AI #11: A flying update from Kaohsiung

This week, I'm writing to you from the city of Kaohsiung in the south of Taiwan. I've arrived here from Guangzhou in China and will be on the move again to Taipei on the last leg of my trip very shortly.

It's been an eventful few weeks. One minute, I've been sitting in a high-rise office, listening to a man tell me his plans to make a splash in noodle soup. The next, I'm clambering through the crowd at a heaving railway station for another long train ride to another distant city.

I've seen a lot of changes in the short time since I was last in many of these countries, and had many interesting conversations. After five weeks on the road, my notebook is almost completely full. And I think I have the outline for some stories that will really interest you on my return.

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For example, there's a little Singaporean company that caters to Asia's growing taste for baked goods. I've known about this company for a quite a while. But on this trip, I've been struck by how visibly it's expanding across the region and how busy all its outlets seem to be.

I also came across an opportunity at the bottom of a glass of teh tarik, Malaysia's signature drink. In Kuala Lumpur, I caught up with the firm that's one of the two big suppliers of the condensed milk that goes into teh tarik and was hugely impressed by the management's ambition and track record so far.

I'll be returning to these companies in the coming issues. And there are a host of others I want to tell you about. But these will have to wait until I get back. There's a lot of work still to be done and I'm not certain which ones will make the cut yet.

In the meantime, there have been a number of developments that I would like to update you on. Starting with a great fortnight for ARA Asset Management.

ARA and Petra move to "Hold"

I'm sure you noticed that a couple of our stocks have now moved through their buy limits and will be moved to "hold" in the portfolio for the time being at least until I've had a chance to assess these developments.

The biggest mover is investment manager ARA Asset Management, which has risen 17% to S$1.56 since my last email a fortnight ago. We're now sitting on a paper profit of 43% on my original recommended price on this stock.

The big news on this was related to one of the real estate investment trusts that ARA manages. Suntec Reit is to acquire a one-third stake in a prime development in Singapore's Marina Bay, subject to the approval of Suntec's investors. This will benefit ARA because it will earn acquisition fees as a result of the deal, together with ongoing management fees on the assets.

This is exactly why I like ARA: as the funds it manages grow larger, that directly grows ARA's earnings without the company needing to put its own capital at risk. Next week, I'll take a look at what impact the deal will have on earnings and update you with some background I got from a meeting with the company when I was in Singapore earlier on this trip.

Chocolate maker Petra Foods has been loitering around my buy limit for a few weeks now, and as of this update it's slightly over S$1.6, which moves it to a hold. I suspect that investors are anticipating a decent set of results in mid-November. I also had a chance to meet Petra in Singapore and will fill you in on some of the background I got from that discussion. So far, our paper profit on this position is 12.5%.

ICICI Bank was already on hold, having passed my limit some time ago. But it's risen further since, releasing second quarter earnings that beat the market expectations. Our paper profit is 50%. I don't anticipate raising my buy limit on this one but my feeling is that there's value in continuing to hold it for now. However, I'll be looking at it again more closely and will update you fully.

Elsewhere, we've seen a bit of weakness in software firm Silverlake Axis, with shares gradually slipping back to S$0.325 currently, from a high of S$0.39 this year, reducing our paper profit to around 12%. The approach of the ex-dividend date for the special dividend may have played a part in this, but it also looks to have been related to a placement of 50,000,000 shares by the controlling shareholder at S$0.32.

Although the price is weak, any increase in the free float is probably good news in the long run, since Silverlake's big problem is the low liquidity and the size of the founder's stake. In other encouraging news, the company announced a new contract win. I'll discuss all this in more detail next time. For now, it remains a buy.

SILV five year performance: 2005 -31.25%| 2006 +165.45%| 2007 -17.81%| 2008 -85.00%| 2009 +261.11%| 2010 +6.18%

Although there's been no news on the stock, I know that some of you have been disappointed by Eredene Capital, which is undoubtedly the laggard of the portfolio thus far. It's showing a paper loss of 2.7%, despite being the longest standing recommendation in Asia Investor.

This is a slightly different type of investment to the rest of the list, so I'll be taking a look at when we might expect it to begin performing. It remains a buy, although I should stress again that investors in this stock may need to be quite patient.

ERE yearly performance since listed: 2005 (Feb) -24.32%| 2006 +2.68%| 2007 -28.70%| 2008 -29.27%| 2009 +12.07%| 2010 +13.85%

Finally, I've just this minute seen that First Reit is about to carry out a rights issue of S$172.8m to fund the S$205.5m acquisition of two new hospitals in Indonesia from its sponsor Lippo. This is the same pipeline deal as I discussed in my recommendation on this stock a fortnight ago.

All this was expected, but my initial impression is that the terms on this are slightly more favourable for First than I anticipated. The shares ticked up marginally today, despite the rights issue being at a large discount to the current price, suggesting that other investors feel the same. I'll be going through the numbers in detail next time. For now, it remains a buy although I reiterate that investors in this need to be willing to take up this rights issue and most likely subsequent ones as well.

FIRT yearly performance since listed: 2006 (Dec) +7.04% 2007 +1.32%| 2008 -47.40%| 2009 +101.23| 2010 +18.07%

One that got away but there'll be more

Unfortunately, I also have a bit of a mea culpa for you this week. Because I wasn't quite quick enough on a recommendation, I'm afraid I failed to net you a 76% gain in just a few weeks. The only good news is that the Asia Investor strategy means it shouldn't be the last opportunity of its kind we see.

You'll remember a couple of weeks ago that I was planning to tip a medical investment but unfortunately two passed my buy limit, while the third turned up some issues at the end of my research.

Well, one of the two I thought had got too expensive was the company below: Thomson Medical Centre, a maternity hospital and womens' and childrens' clinic operator in Singapore and Vietnam.

Source: Bloomberg

Look at that gain in the last couple of weeks. What happened? Peter Lim, the Singaporean investor who was one of the unsuccessful bidders for Liverpool Football Club, bought out the founder and made a takeover bid for the whole company at S$1.75 a share, a 62% premium to the undisturbed price.

To be frank, I don't understand what he's doing here. I think this is a great company. And with most buyouts, there's extra value the buyer gets from being in control that makes the shares worth more to them than ordinary investors like you and I this is known as the control premium. But a trailing p/e of 32 times earnings seems a bit too much.

However, I'm obviously now highly aggrieved that a matter of a few cents and a couple of weeks made the difference to me getting you in on this deal.

So what is the tiny crumb of comfort in this? Well, Thomson is a pretty typical Asia Investor company. It's a bit smaller than usual, but it's a well-established, high-quality operation that's been built up by controlling shareholder or family exactly the kind that my approach tends to draw me towards.

Firms like this make attractive takeover targets for a multinational, private equity firm or in this case a wealthy individual. Meanwhile, the founder or family has most of their wealth tied up in the company's shares and after many years working on the business are often keen to cash out.

With the enthusiasm and ability to buy into growth stories very much alive in Asia, I've always believed that some of the Asia Investor stocks will end up as takeover targets at very healthy prices and Lim's expensive-looking deal gives me further encouragement that I'm right about this. Of the ten stocks in the portfolio at the moment, I'd say that over half of them have the potential to be involved in a deal like this eventually.

Obviously, I don't think all of them will be. But I'd be very surprised if it doesn't happen to at least some of the stocks I've already tipped or have on my shortlist at the moment.

That's it from me this week. The night markets are open and I'm off to have some of the island's legendary stinky tofu.

Prices as of 8/11/10

(Singapore tickers vary between brokers. The three common ones are listed for each stock.)

Sources used in preparing this report:

First Reit announcement 09/11/10

ICICI Bank shares jump 6 pc as Q2 results beat view - Economic Times 29/10/10

Silverlake Axis announcements 13/10/10, 25/10/10 and 27/10/10

Suntec Reit announcement 26/10/10

Thomson Medical Centre announcement 29/10/10

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