The Global Portfolio executed a major strategic shift in early April. We have articulated our rationale behind the move, which was primarily predicated on expectations of a world moving increasingly out of sync — as a result of diverging Covid-19 and reopening strategies, economic growth as well as fiscal and monetary policies.
The portfolio is still biased towards US stocks, which we think will continue to outperform in the short to medium term, despite current volatility. Stocks are being buffeted by growing worries that the Federal Reserve will be forced to tighten more aggressively, thereby risking recession, as inflation runs hot.
Nevertheless, the US economy remains on relatively firm ground, thanks to the massive fiscal and monetary support during the pandemic. US household debt-toGDP has been declining steadily, from the pre-global financial crisis high of about 100%, to about 77% currently. This is, in fact, lower than that for Malaysian households (89%). The headline data suggests that US consumers have the capacity to spend and drive growth going forward. We will explore whether this is the indeed the case in the near future.
Expectations of widening interest rate differentials and current heightened uncertainties also favour the US dollar as the relative safe haven. The greenback has strengthened considerably in recent days, against the euro, yen and many emerging market currencies including the ringgit. And that should help temper, somewhat, imported inflationary pressures — and, perhaps, the actual need for aggressive rate hikes. In addition, as we said previously, liquidity premium tends to widen during periods of greater uncertainties and the US market is the most liquid in the world, consisting of a large number of mega-cap stocks.
Notably, we added several China-based companies listed on the Hong Kong Stock Exchange to our basket of stocks. We believe they offer very good risk-reward propositions beyond the short term, based on prevailing valuations.
Undoubtedly, China’s stringent adherence to its zero-Covid strategy, on top of a slowing global economy, is currently driving a chorus of GDP growth downgrades from market analysts. For instance, the International Monetary Fund recently lowered the country’s growth forecast from 4.8% to 4.4%.
Nonetheless, China’s official growth target remains at 5.5%. With inflation relatively subdued, the government has room to implement more fiscal and monetary support. This is likely to include a combination of monetary easing — the central bank recently cut the reserve requirement ratio for banks to boost liquidity — and fiscal stimulus, particularly for infrastructure, renewables and green energy as well as hi-tech-related projects. We suspect growth momentum will gather steam in the second half of the year. Lockdowns in some of the largest cities, including Shanghai, are dampening domestic consumption for now. But this will eventually recover and China’s huge and increasingly affluent population is a sustainable driver for future consumption growth.
Yihai International
Odds are that you probably have never have heard of Yihai International, but we bet that many people know of its sister company, Haidilao, or have even visited one of its many hotpot restaurants. Yihai, which is majority-owned by Haidilao’s founders, supplies the hotpot soup flavouring and dipping sauce condiments to the restaurants, which accounted for roughly one-third of the company’s total sales last year. It is a leading compound condiment manufacturer in China, with R&D capabilities for new products.
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Over the past five years, Yihai has grown its sales at a compound annual growth rate (CAGR) exceeding 40%, partly from leveraging the Haidilao brand name (see Chart 1). It holds the exclusive rights to use the Haidilao brand for its condiment products for perpetuity.
Aside from supplying the restaurants, its hotpot soup base, broth and flavouring, dipping sauce and Chinese-style seasoning condiment products are widely sold in hypermarkets, supermarkets and smaller retail outlets as well as online, for instance, on Taobao, Tmall.com and JD.com — under the Haidilao and its own house brands. Notably, these third-party sales earn better margins than sales to the Haidilao restaurants.
The company is profitable, reporting net profit of RMB766 million in 2021, on the back of sales totalling RMB5.94 billion — though margins fell, owing mainly to higher costs for raw materials such as vegetable oil and changes in sales mix. Its newer range of ready-to-eat food products — such as self-heating mini- and microwavable hotpots and instant rice — carries lower margins. Margins may remain under pressure in the short term because of rising raw material prices. But we think its growth potential is positive, with the younger generation’s penchant for eating out and convenience in home cooking. Nearly all of its revenue is generated domestically, though the company is tapping into export markets.
Yihai generates positive cash flows and is sitting on net cash of about RMB1.46 billion (S$306.5 million). The company has consistently increased dividend payout each year since the first payment in 2017. Its shares have fallen sharply, from a high of HK$142 in early 2021, dragged down, we think, by weakening sentiment for Haidilao. The stock is now trading at little over 21 times forward earnings, well below its five-year average price-earnings ratio of 30 times and peer average PER of 39 times.
Postal Savings Bank of China
Banks are often viewed as the best proxies to broader economic growth. Postal Savings Bank of China (PSBC) is one of six stateowned banks in China. It has the largest branch network — about 40,000, giving it comparative advantage in terms of access to existing and potential customers, especially outside the major cities.
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PSBC is primarily a retail-centric bank, with some 70% of its business derived from personal banking. It is thus well positioned to grow under the government policy mandates for rural revitalisation and common prosperity, including rising demand for wealth management products on the back of increasing rural incomes and small business loans.
Its assets quality appears solid, with smaller-than-industry-average exposure to property developers — 2.11% of total loans compared to exposures of between 4.7% and 7.9% for comparable peers — and provision coverage exceeding 400%. Non-performing loans are 0.82% and return on equity is relatively high at 12.5%.
The stock is attractively priced, at well below its net asset value. Price-to-book stands at 0.7 times currently. While this is slightly above average for the eight largest banks in China, PSBC is expected to grow at an above-average clip of 12.3% in the next two years (see Table 1). By comparison, the largest banks in the US are priced mostly above their book values.
Like Yihai, PSBC also has a track record of raising dividends annually, since 2016. Indeed, its dividend per share rose at the fastest pace among the big Chinese banks. Dividend yield is estimated at 5.4% at the prevailing share price.
Guangzhou Automobile Group Co
Our last new addition to the Global Portfolio is Guangzhou Automobile Group Co (GAC). The company derives all of its revenue from car sales in China. As expected, business suffered from Covid-related headwinds, including chip shortages and movement restrictions that dampened consumer confidence.
We think, however, that the auto manufacturer will recover on the back of the eventual improvement in chip supplies and domestic consumption and, further, from government incentives for new energy vehicles, as part of the country’s net-zero carbon emission targets (see Chart 2).
GAC produces vehicles under its own brand names — such as Trumpchi and Aion — as well as foreign-branded joint ventures and partnerships, including with Honda Motor Co, Toyota Motor Corp and BYD Co. New SUV launches — such as GAC Toyota’s Frontlander and Venza; and GAC Honda’s Vezel and Breeze models — that are also higher-margin products should boost earnings in the coming quarters. Higher plant utilisation and a better product mix are also expected to raise overall margins.
Importantly, its shares are attractively valued — currently trading at deep discounts in terms of PER as well as price-tobook values to both local and global peers. Earnings and operating cash flow yields are attractive at 13.3% and 7.8% respectively. Meanwhile, dividend yields have averaged 3.8% for the past five years and 4.1% at prevailing prices.
The Global Portfolio fell a hefty 5.9% for the week ended April 27, though slightly better than the MSCI World Net Return Index’s 6.2% decline, amid continuing weakness in the broader market. All stocks in the portfolio declined, with Amazon.com (-10.3%), CrowdStrike Holdings (-9.6%) and Bank of America (-8.6%) being the biggest losers. Last week’s losses pared total portfolio returns to 36.1% since inception. This portfolio is underperforming the benchmark index, which is up 43.7% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
