Value Investing in Asia, The Book Reviewed
Investing in Asia is a little different than in the west.
When we start investing, we would usually pick up some of the books highly recommended for novice investors to get started.
This can be The Intelligent Investor by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher.
These are great books, and both introduce you to the basics of securities analysis, the importance of investing based on value and how to uncover growth.
Asia is still predominately an emerging markets. Their stock market is still developing. Business practices, transparency and governance is more lacking.
As such, some of the things we assume to be less of a problem is a huge issue when investing in Asia.
So how do we marry these fundamental concepts in our Asia context?
My friends Stanley and Mun Hong have written a book called Value Investing in Asia. Stanley and Mun Hong, together with Willie ran Value Invest Asia, a site that provides resources when it comes to investing in the region.
This book, is not like some of the books that you have read, that just consolidates a lot of the articles they have written and called it an investing book.
The whole book is very coherent.
General Breakdown of the Book
Value investing in Asia relates to you why you should invest in Asia.
The writers go through the historical growth of Asia and the potential growth ahead. The book also talks about the characteristics of investing and business in Asia.
Then, the writers shares what they know about investing in the value approach. This second section can be seen as your high level introduction to value investing.
The book will go through many case studies so that you can understand what they are talking about, as well as do your own historical research on the examples given and how well they do now.
Who this Book is For
If you are already a practitioner of value investing, this book is applicable to read about investing in Asia from the point of view of other practitioner.
If you are new to investing, this book is quite a good read. Use this book as a linked list to branch out to the deeper parts of value investing.
The book also provides a 5 finger process as a simple checklist to go through prospecting a business and a chapter on red herrings when it comes to investing in individual company.
Some case studies or examples cited:
- Tingyi Holdings
- Capitaland Malls Trust
- Samsonite International
- Air Asia Berhad
- Orient Century Limited
- Ertat Lifestyle
- Fountain View Development Berhad
- Olam International
- F&N and Vinamilk
- Yoma Strategic
- Belle International
- Old Chang Kee
- OTO Holdings
- Cross Harbour
- Dairy Farm International
- Super Group
- Hong Kong Land
- First Resources
- Dalian Wanda Commercial Properties
- Tencent Holdings
From this point on, I will highlight some of my reflections about the book and my process.
Disconnecting the actual markets from the business
The book tries to influence us that, in the great financial crisis , even the stock price of Singtel fell by 40%.
However, this does not mean that Singtel have lost 40% of their customer in 2 months.
Here they try to explain that in the short run, particularly during market panics and euphoria, the price might not reflect the actual business.
To be fair, businesses work differently and losing 40% of customers might not always result in a proportionate 40% fall in share price.
When the pricing and the business disconnects, this is where potential value emerges.
Viewing Valuation as a Range instead of a Definite Value
The book says: “Given the large number of assumptions we need to make during a valuation exercise, we believe that at best valuation can be narrowed down to a range.”
This is pretty true.
When we get started, we want to learn the right way to determine price to earnings, price to book, how to accurately compute the discounted cash flow to derive the intrinsic value of a company.
And we tend to treat the figures we derive to be the absolute.
Overtime, we learn that the business and the environment is so fluid that your cash flows, earnings and prices keep changing.
In the end, we try to use a few valuation metrics, but we also try to determine if the company is leaning closer to fair, under or over value.
How do you determine the speed of a car if the car is always volatile? You cannot.
And this is where we understand that Stanley and Mun Hong are practitioners of this. Only when you struggle then you realize that its not so straight forward.
Growth and Recent History of Asia Investing
The first part of the book is where I find it an easy and entertaining read.
I am of a similar age group as Stanley and Mun Hong, so its great to see them narrate how these foreign firms, upon seeing the great potential in Asia, moved in, with varying results.
They also talked about some of the potential oversupply that happened in the past, why it happen, as well as the commodity super cycle.
Misunderstanding the Future Aspirations of Asians
The book brings up an interesting part where a famous technical trader, Daryl Guppy shares what he observes in a Chinese financial conference.
A renown American financial trader gave a presentation to a Chinese audience. The Europeans will think the talk is inspiring, insightful and useful. However, the Chinese audience found the talk to be irrelevant.
The American trader talks about making your money, then moving to the countryside. This is the Western Dream.
In the Asian context, you might come from a poor environment and your concern is to make it big, upgrade your lifestyle. Why would you want to do so much only to return to the countryside?
I found this really funny.
3 Different Kinds of Value
Stanley and Mun Hong categorizes value investing into 4 categories:
- Asset Value
- Current Earning Power Value
- Growth Value
- Special Situations
They use three examples to bring the concept across:
- Asset Value: OTO Holdings Limited
- Current Earning Power Value: Cross Harbour Holdings Limited
- Growth Value: Heineken Malaysia Berhad
- Special Situations: F&N Limited
This is the part where they went through their past prospecting experiences and provide 3 detailed case studies.
I think classifying value into this way is pretty much on the point. I would have consider Current Earning Power Value and Growth Value to be similar and put them together.
This break down allows the reader to separate finding margin of safety with zero growth (earning power) and those that have a lot of growth.
The book at the end, tries to tie up what we learn about valuation up to this point in 5 different case studies:
- Value through Assets: HongKong Land
- Current Earning Power: Tingyi Holdings
- Growth through cyclicality: First Resources Limited
- Special Situation: Dalian Wanda
- High Growth: Tencent Holdings
All the case studies are well written and I did enjoy the Growth through cyclicality a fair bit, since it is an area that I am weak at.