I am not a huge fan of ballet, but would definitely go out of my way to see this again if I get the chance.