Guest Interview: Michael Fritzell From Asian Century Stocks

(Edition Number: 22)

If you wish to read this as a webpage, and not an email, then follow this link, where you will be directed to all of the previous guest interviews.

This week, I had the opportunity to interview Michael Fritzell, a former portfolio manager with more than 15 years of experience in the industry.

I was particularly excited for this one, as Michael has been based in Asian markets for most of his career. Thus, had some excellent insight into that area.

He shared the full extent of that knowledge in today’s interview, where we discuss the breakdown of the various nations within the continent, how they differ from one another, and a heap of other important learnings from Michael’s experience which has seen him live in Sweden, London, Bejing, Shanghai, and Singapore.

This one was fascinating to me, I learned a lot, and I think you will find it to be just as interesting.


Michael Fritzell, Asian Century Stocks

Michael Fritzell, after serving more than 15 years in the investment industry, across an array of countries, quit his job a few months ago to pursue his passion.

Unsupervised investment research.

I have a lot of respect for those who pursue this goal. I know from first-hand experience how much of a slog it can be at the beginning.

I will save the exploration into Michael’s past for now (as he does a sublime job of covering it in my first interview question).

From my interactions with Michael, it is clear that he has vast deposits of knowledge concerning the Asian markets. You can find him over on Twitter under the handle @Fritz844.

Asian Century Stocks

The medium in which Michael now shares his work, flows through his Substack, named Asian Century Stocks.

You can find a link to the about page, as well as what content he shares using the links provided.

Michael writes about a host of Asian-related themes, including (but not limited to) equity analysis of Asian companies, major news in the region, curated links and opinion pieces on sectors or trends.

There are relatively few analysts out there with substacks that focus entirely on the Asian market, and Michael’s is the most comprehensive I have seen to date.


The Interview

Investment Talk:

Good morning Michael. Great to have you here today.

So, I have a lot of questions I want to ask you. I am excited to have someone with an Asian focus with us today.

But first, how about we start with an introduction of sorts. Perhaps you could explain to the readers a little bit about your history, how that leads you up to where you are today, and what that journey looks like.

And then, following on from that, perhaps you could share with us how you became so involved in the Asian equity space?

I know you are based in Singapore, have you always lived there?

Michael:

Hi! Thanks for the invitation.

I grew up in Sweden in Northern Europe. I was always good at maths, so that’s why I ended up choosing a finance major in university. And since finance jobs are scarce in Sweden, I moved to London after graduation to work in corporate finance.

I was in London for just less than two years before the financial crisis hit. Suddenly, I was out of a job and had no idea what to do with my life. Coincidentally, I had enrolled in a part-time Chinese class a few months earlier and absolutely loved it.

So, I thought to myself: why not move to Beijing for a while to study Chinese and ride out the financial crisis? There were no jobs available anyway.

That’s how I ended up in Beijing. I enrolled at Peking University, where I learned the basics of the Chinese language. I ended up staying in Beijing for a year.  

I had started investing in stocks right in the middle of the financial crisis, around November 2008. I read Buffett’s biography and Seth Klarman’s Margin of Safety and I was hooked.

The stocks I bought ended up being pure garbage, but since I invested close to the bottom I more than doubled my money. Those returns helped pay for my entire year of studying in China.

I ended up being very lucky. An emerging market fund manager set up an office in Shanghai and needed a buy-side analyst to help them do basic research. I had taken the CFA and had some finance experience so they hired me on the spot.

I stayed there for almost three years.

It was a formative experience: hundreds and hundreds of meetings with corporates. It was a different time back then – not many foreigners on the mainland. And certainly not in A-shares (I helped start an A-share fund in 2013).

A bit like baptism by fire: many corporates didn’t speak English and I had to speak Chinese to corporate secretaries and IR teams to get by. 

The reason I left China was two-fold.

First, my health deteriorated. I started getting chest pains and doctors had no idea what was going on. Perhaps pollution or the poor quality of food.

Second, when I went home to visit my parents in Sweden I had a coffee with a wealthy individual in their home town and he suggested I go work for him in Singapore. I took up his offer and helped him co-manage his Asian portfolio of stocks, which was close to half a billion dollars at the time.

I’ve now lived in Singapore for 8 years where I have a young family.

Other than that family office, I did a short stint at a local hedge fund and spent a few years doing contract research for another European fund manager.

Two months ago, I quit that job to focus full-time on my new Asia-focused Substack “Asian Century Stocks”.

Investment Talk:

So, you are currently the owner of Asian Century Stocks.

First, could you maybe explain what that is, and perhaps sprinkle on some of the story of how you came to start this publication and some of the lessons learned along the way?

I know that you have worked as an analyst and portfolio manager for well over a decade in Asia, and now ACS is your full-time gig, so kudos for making that leap my friend.

Michael:

It is absolutely my full-time gig. There are a few reasons why I started the Substack:

One is that I’m hoping to focus on what I think truly matters: finding great actionable ideas, regardless of whether the stocks are popular or not. Over the past few years, my previous client increasingly steered me towards tech stocks, and that’s simply not an area that I find particularly interesting right now.

Being able to set my own agenda is a huge positive in my book. Hopefully, I will find clients to share my views of what makes sense and what doesn’t.

The second reason is that I think there is no one else who occupies the niche of Asian value stocks yet.

There are a few that focus on either Chinese or Japanese tech stocks and those are great niches - I’m just not smart enough to compete in them. I’m hopeful that my Substack will be able to carve out a niche for itself.

The biggest lesson is that you have to market yourself actively.

Just writing content will not necessarily make people sign up for your service. What I really love doing is research and that’s where my strengths lie. But I’m slowly learning the marketing part of the business as well.

Investment Talk:

Thanks for that insight into your history Michael, really appreciate it.

So, a lot of readers might not be super familiar with the Asian markets. Now, that’s a big canvas to tar with one brush. Obviously, there are some significant differences across regions within Asia.

I am wondering if you could paint a picture of the Asian equity market for readers.

Perhaps highlighting some of the more unique disparities from that of the US market, and then maybe honing in on particularly interesting markets?

I, myself, like to spend a bit of time studying Japanese companies, but am not all that familiar with the rest of Asia.

Michael:

Asian markets are very diverse. That’s part of the attraction. I can always find ideas somewhere.

“Broadly speaking I think we can divide Asian countries into the following buckets:

Developed Asian markets: Japan, South Korea, Taiwan, Hong Kong, Singapore. These are mature economies with poor demographics but highly innovative and well-run companies. The rule of law is relatively strong.

Communist nations: China, North Korea and Vietnam remain Communist. China and Vietnam are downplaying this connection in foreign media but it permeates their entire societies with 5-year output plans, censorship, no checks and balances on power, etc. It gives rise to very special dynamics in their economies.

South and Southeast Asian emerging markets: Indonesia, Thailand, Malaysia, Philippines, India, Sri Lanka, Pakistan, Bangladesh, Cambodia. Several of them have excellent demographics. Backwards in many ways regarding poor infrastructure, not much manufacturing exports, typically poor rule of law. Highly susceptible to international capital flows. The currencies tend to be volatile. And the volatility also creates opportunities for investors from time to time.”  

One major difference compared to investing in the US is weaker corporate governance. You can’t just discount cash flows and expect them to come your way.

In countries with less robust legal systems – for example, Indonesia or China – you won’t have much legal recourse. If you lose your money, you’re not going to be able to sue the company in local courts.

So your analysis has to be focused on the character of the individuals in charge.

How have they treated minority investors in the past?

Do they buy back shares or engage in dilutive share issues?

Has management been buying shares recently?

Are they open about problems or promotional in their communication with investors?

On the positive side, many Asian private companies are run by first-generation entrepreneurs. Many of the companies in China and Vietnam were created in the last 20-30 years, which means that the founder is still in charge in many cases.

First-generation entrepreneurs tend to be sharp and hungry.

Another disparity vs investing in the US is obviously that each country has its own currency. They can be incredibly volatile, especially in markets with recurring current account deficits such as Pakistan and Indonesia.

So you’re not only betting that the stock price will go up, but you’re also betting that the currency will appreciate. That makes EM investing part macro speculation – whether you like it or not.

From a growth point of view, I find Vietnam particularly interesting. Pull up the chart of Vietnam’s exports in US Dollar terms: their exports are booming. More and more companies are diversifying away from their Chinese supply chains into Vietnam or other Southeast Asian countries. That’s creating a middle class in Vietnam who suddenly starts to buy cars, commodity housing, home appliances, electronics, etc. It’s heaven for a stock picker.

Otherwise, you can find great stocks in every country. There are always themes worth betting on.

For example, Japan is not a fast-growing country. But given the ageing population, healthcare spending is rising. And thanks to outbound Chinese tourism, Japan’s tourism industry has done very well over the past few years.

For long-term holdings, I prefer owning companies in stable countries with a secure rule of law: Japan, Singapore, Korea, Taiwan and maybe Malaysia.

But I’m also happy to buy shares in more volatile emerging markets such as Indonesia if the upside outweighs the risks.

Every time there is talk of ECB or Fed tapering, Indonesian stocks tend to fall disproportionately. That’s usually a good time to step in and buy.

Investment Talk:

That’s great.

Which areas within Asia would you say you tend to focus on most, and why?

Then, as a follow-up, what does your geographic composition look like? Do you invest across the US/EU at all, or is it mostly Asia?

Michael:

I gravitate to stocks that I have researched in the past.

If you check the about page on my Substack you will find that I have recommended a disproportionate number of Singaporean and Malaysian stocks.

That’s just because I’m close to these markets and close to the grapevine. It gives me confidence that I won’t make the typical mistakes that foreigners often make when entering new markets.

I cover every sector. But I’m not smart enough to understand biotech or pharma companies so I tend to avoid those sectors. I’m also having difficulties understanding tech stocks.

I still don’t know what “AI” means.

I don’t have a view on whether we’ll sit in robotaxis by 2025 or 2035. Compare that to Genki Sushi, for example. Or counting the number of cigarette sticks produced by British American Tobacco Malaysia each year. I try to keep things simple.

Other than that, I’m willing to go anywhere.

In Southeast Asia, you tend to find more rent-seeking businesses that aren’t necessarily growing that fast. In those situations, you’ll want to buy them cheaply. Same with Chinese SOEs. They’re not going to compound fast, but if you can buy them cheaply – like with China Unicom – great. For faster-growing more innovative stocks I think you’ll have an easier time in Taiwan, Japan, Korea.

I spent about a year investing in US and European stocks professionally. But I have also invested in US and European stocks in personal accounts. Most of the stocks I have recommended on Value Investors Club are US or European stocks.

Investment Talk:

I suppose now would be a good time to ask about your overall process.

So, we have learned where you tend to invest, but perhaps you could explain to us how you invest.

What are you looking for in an investment, what does your position sizing strategy look like, how many positions do you tend to hold, and so on.

Some flavour on how you operate would be great.

Then, if you could explain why you chose to invest in that, that would be great too.

Michael:

I focus on value stocks that have specific near-term catalysts. There are a few elements to this:

First, I’m looking for an upside to intrinsic value. I project earnings a few years out and then apply a multiple. For a fast-growing company, I’ll apply a multiple on earnings say 5 years out. The multiple will reflect the earnings growth potential at that point in time.

For a slow-grower, I’ll want a reasonable multiple, say, 2 years out. With the future projected value and dividend payment, I calculate what the potential upside might be. An upside above 50% can lead to a satisfactory IRR. Anything below that is probably not worth getting into.

Second, I want a near-term catalyst. Ideally, something to cause earnings expectations to shift upwards within the next 6-12 months. It could be a recovery from COVID-19. New government regulation. Or a new product that sell-side analysts haven’t fully taken into account.

Third, I’m looking for quality. A unique product or service enjoying long-term secular tailwinds. That limits competition and should enable the company to earn a fat profit margin and free cash flows. But I’m also happy investing in commodity companies if they sit low on the cost curve and the stocks are cheap enough.

Fourth, a clean corporate structure and reliable accounting. I pay a lot of attention to the track record of the management team. Behaviour repeats – if they’ve done shady business in the past, chances are they will do it again.

I can’t say that I know exactly how to size positions.

I tend to have 5-7 stocks in each with more or less equal weights in my personal accounts. I am happy to put on 30% positions in my own accounts if the company’s quality is excellent and the downside is more or less zero. But for riskier stocks in say Indonesia or smaller private companies in China, I don’t think I’d dare to put more than say 5% in each.

Investment Talk:

For someone who is interested in the Asian markets, but perhaps is reluctant due to the absence of a local presence or network, what would your advice be to start becoming comfortable with the space?

Local news? Sifting through the indexes and examining individual companies. What would your advice be to someone in that spot?

Michael:

First, you need an Asian broker. I like Boom Securities in Hong Kong (parent: Monex Group) because their costs are low and offer access to most Asian emerging markets.

But if you’re happy sticking to Hong Kong, Singapore, Japan or ADRs/GDRs, then Interactive Brokers works as well.

On my Substack, I try to offer a balance between Asian EMs and Hong Kong / Singapore / Japan stocks so that most readers will be able to act on at least some of my ideas.

I know it’s popular to invest in Chinese tech stocks these days. But my advice is that if you don’t have a local presence – just avoid smaller private companies in emerging markets, including China.

It’s hard to know whether EHang or Lvji is telling the truth about their operations. So in many cases, you end up speculating on a greater-fool theory. I think if you’re sitting across the world with limited access to information, you’re probably better off sticking to markets with a more secure rule of law: Japan, Korea, Taiwan, Singapore and maybe Malaysia.

Start with a specific niche. If your knowledgeable about tobacco, then read up on all the trends in that sector. Euromonitor reports or broker initiation reports can help.

If you don’t have access to Bloomberg or sell-side research, try Googling “company name initiation filetype:pdf”.

By starting with a specific niche, you’ll get a context for each company. And you can contrast the properties and valuation multiples of each stock. Compare BAT Malaysia with Gudang Garam, for example. Compare government regulation of tobacco in Malaysia vs Indonesia. See which direction consumers are moving. If vaping is becoming a big thing in Malaysia, chances are it will become a big thing in Indonesia, too. And you’ll be ahead of the curve once Indonesians start vaping as well.

News-wise, I recommend reading Nikkei Asia. Their coverage is better than anyone else’s. And it only costs US$10 per month for an annual subscription. That said, the news will probably not help you make money in Genki Sushi.

At best, it will help you understand how far Japan is in its vaccination drive. But to make money, I think you will need specific ideas – not just general news.

There are a few sources of good ideas. Other than learning a specific niche, I recommend going through insider transaction reports. Then dig deeper.

Perhaps even contact the individuals who bought shares and ask them why.

Buybacks are also helpful. A fraudulent company does not engage in buybacks. Stronger companies such as Tencent and Mediatek tend to buy back shares in a very disciplined fashion.

Find products you already know about and love. For example Sony or Nintendo or companies of that nature. It’s also helpful to observe other consumers: where is consumption moving and why?

Right now, a lot of people around me are getting vaccines and are starting to travel. That’s tempted me to invest in airports and entertainment-related stocks.

An advisor can help. Reach out to me to bounce ideas if you want. Or any of the other people on Twitter or Substack who have experience investing in particular Asian countries.

Investment Talk:

What, in your opinion, are some of the most common misconceptions of the Asian markets, perhaps from a Western perspective, and how do you see them as being inaccurate?

Michael:

One misconception is that every emerging market is growing.

That’s not necessarily the case. Some of them are submerging – or staying flat in relative terms. Only a few countries have become wealthier compared to the West over the past 50 years. And those countries are almost all in East Asia: Japan, Korea, Taiwan, China, etc.

It’s a very rare occurrence.

The rest of the “Third World” should instead be seen as “cyclical markets”.

You buy them on a down-cycle for the currency and the stock market. And you sell them when they’re at the top of the up-cycle.

Marc Faber’s book Tomorrow’s Gold is excellent in helping you understand how markets move in cycles.

Another misconception – that I mentioned previously – is that you can just discount cash flows as if they will be distributed to you. Yes, maybe. But the reality is rarely that simple. So if you want to get involved in companies with a dubious track record, just be aware that you’re engaged in speculation and hoping for a greater fool to buy the shares from you.

I think there’s a huge variety of opportunities across Asia.

When you mention Asian stocks, people immediately think of Alibaba and Tencent. But there are so many more stocks to choose from. Thousands upon thousands of listed companies in Asia, most of which you have never heard of.

Malaysian semiconductor stocks, Taiwanese elevator companies, Indonesian property developers. As long as you’re willing to go down in market cap, the opportunity set is absolutely massive.

Investment Talk:

I know you mentioned China earlier on, and gave some insight into that market, but I would like to get a bit more granular on this topic now.

There are some pretty big tech companies based in China. I am sure many readers are aware of a few of them. There has been some commotion over the last year or so concerning these giants and their relationship with the CCP.

This, perhaps ignorantly, is one of the areas that I struggle to reconcile with respect to investing in China. I have no idea about the reality of the power that the CCP influence has in public markets.

What is your take on that? How do you view the CCP and their relationship with public entities, and perhaps even the market (both private and public) overall?

Michael:

It’s a great and important question.

I find that people have been lulled into a sense of security because many Chinese tech stocks have performed well recently.

When Deng Xiaoping took over in 1978 he undertook reforms that catapulted the country into a richer nation. Land reforms improved agricultural yields and later on, manufacturing exports helped create a middle class.

After the Tian’anmen massacre in 1989, Deng Xiaoping almost lost power but managed to keep the reform process going. His chosen successor Jiang Zemin was General Secretary until 2003. Since then, the reform process has gradually come off the rails.

After the 2008 Olympics, it became clear that new leadership was emerging in Beijing.

Xi Jinping and other second-generation revolutionaries (红二代) have effectively neutralised opposing factions within the party.

Very soon after Xi Jinping became General Secretary in 2012, he started an “anti-corruption” campaign to weed out anyone who didn’t support him.

Key Jiang Zemin allies (“Shanghai faction”) such as Zhou Yongkang were imprisoned, as were potential political opponents such as Bo Xilai.

Xi Jinping is a leftist. He looks up to Mao Zedong. That’s not just how he portrays himself in media – he really does.

So while China today is a liberal society, today’s reforms will impact society 5-10 years from today. And the trends that I am observing are unfortunately not positive.

In 2012, roughly 30% of bank loans went to state-owned enterprises. In 2016, that number had risen to over 80% (data series has now been discontinued).

From my vantage point, it’s very clear that SOEs continue to take market share. The ROEs of Chinese companies are falling across the board.

Since the mid-2010s, major private Chinese companies have been forced to adopt Communist Party Committees who sit above corporate boards and have the powers to hire or fire CEOs.

In September 2020, every single private company must now adopt these Communist Party Committees. From a governance point of view, that’s worrying in my view.

How can you expect the board to take minority shareholders into account when the Communist Party has the final word? And how can smaller private companies compete with SOEs, when SOEs can simply direct the Party to exchange the top leadership of their competitors?

It looks like the “anti-corruption campaign” has now moved to the private sector.

A great number of private tech companies has had their senior leadership quit – perhaps after pressure from the government. We know that Jack Ma is close to the Shanghai faction and that there is certain enmity between Xi Jinping and Jack Ma.

That could be a reason why they went after him. In China, after businessmen become too powerful and able to challenge Communist Party rule, they often fall down a cliff or die in a tragic bungee jumping accident.

Another question mark is the currency.

After (true, underlying) budget deficits blew out in 2016, they tightened capital controls in 2017. Capital can flow in, but it’s unclear how easy it is for it to flow out.

Some foreign companies have reported difficulties in repatriating capital, though it’s unclear exactly how difficult it is for the average company. Either way, there are strong reasons to believe that the market exchange rate for the RMB is not the quoted CNY or CNH numbers. If capital controls were loosened, capital would probably flow out.

I am not completely comfortable investing in Chinese companies for that reason.

But I do own inexpensive SOEs such as CNOOC, because they receive revenues linked to US Dollar Brent. And with SOEs you can at least trust that they have the support of the government and that the accounting is reasonably accurate.

Investment Talk:

Sticking with China for a moment. You recently appeared in an interview with Sweden's Avanza, where you discussed the Chinese housing market and their crackdown on tech stocks.

Sadly, this was not in English, but I figured I would ask you what was the general discussion there?

What were the key takeaways from that interview, and how do you view the Chinese housing market right now?

Michael:

I wrote an article about the Chinese housing market here.

There is too much housing being built and it’s not clear where those apartments end up. In 2015, the government tried to deal with the problem by cash hand-outs and rapid growth in mortgage lending. That helped reduce inventory.

But new starts continue at a 23 million pace while housing completions barely reach 12. The problem hasn’t been solved yet.

The only way I can see the current situation continue, is if the government continuously increases its fiscal deficits to support construction.

With higher fiscal deficits, you run the risk of inflationary pressures – which has led to public backlash in the past. So policymakers are stuck between a rock and a hard place.

The government just introduced a new policy called the Three Red Lines, limiting the debt growth of the major developers.

But we’re talking about limiting growth – not actually reducing over-construction. It’s a strange situation.

Japan in the late 1980s had a similar sqm/capita pace of construction. Since then, the sqm built per year has dropped over 50%. We could see something similar happen in China.

Meanwhile, home prices are high in tier 1 cities. Rental yields of 1.5-2.0% for apartments sitting on 70-year land leases and depreciate quickly due to poor quality of materials.

Affordability rates are above 40x. Those valuation levels have typically marked peaks in the past, whether you’re talking about Japan in the 1980s or London during the South Sea Bubble of 1720. Home prices are lower in other parts of the country. But if you value the entire housing stock and compare it to GDP, you’ll get to a number that’s very similar to Japan’s in the late 1980s (about 500%).

Investment Talk:

Switching over to Singapore now.

Sea Limited is an interesting company based out of Singapore and is one that has caught the attention of many retail investors in the West.

The appeal seems apparent. They have a cash cow gaming business, their commercial aspirations (which are expanding across the world) look promising, and their payments business appears to link in with all that, despite being a hugely competitive space in Asia.

What I want to know, is what is the perception of the business over there?

Is Shopee actually a great platform, or does it just generate traffic from offering huge discounts?

What is the general feel for Free Fire?

Feel free to go on tangents here. I would love to hear your thoughts on this company. If you are not super familiar with it, that’s fine.

Michael:

Oh! I think you asked the wrong person. Lol. But I do know experienced fund managers who have met with Sea’s management team and are highly impressed with them.

I know people playing Sea’s (casual) games. They seem to think Shopee is better than Alibaba’s Lazada in many respects. It can’t be a coincidence that Shopee is taking market share in almost every market they enter: Taiwan, Singapore, Brazil, etc.

They’re doing something right.

I know that they’ve been offering very generous discounts in Taiwan and that their take rate is increasing. I can’t definitively say whether their market share gains are due to heavy discounts or whether they have a lasting competitive advantage that will see them dominate these markets longer term.

I don’t have time to play many video games, unfortunately. I’m too busy doing research and taking care of a young child.

I hear that Free Fire has become very popular in India. Though I’ve never seen anyone actually play it. It’s impressive that Sea has transitioned from a game distribution channel (Garena) to developing their own games. I suppose it says something about the quality of management.

I have no view on the company’s valuation. I suspect it’s on the high side.

Investment Talk:

Moving on now, what does your idea generation look like?

How do you generate ideas, considering the opportunity cost of researching each one you come across?

Michael:

I use broad “conceptions” to guide my idea generation.

Themes where I think profitable ideas might be found.

For example, I believe recovery from COVID-19 will follow Japan’s vaccination program.

I also know what sectors were hurt by COVID-19: live entertainment, cinemas, karaoke, tourism, retail, rail passenger transport, etc. Then I run a screen on Bloomberg for ideas within these specific sectors. That would be the top-down approach to idea generation.

Right now, the major themes that I find particularly compelling include:

1) The introduction of vaccine passports, leading to a gradual recovery in international air travel. It will have an impact on oil prices, airport passenger throughput, Thai tourism, etc

2) mRNA vaccination programs in Japan, Singapore and Korea, enabling these countries to finally recover from COVID-19 (hopefully)

3) The risks that the delta variant of SARS-CoV-2 will lead to lockdowns in markets that are not fully prepared (it’s highly infectious and also leads to symptomatic infections in children)

4) Record speculative activity among retail investors in many Asian countries, chasing momentum up – and potentially down once the party stops

5) ESG mania causing some “dirty” stocks such as tobacco to become very inexpensive

6) Asian defence spending rising to match PRC’s yearly 7% growth rate in USD terms, and perhaps even an acceleration if Japan changes its constitution to allow for higher defence spending. Or if China makes a move on Taiwan, perhaps next year.

7) Inflation bets. We’ll see how long these budget deficits continue, but 15% budget deficits will lead to inflation sooner or later. To hedge against that, you need natural resources stocks or companies with strong pricing power, such as those in the consumer staples sector.

8) Long experiences and short “things”: If you’re bullish about recovery from COVID-19 – as I am – then you should probably expect us to shift consumption from products such as consumer electronics to experiences, including cinemas, tourism, etc.

That shift in consumer behaviour will create winners and losers in a COVID-19 recovery scenario.

Investment Talk:

Lastly, I always conclude these interviews with some quotes. My favourite will always be Graham’s weighing machine analogy. So, to finish this off, what are some of your favourite quotes, and why?

Michael:

Here are a few of my favourite quotes that have helped guide me over the past decade-plus:

·      “Seek uncommon insight” (Bob Wilson)

·      “Buy companies that are doing something new or different” (Bob Wilson)

·      "First get all the facts... then you've got to face the facts" (Paul Cabot)

·      “Only analytic tool that matters is an intellectually advantaged disparate view” (Michael Steinhardt)

·      “You get the best moves playing the surprises” (Bob Wilson)

·      “Investing is about discounting the obvious and betting on the unexpected” (George Soros)

·      “Unless there is fear in a stock, there probably isn’t a lot of capital gains potential” (Bob Wilson)

·      “Ignore pain and suffering - when views are contrarian they are inevitably uncomfortable” (Michael Steinhardt)

·      “Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It's normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it.” (Peter Lynch)

·      “Own stocks when they have successfully passed a difficult test and avoid them during the test” (George Soros)


Questions from Twitter

In this segment, we collected questions from the Twittersphere, and present them to Michael.

@valor_em: “Which country do you see more opportunity (companies well-positioned at lower valuation) today in Asia and why?”

Michael:

I'm bullish on Vietnam. Their export growth is unparalleled compared to any other country on earth.

China is turning inwards, with greater state participation in private companies and a greater focus on self-reliance. Although China will remain a crucial part of key industry supply chains, I find that many Japanese, Korean and Taiwanese firms are moving their manufacturing to Vietnam. Samsung was first in doing so, but many others are now following suit.

GDP per capita in Vietnam is only one fourth that in China and 4% that in the United States. The gap will narrow over time. Geographically, it is close to key trade routes in Asia. The population is well educated and hard-working, on average.

As factory jobs move to Vietnam, a middle class is likely to emerge. With higher wages, they will start consuming autos, commodity housing, appliances, consumer electronics, etc. There will be secular growth across a range of industries.

Unfortunately, investing in Vietnam is a little bit tricky. The quality of the ETFs that invest in Vietnam is poor. To access Hanoi and Ho Chi Minh City stocks you will need a local broker such as Saigon Securities. There are also foreign ownership limits on many of the most popular stocks, leading to one share price for locals and one share price for foreigners, typically for relatively large blocks of shares. But if you're entrepreneurial and want to get involved, I think your efforts will pay off. Because the growth trajectory that Vietnam is really hard to match.

@valor_em: “What is your highest conviction/ favourite stock today?”

Michael:

My highest conviction idea is a Japanese hotel owner and operator Ichigo Hotel REIT.

It's a hospitality REIT run by an American former hedge fund manager called Scott Callon. They run well-managed budget hotels relying on online travel agents for room distribution.

The REIT stands out in that its corporate governance is decent. In contrast to many other Japanese REITs, it has not and will not issue shares below NAV and that increases my confidence that my intrinsic value estimate is accurate.

Something unique about Ichigo Hotel REIT is the company's borrowing cost of just 0.8%. And the company has borrowing capacity before hitting the self-imposed target of 60% loan-to-value ratio. Banks appear to be supportive and there are no major maturities before FY2023/24.

Japan's vaccination rate has accelerated sharply in recent weeks and the country is now vaccinating at the fastest pace in Asia. Not only that, but they are using Pfizer-BioNTech / Moderna mRNA vaccines that are 70-95% effective against COVID-19, as opposed to the Sinovac / Sinopharm vaccines that are used throughout many emerging markets. With a target of 1 million doses per day, Japan's adult population is likely to be fully vaccinated by year-end 2021. The economy will be in a much better spot at that time.

Following Japan's vaccination program, I believe that domestic travel will start to recover. Tokyo Olympics in July 2021 will help put a spotlight on the opportunity in Japanese tourism. International traffic will take longer to recover. Judging from the Israel and US precedents, I believe that the Japanese are yearning to travel again and finally get out of their apartments.

The company states that its NAV/share is around JPY 133,000, implying an upside of +30% compared to the current share price of JPY 102,100/share.

My own calculation puts NAV/share at JPY 139,000, implying a somewhat greater upside. The major question is whether cap rates will fall back to sub-5% levels in a COVID-19 recovery scenario. I believe they will. At the current share price, the forward dividend yield is over 8% and I consider that to be very attractive.

@KiwiPMI: “Top ideas in the Philippines and Indonesia? Or best thematics to target in those markets?”

Michael:

One Indonesian idea that I really like is chocolate manufacturer Delfi Limited.

They have a 45% market share in chocolate in Indonesia - a country with a 280 million population and excellent demographics. Indonesia's chocolate consumption is only 1/4 that of Japan and 1/15 that of the United States. Yet Delfi trades like a micro-cap at a sub-US$400 million valuation. I think this will change over time.

Delfi's chocolate is decent and seems to be competitive against multinationals that have often tried to break into the market. Three generations of Indonesians have grown up with their brands. Competitor Mayorah Indah has taken market share in some segments, but that's partly due to Delfi restructuring its business over the past few years to create a more focused product portfolio. Delfi's key brand name SilverQueen is growing nicely.

I have spoken to others in the industry and Delfi's management team has a decent reputation. The company has paid generous dividends with a median pay-out ratio of over 60%.

The stock price is still low, with a forward P/E multiple of just 12x. I think that P/E ratio could double in the next few years. With a solid net cash position and CEO John Chuang buying shares on the open market, I believe the downside is limited.

The pandemic has hurt the company as many mom & pop stores closed down temporarily. But the demand for chocolate will not disappear and I believe they will resume the 2018-19 organic growth rates of 5-10%.

The management team is currently in their 70s and the big question is whether the company could eventually be sold. Delfi has apparently been approached by potential buyers several times. If a multinational were to take over the company, it would probably be willing to pay several times the current market cap.

@BoLy24939844: “Would like to hear his take on the latest China tech CEO’s stepping down and investment risk involved.”

Michael:

The recent trend of Chinese tech CEOs stepping down is somewhat of a mystery to most outside observers, including me.

Journalist and CCP-expert Katsuji Nakazawa at Nikkei thinks that Xi Jinping has taken the anti-corruption campaign from the party to the private sector. There could be some truth to this. Jack Ma, for example, was backed by several individuals in the competing Shanghai faction, including the son of former general secretary Jiang Zemin.

Some argue that Xi Jinping does not appreciate the rockstar status that Jack Ma has achieved. There are many precedents of Chinese corporate leaders losing their privileges once they become too powerful.

There could also be an ongoing fight to control data. Alibaba and Ant Group famously refused to share their customer data with the government.

There are also signs that Bytedance had disagreements with the government on the collection of data. Some believe that the government wants to control industry-wide user data as inputs for a future social credit system targeted at individuals.

This means that the interests of minority investors could conflict with those of the ruling Communist Party. Once these corporate leaders have been replaced, will the new corporate leaders be good stewards of capital? Will they be working for the best interests of the company or the Communist Party?

Then there are also other risks in Chinese tech companies that are worth mentioning:

  • The VIE structure has never been tested in court

  • Online data can easily be faked so don't take their numbers at face value

  • With some exceptions, tech is a fast-moving and competitive industry. So, you better choose a company that's protected from competition through some type of moat.

Given this backdrop, along with record speculation in the sector, I am a little bit careful of Chinese tech stocks. I prefer to invest in areas where no one else is looking since that will improve the chances of finding undervalued gems.


Concluding Remarks

Would just like to close this out by saying thank you to Michael for taking the time to answer these questions today.

In my mind, the interview will be as good as the guest wants it to be. They dictate the quality, which is often a direct outcome of the amount of thought they put into their answers.

Michael smashed this one, and I found it fascinating to hear about the Asian markets from a man on the inside.

Be sure to reach out to Michael over at @Fritz844, and stay tuned for future guests.

You can access all of the previous guest interviews in using this link, where you will be directed to an exclusive guest interview feed.


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Conor,

Lead Analyst at Occasio Capital Ltd


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