Diego Milano is the manager of the Quercus Fund. It is a fund based on global equities and deep value.
The objective is simple, but not easy: to buy securities at extremely low prices in relation to their intrinsic worth. In order to find and hold them, the Fund employs a unique deep-value, long-term, and unconstrained global approach.
We met in Vienna for the Andy fintwit Europe (Europoors) meeting. It was great meeting Diego and others.
We always had a position in common, First Pacific, which is a holding company of defensive assets in South East Asia, and is really deep value. This was a decent winner for both of us, with large capital appreciation and dividends
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Diego also pitched Tianjin Development numerous times, and talked about it in Vienna. We did not have time to go in much detail, but he agreed to respond to my questions about this company for this article. I felt that it was better to get the thesis from the man who knows the company well himself and owned it for years.
No money was exchanged for this article, only a few beers in Vienna and also some Spanish cockles from Espinaler (TM).
Back to Tianjin Development:
This is an extract of the original thesis by Diego Milano in 2021.
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So I had some questions to Diego about this initial thesis, and I wanted to understand how to invest in a deep value without a catalyst company, how do you view capital allocation in this case. It is interesting to get the mindset of such deep value investing.
Question-What has changed, is it the same business since 2021?
It is essentially the same business.
The main change since the first time I wrote about Tianjin Dev was the selling of a money-losing subsidiary (Tianduan) in 2021, for HKD 600mm.
But the other subsidiaries remained unchanged.
Q-What is the fat pitch on Tianjin Development in 2025?
The core thesis remains the same: the stock trades at an extremely high discount to the value of its assets. While this is not a fat pitch, it is a case of value being its own catalyst.
Having said that, we have two potential catalysts:
deployment of cash, even if partial. From 2008 to 2021, we had on average almost one deal a year of a size at least equivalent to 20% of its current market cap (HKD 2.6bn). Its last major acquisition was ten years ago (the pharma business). I am all for being a conservative steward of cash, but at some point it has to be put to good use.
stabilization / improvement of the elevator business. Its stake in Otis China is the main contributor to profits. The elevator business is like a flywheel: new equipment is installed, and it brings with it a long period of service revenues (maintenance). New equipment is cyclical, and related to real estate cycles. Services is a recurring and steady business, with high margins and returns. Globally, services represent more than 80% of the profits of an elevator company. But given that the urbanization of China is comparably more recent, new equipment is more relevant.
Otis China has been struggling due to the crisis of the real estate sector. We finally got to a point where services and new equipment are reaching similar levels of profits, which makes for a much healthier business profile. Additionally, there are some early signs (and I may be completely wrong in that) that China’s real estate situation is stabilizing. So it is quite possible that from 2026 onwards, Otis China profits will return to growth.
What is a municipal holding company?
I called it that because 1) it is majority-owned by the city of Tianjin (which is one of the four cities in China with status of province), and 2) it does not directly operate its assets, therefore one can call it a holding company.
How did they build their net cash position, what is the idea behind it?
We need to go back in time to understand that. While the company has been net cash as far as I can see, its magnitude changed in 2010, when it sold its toll roads assets for HKD 1.4bn. During the following ten years, a number of acquisitions and disposals were done. Non-core assets were sold, and a large new business, pharma, was acquired. Nevertheless, the cash kept piling up: from HKD 3.4bn in 2011 to HKD 5.4bn in 2021, which is close to the level we are today (excluding the cash within Lisheng Pharma). With no new acquisitions since then, current dividend per share is 50% larger than 2021’s. I imagine that at some point, the company will either use part of the cash for new deals, or increase the dividend even more.
How did Tianjin ended up owning all these stakes in various listed and non listed companies? Do they still build new investments?
The business of any holding company is indeed to own various different companies. Especially in Europe and Asia, such holdings are not that odd.
In addition to the surviving ones, throughout the past 15 years the group had stakes in other sectors such as toll roads, wineries, gas distribution and hydraulic presses.
The ones that continue to be part of the company have both historical and strategic reasons.
The utilities business operates within Tianjin’s TEDA zone, a technological development area where a number of companies, both Chinese and multinational, have plants.
The minority stake in Tianjin’s Port (which ranks as the 8th largest container port in the world), has both historical and strategic reasons. Ports can be a patchwork in terms of structure: if a terminal is a critical part of the operation of a company, it is only natural that it may want to have a say in its operations. Tianjin Dev actually used to be the majority owner of part of the port. In 2010, most port operations were consolidated in a single entity. This is the Hong Kong listed one that survives today, and in which Tianjin Dev has a minority stake.
As for Otis, it had a number of JVs in China for a few decades. Its main base of operations is within TEDA region, where they also have one of its largest R&D units globally. The JVs ended up being slowly consolidated within Otis China, the one where TianjinDev has a minority stake.
Its pharmaceutical business was bought in 2015. Non-core parts of the acquired company were sold, and its most significant pharma asset is listed in Shenzhen.
Since your initial thesis in 2021, the stock is up a bit (63.5% in 5 years). What do you think drove this, was some value realised, or was it just core execution?
The only significant development was a 50%+ increase in dividends since 2021. And yet, it is still small compared to the large pile of cash they have in hand.
As for the subsidiaries operations, they had their ups and downs. Utilities and the port have been steady, pharma has been struggling due to the centralization of the government procurement process, and Otis China has been suffering along with the real estate crisis, but remains quite profitable.
I usually do not express conviction on the reasons behind stock price movements, but it seems to be just a slightly lower discount to its fair value. In any case, the stock price continues to be extremely undervalued compared to its intrinsic worth.
How do you rate the management?
In my opinion they should be more aggressive to increase shareholder value: buybacks, extraordinary dividends, take advantage of discounts over discounts (the port is dual listed, and the Hong Kong listing is also undervalued compared to the Shanghai listing). To summarize, put the cash to work.
However, since 2021 its assets kept most of their value, and no “diworsification” deals were attempted.
In that sense, they have been good stewards of capital. But overly conservative.
Have you seen some activities by the company that are done not for the company's interest in mind, but rather to help the city of Tianjin strategically? One example would be building some trophy asset, or some loss making asset but with great benefit for the city of Tianjin.
No. I can’t think of any specific example where that’s clear. Even when they bought something that used to be owned by the city, valuation was reasonable.
We can think of the company as a tool to bring companies closer to listed markets.
But can I understand the rationale behind all deals? Not really.
But I don’t find them harmful on purpose.
General investing question: Everyone is focusing on buying cheap with catalysts. Tianjin seems to be just buying cheap. How does just buying cheap work for you in general and how it could continue to work with Tianjin?
It is a case of value as its own catalyst. While a few catalysts could be implemented, there is no sign that they will be. The price is so cheap though, that good surprises seem more likely than bad ones.
In general terms, “just buying cheap” works reasonably well when the value is at least maintained. If it increases, they can work really well.
Melting ice cubes, on the other hand, can always turn into a bad experience. I tend to stay away from them.
Theoretically, it is better to buy cheap with catalysts. There are two potential problems though: 1) when cheap is not cheap enough and 2) when the catalysts are priced in.
Specifically for Tianjin Dev, I believe it can work really well if and when Otis China is able to increase its profits.
What is the capital allocation you expect going forward?
I do not expect major moves in terms of dividends. But I expect that at some point part of the cash will be deployed into acquisitions.
Importantly, the likelihood of large capital destruction seems low.
What is your target, do you plan to hold it for the long term or resell if it hits your valuation target?
I do not have specific targets, but an appraisal of value that gets revaluated frequently. The indicator I keep track to compare different opportunities is the discount between stock price and value.
I will probably sell much sooner than when the stock price gets near there. When they get close enough so that there are better opportunities, I should sell and reallocate.
In most cases, I am both prepared to hold for the long term and to sell at any time in favour of something more enticing.
If you are interested in, you can find more details about my investing philosophy by reading the Letters to Shareholders publicly available at www.quercusfund.com
Regarding Emerging value, I aim to provide a great complete coverage of emerging markets opportunities as my first focus, and I keep covering my hidden champions in developed countries. The idea remains the same, find the best opportunities globally. Subscribe to the premium tier to get all the updates and ideas. This follows my portfolio, which did 19% CAGR since the start of the newsletter in 2021, in a difficult value environment.
You should valuate by P/E ÷ ROIC.
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P/E is not equal for all stocks because of differences in the intrinsic quality & D/E of invididual stocks.
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Have a look at JFIN:Nasdaq
Interesting, wasn't aware First Pacific's had also caught your eye.
One thing that truly stood out—beyond the attractive valuation from a NAV & low single digit P/E perspective, was management's business acumen in their more recent toll business acquisition, with ~6x P/E multiple from memory.
What's remarkable: those earnings were based on toll pricing that had remained largely flat for multiple years across many routes, management had bought in, aware of the significant pricing upside embedded in an already cheap acquisition multiple.