From Asian Godfathers, which if you haven't read, is excellent:
"If one seeks the worst record of corporate governance in the region over the past thirty years, a serious contender has to be Jardine, Matheson... The Keswick family ... have treated minority investors in a manner that would make many godfathers blush"
The take under of Jardine Strategic in recent years does little to assuage this concern. $58 NAV, buyout price of $33.
It's true, the take under of Jardine Strategic was low, but whose family or owner buys listed subsidiaries at NAV? Nobody, this is a constant historic theme we see, like the Bollore take over of the Rivaud entitites, the Picanol take over of Tessenderlo. This is an issue easily avoided by placing yourself at the right side of the capital structure.
NAV and sum of the part investing is non realistic and never works, which is why I don't do sum of the part investing but earnings yield investing.
Agree NAV and sum of parts doesn't work in SEA. But it's a self-inflicted wound entirely because of the governance problem.
NAV stories were terrible in Japan for 3-4 decades, but clear focused regulatory reform in the past few years has allowed an activist class to offer buy outs and close these gaps, and this is on fire past 1-2 years. Governance matters.
Bollore, Picanol, Kesswick (and many other Asian Conglomerates) use of Breton Pulleys and systematic squeeze out of minorities makes them examples of some of the most egregious abusers, and you shouldn't use them as examples of "see they do it too!" Another way to put it: are these the type of people you really want to be partnered with? "Oh they'll cheat minorities in a subco, but they won't cheat me."
Even then, Europe is better than Asia. In Bollore world, you have stronger regulatory disclosures, litigation in Rivaud on fair value, and the recent spin-outs where Canal and Havas have the value transferred back to the shareholders.
But for companies in Asia, you have much weaker reporting requirements around related party transactions in SG and HK, selective and non-enforcement in some of the other countries. Family owned construction companies, de-consolidated black box JVs etc, inter-pary loans. Pretty much everything has been use by these companies.
For example in Indonesia, you have government granted concessions and policies around palm oil and import substitution that "may" involve substantial political payouts and "minority partners" that extract a meaningful amount of the economic value. None of this will be apparent if you are just reading annual reports.
Being on the right side of the conglomerate is better than a subco. But there is also a family trust above the conglomerate, which can jump in and out to pluck assets when advantageous to them. Chow Tai Fook (private family) plucking of assets from New World is a example of this that happened just last year.
Again I highly, highly recommend you read Asian Godfathers. Easily the best book on SEA investing.
Thanks for the long comment. I am doubtful that NAV stories will continue to work out very well in Japan, if they buy back 10% of the shares to please the regulator it's nice, but they need to go all the way. We will see.
There is no stronger regulatory support in France, I saw many companies taken under like EDF, MPI energy, and now Bollore subs. The Bollore subs shareholders have zero protection. Literaly no difference. Same in Belgium.
There are worse corporate governance issues like the examples you mention in HK small caps.
I am happy with Jardine to benefit from a base dividend + a buyback yield. I would not be comfortable holding Jardine C&C at these prices due to the risk of take over cheaply.
I would really love to read Asian Godfathers and I thank you for the recommendation. However, I am devoting 100% of my investing time to companies and reports, because my time is limited as a part time writer/investor.
About investing in Asia and weak corporate governance, I limit my exposure by geographies. Also if you know me I got balls of steel in investing. I invested in Kazaskhtan during the Ukraine war (x3), bought companies in Colombia, South Africa, woke Spain and socialist France, Bangladesh, China last year as everyone was saying that China stocks are at 20 years low or something like this. I just bought laughing.
Thanks for this article. I'm looking at United Tractors. It seems to be incredibly undervalued. I think it's a 50% discount today, perhaps more. Have you tried valuing UNTR.JK? Also, they paid a huge dividend to shareholders this year. That's not sustainable. I suppose it was to get funds into the Astra parent. Any thoughts on the dividend going forward?
Thanks. In general I do not go too much in details for companies that I cannot buy and I don't know more about united tractors in particular. The long term earnings chart looks favorable. Try to google for write ups.
I’m afraid this is rather wide of the mark, understandable given the desktop basis of the analysis.
One useful thing the author could do is simply to examine underlying profits over the last 15 years, or look at EPS while stripping out buybacks. That will tell you the story over whether there is any deep value in the company.
The past 15 years underlying profits has nothing to do with the deep value, which is based on earnings power and balance sheet, but with the process of value creation. I get the criticism on that part, this is why it is only part 1, and covered two listed businesses, and I will continue with further analysis and on the value creation.
Also stripping out buybacks is not correct and is a arbitrary choice of selecting some of the capital allocation only.
I understand your point, but I am using these as a proxy for understanding the company more deeply. For instance while deep value isn’t based on growth, it is affected by de-growth. Jardines is actually shrinking (pre disposals) and therefore will likely be on a static or downward earnings spiral over time. As such, the perceived value will actually be lower.
As an example the company’s book value, while not fraudulent, is misrepresentative and the real value somewhat lower. The ability to sustainably generate cash is also severely restricted and will likely be negative.
The point about share buybacks is again not that it affects value but that the headroom for Jardines to further create value on an EPS or BVPS basis is actually very very limited. If anything, Jardines is probably overvalued currently and certainly it is expensive on a PEG basis of some ~10x - 15x.
Jardines earnings were decreasing in recent years post covid. I reviewed it and do not think that this is a permanent direction due to various factors like macro and loss making subsidiaries sold. If you think that this is permanent, then it could be overvalued on a PEG basis.
Possibly, you’re more sanguine than I am though about a portfolio which fundamentally comprises five things: (grocery) retail, ICE cars, coal, palm oil and Hong Kong central real estate. This alludes to a more permanent diminution than you are suggesting.
For sure that there are different opinions in the market about the future prospects of these industries in SE Asia, and Jardine also has heavy equipment, EVs, Financial services, real estate in different countries, Nickel now.
From Asian Godfathers, which if you haven't read, is excellent:
"If one seeks the worst record of corporate governance in the region over the past thirty years, a serious contender has to be Jardine, Matheson... The Keswick family ... have treated minority investors in a manner that would make many godfathers blush"
The take under of Jardine Strategic in recent years does little to assuage this concern. $58 NAV, buyout price of $33.
It's true, the take under of Jardine Strategic was low, but whose family or owner buys listed subsidiaries at NAV? Nobody, this is a constant historic theme we see, like the Bollore take over of the Rivaud entitites, the Picanol take over of Tessenderlo. This is an issue easily avoided by placing yourself at the right side of the capital structure.
NAV and sum of the part investing is non realistic and never works, which is why I don't do sum of the part investing but earnings yield investing.
Agree NAV and sum of parts doesn't work in SEA. But it's a self-inflicted wound entirely because of the governance problem.
NAV stories were terrible in Japan for 3-4 decades, but clear focused regulatory reform in the past few years has allowed an activist class to offer buy outs and close these gaps, and this is on fire past 1-2 years. Governance matters.
Bollore, Picanol, Kesswick (and many other Asian Conglomerates) use of Breton Pulleys and systematic squeeze out of minorities makes them examples of some of the most egregious abusers, and you shouldn't use them as examples of "see they do it too!" Another way to put it: are these the type of people you really want to be partnered with? "Oh they'll cheat minorities in a subco, but they won't cheat me."
Even then, Europe is better than Asia. In Bollore world, you have stronger regulatory disclosures, litigation in Rivaud on fair value, and the recent spin-outs where Canal and Havas have the value transferred back to the shareholders.
But for companies in Asia, you have much weaker reporting requirements around related party transactions in SG and HK, selective and non-enforcement in some of the other countries. Family owned construction companies, de-consolidated black box JVs etc, inter-pary loans. Pretty much everything has been use by these companies.
For example in Indonesia, you have government granted concessions and policies around palm oil and import substitution that "may" involve substantial political payouts and "minority partners" that extract a meaningful amount of the economic value. None of this will be apparent if you are just reading annual reports.
Being on the right side of the conglomerate is better than a subco. But there is also a family trust above the conglomerate, which can jump in and out to pluck assets when advantageous to them. Chow Tai Fook (private family) plucking of assets from New World is a example of this that happened just last year.
Again I highly, highly recommend you read Asian Godfathers. Easily the best book on SEA investing.
Thanks for the long comment. I am doubtful that NAV stories will continue to work out very well in Japan, if they buy back 10% of the shares to please the regulator it's nice, but they need to go all the way. We will see.
There is no stronger regulatory support in France, I saw many companies taken under like EDF, MPI energy, and now Bollore subs. The Bollore subs shareholders have zero protection. Literaly no difference. Same in Belgium.
There are worse corporate governance issues like the examples you mention in HK small caps.
I am happy with Jardine to benefit from a base dividend + a buyback yield. I would not be comfortable holding Jardine C&C at these prices due to the risk of take over cheaply.
I would really love to read Asian Godfathers and I thank you for the recommendation. However, I am devoting 100% of my investing time to companies and reports, because my time is limited as a part time writer/investor.
About investing in Asia and weak corporate governance, I limit my exposure by geographies. Also if you know me I got balls of steel in investing. I invested in Kazaskhtan during the Ukraine war (x3), bought companies in Colombia, South Africa, woke Spain and socialist France, Bangladesh, China last year as everyone was saying that China stocks are at 20 years low or something like this. I just bought laughing.
Thanks for this article. I'm looking at United Tractors. It seems to be incredibly undervalued. I think it's a 50% discount today, perhaps more. Have you tried valuing UNTR.JK? Also, they paid a huge dividend to shareholders this year. That's not sustainable. I suppose it was to get funds into the Astra parent. Any thoughts on the dividend going forward?
Thanks. In general I do not go too much in details for companies that I cannot buy and I don't know more about united tractors in particular. The long term earnings chart looks favorable. Try to google for write ups.
I’m afraid this is rather wide of the mark, understandable given the desktop basis of the analysis.
One useful thing the author could do is simply to examine underlying profits over the last 15 years, or look at EPS while stripping out buybacks. That will tell you the story over whether there is any deep value in the company.
The past 15 years underlying profits has nothing to do with the deep value, which is based on earnings power and balance sheet, but with the process of value creation. I get the criticism on that part, this is why it is only part 1, and covered two listed businesses, and I will continue with further analysis and on the value creation.
Also stripping out buybacks is not correct and is a arbitrary choice of selecting some of the capital allocation only.
I understand your point, but I am using these as a proxy for understanding the company more deeply. For instance while deep value isn’t based on growth, it is affected by de-growth. Jardines is actually shrinking (pre disposals) and therefore will likely be on a static or downward earnings spiral over time. As such, the perceived value will actually be lower.
As an example the company’s book value, while not fraudulent, is misrepresentative and the real value somewhat lower. The ability to sustainably generate cash is also severely restricted and will likely be negative.
The point about share buybacks is again not that it affects value but that the headroom for Jardines to further create value on an EPS or BVPS basis is actually very very limited. If anything, Jardines is probably overvalued currently and certainly it is expensive on a PEG basis of some ~10x - 15x.
Jardines earnings were decreasing in recent years post covid. I reviewed it and do not think that this is a permanent direction due to various factors like macro and loss making subsidiaries sold. If you think that this is permanent, then it could be overvalued on a PEG basis.
Possibly, you’re more sanguine than I am though about a portfolio which fundamentally comprises five things: (grocery) retail, ICE cars, coal, palm oil and Hong Kong central real estate. This alludes to a more permanent diminution than you are suggesting.
For sure that there are different opinions in the market about the future prospects of these industries in SE Asia, and Jardine also has heavy equipment, EVs, Financial services, real estate in different countries, Nickel now.