Top Down Analysis: Possible Sectors to Investigate with Potential Long Term Upside

 Hey guys,

Please feel free to contribute to this section on which industries/geographies we should investigate.


Here are my takes for the next 5-20 years:


Equities

• Asian environmental services, in particular water (Hyflux etc) - due to water scarcity in China, India, Middle East -> rising affluence means increasing levels of consumption per capita but they do not have a good sanitation system - too much dirty water around to meet the increasing demand
  

• Asian healthcare - witness the Parkway health saga - more people aging in Asia , more affluence = more travelling, medical tourism - explore Singapore and Malaysia as a travel hub for such activities of hospital treatment + entertainment (Integrated Resorts)
• China financials - the UBS Chief investment strategist in Singapore recommended buys in all 3 Chinese banks - ICBC, BoC and CCB. ABC is a not so good due to high level of non performing loans, and relatively bad performance. If you check their ROE on one source, all above 12% from 2005-2009 (indicating Buffett's durable competitive advantage?), on the face of it. of course, haven't adjusted for all the analytical adjustments in corp.
• China real estate: UBS talk shows 15 million people moving into urban areas every year. property prices are going sky high, fears of bubble. But the fundamentals mean demand is more than supply over the next few years due to increasing urbanization from rural areas to Tier 1, Tier 2 and Tier 3 cities. Future growth areas : Tier 2 and 3 cities - i.e. the ones that are situated further from the eastern coast of China (Tier 1 being Shanghai, Beijing etc). China is rapidly building infrastructure to connect these inland cities to the coastal areas, and MNCs like HP are building more factories inland to take advantage of cheaper labor.  Some companies to investigate: China Vanke (China's Capitaland) , Singapore's CapitalandMallsTrust (investing alot in China). He also said that state owned enterprises in China doing real estate tended to outbid other companies for land (they bid a premium over the private companies) so they secure the most lucrative land to develop property - a risk to take into account.

• China retail: In particular, Li Ning - consistent ROE of about 30% from 2005-2009. Potential to be (or already is) China's Nike.It consistently beat foreign sports brands in the China market like Adidas and Nike.
• Singapore real estate - looking into REITs that have exposure in Singapore (due to increasing tourism arrivals due to IR), Indonesia (recently positive reports on its growth) and China (increased consumption in the world's biggest market)

Risk Management
Maybe buy some ETFs to ride the wave and minimize risks.

• Investigate S&P500, DJIA, Emerging Markets, FTSE/Xinhua China 25, MSCI Emerging Markets, MSCI Indonesia, STI?  

Emerging Markets

I recently attended a CFA conference on Asset Allocations in Emerging Markets. One of the keynote speakers, Lawrence Speidell, CFA, said investing in developed markets are riskier than investing in emerging markets. Emerging markets you get higher returns, but look at Eurozone and US now, all in trouble! Putting money in Eurozone/US may lead to stagnation. Also, emerging markets people are more optimistic about tomorrow than the developed countries, and demographically, there are proportionately more young people in emerging markets to be consumers and represent a pent up, latent demand for goods and services compared to developed countries, who face an ageing population who are less productive. The emerging markets' young population is highly ambitious, innovative and enterprising and always striving to build a better future for themselves, whereas developed markets are too saturated and overpriced for more growth.

What Methodology to Use?

This is the scope so far in my mind. To identify companies worth examining further, perhaps we could filter them out objectively through quantitative criteria by using the New Buffetology's Ten Points of Light: i.e. ROE >12%, ROA >12% , debt < 5x net earnings, etc.

And also in industries where the companies are market leaders and can enjoy a competitive durable advantage from a strong brand name and almost monopoly position. Because analyzing individual companies are time consuming, we want to ensure the right horses are chosen!

Why Invest in China stocks

In Chinese, the word "crisis" is made up of a combination of two characters. The first signifies "risk". the second stands for "opportunity".

China could face many crises ahead. As an investor, the ones I need to examine most closely are those where potential risks - the fears they provoke, the solutions they require - have the best chance of creating value.

"If you do your homework, buy cheap, and remain patient, you should be able to walk over and pick up that pile of cash in the corner that nobody else notices."

By today's accepted standards, China is a relatively safe place to invest.
The PRS (Political Risk Services) Group, a leading organization in investment risk analysis, has ranked China as a "low risk" country since 2001.
In 2006, using factors such as total foreign debt as a percentage of GDP, debt as percentage of export goods and services, and international liquidity and exchange rate stability, China scored 47.5 on a scale of 50. Japan scored 46, and the United States a lowly 30.5. In fact, the United States has been considered more risky than China since 2001 - and that was before the September 2001 attacks.

-Jim Rogers, A Bull in China (2007), Chapter 2: Risk: The Perils of Success

Kick-off Project: Analysis of the Big 3 Banks in China

Analyst coverage

• Bank of China (Anthony)
• Industrial and Commercial Bank of China (Ian)
• China Construction Bank (Matthias)

Research questions: 


1. What has the Chinese financial industry performed in the past five years, and what is the outlook for the next five?
2. How have each of these banks performed over the past five years? Is there evidence of a durable competitive advantage in their respective industries?
3. What is the risk profile of these companies? In particular, gearing, Tier I Capital ratio etc.


To convene on 25 August 2010, Wednesday 2pm to discuss these issues.

Kick-Off Meeting - Formation of AIM Investment Research

AIM Investment Research kicked off its meeting today. 


Issues discussed:

Vision

• To earn members an above average return (>12%) over the long term (5-10 years) through timely and relevant research 

Mission

• To incorporate as an informal investment research group to exchange ideas, research themes and analysis of promising companies from various sources
• With option, if members decide, to pool funds to invest in equities in future 

Target audience

• Focused on tertiary level investors with a longer time horizon and higher appetite for measured risk 
• May have little or no capital, but start off early for an understanding of the industries

Long term geographical coverage

• United States - still the leader in business and technology, will still lead the world for at least next 50 years. Recovering from the Great Recession, still opportunity to uncover quality, brand name stocks at lower valuations
• China - the world's biggest emerging market, stocks still relatively low-priced compared to stocks in developed countries - represents huge potential for growth
• Emerging markets - countries with young population, highly optimistic, represent huge pent up demand for quality goods and services, e.g. Indonesia 

Collaboration methods:

• Document sharing through Dropbox/Emails
• Meetings - teleconferences or face-to-face

 Current Project : Analysis of the Big Three Banks in China 

Future studies:

• China real estate + Singapore real estate
• China consumer markets
• China environmental - e.g. water, air pollution
• Asia natural resources - mining, palm oil, oil & gas, timber
• South-East Asia consumer markets/entertainment - e.g. casinos

Warren Buffett’s Ten Points of Light

1. Does company show a consistently high return on Return On Equity?
• Companies that benefit from durable competitive advantage have high ROE, >12%
• Price competitive commodity type businesses have low ROE, <12%
• Consistency is everything

2. Does company show consistently high return on Return On Total Capital?
• Consistent ROTC
• Won’t work for companies in price competitive business
• Look for ROTC >12%
• With banks, investment banks, financial companies, look for consistent ROA >1% and consistent ROE >12%

3. Does earnings show strong upward trend?
• Historical EPS that strong, show upward trend, indicate durable competitive advantage
• Historical EPS wildly erratic indicate price competitive business

4. Is company conservatively financed?
• Companies with durable competitive advantage typically have long term debt burdens of fewer than 5x current net earnings

5. Does company have brand name product or service that gives it competitive advantage in market place?
Yes = good, can enjoy consistent financial performance over the years

6. Does company rely on organized labor force?
No=good, cannot bid up wage prices and cause strikes

7. Can company increase prices along with inflation?
Yes=good, indicates strong brand name, customers willing to buy product even as prices increase

8. How does company allocate retained earnings?
Good=re-investment for expansion, buy back shares
Tenuous=research and development (results not guaranteed)

9. Does company repurchase shares?
Yes=good, increase earnings per share

10. Are company’s share price and book value on the rise?
Yes=good, market recognizes book value increase, reflected in share price

Source: The New Buffettology (2002)
by Mary Buffett (Buffett's ex daughter in law) and David Clark

http://www.amazon.com/New-Buffettology-Techniques-Investing-Successfully/dp/0684871742