Updates – May 2019

Some short updates on the Viet and global portfolios

Viet portfolio

The Viet portfolio represents around 5% of my parents’ net-worth. The portfolio is currently invested in 4 companies:

Coteccons – led by Mr Nguyen Ba Duong, it is the largest contractor in Vietnam. It has expertise in projects ranging from residential housing to industrial parks to infrastructure. Differently to most of its peers, the business has been run conservatively with no debt for a long time. Our family purchased the stock at about 6-7x after-tax earnings. With a long run way ahead, measured by floor space per capita at around 24 m2 per capita in Vietnam vs 40 m2 in China and 80 m2 in the US, and a 3% inflation environment, with decades ahead worth of growth in infrastructure made easier by the government’s commitment to divestment program of government-owned stake, we have purchased a very well-run contractor with good long-term tailwind at a decent price.

FPT Online – led by Mr Thang Duc Thang, the chief editor of VnExpress – the premier digital newspaper of Vietnam. Newspaper in Vietnam has an unusual development in that the leading and most-objective newspapers are predominantly digital. This is because the Vietnam growth since the early 2000s happened at the same time with the mass adoption of Internet across both developed and developing countries. Mr Thang Duc Thang – a journalist by trade who possesses unusual drive for entrepreneurship, founded the paper in collaboration with the private-sector FPT group. Mr Thang knew from the beginning that VnExpress would focus solely on digital news and would focus on “delivering news fast and tell the truth”. 20 years after its founding, the paper now has 40m unique monthly visitors, which is pretty amazing given that there are 95m people living in Vietnam. Our family purchased the stock at around 5-6x earnings. Half of the market cap at the time we bought was cash and the business generates a whopping 40% after-tax margin (!).

Binh Minh Plastic – led by Mr Nguyen Hoang Ngan, is the largest plastic-pipe manufacturer in the Southern of Vietnam. The competitive advantages of the business are 1/ economies of scale on each ton of plastic pipe produced, 2/ distributor relationships honed over 3 decades, 3/structural advantage of a local producer thanks to the high value/weight ratio of plastic pipe, which makes transportation cost a barrier to entry for imported products and for products sold by far-away competitors and 4/a relentless focus on cost which has kept BMP SG&A ratio as a % of revenue the lowest in the Vietnam if not the SEA region. Our family purchased the stock at 7-8x earnings. The business net cash makes up 18% of the market cap at the time we purchased it.

REE – led by Mrs Mai Thanh is an infrastructure holding company with a focus on electricity power generation and water generation. The business also has 130,000 m2 in commercial properties and a 3000bn VND M&E business. Our bet on the stock is that Mrs Mai Thanh will eventually be proven a skilled capital allocator in finding 1/well-run hydro and thermal power plants and water plants, 2/expertise in keeping the plants cost-efficient and 3/sensible deployment of capital in commercial properties that I know of and understand thanks to my background of growing up in HCM where REE does most of its real estate business. Our family purchased the stock at 7-8x earnings, the business has a net neutral net debt position.

40% of the portfolio is either in cash or 1-year bank saving account paying 7% interest.   

A note on valuation: The Vietnamese 10-year government bond yield is currently trading at 4.8% or 20.8x earnings. If I get to buy great companies at below 10x earnings, that will satisfy my criteria of a “reasonable price”. At such a price our family equity exposure is protected by a margin of safety in the event that bond yield rises substantially, which in the recent past it was at 8%-12%.

The Global portfolio

My global portfolio, which represents 90% of all my savings, is currently invested in 5 companies:

Alphabet – ran by Mr Sundar Pichai is the world most AI-driven, AI-integrated company. I bought the stock at 16x pre-tax earnings (assuming 12% growth in ex-other bets pre-tax earnings next year). Our growth expectation is lower than the rest of the market, but even at a lower expectation than the market Alphabet still seems reasonably priced.

Berkshire Hathaway – ran by 2 groups – the capital allocators group and the operator group. There are 4 capital allocators in the business, Mr Buffett, Mr Munger, Mr Ted Weschler and Mr Todd Combs. The operator group is ran by a number of operating managers, of which 2 has key oversight on all businesses – Mr Ajit Jain and Mr Greg Abel. I bought the stock at 13x look-through earnings (operating subsidy earnings + stock-portfolio look through earnings) net of investable cash. At the current size, I do believe the capital allocator group can buy back more shares without worrying about opportunity cost.

Unilever – ran by Mr Alain Jope – is a house of 13 EUR1bn brands (all of which I have used and liked since early age – which shows the incredible footprints in emerging countries of Unilever) and a myriad number of organically built smaller brands. It’s the Berkshire Hathaway of consumer good brands. Assuming the valuation of Unilever India is reflecting the fair value of that business in a privately-negotiated transaction, I bought the rest of the Unilever group at 14x earnings, when the business has a whopping 60% exposure to emerging markets, of which 10% is from frontier markets! That is not a position one can build in 1 day, 1 week, 1 decade or even a century. This is not an exaggeration given the temptation of getting in emerging countries early and get disappointed due to its early-growth nature (unstable political scene, differences in corporate practices). On top of that, fending off the developed-nation retailers is hard enough, dealing with the fragmentation of distribution and retailing in emerging countries is another problem. It’s no wonder that P&G got itself in emerging countries as early as the 1950s and still playing catch up with Unilever. History of Unilever does show that the business succeeded in the far flung region of the world and the chief reason for that traced all the way back to when William Lever first instilled his passion of selling soap beyond the British border. 

Apple – ran by Mr Tim Cook and designed by Mr Jony Ive – is a consumer-good franchise protected by extraordinary mind share and brand power, with a kicker of switching-cost advantage. The business is the only premium consumer electronic producer that successfully adopts the luxury-retailing model (premium retail stores coupled with high pricing power) across the consumer electronic space. I like Apple products as much as I like Unilever products. The business has been spending lots of money in buying back stocks at <16x earnings which have added lots of value to continuing shareholders, and we bought the stock at around 10x pre-tax earnings around Q4 2018.

Visa – a great company benefiting from significant tailwind of cash vs digital payment displacement, protected by switching cost and network effects in a 4-party business model (consumers, merchants, issuance bank and acquiring bank). It has great brands that delivers safety and fast promises. I bought the stock at around 17x pre tax operating income in 2016 and have sold half the position as it approaches 26x last year to buy up Apple and to add on to other positions. However, at the current 26x earnings, Visa does not look expensive. If one thinks that Visa can easily grow with absolute-$ payment growth which should mimic GDP growth, at a 6% discount rate then even at 33x earnings, all the cash-digital displacement tailwind is still an optionality!

I have only 5% cash in my portfolio. So among the top 3 companies in the portfolio, it is quite concentrated.

I have also sold Fanuc. The reason is because from the reading of its earning guidance, it’s a very cyclical business. I bought the stock at 17-20x earnings thinking it will be a smooth ride to 10x when robot per capita increases gradually. But it has proven to be that it is not a smooth ride. One year it will be 20x, the next it jumps to 50x. A rough DCF will just mean that the current price may just have reflected fully the optionality of robot/capita converging to the standards of Japanese highly automated factory. It’s the price that I paid that was wrong, not the business fundamental. Fanuc remains a customer-obsessed company with exceptional product quality, and run in a conservative manner.

Update on smaller companies: I made a commitment to focus more on smaller companies this year. So far there were a few small companies that I really like (noted some of these are still of large size. I will keep going down the market cap scale however, the smaller it is the harder it is to understand the business). These include:

  • The New York Times: a great journalistic product. They have 130m unique monthly visitor yet only 4.3m pays for digital subscription.

 

  • Intuit: customer-driven company that sells accounting and tax products for SMEs and consumers. It has a history of self disruption and fought off giants such as Microsoft.

 

  • Square enix and Nintendo: content franchise where their games stay in the top 10 gaming franchises of all time for a long time.

 

3 lessons from the Berkshire Hathaway 2019 Meeting

 

  • Value investing: “[We don’t believe in] the idea that value is somehow connected to book value or low price/earnings ratios. As Charlie has said, all [intelligent] investing is value investing.”

 

  • Focus on big picture: “I think if somebody is terribly interested in the details, they really are missing the whole picture. Because you could have known every detail of our textile business in 1965, and we could give you the information as to how much we made from linings and how much we made from handkerchiefs, [but] you’d be in a different world.”

 

  • What do you value most in life? “It’s the two things you can’t buy, time and love.”

 

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