The Art of Green Investing

I would like to present a stock idea to you. Imagine, a stock that has the following businesses:-
• Market leader in Fountain pens and stationery business in Germany, as well as being one of the world’s premium brands.
• Brand owner of 44 brands including such names as Goldpfeil and Comtesse, Salamander, JOOP!, Cerruti 1881, Junghans, Dugena, Sioux and Pierre Cardin, Esprit, PUMA and MEXX selling in over 100 countries with a network of more than 13,800 points-of-sales.
• Top 3 producer of baby diapers (Fitti, Baby love) and the No 1 Adult diaper (Dispo, Certainty Guard) producer in South East Asia.
• One of South East Asia’s largest producers of Canned Pineapples and dominant (~60% market share) premium fruit juice player in Thailand.
• A Thai restaurant/bakery chain, S&P group, a household name in Thailand with 243 outlets throughout Thailand and 18 restaurants around the World.
• Owner for Indochina of one the most successful bakery franchises in South East Asia, Rotiboy, and for potentially other countries in Asia in near future.
• Second largest producer of Sorbitol (food additives/Vitamin C/toothpaste) in the World, as well as effectively the only other supplier of high speed Diesel to companies in Indonesia, other than the state run oil company, Pertamina.
• One of the Global leaders in Security Digital Video Recording Technology, commanding around 24% market share globally for sales of Digital Video Recorders for security purposes.
• Premier property developer of high end condominium and residences in Phuket, Pattaya and Bangkok.

Now, what if I told you this stock is forecast to grow its EPS by 20% for FY06 and 35% for FY07, respectively. Average gross margin for its businesses is 30.5% and net margin is 13.7%. Average debt to equity is 15% whilst average ROE is 21%. What kind of multiple would you be willing to pay for this stock?

It is not difficult to assemble a portfolio of world class companies, the trick is how to put together a combination of these businesses based on an existing valuation of 8x FY06 and 6x FY07 PER. (But if you do know of any such companies, don’t forget to tell me, as I certainly would like it to be part of the fund!). However, compiling a portfolio of cheap stocks in itself is also not difficult. After all, markets are littered with cheap stocks, and for most of them, for good reason. It’s when you have to assemble a portfolio of cheap stocks that are likely to attract investors’ attention over the near future that it becomes a ‘little’ more difficult, or as I always like to say, where the science ends and the art begins.

Since our launch date, in 24th March 2006, average valuation for the fund has risen from an average PER of 8.1x for FY06 and 7x FY07, to around 8.4x FY06 and 6.1x FY07, as the market started to discover some of the stocks in the fund and as we switched out of some strong performing stocks into cheaper new ideas. The latter part is particularly important for us, otherwise, our investors will surely redeem when our target price is reached if there is not always a continuing renewal of the best ideas to the fund!

Over the past month, we were rewarded with our hard digging in areas where no investor had gone when a foreign broker initiated coverage on our largest holding, Pelikan (PELI MK) (the first foreign broker to cover this company), putting a target price of RM3.60, a 35% upside from closing price at the end of September, substantially higher than our initial entry price. Another foreign broker also recently initiated coverage on Tipco Foods (TIPCO TB), currently the fund’s second largest investment, putting a target price of Bt9 (+32% upside) for the stock, again initiating coverage only after the stock had already risen substantially from our initial investment cost. We have been somewhat ‘lucky’ in the timing of our investments in our best ideas, however, the market can remain inefficient for a long time. Still, luck or not, I believe it is just a matter of time before the market wakes up to the other ideas in our portfolio. It could be 12 or 24 months from now, but in the meantime, these companies will continue to grow at an average growth rate of 20-35% per year and pay out an average dividend yield of 3.7% per year until that happens, not a bad price to be paid to wait for a rerating further down the road.

As a result of these successful ‘discoveries’ by the markets, the fund posted an excellent month for September, ending its first six months on an estimated net NAV (after fees) of 113.95, +4% MoM and +14% since inception at the end of March 2006, well ahead of our full year target of 10-15% absolute returns per annum for the fund’s investors and well ahead of the MSCI Far East Free (ex Japan) index, which was up +2.8% MoM, or +6.2% over the same period since the fund’s inception.

There is however no rest for the wicked and our company visits schedule was bursting in September, venturing where no fund has gone (or so we like to think), with around 23 companies visited in HK/China, Singapore and Thailand. This brings our total number of companies visited YTD to around 226 since the beginning of the year, or an average of just over 1 company/working day! Given that we hold around 16 companies in the fund at the end of Sept, we’re talking about a hit rate of 1 company that meets our criteria and that will eventually ‘earn’ a place in the fund for every 14 companies we visit, or even more if you consider that these shortlisted companies are already filtered out from more than a few hundred companies in each country.

As I had indicated in an earlier email this month post coup in Thailand, and given our substantial position in Thailand at the end of September (45% of NAV), which is up substantially since my previous email, I believe it is important to highlight our view on Thailand’s macro outlook. Though we are stock picking fund, I’m a pragmatist and ultimately all factors are interlinked and cannot be ignored. To summarise again my three points on the recent coup:-

1) The coup has been one of the most peaceful coups in Thailand's history. As long as the coup council shows that it will pass power over to a civilian government as soon as possible, I do not believe there will be any major demonstrations against the coup, especially as the King has already given his support to the Adminstrative Reform Council (ARC). The feeling from Thais seem to be more of relief than anything else as the coup is seen to break the political impasse that Thailand has been facing for the past few months.

2) Democratically, this is a step back for Thailand. Economically, probably a step forward from where we were. Was the constitution perfect, no. Was it possible to amend it, probably not, especially with Thaksin consolidating his power. There is absolutely no doubt that if Thaksin was to stay on for a couple more years, it would be very hard for anyone to remove him as he will have the power to amend the constitution and bend the system to strengthen his grip on power. So, between democracy now and dictatorship later, or dictatorship now and Democracy later, which would you prefer?

3) The risk mitigator: The King. Fact is that Thailand cannot rely on the King forever and must put in place the process that should not require monarchic intervention. With the coup, it gets another go, but I doubt there are many chances left to get it right. So let’s hope the experience from the previous constitution can be applied. Still we thank god for the King’s good health, long may he live.

Consequently, the Thai economy has been slower than expected the past 6 months, but outlook should be better. Most Thais have fond memories of the previous King ‘approved’ administration under Anand Panyarachun and I suspect are hoping for a similar outcome this time around. Having recently visited Indonesia and Philippines, I believe Thailand does not have the liberty of time as these two economies are starting to pick up pace and seem to be getting their acts together. If Thai politics continue to drag, it could miss out on an ASEAN economic recovery.


As you can see, our weighting in ASEAN stocks currently make up around 72% of our total NAV. That position supports our view somewhat that the next stage of Asian economic growth will be led by these former Tiger economies. Again, this is partly more from the fact that we have found more interesting (and perhaps more ignored stocks) in these markets versus other Asian markets and also the fact that our comfort and knowledge level currently are more focused on these economies. Still, our recent trip to Hong Kong has yielded more interesting China related ideas and we will be exploring these further over the next month or so.

In the meantime, I believe we are over the worse of the summer months, Asian indices have generally posted steady recovery since June as can be seen from the MSCI Far East Free (ex Japan) performance and, I expect, is likely to continue to recover into 4Q06, historically a decent quarter for stock performance in Asia. Given the abundance of manufacturers in Asia, 3Q and 4Q tend to be seasonally the strongest quarters, and can often account for more than 55% of total full year revenues.

Some food for thought: Global Warming
Finally, I would like to share with everyone a topic that I have been doing quite a bit of reading and research about recently, global warming. I strongly urge everyone to, at the very least, watch the movie, “An Inconvenient Truth”, if not also buy the book, which is authored by US ex-Vice President, Al Gore. Global warming has for me always been a topic confined to fringe activists and something I must confess to have never considered seriously. Recent events, such as hurricanes, floods, melting of the polar ice caps etc did however set my warning lights flashing, and after doing more research on this area, I have found the facts to be pretty bleak and depressing, and it is extremely clear that this problem is not one for future generations, but a problem that will have a profound impact on our immediate children, if not already ourselves. There has been far too much ignorance on this topic (me included) and we owe it to our children to leave them a world they can live in, which means doing something NOW rather than when the problem becomes too big to solve.

Going forward, this will significantly shape the way I look at investments. I will be doing more due diligence on companies that we invest in, especially on waste treatment as well as on carbon emissions. I always believe it is better to work from within than without, hence, for companies that we invest in or are already invested in, we will be actively encouraging or even demanding them to either meet or exceed emission standards. I believe as active shareholders, we can do more good by working with the companies rather than by ignoring them and hoping that the problem will solve itself. It most certainly won’t.