Author Topic: 0662.HK - Asia Financial Holdings  (Read 3828 times)

BroKon

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Re: 0662.HK - Asia Financial Holdings
« Reply #10 on: May 13, 2020, 11:54:16 PM »
Thanks for the input Cicero.

Its a fair point on ROE, but the closing of the discount to a more normalised 35% discount, after HKFRS9 is implemented and corrects some of the undervaluation, should provide more than the additional return required for investors.

I think you are being a little harsh on the annual report, I have seen way worse examples, and I also think you can take a little comfort from the shareholder roster, that they will at least have to consider minority shareholders.

And yes that was my running assumption on the boats, but I was a bit taken aback by how they called them "yachts".


RVP

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Re: 0662.HK - Asia Financial Holdings
« Reply #11 on: May 14, 2020, 03:03:21 AM »
Great points Cicero. To give you the short answer -- this is not one of those cases where there's valuation gaps on assets that have been recorded to perfection, and you need to whittle down your NAV accordingly.

I think 1x reported BV is reasonable (and conservative) because the assets are for the most part liquid, growing, high quality, and easily verifiable. The ones that are not liquid, and which are categorized as long-term interests, are recorded at amortized cost (which is likely far below fair value). There's no indication the liabilities are under-reserved, and they've historically been overstated. The underlying business is also relentlessly profitable and continues to throw off cash. If you're skeptical of asset value (like me), you can try to figure out the underlying earnings power of the business and investment portfolio, though it'll take a bit more work. I think you'll reach a similar conclusion, even after applying a 10% discount rate.

For the longer answer:                 

1. Regarding ROE/ ROIC, I agree that it's not optimized for peak efficiency. I don't think that's a bad thing. It increases their durability to handle shocks, while preserving optionality to snap up great opportunities as they've done in the past.

Because of a huge excess cash/bond pile currently earning a pittance, and some earnings accruing on the associates/JVs/equities level, returns are going to look lumpy on an accounting basis. It doesn't mean that value isn't being created. Though a rough proxy, book value has increased at a roughly 8% clip in the past decade, and this is probably understated since it's after dividends and some stakes are recorded at cost. This is pretty good considering they don't use any leverage (besides insurance float), and there's no upward "fair value adjustments" in bubble-like non-liquid assets like what you see in a lot of HK property companies. 

2. In general, I agree that some discount to controlled companies/ conglomerates may be warranted, but because of capital allocation risk, not take-under risk. It's not that easy to privatize a company in HK. You need at least 75% of the public float (not including insider/ family shares) to approve, and no more than 10% can vote against. I've looked at several take-under situations in HK over the years, and in my opinion the offers are not usually as bad as how the media portrays them. In cases like Hopewell, yes you'll see huge discounts to book value, but that's because BV is usually grossly inflated via usage of very low cap rates. If you try to isolate the recurring cash earnings stream and apply a more reasonable discount rate, it's often not that bad.

3. The disclosures could definitely be improved (like many other HK companies), but I think enough information is provided to form a rough appraisal of intrinsic value. And in my opinion, that appraisal is probably going to end up on the low side, because they're rather conservative in their reporting.

I disagree that public shareholders are low on the priority list. It's hard to understand (hence the opportunity) because there are many different businesses under one umbrella, and the accounting standards aren't able to fully capture the inherent earnings power/ intrinsic value in a straight-forward manner. I don't see any indication that they're intentionally trying to mislead shareholders in any way. The compensation is not excessive, and when there's an event where value is crystallized and appear on the books, they've historically been rather shareholder friendly via large special dividends and buybacks.   

4. The company rarely trading at book is, in my opinion, a function of its relatively small size and pretty wide/ diverse holdings that don't lend themselves to simple automated analysis. Historically it looks like the discount narrows around monetization events. This, of course, should have no bearing on the underlying value of the business. Today, their asset base and equity is getting considerably larger (~US$ 2B and $1.3B respectively). Given their discipline and ability to compound value, they're going to fall into more and more radars. In fact, they will be added to the MSCI HK micro cap index end of this month. As following increases, it would not be surprising if the historical discount to NAV shrinks over time, all else equal.     

Not much to add regarding the boats/ entertainment expenses, except it's not material enough to make much difference in my opinion.

Agree completely that the HK Life price tag is economically irrational. It's recorded at cost (~HKD$100M), so no need to worry it will cause impairment to BV. And certainly not using that case to infer the rest of the portfolio is massively undervalued. 1x BV doesn't account for any potential mark-up, if that's the yardstick you choose to use.

However, I will say that it's not too hard to see certain other parts of the portfolio rather undervalued just based on reported figures (or lack thereof) and basic understanding of the stake(s).   

Cicero

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Re: 0662.HK - Asia Financial Holdings
« Reply #12 on: May 14, 2020, 10:01:59 PM »
Thanks BroKon and RVP. You field some good points. RVP on your points:

1. Apologies I have not looked at the historical ARs in a lot of detail, so maybe this gibberish, but isn't a good portion of the increase in book value driven by fair value adjustments of equity holdings? Last year for example they wrote unlisted equity investments at fair value up from HKD 3.1 Bn to 4.1 Bn
2. I appreciate the mechanics in Hong Kong and I agree that they offer some protection (given that they are incorporated in Bermuda there are some additional protections there as well). The scenario I am worried about is "share price goes down for whatever reason, majority makes a takeover offer at an attractive premium to current but at a huge discount to fair value". I agree that many HK real estate businesses mark their properties at unsustainable levels and deserve to trade at a discount to book. In Hopewell's case I find the timing rather curious given some of the plans on redevelopments, but that is a different story
3. Did you or BroKon talk to management? Are they open to meetings?
4. The point on MSCI micro is an interesting one

I'll do some reading on this name; I am intrigued :)

BroKon

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Re: 0662.HK - Asia Financial Holdings
« Reply #13 on: May 15, 2020, 08:58:32 PM »
Well here is some more reading for you, a profit warning they just issued: https://f1020179-7def-4e52-a364-9f60a5a24700.filesusr.com/ugd/b4d5f7_7d0cdb38846b4e74a271034a4141212e.pdf

Drop in asset value of 10% seems pretty much in the ball park, although the net loss expected is much harder to reconcile (at least I couldn't when I took an initial run at it), unless they are talking about their comprehensive income.

In terms of talking to management, they didn't come across as very open at all, but I guess like everything it depends on the AUM behind you.

RVP

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Re: 0662.HK - Asia Financial Holdings
« Reply #14 on: May 15, 2020, 11:18:33 PM »
Re: the profit warning, I'll try to give it a shot:

As of YE 2019 (all in HKD), the financial assets measured at fair value through profit or loss was ~$1.2B, of which ~$1.1B was in equities and investment funds. S&P 500 and Hang Seng Index dropped roughly -21% and -17% in first quarter. Let's call it a -20% drop on their $1.1B exposure, which would be about -$220M.   

Holding the Interim 2019 income statement steady, we had roughly $75M underwriting profit +$79M div income and +$49M interest income +$32M from JV/associates = $235M. Subtract $59M for operating expenses and financial costs, you're left with $176M. Subtract -$220M from the financial assets losses above, and you arrive at an expected $-44M net loss before tax. 

For the asset value, I can easily ascribe a -5% mark-to-market impairment from the financial assets above, Bumrungrad Hospital, and Bangkok Bank. The remaining -5% might be from write down in PICC life.

YE 2019 embedded value for PICC life was roughly $4.4B (at share), vs a recorded value of $3.4B on Asia Financial's books. Based on prelim Q1 figures from PICC, core capital at PICC life has actually strengthened, so I don't see any red flags there. Lower interest rates will be headwinds for life insurers, but if what I expect is accurate regarding 50% of the asset value write-down stemming from PICC life, I think it's just Asia Financial being conservative as usual.   

BroKon

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Re: 0662.HK - Asia Financial Holdings
« Reply #15 on: May 16, 2020, 01:53:51 AM »
That's embarrassing, I read it as a net loss of 244m. Ignore me. FWIW my maths was similar to yours, clearly my reading skills need some work though. That will teach me to skim announcements on my phone.
« Last Edit: May 16, 2020, 01:55:50 AM by BroKon »