Bloodbath, Gold still undervalued

Little did I know how prophetic my last paragraph in my previous memoir was, as right after I sent it out, Asian markets began its rapid spiral downwards, with the MSCI AC Far East ex Japan index falling 10.1% from that date, or down 7.2% MoM. The index is still up 6.9% since the beginning of the year, but mood in general remains generally grim, as such, momentum may not come back until 2H06. In meantime, after a strong debut last month (+4.8% since inception), the fund gave back some of its gains in May and ended with an estimated NAV of 103.1, down 1.6% MoM but still up 3.1% from date of inception (24 March 2006).

Average valuations for the portfolio dropped slightly as we revised up some of our earnings post 1Q06 results announcements, with portfolio weighted average PER of 7.7x and 6.6x for FY06 and FY07, respectively against EPS growth of 21.5% and 20.1% for the same respective periods. PBV fell slightly also to 1.3x PBV vs ROE of 20.3% for FY06. The companies in the portfolio had a weighted net cash position of 2.4% of the market capitalization with expected dividend yield of 4.6%.

The sharpness of the drop in the markets has caused us to review our position a little more closely and we will continue to maintain a cautious stance into the next 2-3 months. With new subscriptions, we expect our cash position to stand at 24% in beginning of June, which I believe would put us in a good position to accumulate any stocks that are oversold. We are likely to step up our marketing efforts to look for new funds the next couple of months as we believe the recent pullback has already put some stocks back to attractive levels.

I noticed something interesting in the makeup of our portfolio which I thought would be worth highlighting to my investors. Looking at our country allocations, it seems to be split quite evenly with 41% in South East Asia and another 45% invested in North Asia markets; however, if we delve a little deeper, the ultimate exposure (i.e. main revenue sources for the companies in our portfolio) portrays a very different picture.

Forty two percent of the weighted average revenue for the stocks in our portfolio comes from Europe, and of that, a substantial portion actually comes from Germany (courtesy of our top two holdings, Pelikan International (PELI MK) and Eganagoldpfeil (48 HK), both of which have substantial business interest in Germany (as well as brand presence I might add). I will confess that this is pure coincidence and I had not set out with the intention of looking for German exposure for the fund in the first place, it just happened that way.
Having said all that, it’s not too bad to be having some German exposure at this stage. The economy looks to be recovering with unemployment continuing to drop…

…with opportunities for growth in East Germany starting to look more promising. Of course, do not forget that the Football World Cup will also be kicking off in Germany this June and should help support the seasonally weak retail period (which should bode well for retail sales for both our stocks!). Consumers across the Euro zone are also becoming more confident about their employment prospects, according to a European Commission survey released recently. The commission's surveys have shown rising consumer confidence since last July. Still, we did not highlight this aspect of our portfolio to show promising growth prospects in Europe but the fact that our exposure may not be what it would seem. Maybe I should rename the fund NTAsian-German Discovery Fund…

On a slightly lighter note, last month, quite a few people had asked me what I thought of gold, as such, I had suggested an alternative investment in the form of the SET index (given close parity to Gold at that stage). Since then, as it happens, Thailand have just launched SET futures market, so you can actually now buy SET index. The good news: If you had actually bought the SET index vs gold, you would have outperformed gold over the past month. The bad news: you would be down 7.1% MoM if you had bought the SET index. However, longer term, I would not bet against gold. The chart below shows how much relative value for gold has fallen against its cousin, “black gold”.


To put it into perspective, in 1988, at the previous peak for gold prices, one ounce of gold would have bought you 30.4 barrels of oil. Now an ounce of gold will only buy you a pitiful 8.9 barrels of oil, despite the recent run up in gold price. If you’re not willing to bet that high oil price is a temporary phenomenon, and at this stage I don’t think most people are, you better buy more gold.

Seeing as we’re on everyone’s favourite subject, I have to confess that I did manage to find what is probably the most undervalued gold play in Asia (do not fault me for not trying!). This company has 1.7 tons of gold held as fixed assets on its balance sheet at historical prices. Under HK accounting laws, a company cannot mark fixed assets to market, meaning that the 1.7 tons of gold it holds is valued at an average historical cost of US$300/ounce. Given that this company is currently trading at 0.63x PBV, this implies that the market is valuing the gold on its balance sheet at closer to US$189/ounce (vs current market price of US$630!). The only problem is, to unlock this gold value, you would have to buy a toilet (amongst other things) and melt it down, as almost a third of its gold assets is in form of the most expensive toilet in the world (verified by Guinness Book of World records), US$10m to be exact, at current market prices. Puts a new meaning to the saying “if you dig long enough in c*#p, you might just find gold”.

Despite this seemingly bargain of a lifetime, I could not bring myself to buy a gold toilet as a proxy to gold price and instead settled on accumulating more shares in Hourglass (HG SP), one of my favourite retail stocks in the Singapore market. The current price is so low in terms of valuation, that it is effectively valuing its inventory, comprising of high end watches at Hourglass’s cost, at a discount whilst valuing its regional branch network, brand name and other assets at zero. It recently reported its March FY06 earnings, which registered a net profit growth of 43% YoY, valuing it on 7x FY05 earnings. Longer term, I believe the growth potential for high end watch sales remains very good for Singapore, especially when the casinos open. Until then, Singapore is still one of the most attractive places in Asia to buy high end watches (watches is the top category in terms of retail product sales value for Singapore), especially with the recent introduction of taxes on luxury watches in China.

Happy sleepless nights for the month of June (hopefully not from the stockmarket!). It’s a time to make friends!