We attended the Value Investor Conference in London, which took place on May 22nd 2014. Below are notes from the presentation by Andrew Cormie, Eastspring Investments (note: These notes are what the presenter said to the best of our knowledge, but there may be some inaccuracies). For some more great coverage, check out Dan Mccrum of FT’s notes. Also see: Mason Morfit on Shareholders in the Boardroom and Mason Hawkins on The Importance of Terrific Partners

Andrew Cormie

Andrew Cormie, Eastspring Investments – Value in Asia – Can We Quantify the Current Opportunity?

  • Specialist Asia Value Manager with ~$100bn AUM

Main Points:

  • Over time value outperforms, Asia is no exception
  • Recently value has faced severe headwinds
  • Markets have over rewarded certainty and quality
  • Which has driven very strong momentum in narrow clusters of stocks

Companies they don’t want to own at this price:

(1)    Tencent Holdings Ltd (HKG:2988) (OTCMKTS:TCEHY) and  Galaxy Entertainment Group Limited (HKG:0027)

  • Really fashionable things in Asia have been Chinese internet and Macau gaming and these stocks have been the poster child in their respective sector.
  • Owned in the past and made money but over the last 2-3 years have been unable to get minds around the valuations you need to pay.
  • The concern is valuations, not so much earnings. Macau gaming particularly generating a lot of earnings but not risk free with the valuations the market is pushing these names to.
  • Whatever way they torture the no.s, struggling to pay for valuations 2-3 standard deviations expensive relative to historical.

(2)    Commonwealth Bank of Australia (CBA)

  • It hasn’t just been fashionable stocks being pushed to high valuations – Commonwealth Bank of Australia (ASX:CBA) (OTCMKTS:CBAUY) is a boring stock, which has played v well to investors looking for certainty and quality combined with a chase for yield.
  • High quality company
  • But growth is tepid
  • Markets appear to be extrapolating the future off the peak
  • View valuations as excessive with no margin of safety
  • Trading pretty expensive relative to its own history (relative PB ratio)
  • Valuation metrics: ROE 18.3%, P/E 15, P/B 2.7, DY 5%, Mkt Cap US$bn 117

Andrew Cormie: Out of favor stocks

Stocks they like which are out of favour:

(1)    Bank Of China

  • Not identical to CBA but not too dissimilar, similar mkt cap and ROE
  • Compare it’s valuation metrics to CBA above: ROE 17.9%, P/E 5, P/B 0.8, DY 7.1%, Mkt Cap US$bn 120
  • Well run domestic and international bank
  • Fear over Chinese growth, credit and disintermediation have caused a substantial de-rating (relative PB ratio)
  • If you think the Chinese economy is an evil, wilful Ponzi scheme then this is a value trap
  • They don’t believe this – they believe there will be a slowdown in growth as China transitions from manufacturing and investment to services and consumption and as the leadership deals with corruption. Think there will absolutely be a credit cycle – centered in the property sector where people over-invested in white elephants where no one wants to live. However, don’t think will be as bad as the thunder people are saying.
  • When go through all these and what they think are normalized earnings, they think this is more than in the price.
  • View valuations as attractive with a significant margin of safety and good opportunity to surprise on the upside.
  • If they are wrong and China turns out to be much worse than they expect, then investors would want to be very careful with other regions such as Australia due to the interlinks in the economies.  You may not want to be hiding in an Australian stock that is 2.7x BV (i.e. CBA)

(2)    Noble Group

  • Global commodity supply chain logistics business
  • Valuation Metrics: ROE 5.1%, P/E 30, P/B 1.4, DY 0.9%, Mkt Cap US$bn 6.6
  • Historically generating a ~20% ROE
  • Last 3-4 years decided to diversify from hard commodities and energy into soft commodities and like all great expansion strategies managed to do at top of the cycle
  • Significant de-rating over this period due to multi-year investment phase and cyclically low prices
  • In minerals business have been able to co-invest with producers to ensure long-term off take agreements
  • Found were unable to do in soft commodities so became the producer themselves and once built scale and had the off take agreements, brought in other investors to free up capital.
  • The process took longer than expected and mkt got disillusioned and between both commodity cycle and business cycle taking longer than expected started to extrapolate the worst off the bottom.
  • Noble have since been executing better – have gotten rid of some mgmt. that were slow to execute and brought in COFCA (China’s state agri co.) in a joint venture selling half the agri business to them with an option to buy another 10% if it is spun out.
  • While don’t think it will get back to the 20% ROE, thinks mid-teens is more likely (from 5-6% now)
  • View sustainable earnings as substantially higher than current levels
  • Attractive valuation and a large margin of safety

Andrew Cormie At London Value Conference: Value in Asia by ValueWalk