The Bad Investor

Stock Writeups

CIH - China Index Holdings ADR

21 January 2020

Market Cap: USD $300 Mill (6.9 USD/CNY)

Share Price: USD $3.10 @ 21 January 2020

This is a Chinese ADR spinoff. If you can't get comfortable regardless of business quality then its not for you. I have done some scuttlebutt on the ground in China, talked to some local developers, and I have high conviction in the quality of the business.

Elevator Pitch:

  • CIH is a real estate industry focused data driven tool that provides historical sales data, industry macro analytics and top 271 developer data/ratings (think a cross between Corelogic, Costar & Moody's). Customers are property developers, financial institutions and real estate agents. Key to the thesis:
    • Property development is a bad business because any earnings must be reinvested into more land to replace sold inventory. If a developer wants to stay relevant, it must keep acquiring land. As a primary tool for pricing land, CIH is a beneficiary in this industry. Furthermore, a developer continues pricing available land regardless of the vicissitudes of the property cycle, thereby insulating CIH from the the industries cyclicality.
    • Property data providers are a duopoly in China, each focusing on different parts of the workflow (land acquisition vs sales) with some overlap.
    • CIH has a lower priced product, bigger database and better after sale care. 20+ year database and largest in China.
    • Has pricing power since it is imbedded in the workflow (asymmetric cost of product vs value for customer). Has 90%+ retention rates for top 100 real estate developers in China and 5 year or longer relationships amongst this cohort, 70%+ overall customer retention rate.
    • Growth comes from pushing new products out to to new and existing customers as well begin charging existing customers for previously free service.
  • Quality earnings
    • 80% and stable gross margins, 40%+ stable operating margins, 40%+ stable Net margins.
    • Infinite returns on capital (maintenance capex + growth fully funded by float/annual subscription fees paid upfront, no NTA) and debt free (excluding float). Over 100% cash conversion rate.
    • Very attractive 10 year agreement to operate via 20 year old brand/domain from spinoff parent.
  • "Fair priced" of 12.5 x PE 2018 (TTM P/E 10.54, EV/EBIT 10.20, TTM EV/Net Income 12.35, TTM EV/FCF 7.12).
    • Mis-priced due to spinoff from parent company (NASDAQ:SFUN), negative stigma around China property market, negative stigma around ADRs. Small cap Chinese company listed in overseas company is a recipe for misunderstanding.
    • Chinese ADR and majority voting rights owned by Chairman may be alarming to some investors.
  • The thesis is make or break based on managements honesty/integrity and capital allocation.

The durability of the business segments

The business operates in the following segments:

  • 1. Data Service (Targeted at property developers, business development/land acquisition team) 30% of revs (36% growth 2017, 36% growth 2018):
    • Website access to the standardised China Real Estate Index System (CREIS) database which costs ¥60,000/Annum paid upfront (single city access) or ¥350,000/Annum (National access). Target clients are property developers, real estate agents, financial institutions and strata management companies. Currently, there are 10 different database products being offered. Below is a short description of the product I was able to trial:
      • Land version (upcoming development land auctions, historical, macro stats, monthly quarterly and annual reports, satellite images),
      • Urban Edition (project specific sales data, developer specific sales data and total market sales data, macro data, average prices, demand supply info),
      • Enterprise Edition (China top 273 developer project data),
      • Macro Version (policy changes, region specific data, developer specific data),
      • Preowned Homes (pre owned home data, heat maps, area pricing data),
      • Enterprise Risk Assessment report (205 companies, analysing external, operating risk, financial risk, other risks and 45 indicators for each entity, something like
      • Others: Office Version, Aerial Centre, Report library, Brokerage Version, Commercial Property, Macro data, House Price Decision.
    • Mobile app: ¥25,000/Annum/user. Condensed and user friendly version of CREIS system which quickly provides calendar of upcoming land sales including key data in a few tabs for a back of envelope land valuation.The website is used when writing feasibility report for multi million/billion dollar land acquisition opportunities while the mobile app can be used on out of office site visits or by upper management to grasp key data quickly to make decisions.
    • These services are required no matter how much apartment supply is in the developers pipeline, as the Business Development team will be pricing opportunities continuously regardless of macro economic conditions. The Marketing team need to monitor comparable sales to price existing inventory competitively against comparable stock in the market continuously. Clients are likely to keep using the product unless they become insolvent and CIH's customers are the largest developers in China.
    • Growth story comes from building new Costar style commercial property database and other products, then pushing out to existing and new customers (more on this is "Growth" section below. In 2018, CIH experienced a 20% growth in the number of clients in Data Services (1200), 10% in 2017.
  • 2. Analytic Services 19% of revs (22% growth 2017, 23% growth 2018): Customised, project specific white papers for developers which addresses quality of development or investment/macro potential of the locality. May include online customer satisfaction surveys (management emphasised that they do not do extensive, capital/resource intensive, on the the ground research, they prefer desktop studies). Developers use these reports as a third party opinion and present these to potential residents or financial organisations for additional credibility as marketing aids and/or to to improve service for their strata management businesses.

The other side of this segment is offering reports to developers that may help the developer make decisions on land acquisitions. These third party reports provide an independent opinion to support land acquisition reports or business plans. The cost of these reports (around ¥15k depending on level of detail) is a fraction of the cost of an analytical mistake on a multi million/billion dollar project and are becoming more standard parts of the workflow for large developers as third party opinions (managers will always prefer to commission these reports since they mitigate career risk). In 2018, CIH experienced a 30% increase in the number of clients, 20% in 2017 from both monetising previously free products and pushing out new product lines.

  • 3. Promotion Services 45% of revs (19% growth 2017, 13% growth2018): CIH is an authority in the real estate industry that publishes Top 10 and Top 100 industry reports (weekly, monthly, quarterly & annually ranking developers on brand value and economic trends) and holds industry events in March and May where the research is presented to industry leaders. CIH also consults with the China National Bureau of Statistics along with its partners at Tsinghua University to help guide the direction of future economic policy.

CIH then leverages its reputation in the industry by providing value add services to these developers such as certification or those aforementioned in 'Analytic Services' from the data that these companies provide. While 'Promotion Services' is company specific, 'Analytic Services' is more project specific. The cost/value asymmetry for the certification is also clear when the business goes to raise funds. The cost of the certification is minuscule compared to the increased loan sum or cheaper cost of funds over the life of a project.

The data provided by the companies is then used to rank and compare with others in the industry and the flywheel continues. The barriers to entry are high since the most powerful developers are unlikely to trust a no-name business with their data. Growth in the 'Analytic Services' is higher which makes intuitive sense since the rankings are unbiased and not necessarily for profit while while the 'Analytical Services' are. The above 3 segments are the most predictable and sticky as the clients are unlikely to stop using the products .

  • 4. Listing Services 6% of revs (-28% growth 2017, 160% growth 2018): Online commercial real estate listing website/app that allow customers to post advertisements and make changes for a period of 1 to 3 months for a fixed fee. This service occurs through favourable terms with the 20 year old parent domain/brand and website (CIH only pays SFUN ¥500k per year for software which generates circa ¥500 mill and no royalties/fees for branding etc). This is the least desirable business and moves with the sentiment of the real estate market which is cyclical in nature. This is in a competitive oligopoly (about 8 other major real estate listing platforms). The network is the largest within this oligopoly by page visits and it is still a good, asset light business with high returns, however it's limited predictability makes it a less desirable business than the rest of CIH. Also, the nature of network effect businesses is such that if it starts losing its reputation as customers leave the service, the platform could fail quickly and catastrophically (although the likely hood of this happening is very low given the brand and history of the business). This segment is only <10% of the revenues.
  • The competitor: CIH has one competitor E-house holdings (HK:2048). E-housing holding is one of Chinas leading real estate agencies, so their data is targeted mainly at apartment sales data in their China Real Estate Information Corp (CRIC) database (this makes sense as this segment has synergies with their broker/agency business). E-house's CRIC database is the focus of the Sales & Marketing team (not the business development/acquisitions team as for CIH's CREIS which has a better land database). The cost of the competitors product is ¥500k/Annum, 40% higher than that of CIH. The feedback about ongoing/after sales service is poor for E-house and that they are a sales focused company. One reason for E-houses higher subscription fee is higher overheads for E-house who has local researchers in the satellite cities while the researcher for CIH are more centralised (CIH does not do resource intensive work and are data focused). CIH has a more dominant positions with 20+ years of data being established in 1994 (8 years earlier than E-house) covering 2310 cities (1923 more cities than E-house). When reading China real estate industry reports and outlooks from investment banks, the most common sources are NBS (National Bureau of Statistics), CREIS (CIH), CRIC (E Homes HK:2048) (many can be found using google). Like the investment banks, the developers I spoke to (leading developers in the region) also use both services. While there is some overlap in the services provided, the competition is low between CIH and E-house since users often subscribe to both services, however when a potential client has a limited budget or can only choose one provider, they are likely to go with cheaper CIH product which also has more data and better support/post sales service.


The business is fully funded by float from deferred revenues. It has negative net tangible assets and so it has infinite return on capital. If you include cash into the NTA, it still returns 190% on NTA, and if you count float as cashflow, that figure doubles.

The best part is that the cashflow can go back into building new business lines to continue generating 80%+ Gross margins and 45%+ operating margins with very high incremental margins (essentially no additional cost per new customer). Management has mentioned that going forward they are focusing on expanding their database. This is a good strategy as the two drivers of the competitive advantage for CIH is 1. database and 2. client relationships.

The reason for such high margins is largely in part to its agreement with SFUN. In short, CIH pays ¥500k per year for software rights with a 10 year contract and all ongoing technological maintenance is on SFUN. It pays nothing for getting customers from the website, no data license fee and no intellectual property fees. CIH also has lease agreements with SFUN to lease office space from the buildings they own (these rates were fair when checked against local rent rates). There is no way to know how long the contract will last, however both SFUN and CIH are controlled by Mo and it is in his best interest to maintain the current agreement. That being said, his interest may change at any time. This is a risk.

Tax is a big consideration for Chinese companies. The government always reaches for it's cut in overly profitable businesses. Examples are in property where the Land Value Add Tax can get as high as 60% after all other taxes have already been deducted! A similar story exists in BaiJiu (Chinese white wine companies like Moutai). Technology companies are on the other end of the spectrum. China is encouraging technological development and has big tax breaks for tech companies including grants (which CIH receives, but are insignificant to bottom line). The motivation for this has become clear in light of impacts of trade wars, tariffs and national security technology talks as China seeks to become independent and a leader in technology.

Capital Allocation/Management

As mentioned in the 'Elevator Pitch', management will make or break this thesis. It comes down to a judgement on Vincent Mo's honesty and integrity (especially since he owns absolute of voting rights). CIH is very clean at the moment but one way to get some hints into how it might look in the future is through how he has allocated capital in the past at SFUN (the parent of the spin) since CIH has a limited history on it's own. SFUN has in part become a holding co for Mo, however, this spinoffs (and the other proposed spinoff) appear to be recognition of the confusing structure.

Property (30% of SFUN assets) - Investing in property is not the core competency of SFUN so this is concerning. Properties SFUN owns are:

  • Buildings owned: 325k sqf at 72 Wall st NY, 265k sqf in San Fransisco, 69k sqm in Beijing, 3k sqm in Hainan, 22k sqm in Hubei, 46k sqm in Chengdu and 30k sqm in Chongqing, 42k sqm in Shanghai. These acquisitions make sense from a strategic perspective but not an asset allocation perspective.
  • Other: properties owned include 10k sqm of certain properties in Meilin lake villa in Jiangsu , Upsky Hotels (San Fransisco, Long Island Lighthouse) and Beihai hotels (I have no idea what villas and hotels have to do with an internet platform business)

Management would argue that the business produces so much cashflow and that reducing rent will increase margins, however this is not the best use of capital as it is a significant drag on return on equity. From an opportunity cost perspective, interest rates are around 2% in the US and about 4% while rental yields 3%-6% in China so there is little value add in trying to reduce rental costs. Since the cashflow can't be reinvested in the business at high margins, and opportunities offer low double digits rental yield (assume 50% leverage) then the cashflow is arguably better in the hands of the shareholders.

The office building purchases are a yellow flag. It might have been clever to buy the NY building at depressed prices in 2013, but it's still not the core competency of the business and depresses ROE. The Villas and Hotels are a red flag. Often, Chinese business leaders purchase assets to show guests/potential business partners/officials etc on local/international delegations and is Chinese business culture, however these investments do not show discipline on management's part.

Short Reports

In 2013 there was a series of 3 short reports by Glaucus focusing on 3 issues:

  1. Expenditures relating to training and non-profit initiatives;
  2. Corporate governance issues;
  3. Variable interest entity (VIE) structure.

In short, the major concerns were the Commercial Building in New York used as a training centre, the Hainan Resort purchase, and a home purchased under a charitable organisation including donations which are unaccounted for. CFO of the infamous Longtop Financial fraud acting as chair of the audit committee of SFUN.

Restructuring of SFUN?

SFUN went through a major strategic change in 2014 when the real estate market downturn impacted its business. Previously, it was a advertising based information platform with main customers being sales agents. It transitioned to a business which takes place of the agent and has direct relationships with developers and includes transactions through it's website. It apears that management recognises the confusing business model between the transformation and the hodgepodge of assets and is the could be the reason for spinning off CIH. Management has also mentioned the potential spinoff of its core business, the advertising, marketing and listing business although the timeline for the spin was end of 2019.

SFUN purchase of CIH shares

On 24 December 2019, SFUN agreement to buy up to 15 million CIH unlisted B-shares (Vincent Mo's non ADR shares with 10:1 voting rights) at fixed price of $5.99 (190% of todays price of $3.1) from 24/12/19 to 24/12/20.

15 million shares of CIH represents half of Vincent Mo's shares in CIH. He has an 36.6% interest in SFUN, so the transaction reduces his ownership of CIH from 34% to 22.6 % while maintaining full control. Essentially, Mo is selling CIH shares which doesn't show confidence on his part, albeit at a 90% premium to todays trading price. SFUN shareholders are forced to pay the high price of $5.99 for shares selling at $3.10 on the market, while Vincent Mo enriches himself. CIH holders aren't affected except by association with Mo and SFUN.

Between 29 August 2019 and 30 December 2019 SFUN bought 2,345,876 A shares. On 27 December 2019, SFUN purchased 5,000,000 shares from Mo's holding company as per the 24 December 2019 agreement. In total, as of 27 December 2019, SFUN owns 7.6% of CIH and Mo owns 29.5% of CIH.

CIH Acquisition strategy

SFUN had made strategic investments in other offline agency businesses. Other investments (20% of SFUN assets):

  • Hopefluent Company Holdings (1.6% of SFUN assets).
  • Shenzhen World Union Properties Consultancy (8.2% of SFUN assets), 10%
  • Topspur Realestate Consulting (3% of SFUN assets)

The above investments were made as 'strategic partnerships' across their business lines, including advertising, e-commerce, listing service, new home agency and consultancy.

  • Guilin Bank (2.6% of SFUN assets),
  • Wanli New Energy (4.6% of SFUN assets)

The Guilin Bank doesn't have a direct relationship with the core business, however this relationship may help with securing debt. Wanli is a lead acid battery manufacture which seems to have zero relevance to SFUNs business at all.

These are the types of acquisitions we should be looking out for. The prospectus states that it will look for acquisition opportunities where the subject has differentiated data or technology. This is the right approach strategically, but being a tech company, we could see some crazy acquisition valuations. This may be red flag unless they buy out smart strategic businesses or their major competitor for a fair valuation. It is encouraging that SFUN didn't make any acquisitions in tech companies, but the horizontal aquisitions are concerning.

SFUN has occasionally bought back shares, but has diluted shares by 1.5% CAGR over 10 years.

Between the hodgepodge of assets, the short reports, the SFUN restructuring, spinoffs and related party transactions, it's alot for a shareholder to get their head around. Management has been quite candid about business operations in earnings calls, however, I don't think they've done enough to explain how the above actions benefit shareholders.


Lets look at businesses with similar characteristics.

  • Corelogic (NYSE:CLGX) P/E 111 P/S 2,
  • Moody's (NYSE:MCO) P/E 35 P/S 10,
  • Costar (NASDAQ:CSGP) P/E 73 P/S 17,
  • REA Group (ASX:REA) P/E 130 P/S 15.5,
  • E-House (HK:2048) P/E 8.5 P/S 1.1
  • China Index Holdings (NASDAQ:CIH) 2018 P/E 12.5, 2018 P/S 5

TTM P/E 10.5, TTM EV/EBIT 8.3, TTM EV/Net Income 10, TTM EV/FCF 6. DA is not meaningful and FCF includes deferred revenue (since differed revs can’t be refunded, 6.9 USD to CNY exchange rate).

E-house is a realestate agency business first and foremost (larger part of business revenue). A glance at the financials combined with the business models dependancy on the macro environment makes it clear that its an inferior business, and is priced appropriately lower than CIH.

The valuation is back of the envelope and we check the assumptions from a few perspectives:

The average value of a stock is PE 12.5 (fair price). CIH is far superior to an average stock. A business like this is probably worth PE 18-25 (4% earning yield and 11% growth implies a 15% discount rate). Furthermore, assuming that Mo's recent private sale is his interpretation of a fair price, $5.99 which suggests a multiple of PE 26. Finally, the long term bond rate in China is around 4% which translates to a PE 25.

If we are paying a below average price (PE 12.5) for an above average business, the margin of safety comes from the quality of the business. Using the reverse DCF method, the MOS is any growth in excess of 7% (15% required rate less 8% earnings yield). These figures are conservative since earnings to cashflow conversion is above 100% and yields would be higher on a cash adjusted EV basis.

The growth story comes from the build out of the data business. In the worse case scenario (assuming the growth story fails), the current 33 city commercial property coverage is 22% of the Data Services business revenue (33/150 total cities for real estate transaction data). That's 6.6% of total revenues. At 40% net margins, a loss of 6.6% would reduce earnings by 16.5% and this would in tern imply a multiple of PE 15, which is average price to pay for a better than average business the existing database business and this represents a margin of safety. Again, this is a conservative assumption as majority of the existing business is based on the non-commercial data business (likey less than 22%).


The good thing about this thesis is that it doesn't rely on astronomical growth, however below is a discussion on how I think about potential growth for CIH.

The 'CoStar' business

The growth story is in the Commercial Real Estate database business. This is where my thesis varies from others out there. In the conference calls and in other write-ups, they focus on CoStar and CIHs new business, a business which is more competitive and traditional consultants (e.g. JLL, CBRE etc) have better clients relationships. Speaking with management in Chengdu, the top tier 2 city in China, they did not have confidence in the platform as it stands in their area (however 1st tier city data may be more comprehensive).

The current CIH database business covers 150 cities for real estate transaction data. It covers 2310 cities for land sales data. In the conference calls, management says that they are up to 33 cities for the commercial property database with a target of 40 cities by end of 2019 and 20 cities added per annum thereafter.

At this pace, it would take 5 years to reach the same scale as the existing business, which took 20 years to build. In the prospectus, it lists the number of cities added and the average growth for years 2016, 2017 and 2018 between residential, commercial and land segments as 1.7%. Due to the competitive nature of the business and ambitious growth goals in this segment, it is unlikely that this is where growth will come from in the future.

Where has growth really come from? Management claims that growth comes from an increase in customers. This is plausible, and CIH is more likely to succeed versus a competitor with new products since it can push new products through to users of existing products. The following products are managements explanation for the 20% customer increase from pushing new products released to the market and existing clients in 2019/2020:

    • Landlord CIH tool ended trial period at end of Q3
    • Office database for commercial real estate developers and operators and financial institution in trial period and some clients have purchased (financial institutions are 60% of subscribers for this product). Previously free, began to be monetised in August 2019
    • Listing tools to assist real estate agents to assist them in listings seeking to release in Q3 2019
    • Enterprise risk management platform for financial institutions released in October 2019 ratings for the business and related shares or bonds.

Implied growth/reverse DCF

Like the 'valuation section', we check that the growth assumptions make sense from a few different perspectives. The current price implies a 8% earnings yield and a growth rate of 7% growth rate to achieve a hurdle of 15% (8% + 7% =15%). If float is included into the Price/FCF calculation, the free cashflow yield increases.

If the business has pricing power, it just needs to increase prices with GDP and inflation. China's GDP growth is 6% and inflation is 2%. That's 8%. The Data Analytics and Promotional Businesses are mission critical and have pricing power in excess of GDP. To check this we look at the 'Promotional Business':

We can assume that the 'Promotional Business' doesn't grow substantially by the number of users. This is because it primarily releases non for profit Top 100 ratings, where the customers wouldn't grow faster than the growth of developers in the industry. Under this assumption rev growth comes from price increases only and growth was 19% (2017) and 13% (2018). Number of developers increased by 2.2%/annum (2009-2018) while real estate agents grew 3% per annum in the same timeframe, blended growth is be somewhere between 2.2%-3%. Assuming worst of 3%, CIH has been able to raise prices at least as fast as GDP (13%-3%=10% which is greater than 7%).

Tailwinds and the general trend of Chinese developer industry and the addressable market:

There is a general trend toward consolidation in the development business as operational workflows become more sophisticated.

Before major policy changes, developers received cashflows from sales prior to breaking ground. This cashflow could be used to purchase another site and repeat the process all before breaking ground on the first project. This in effect leveraged developers significantly and would work out as long as the the general public kept buying and prices keep rising. Sensing a bubble, government policy changes delayed the timing of the cashflows for developers and implemented strict purchasing regulation to cool the market. This resulted n many developers unable to meet cashflow requirements and became insolvent. Many either closed down, sign joint ventures with larger developers or get acquired. This means that the larger developers get larger, have economies of scale, consolidate and get even larger.

Both from government side and the business side, we are seeing policy and business culture become more modern/western. At the planning department, the implementation of processes and adherence to rules is moving toward that of established countries. Large businesses are also moving toward operational excellence in workflows such as documentation and analytical rigger. In some cases, government employees are more strict than in western cultures. The drivers of these traits are threefold. 1. Higher town planning and quality standards which is natural in developing economies 2. Employee fear of career risk. Communist punishment extend past 'limited liability' and career risk aversion is strong both in government and corporate. 3. Implementation of digitised workflows which improve efficiency, work quality, documentation and accountability. Notice that these three are a flywheel and act to push each forward.

Consolidation and increased operational rigger are tailwinds for a workflow based SaaS company like CIH.

Another avenue of growth comes from monetising free products. Prior to the spinoff, SFUN was offering CIHs products to clients for free. CIH is in the process of charging for these products. Furthermore, the services are underpriced compared with tits competitors, suggesting untapped pricing power.

As far as CIHs addressable market, it has 1200 database customers (including developers, agents, brokers, financial institutions) and has an addressable market of 97,900 developers (growing at about 2% despite effects of consolidation) let alone other potential clients such as agents, brokers and financial institutions.


It is impossible to know exactly why a business is mis-priced and isn't always helpful to think about, however there are a number of plausible reasons for the mis-pricing in this case:

  • CIH was a spinoff and not highly publicised like IPOs. Direct listing doesn't raise money so there was no marketing to inflate prices.
  • No US or Mainland China based analyst coverage in conference call. Analysts on conference call ask questions about the general trend of the property market rather than the core drivers of the businesses like new product releases and customer retention rates.
  • Illiquid micro cap (300mill) with half of float held tightly by chairman and other institutions (63% of oustanding shares).
  • Chinese ADRs are out of favour (rightly so in some cases) due to generalisation about fraud.
  • Chinese real estate is out of favour because of strict policy being enforced by government.
  • Price correlated to SFUN which has been in a down trend for a long time

CIH Pre-mortem

What will cause the investor to lose money? The business has a strong moat and big Margin of Safety. Things like currency aren't a major risk. The 3 major things to watch out for will be 1. acquisition pricing or acquisitions unrelated to the core competency of CIH. It appears Mo has already made SFUN his personal conglomerate, hopefully this doesn't happen with CIH. 2. The agreement between SFUN and CIH to share data, intellectual property, software and the website may change at any time at Mo's discretion, this is another risk. 3. Finally, Vincent Mo is the controlling shareholder and could pull the rug out from under minor shareholders in some nasty way. Chinese Yuan devalues.

It is for these reason that CIH is not appropriate for a concentrated portfolio (like ours) but may have a place in a diversified portfolio. Notable owners are General Atlantic (8% of shares out), Davis Advisers (5%) & Carlyle Group (2.5%).

Disclosure - I own shares of China Index Holding. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do your own research before purchasing any security

Got any thoughts? Email me:

TYO:8909 - Shinoken Group

26 December 2019

Market Cap: Yen $47 Bill (AUD $620 Mill)

Share Price: Yen $1288 @ 26 December 2019

I have added one new position to the portfolio since my Mulpha writeup. Reflecting on the year, I have moved toward defining/staying within my circle of competence. I have been in the property development industry for close to a decade in both Australia and China and that gives me high conviction in 3 businesses mentioned here in this post (Mulpha, Shinoken & undisclosed). My investing history to date has skewed toward discount to asset/sum of the part plays where I was most comfortable and had high conviction (like Mulpha). I continue to hold onto Mulpha because it is just so cheap vs quality of assets. This year I would like to focus on quality companies within my circle. Previously i didn't think that was possible since real estate is often associated with cyclicality/unpredictability and dirty cigar butts. That brings me to Shinoken Group (TYO:8909).

Elevator Pitch:

  • Half the business is asset light property management business with high return and high customer retention (98%)
  • Other half is non conventional development business.
  • Niche target market: Busy credit worthy salary men property investors who need someone to take care of the entire investing process. Shinoken offers a full package service from land sourcing, acquisition, design, development, construction, renting to tenants, offering utility supply to tenants, property management, property insurance and even aged care once the tenant is ready to move. This is attractive for investors as they can leverage up very highly and take advantage of the interest rate/rent yield spread (1-2%/4-5%)
  • Selling at about 7 x PE now which is still attractive and slight premium to book which is fair given its superior-to-market returns.
  • Misplaced due to recent turmoil in industry which Shinoken has no symptoms/does not share the same target market (see write ups for details)
  • Other bonuses such as listing of a REIT which is another client base in addition to the working class property investor.

This has been written up so I wont waste your time here:

I have been looking at another position which is an ever better company than this one (but more expensive/fairly priced). Look out for the post.

Disclosure - I own shares of Shinoken. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do your own research before purchasing any security

Got any thoughts? Email me:

KLSE:Mulpha - Mulpha International Bhd

3 July 2019

Market Cap: MYR $700Mill (AUD $240Mill)

Share Price: MYR $2.19 (AUD $0.75) @ 3 July 2019

*Edit: Update 14/08/19 - Thesis broken as management fails to close AOG price gap by agreeing to sell to Brookfield for significant discount to NTA. Mulpha shares the same managmeent. Position sold.

*Edit: Update 17/07/19 - Sold Cairns Esplanade for AUD65M, was held on books for AUD36M

*Edit: Update - Mulpha agreed to take aprox 2/3 of its AOG ownership in Brookfield script and aprox 1/3 in cash which resulted in a small write down. Continues to remain cheap trading at least 50% discount to asset value

Elevator Pitch - Mulpha is the permanent capital vehicle for the chairman Lee Send Huang. It is an Investment holding company and property developer listed on the Malaysia (Burhad Main Market). However, all but 2 of its blue chip commercial portfolio and strategic development portfolio are in Australia (others in Malaysia and New Zealand). This misunderstanding is the primary source of mis-pricing causing the business to sell at 25% of reported NTA. Of the NTA, Mulpha's investment in Australian listed company, Aveo Group, is worth the value of Mulpha's market cap. The quality of the portfolio at substantial discount is compelling enough, however there is also catalyst on the way. Even if this catalyst doesn't execute, there is the environment for many other catalysts.

Aveo is currently in talks with Brookfield about a whole of company sale with expiry date for negotiations on the 22nd July 2019. If the sale goes through, this discount to asset value stock will turn into a net-net!

Areas of Businesses

Property Development: Active both in Sydney and in Malaysia. The most notable development sites are in Norwest, Sydney, a suburb in the North West of Sydney which recently opened it's metro station (Norwest). Mulpha owns significant land parcels in the most prominent locations including the suburbs primary shopping centre. Projects owned by Mulpha include Marketown (4.4 ha), The Greens/Haven/Neo (4.4 ha), Essentia (6.1 Ha). Both Market town and The Greens have enormous uplift potential subject to the approval of 2000 apartments.

The other substantial development site is Leisure Farm Malaysia (370 Ha) which is located 40 minutes from Singapore. A high speed rail linking Kuala Lumpar and Singapore has been announced for anticipated for completion in 2026, with a station at the project. This project is recorded on the books for significantly less than its actual value.

Hotels, Resorts and Commercial Buildings: These include the trophy 509 room Intercontinental Sydney, Sanctuary Cove resort Gold Coast (64 ha inc hotel/office/residential/golf course), trophy 166 room Hayman Islands Great Barrier Reef (290 ha with 17 house land lots for sale), Waldorf Stadium Apartment 4-star Hotel Auckland, Rydges Esplanade 4-star Hotel Cairns, Transport House Sydney (strategically located adjacent to the Intercontinental site and could have development uplift in the future).

Aveo Group Equity: Mulpha owns 22.6% of Australian listed Aveo Group (ASX:AOG, AUD $581mill) which is a developer, owner and operator of aged care providers. Aveo is a defensive business that services the aging Australian population and is the second largest aged care provider in Australia after Lendlease and before Stockland. The homes are sold and the lump sum for the property is paid upfront with a service fee being recognised annually. When the resident leaves, there's exit and refurbishment fees that are deducted from the upfront payment with the balance being paid back to the owner or their estate. This is a very low return on asset business but it makes use of the float from upfront payments from residents as leverage/float and is able to achieve 17% ROE. All this is interesting, but the most interesting thing is that Aveo is trading for 50% it's NTA. The value of Mulpha's 22.6% ownership is AUD $256 Mill at the current market value of AOG (MYR $740Mill) which covers the market cap of Mulpha today. Aveo is in the process of negotiations with Brookfield for a whole of company sale.

Other investments:

KLSE:Thriven Global Bhd (24% ownership) - Malaysian listed real estate developer. Value of ownership MYR $28.8Mill marked to market. Market price 37% discount to NTA.

Education Perfect (39% ownership): purchased stake for MYR $46 Mill. Has 1400 schools as clients.Unknown revenues and substantial admin costs looking at the employee roster on the website. Assumed worthless. For comparison, publicly listed company Kip Mcgrath has a similar market cap (ASX: KME) and is in the same industry.

New Pegasus (33% ownership): London property, equity worth MRY$ 116Mill.

Asset management business : Pindari Capital is a real estate focused fund that does direct real estate investing and debt investing along with a range of other property related services. Likely (but nor solely) used to fund Mulpha/Aveo projects. Book value and underwriting skill unknown. Assume no value.

Wine business : Owns a vineyard and produces wine. Assume worthless

Others: there are potential other investments which aren't listed in the reports. We will assume nil value.

Misunderstanding - The core misunderstanding by the market is the fact that Mulpha is listed in Malaysia while it's main operations are in Sydney, Australia. It is unlikely Malaysians understand Sydney property development outside of what they hear in the news, which has recently been about Sydney's falling house prices. Further exacerbating the bad sentiment, Aveo was the target of an investigation into the ages care industry in Australia with claims for mistreatment and unfair terms for their residents. This received negative press both in Australia and Malaysia. The current chairmans father, Lee Ming Tee, has a poor reputation amongst the Malaysian and Australian community for falsifying accounts and acted in ways to prejudice minority shareholders. He was sentenced to jail for one year in 2004. Since Lee's son has taken over, there has been little news of foul play.

Another reason for the misplacing is the relatively speculative nature of emerging markets. These factors combined with the illiquid, overlooked nature of the stock.

Management - The chairman, Lee Send Huang, who as taken over the reins of his father Lee Ming Tee in 2003, is a 48% owner of Mulpha. He shares the board of Aveo, as chairman, with one of his directors at Mulpha. The behavior of management has raised some eyebrows.

Mulpha has provided a number of ongoing, related company transactions to Aveo including Rent, Asset Management fees, Administration and Commission on sales. It is difficult to know if these rates are fair. Provisions of financial assistance are regularly issued to Mulpha Ventures (MYR $4 Mill/pa or 0.04% of NTA/pa). It is unclear what happens to these loans and how much of these loans get written off although these could be legitimate. Lee is a 61% owner and Chairman in SUN HUNG KAI & CO. LIMITED 新鴻基有限公司 (HK:0086). There are a number of SFC filings which highlight foul play in the securities trading company. Although there are a number of questionable actions by management but it doesn't appear that they are hugely detrimental to shareholders (except for Mulpha Ventures which is a negative both if it's legitimate speculation or fraud).

From an asset allocation prospective, management has said that it is willing to sell parts of its portfolio if it gets offers that are in excess of what they think the assets are worth. Their asset allocation has been good to date. They purchased a portfolio of 4 properties including the Intercontinental Sydney and Hayman for AUD $400mill sold the other two for AUD$85 mill and AUD $141mill leaving a coast base for the aforementioned properties of AUD $174 mill. Those two properties are, in the worst case, worth AUD$ 220mill.

Valuation - The thesis is that this is a discount to asset value stock with a catalyst that may turn the illiquid assets into liquid asset. It becomes a net-net. The core requirement for these plays is that the business have a history of profitability so that the value of the business does not evaporate as you wait for the market to realize the value of the assets, even if this catalyst doesn't execute.

Earnings are irrelevant in this case as fair values are changing year to year on the properties and affects the earnings figure. Cashflow from operations is a better measure. In the past 14 years (2005-2018) 2012 was a cashflow negative year due to European debt crisis' effect on sales. 2009 was a cashflow positive year and 2008 was a loss making year despite relatively high revenues (I suspect its because of high volumes of properties under construction and high expenses which were not recovered in proportional revenues).

The portfolio of businesses and properties looks different today than it did in 2012. Today, 7 out the the top 10 properties are cash generative while in 2012, only 5 were. The other 5 were development sites which are highly capital intensive so it is expected that the business will remain profitable as long as the portfolio is mainly cash generative properties.

The value of the assets is the most part of the business. My summary is as follows (see the link for details):

Sum of the parts Value (MYR)Property Development 2357.01
Hotels & Resorts 1538.43
Investment 28.80
Aveo Group 742.05
Asset Value 4666.29
Cash 150.57
Liabilities -2654.60
Net Asset Value 2162.25
*The detailed valuation can be found here

Mulpha's market cap today is MYR $700mill while my conservative valuation is MYR $2160mill (Margin of safety of 65%). This valuation doesn't take into consideration the strategic value of the assets nor does it consider the potential uplift from ongoing planning proposals. It also only takes into consideration the top 11 holdings and excludes any other investments other than Aveo.

The average return on equity has been 6% over the last 5 years. A business like worth around about its asset value. Given how conservative I've been in the valuation, this is a very cheap business.

The debt appears to be quite high, however, in property deals, the individual assets can either be loaned against individually or bunched up into a cross-collateralized debt facility. It is likely that the commercial investment assets are bundled up into a single facility with one bank. It's also unlikely that the bank will call the debt on the portfolio of bluechip assets on a large debt facility. At times, development loans can be rolled up into the large facilities, which reduce the risk of the bank seizing the development site but also expose the entire portfolio to a potential bad development project. Often, large mature companies with experienced management teams and a proven track record have more bargaining power with a bank. It is even more true for clients with large facilities. It is unlikely that the debt is a major risk here.

Competitors with similar assets such as other Australian ASX listed developers Mirvac, Crown, Lendlease and Stocklands have ROAs of 4-8% and PEs of 9-20. ROA is comparable but the PE is 3. The industry average price/NTA for hotels/resorts/cruiselines is 0.53 while for travel/leasure/hospitality it's 0.90. Mulpha i cheap by all measures, especially for the quality of the assets.

From a probabilistic perspective, if we assume that the price will reflect only 7/10 NTA in 10 years with no growth, then Mulpha’s stock will return 11.3%. Given that a property cycle in Sydney is generally accepted to be 5-8 years it is more likely than not that the market will revert to the mean within 10 years. Another way to look at it is to say that if there’s a 6% chance every year that a catalyst will occur, odds will be in your favor in 10 years.

Now, if we assume that Aveo shares will reflect 70% value with no growth, in 5 years, it will return 6.9% plus 2% dividend yield to return a total of 8.9%. I think these are conservative scenarios for both cases. If the businesses improve, buy back stock, pay dividends, properties revalued, continual development of properties, reopening of the Hayman resort or any other catalysts, then the return will be higher. In this case, we're saying that we need a greater than 10% chance a year that a catalyst will occur. In just the past 12 months, there have been 2 equity purchase offers which makes the 10% chance look quite realistic.

Catalyst - In the potential sale of Aveo, Mulpha is the largest shareholder in Aveo and since Lee is chairman of both companies, it is likely that he wants to see Aveo's 50% discount to NTA close, at least partially. Lee would likely be able to deploy the capital back into the Sydney property market given its position in the property cycle.

There is a risk that if the price drops further, Mulpha will make a low ball bid, however this is unlikely given the cash balance of Mulpha (MYR $150mill cash vs Aveo's MYR 2180 Mill market value of shares not owned by Mulpha). It is likely that his interest are aligned with the shareholders at Aveo and wants to see a deal get done.

Management act questionably at times, however this does not seem to be at the loss of the shareholder. Furthermore, the business seems to be the chairman’s permanent capital vehicle for Lee, which suggests that if the sale of AOG completes one of these scenarios is likely to occur:

  1. the cash is redeployed into other assets. This is most likely given that this is the permanent capital vehicle for Lee and the current opportunity set in Sydney property.
  2. the cash is returned to shareholders via buybacks. Possible and preferred, especially given the current discount to asset value. It has done this in the past and keeps a mandate renewed annually to repurchase up to 10% of the issued shares annually. This is possible. There is a very small chance that the business buys back 60% of the shares outstanding and concentrates Lees shareholdings to 75%, which would allow him to delist. There's a 25% minimum free float requirement. The management may then delist and attempt to offer a low ball bid for the remaining minority shares. This seems unlikely. This would take 3 years to execute and can be monitored through quarterly reports.
  3. the cash is returned to shareholders in the form of special dividend. This is the most unlikely unless:
    • the cash is distributed to shareholders, including Lee.
    • the Lee uses the cash to purchase 30% of the excess shares to hold 75% of the float and delist. I find this unlikely. Furthermore, there may be tax implications for Lee in this case and given Lee's fathers business philosophy, it seems that the family prefers to control more assets with a smaller equity base by making more acquisitions.

While not all above scenarios are ideal, they would all be value accretive in some way shape or form, and should allow the shareholder to exit if management chooses to do something distasteful.

Summary - This is a business selling for less than asset value which is profitable. There are compound misunderstanding which make for compound mispricings. Conservatively, Mulpha is selling for 35% of it's value, with optionality. It's average ROE over the past 5 years is 6% which deserves a a value around book. This is not a perfect situation, there are some risks around management and uncertainties around the catalyst, however, there is a point where the opportunity is priced so cheaply that these risks are accounted for.

Both Mulpha and Aveo are cheap and have their own risks/rewards and are priced that way. Aveo would pay out cash and is listed in a low country risk market, while Mulpha would see the capital redeployed via the hands of management. Both businesses are controlled by the same management team, the main difference is how much uncertainty you're willing to deal with, but the way they're priced now, you get what you pay for.

Disclosure - I own shares of Mulpha & Aveo. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do your own research before purchasing any security

A note on Sydney Housing (Macro) - Theres a reason this is the last section. Because normally I wouldn't even bother mentioning macro trends but there are some tailwinds which might help Mulpha. The last 6 months to 1 year has seen the "bursting of the property bubble" in Sydney. This was due to tighter lending regulations on foreign investors (introduction of doubling of stamp duty) as well as APRAs restriction on investment mortgage loans which dried up capital flows from overseas. In the last month, a confluence of positive forces have converged. Interest rates have been lowered twice from 1.5% to 1% which is a historic low. APRA removed the restriction on new investment only loans and APRA also removed the 7% serviceability requirement for mortgages.

It was anticipated that Labor would win the most recent election, and if they did, they proposed changes to the dividend tax credits as well as proposed changes to the 50% capital gains discount on the sale of a residential property to 25% as well as the deletion of negative gearing which allowed investors to include mortgage interest payments as an expense to an individuals taxable income. Liberal won and the positive reaction was seen immediately in a stock market rally. The positive effect on housing was also seen in auction rates. During peak bubble, auction rates were 80 percent, they fell to 40% when the bubble burst and since the election have returned to 60%. Anecdotal evidence speaking with my mortgage broker suggests that business has increased 2 fold since the trough.

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ASX: MGC - MG Unit Trust Units

24 June 2019

Market Cap: AUD $64Mill

Share Price: AUD$0.35

*Edit: Update 18/11/19 - Remaining litigation settled. Anticipating insurance to cover a significant portion of settlement.

Background - Murray Goulburn was one of the largest dairy food producers in the Asia pacific region up there with Fontara. It had a cooperative structure with the supplier/farmers which owned the business while there was another linked entity that was publicly listed and profits were distributed between supplier/farmers and shareholders using a profit sharing mechanism.

Long story short, conflicting incentives of management bonus scheme lead to inflating dairy prices. The structure lends itself to unaligned interest between management of a publicly listed company who are also responsible for the profits of the supplier/farmers. Add forecasting of a commodity price which is un-forecastable leads to certain disappointment and you get class actions from both the shareholders and farmers. Saputo made a bid and bought out the business for a special dividend of AUD$0.80, leaving only the listed entity liable for 2 litigations which held cash and equivalents of AUD49c as of April 19.

The entity was a part of 2 class actions, 1 of which has been settled as of announcement on 24 June 2019. This was settled for AUD42mill and management anticipates 80% to be covered by the insurance company (AUD1.5c/share payable by company). The other is still outstanding and trial mediation is set to occur in September 2019 while the trial is set to begin in February of 2020. The two class actions had overlapping elements and revolve around similar events.

The company has proposed a delisting with reduced cost of insurance premiums being its primary motive. It also reiterated that the entity would be wound up following the conclusion of the litigations and remaining equity will be distributed to shareholders.

Valuation - AUD43c. Margin of Safety 28%

    • AUD $0.49 per share remaining from 15 April 2019 announcement
    • less 20% of AUD42mill settlement = AUD1.5c/share (the rest is assumed to be paid by the insurance company)
    • Leaves AUD43c
    • Current Market Price AUD35c

Summary - At a 28% MOS There is 8c discrepancy between price and NTA. If the result for the remaining litigation is similar (AUD1.5c), 8c should be suffice to cover overheads and the resulting litigation fees. Even in the worst case, if shareholders are made to bare 100% of another AUD$42mill (AUD7.5c), investors would come out flat.

Other Shareholders -

  • Nordly's Investments has gradually purchased 19.55% of the remaining company
  • Mercantile (a corporate raider which also drove the liquidation of AKF) is a 5% stakeholder too.

More information -

Disclosure - I own shares of ASX:MGC. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do your own research before purchasing any security

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ASX: AKF - Ask Funding

6 July 2018

(This is one of my archive post from a Value Investors forum in July 2018. I subsequently sold the stock for a 160% profit within 2 months.)

Market Cap: AUD $1Mill

Share Price: AUD$0.021

Background - Australia-based pre-settlement and disbursement lender who was taken over by corporate raider Sir Ron Brierley (Mercantile ASX:MVT). The Annual report states that "The Company has continued to service and amortise its loan book with the sole objective of delivering the surplus funds to shareholders". The business how now requested removal from the ASX listing and plans to do a 10% on market buyback. The company has announced that it will conduct the buyback at NTA.

Investment Thesis/Valuation - AKF recently completed a unmarketable parcels share buyback at NTA 6.03c (as of end of March 2018). Current price 2.1c, MOS 65%. Objective is to sell during the on market buyback.

Other Shareholders - Largest holders are Mercantile 71.4% and Wilson Assets Management 12.7%.

Risks - Writing down of unrecoverable loan book. AKF may write down 2m Matrimonal Loan (3.1c/share) leaving the NTA at 2.93c. Court order was to pay the 2.8 m in Feb but has since been appealed. On market buyback may occur at prices far below NTA. MOS is 65% more than covers these risks.

Catalyst - Delisting & On market buyback

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My Niche

22 June 2019

I’m an investor from down in Australia and I’m currently living in China. I’m a small value investor that prefers to focus on illiquid, micro-cap and overlooked businesses that are selling with an obvious margin of safety. Concentration doesn’t bother me and common sense is my main strategy.

My reference point for value is Buffett's Partnership Letters (Sanborn Map and Commonwealth Trust case studies). What doesn't interest me is markets where people smarter than me can work out a price target of $110 for a business selling at $100. I’m looking for obvious value, no excel. From a bottoms up approach, I’ve found that areas like US OTCs and HK micro-caps show these opportunities.

The reason these opportunities existing is 3 fold:

  • Informational edge- Insider trading based on privileged information is unlikely, however, show up to an AGM where you’re the only investor, I’d say you could get some sort information edge if others simply don't care to show up. I try to find companies that a lot of people don’t follow.
  • Analytical edge- I’m not smarter than Columbia business graduates or analysts who invest full time and for their livelihood, but those guys usually invest big sums at big institutions. I try to find companies that don’t move the needs for institutions and aren't worth their time.
  • Behavioural edge- Fund managers are always trying to make quarterly returns so that their investors don’t pull their capital and give it to the fund next door. Investing for myself, I’m able to truly keep the long term in mind. I don’t care about quarterly performance as long as the business as an investment has bright future prospects or there is a strong case of good returns. I’m not going to fire myself and as a result, I can be patient.

I’ve found that a confluence of the above 3 factors can be found in overlooked markets and in securities that aren’t sexy. That’s why I like the HK and OTC markets.

I’ll post ideas I find here and I'm more than open to any and all feedback or questions.

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