Friday, October 28, 2011

Yeoh’s investment philosophy

Yeoh Keat Seng is certainly no stranger to the local equities scene. As one of the earliest analysts in Malaysia, he has witnessed various boom-bust cycles in the last two decades. The former head of research at Merrill Lynch from 1996-2000, he later made his rounds in private banking and fund management. He was even a participant in the 2000-2001 dotcom bubble through his paid research portal, which lasted for about a year. In this exclusive interview, Yeoh shares with The Edge Financial Daily’s deputy news editor Siow Chen Ming his journey through Malaysia’s equities scene, his investment philosophy and stock picks, and some history behind his venture.

TEFD: How did come about?
From 1996 to 2000, I was the head of research at Merrill Lynch, Kuala Lumpur. After the Asian financial crisis from 1999-2000, we had the Internet boom in the US. Our US head office wanted to undertake a global research on the Internet to look at where each country is heading in terms of Internet development, how companies are using the Internet for business, commerce, innovation and so on.

I did research on Malaysian companies and was bitten by the bug. I interviewed companies like Jobstreet, Asiatravelmart and few others. Wong Yee Hui (former Merrill Lynch analyst and later Yeoh’s partner in came to me. At that time, access to research was not available to the man in the street. Unless you are an institutional investor, you won’t get quality research because the research reports were distributed in hard copies and were restricted. So, we thought of an idea to distribute reports via the Internet. There was a US company called the, so we wanted to do something similar here.

Unfortunately, MalaysiaStreet lasted less than a year. Well, it was actually one year, from the begining to the end, because it took us a long time to get the licence before the website started.

What happened after that?
After that, I joined CIMB. The unit I joined was then called Commerce Trust (predecessor to CIMB Principal), and the sister company was called Commerce Asset Fund Managers. One was in unit trusts, the other in fund management. I was running both. I was there for three years. Then, Datuk Nazir Razak wanted me to join what was going to become CIMB investment bank. The division I oversaw was then called CIMB private client services, comprising two units — private banking and retail broking. So all together I spent six years at CIMB.

Then I took one year off in mid-2007 to mid-2008 to spend time with the family and invest on my own before starting my own fund in KSC (Kumpulan Sentiasa Cemerlang).
Yeoh: I look at the long-term trend of the company.
How is working in a big organisation compared with a small one?
Not my cup of tea, I want a freer hand to do things the way I want. Being part of a big institution means a lot of KPIs and administrative things. I rather stay focused on something much narrower, and one that I enjoy more, without being constrained by certain styles of doing things.

The way I manage funds now (in KSC) is very different from a big organisation.

A big organisation would try to do say, plus minus 5% in terms of market returns. Mine is much wider, I go as much as plus minus 20%. Of course we all want the positive side, not the negative side, but they say risk is symmetrical, so technically you are on both sides. I try to shift to the positive side, but the error zone is also greater, unlike that of the large funds.

Second, I also go into higher return markets, such as Indonesia and the Philippines, where my returns will be higher than in Malaysia.

Third, I structured my fund like a hedge fund, or what I call “skin in the game”, meaning my money is there. That’s what hedge funds do and you cannot have a better motivation with your money at stake. This aligns investors and the fund managers’ interests. I don’t just share the upside in terms of performance fees, I share the downside, too. There’s better risk management.

This reflected well in the fund. Up till July this year, our third anniversary of the fund (end of third year), we have doubled the dollar. The fund size now is RM30 million. We started with less than RM15 million because it grew along the way. We look at per unit return/ NAV per unit, not the dollar return. The fund has corrected a bit, down 15% (till interview date). I go for regional markets for better returns and safer companies as opposed to companies where you take binary bets. The style seems to have worked.

The name of my fund is called Incrementum. In Latin it means growth fund, so it is a growth fund. The entry barrier for the fund is RM1 million and I have over a dozen investors.

Are you comfortable with your current fund size?
I am comfortable. There are a lot of advantages of making the fund size small. I can have bigger universe of stocks. It is easier to go in and out. I try to limit the stocks to 20-25. Every stock is meaningful to me.

Tell us how you pick stocks
Every stock has a pride of place in my portfolio because out of the six and seven markets I cover, to have picked them into the portfolio means there must be something very special about these companies. Special within a general context.

For example, I have not bought any Malaysian banks because they don’t offer the kind of growth potential that we see in Indonesia. They don’t offer that kind of valuation appeal. Most of the banks I bought are in Indonesia.

Sector-wise, I have bought banks and some property companies in Indonesia and Malaysia. But I have a lot of consumer companies. The best investment gained eight times in two years — PT Mayora Indah (a food stuff manufacturer in Indonesia that makes the “Kopiko” candy, among other things).

I go for certainty of earnings. I subscribe to this decision-making process called expected value. You want to optimise the combination of probability and returns.

For example, if I were to bet on one company getting a big contract, my return will be huge if the company gets the contract. But what is the probability of it getting the contract... I have no idea unless someone tells me somebody says so. Thus, if you look at the combination of probability and returns, it is not very high. Because returns can be high, but probability will be low.

Whereas you buy something like Mayora, the sales are growing 30% a year, and the probability of generating this return is very high because it is producing a recurring demand product. So a lot of what I do in terms of investing, whether timing investment, choosing a market to buy or choosing a stock to buy, I will try to optimise expected value.

So does that mean you don’t like companies depending on projects?
I do, but as an example, I compare IJM Corp and Gamuda. IJM has many projects, they secure projects constantly, so there is a reason for me to hold on to the company, because more and more projects will come in, and so there is more predictability in terms of earnings stream.

How long do you hold on to a stock?
The average is about one year. The shortest is six months and longest is holding since listing.

I do not do much trading. I look at the long-term trend of the company. If this is the price trend versus the earnings trend, even if I buy at a bit high price, it is forgiving because the earnings will catch up with it. The valuation will then look cheap again and then the price would perform.

That is why I like growth rather than value. For value, I cannot predict when a stock is cheap or expensive. I hope the earnings trend is there and I don’t buy too expensive, and I will get my payback. I would say my style is growth at a reasonable price or GRP. But it is growth first and value second. I don’t invest in any stock with market capitalisation of less than RM200 million.

The first assumption of liquidity to me is market cap. Not always true, but market cap is a cut-off figure. My portfolio may have a few less liquid stocks, but as a whole it is okay. Another thing I do is to attract like-minded investors. My investors are not traders, so I don’t worry about them coming in today, going out tomorrow. Also there is an exit clause. The first year exit fee is 2%, second year is 1%. After that none. So you discourage redemptions. I also don’t deal with distributors. Most of my investors are from the corporate sector, they know me for a long time.

Can you share with us some of your stock picks, and why you chose them?
I have investments in Malaysia, Singapore, the Philippines, Hong Kong, Indonesia. So far none in Thailand yet.

I have two stocks that Warren Buffet would call “perpetual holdings”. They are QL Resources Bhd and Bank CIMB Niaga. Why Bank CIMB Niaga? I think this bank has one of the most balanced growth strategies in Indonesia. Some Indonesian banks go all out for micro credit. Some banks go for certain segments and loan growth, Bank CIMB Niaga offers very balanced and broad-based growth. It is very particular about how it wants to use capital as well. I think it reflects the CIMB style.

In the case of QL, if you look at its track record, it is one of the best long-term growth companies in Malaysia. Compound return since listing is 20-plus percent. It gets tougher and tougher to maintain this growth because of its bigger size now. But what I like about the company is that its management is very forward looking. They think a few steps ahead — how do I generate the next leg of growth? And for the company, growth for the next few years will come from plantations in Indonesia. It has also gone to Indonesia and Vietnam for the fishing and poultry businesses as well.

In Malaysia, I have a stake in a small company called Vitrox Corp Bhd, which is into machine vision systems. It is probably one of the highest tech Malaysian-owned companies here. They do machine vision systems, which is part of the test process for chips inspection. They can inspect up to 40,000 chips per hour. This stock gets hardly any coverage. Liquidity is not so good, it took a while to buy.

In the Philippines, I have Metro Pacific Investments, a company that invests in infrastructure. It owns regulated assets — toll concessions, electricity distribution and water concessions in the Philippines. This company is owned by Indonesia’s Salim family, who also owns the Indofood group. This company is the best, in my mind, to build infrastructure for the Philippines along the model it has done.

In Indonesia, I own Alam Sutera, which is in property. It has done very well, share price has almost doubled. When you buy property stocks, the best time is when the selling price is appreciating. If your land cost is fixed and your building cost is more or less fixed, every single increase in the selling price is pure margin expansion. They have a lot of land near Jakarta and are mainly into landed property.

I also have Indomobil, a distributor of Nissan cars in Indonesia. We don’t have Astra, we were too late for it. Indomobil is a lot cheaper than Astra. Its market cap is one-tenth of Astra’s at the IPO price this year.

Malindo is an Indonesian chicken farming company owned by the Leong Hup group. Consumption of chicken in Indonesia is very low, 7kg per head per annum vs 37kg per head for Malaysia. As 90% of Indonesia’s population are Muslims, chicken and fish are the main sources of protein. There is a lot of upside for chicken consumption there. Chicken consumption is growing at 20%-30% per year over the last three years in Indonesia. QL saw the potential there and went in but was still very new. Malindo is among the top five.

I also have Modern Internasional, which obtained the franchise for 7-Eleven in Indonesia last year. We have seen how well the 7-Eleven franchise in Thailand has done, so again it will be a long-term growth story for Modern, which is starting at a very low base. This company has been around a long time; it used to distribute Fuji products.

In Singapore I have this company called Ezion, which is an offshore marine company in lift boats for oil and gas. The company designs the boat and gets people to manufacture and then charters out. Very good track record, very entrepreneurial management. But unfortunately, the sector has fallen out of favour, but its shares are very cheap.

In China, we have China Life. I think insurance in China is a long-term play, with growth potential and low penetration. However, the stock price has taken a big hit because people were worried about its stock market exposure. But actually the stock market exposure is small compared with the recurring earnings of the underwriting business.

Why China Life and not AIA?
AIA has a much less exposure to China and is more of a regional play. China Life is state-owned and has the biggest footprint in China. This is not a perpetual holding because I don’t know the management so well and also they are more SOE (state-owned enterprise) than entrepreneurial.

How do you keep finding new stock ideas?
I have to keep travelling to look for new stocks. It is good to get out of office and meet people. This is something that I enjoy doing a lot.

Written by Siow Chen Ming,

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