Unfortunately I haven’t been able to update this blog as much as I would have liked in the last few months. This has been due to working consistent 12-15 hour days in my law job. In any event, I wanted to provide an update on HK retailers and my investing portfolio/thoughts in this blog post.
HK Luxury Retailers
There have been 2 positive profit updates from Hong Kong luxury retailers that I own: department store retailer Dickson Concepts (113:HKSE) indicated that it recorded a “significant” profit increase in H1 (to 30 September) due to higher revenues and flat costs; luxury watch retailer Oriental Watch (398:HKSE) recorded higher profits due to sales of higher margin goods and reduced rental expenses. The profit announcements (not to be confused with actual accounting numbers) are below:
https://www.dickson.com.hk/doc/announcement/EA81118.pdf
http://www.orientalwatch.com.hk/owh/pdf/181109/ew_0398ann-20181109.pdf
While HK luxury distributors are not great businesses by any measure, they are solidly profitable. Clearly the quality companies in this space (if indeed there are any) are the actual brand owners, not the retailers and distributors. However the luxury retailers are benefiting from cyclical tailwinds such as reduced rents in HK, increased tourist numbers and a general recovery in HK luxury retail following a serious downturn a few years ago. Mix this with very conservative balance sheets and rock-bottom valuations and you have a beautiful value-investing cocktail.
Of course there are a number of arguments against my thesis. Chinese economic growth is slowing and everybody is afraid of the risks of Trump’s trade war. The increased strength of the HKD against the Yuan is acting as a drag on sales. HK retail sales growth in September was the slowest in 15 months (jewellery and watch sales were up 2.2% in September). You can also rightly argue that the conservative balance sheets and high cash positions of these retailers are tied up in the business due to long inventory cycles and cannot be returned to shareholders. And of course there is the problem of majority shareholder “leakage” that I written about before (https://streetsofvalue.com/2018/09/02/related-party-transactions-and-emperor-watch-jewellery-887hkse/). However, these profitable retailers are already priced for zero/negative growth. Even a modest continuation of this cyclical trend will yield very satisfactory returns. In the event of a total disaster in the HK retail space, our losses will be limited by the abundance of liquid assets on the balance sheets, the lack of debt and the short lease terms (1-3 years is “market” in HK retail). Furthermore, the luxury brands higher up the value-chain will act as a backstop against inventory write-downs. Swiss watch maker Richemont actually bought back €200m of excess inventory from distributors last year to protect its brand value from grey/black market sales. (https://www.ft.com/content/aadf6c6c-5a7b-11e8-bdb7-f6677d2e1ce8)
On a side note, Emperor Watch & Jewellery’s (887:HKSE) long awaited shareholder circular is expected early next week. You may recall that they announced a predatory insider purchase of a Canton Road shop premises from Emperor International. Thankfully HKSE listing rules mandates a minority shareholder approval of such deals. Emperor have delayed the circular for about 2 months already. I am more hopeful than I was 2 months ago about this purchase not going through, but it is still more likely than not to be pushed through. Oriental Watch’s announcement on Friday of reduced rental expenses shows you how overvalued the deal is. I would actually expect stronger earnings from Emperor than Oriental in 2018 due to their more expansionary new store strategy. Oriental Watch’s management are taking an extremely conservative view on the luxury retail market and returned pretty much all earnings to shareholders earlier in the year.
I will continue to closely monitor the situation and welcome any further comments/emails from my readers. I received quite a large amount of email responses to my last post on Emperor Watch from fund managers and private investors which were most insightful/welcome.
Investing Ideas
My portfolio is currently ~40% cash at the moment. “Red October” had little impact on my portfolio due to this cash position, my lack of exposure to North America and illiquidity of most of my holdings. Clearly 40% cash position is not ideal, particularly for a small investor like myself. I simply have not been able to find enough ideas, partly through limited time due to work and also due to high valuations. Thankfully the latter seems to be less of an issue at the moment.
Below is a list of some names that I’m looking at (in no particular order). They include my “bread and butter” net-nets, sum-of-parts holding companies, obscure illiquid stocks, companies I believe will fare well in a higher interest rate environment, closed-end-funds and just generally interesting value plays. Please be advised that I have not completed my due-diligence on any of these names and do not own any of them.
- Vienna Insurance Group
- D’Ieteren
- Bonheur ASA
- ASBISc Enterprises
- Autostade Meriodionali (I may be too late on this)
- Kriton Artos SA
- Game Digital
- Cullen/Frost Bankers
- Lewis Group Limited
- Argo Group
- Urbana Corp
- Canadian General Investments
- KOALA Financial Group Limited
- Holders Technology Limited
- Felissimo Corporation
- Shinko Shoji Co Ltd
- OYO Corporation
- Parks! America Inc
- Doric Nimrod Air Two
So lot’s of research to do and not much time to do it. There’s actually a few names that I’m probably forgetting. But there certainly seems to be lots of interesting opportunities out there for an enterprising, intelligent and small investor. I for one am hoping for more “red” months so this list can get longer.