My Portfolio - Naked in front of you

I've JUST SOLD a position

If you’re here just for the deeds, I don’t want to waste your time, here it is – accurate as of 07^th July 2024.

If you want to know more about my thought process and recent maneuvers, continue to read on as I will share more in the second half of this piece.

In the past 1.5 months, I’ve been in a reflective state; on the many facets of life (and this includes my online presence, which is mainly my YouTube and this newsletter thing that I write to share). This has resulted in a slower cadence of content being put out, as most of my time has been spent on speaking with people, reflecting, thinking – and maybe languishing in the extra time I had (because I wasn’t thinking about producing 24/7).

Safe to say, I’ve come out of that state with more questions than answers.

And… I’ll need your help, and your opinions are greatly appreciated. You can help me fill out a survey here, so that I can know more about you, and what topics you’d like to see me cover in the future. I’ll close the submission by the end of July and reach out to 3 random participants with coffee (probably via an eGift).

Even if it’s not for the coffee – I just hope to know you better.  

Anyway, specific to this newsletter, I’ve come to this conclusion. I know that quite a few of you follow me because of my exposure and coverage of the Chinese Tech scene – and as you can tell, I am still extremely overweight on a portfolio level (>50%). However, I think it would be wise to remain fluid and agnostic to opportunities.

Therefore – this newsletter just has 3 main goals.

1.      Finance / Investing related resources that I benefited from

2.      Current Opportunities / Company Analysis that I’m interested in

3.      Portfolio Moves & Thoughts

Anything else is a bonus, but I hope to first deliver on these 3 fronts. And that’s what you should expect from this. If not, you can just unsubscribe. No hard feelings.

Now that we’ve got the admin stuff out of the way – let me dive into the moves proper.

One look through the top holdings and you can probably tell that I’m your typical “Tech-focused” investor. That said, I only hold 3 of the Magnificent 7 in the US Market. The Tech that I concentrate on are those in the Chinese/HK market.

Now, for those of you who’ve been following me, you would realize that I’ve JUST divested a sizable position (which is now absent from the portfolio).

Chinese Banks.

I’ve basically sold ALL of them on the 2^nd of July 2024.

Before I go into the reasons (which is a theory that I’ve personally concocted), I must first give you some context.

I believe most investors will have an insatiable need to speculate. Me included. Some, speculate with Bitcoin. I speculate with Chinese banks.

Some might coin it – “The itchy finger part of your portfolio”. To set guardrails for this bet, I’ve made sure that I set aside a nominal amount that I was willing to lose – and the total should not exceed ~5% of the portfolio.

I’ll be the first to admit that compared to my other buy-and-hold companies, these group of Chinese banks in my portfolio were the ones that I had the lowest conviction, and I was just “betting” on a recovery. I did however study it a bit, and my thesis was the following.

1.      Everyone knows about Evergrande since 2020 – and many financial institutions were dragged into the mud due to the lack of transparency of their exposure to the property crisis (ie, a lot of negatives have been priced in for more than 2 years).

2. I bought these names at the tail-end of 2022 – allowed for some of these bankruptcy proceedings to happen and took a “wait and see” approach.

3.      And since there is a lack of transparency, you can never know for sure what is on their loan books – and because of this, I adopted an approach where I tried my best to understand, but still had to diversify. So, I bought a group of them, rather than just betting on 1 bank alone. And I try to avoid the ones with bigger property exposure.

4.      When studying the shareholding of these Top Chinese banks, they’re state-owned with more than 50 – 70% of shareholders being the government itself, or state-owned entities. At least the interest is aligned.

5.      A large part of the dividends from the banks were an important source of local government revenue. Local authorities are already suffering from the large reduction in revenue from land sales – and the dividends coming from these equity holdings are keeping them afloat.

6.      At the time when I took an interest in the banks, they were trading at interesting valuations (between 0.4 to 0.6 book), and when looked at their dividend payout history, they were all consistent (which goes back to point 5), I suspect they MUST stay consistent, even during a pandemic. They were promising yields of 9 to 11%.

7.      Not only that, when you look at their return on net tangible assets – and adjust it for the P/B ratio they were trading at, they were at least north of 15 to 20%.

8.      And in China, you probably won’t be afraid of the scenario of a bank-run, because you’re operating in a high-trust society. There’s nothing to run from since the big banks are all quasi-government anyway.

9.      The only concern? The potential CRAZY dilution if things get out of hand. Basically, like what happened in the 2008 Great Financial Crisis. But when looking at how China is dealing with their property crisis today – they don’t look like they’re adopting the American approach. So there looks to be quite a bit of time for reaction and maneuver.

10.  To me, it feels like a game of musical chairs, and I don’t expect these banks to be great compounders for the long term, and I’m just in here to catch the valuation rebound.

And that’s basically my 10-point thesis summarizing my thought process.

However, I have always been very reluctant to share what specific names I bought into, because I can tell you that it is (kind of) a random draw – although I would like to think that I’ve put some effort into selecting those with lower levels of idiosyncratic risk (in my opinion) out of the Top 8 banks.

The results? I think it was ok… I’ve taken 1 round of dividends (which was roughly 9% of my cost), and I acknowledge the amount of luck I had, where the valuations I entered were near rock-bottom, and their valuations had rebounded between 20 to 50%. Overall, I’m up roughly ~+40% (inclusive of capital gains and dividends) for the 19-month period.

The current prices of the Top 8 banks, as of 07/07/2024.

ICBC (1398) - $4.70 HKD

ABC (1288) - $3.39 HKD

CCB (0939) - $5.36 HKD

BOC (3988) - $3.80 HKD

BankComm (3328) - $5.71 HKD

Industrial Bank (601166) - $17.19 RMB

CITIC (0998) - $4.70 HKD

China Merchant (600036) - $33.88 RMB

And that sums up the episode of my encounter with China banks. Stay tuned for part 2 in the following week, and I’ll share the reason (or theory) for why I decided to sell them.

Love, Chi Keng.