Hong Kong Part 2: 7 Large Caps I actually bought

and a small commentary about macro.

Hey everyone,

I got some great feedback to the first part of the Hong Kong Series, and I am happy to announce that I have finished my selection. The article will cover  the large caps stocks I bought in Hong Kong. Other than those 7 mentioned here, I bought another 17 stocks in Hong Kong. So be sure to subscribe to not miss an update. 

For the mid, small and nano caps, I will write another article or maybe even several as those stocks have minimal or no coverage at all and I will go more in depth. The companies mentioned today have ample coverage, but I found them of good value nonetheless.

Macro

But first, my commentary about Macro. There has been a lot of talks about rate cuts and stocks have gone crazy in terms of valuation. However because asset prices are rising including energy and gold - it shows us that rates are actually too low. It seems then that the market will force the Fed to hike this year. When that happens no idea, but it seems that we are in an "ignore all bad news" mood until then.

Palantir's CEO makes obscure comments

https://twitter.com/gurgavin/status/1767973145250533755

The CEO of Palantir basically said that short sellers love pulling down great American companies so they can snort Cocaine. A completely obscure and random comment for a company which trades at 23x P/S and that is up 192% since March 2023.

This kinda reminds me of the Lehman CEO wanting to "rip the short sellers hearts out" in a conference of September 2007. Not a great sign whenever a CEO comments negatively on short sellers. 

Stocks I passed on

There are two additional stocks that I passed on and that might be interesting to others. 

•  China Feihe Limited $6186.HK. They make infant formula in China and are cheap. However their earnings are on the decline and I don't see myself getting above 15% return a year here. 

• China Overseas Property Holdings Limited $2669.HK. It is not expensive, yet I struggle with shareholder returns here.

Large Caps that I actually bought. 

Since Hong Kong is probably the cheapest market in the world right now, for me it did not make sense to go bottom fishing, buying companies where the business has problems and hoping for a mean reversion. 

Instead I bought companies that are still very cheap, have had great shareholder returns in terms of buybacks and/or dividends and that have either have good growth in their field or otherwise a good competitive advantage. I also tried to diversify into different industries.

Tencent

An incredibly boring pick I know, but Tencent is something special. They have incredible IP in the form of WeChat and own a significant amount of game developers like Riot Games (League of Legends), 40% of Epic Games (Fortnite) and Supercell (Clash of Clans, Clash Royale) and a boatload of other great companies. They grew revenues at 7% last year, a decent amount given the slump in video games and margins have increased. 

16x EV/EBIT doesn't look that cheap at first glance. However that doesn't include the holdings that they have. They have several stakes in companies like Tencent Music Entertainment, PDD etc. The company also have spun of their JD and Meituan stake to shareholders already. Their operating profits increased 41% YoY excluding the gain on sale of the Meituan stake. has increased a lot in 2023 and they increased their buybacks and dividends. 

Now the company is not incredibly cheap compared to other that I have found, but it is a company that has (and I hate that word) a big moat. 

Postal Savings Bank of China

It is a bank paying over 7% dividends, trading at less than 0.5x P/B. They basically have no growth in earnings, but their non-performing loans are decreasing and as the economy in China recovers, the growth is more likely to return. In contrast to many other banks, they have a minimal exposure to the real estate market. The purpose of this choice is more in line with diversification and having some exposure to the general economy of China. 

Xiaomi 

This 52b market cap company, has now reached the third spot in total mobile phones sales. The mobile market is a tough market, and yet they were able to establish themselves as a major player. They focus mostly on the budget sector, but have recently pushed towards the higher end market. As a result margins have been relatively tho, however with them pushing towards higher end phones their operating margins have increased the last few years. 

One of the things that is holding them back was on the Software side. Samsung has a big lead with their One UI built on top of Android, which they have worked on for more than a decade. Xiaomi had a lot of bloatware on their skin, even with ads built into their operating system in certain parts of the world.  Instead of Mi UI they now have Hyper OS, which is a lot faster and includes less bloatware. Their push towards the high end has also included better cameras and components in general and Mrwhosetheboss -  a tech youtube with over 18m subscribers -  have recently compared the Xiaomi 14 Ultra to the Samsung S24 Ultra. The Samsung came out clearly on top, yet the signs are encouraging. Five years ago nobody would have even thought of comparing a Xiaomi with a Samsung. 

They have also entered the car market with the Xiaomi SU 7. which looks like a budget Porsche Taycan. How successful it is will be seen.

The company had 10% revenue growth in 2023 and 50% operating profit growth, and trades around 13x LTM EV/EBITDA. In contrast to the Postal Savings Bank of China, which derives their whole revenues from only China, Xiaomi has 44% of their total revenues coming from the international markets. 

They are also the only company that I bought in Hong Kong that doesn't have great shareholder returns in terms of buybacks or dividends. 

Haidilao International

A restaurant company, that is mostly known for their hot pot chain and has around 12b market cap. The company had 31% revenue growth in 2023 and more than doubled their profits, despite only opening 3 new restaurants due to a big increase in table turnover rate. The company trades at 15x EV/EBIT and is paying a 4.7% dividend. I have looked at the company and don't expect a lot of growth unless they expand the amount of stores they own, but I don't see the popularity going down, given the high demand. Given the low valuations for their growth and decent shareholder returns, it will probably do well here. 

First Pacific Company

This 2b market cap company is a holding company with diversified revenue streams. Their best known brand is Indofood, the largest noodle company in the world with a significant market share in Indonesia. The company trades at 7x EV/EBITDA and a significant discount to Book Value. That discount can in my eyes be ignored, as holding companies usually always trade at a steep discount, even excellent ones like Exor. They are paying a 6% dividend and are repurchasing shares (although not a lot). I find it very interesting because it quite hard to get a proper exposure to the Philippines and Indonesia. While they are listed in Hong Kong, they basically have no exposure to Taiwan or China from their revenues. 

Kingsoft Corporation

The company with around 4b market cap mostly sells WPS office, an alternative to Microsoft Office. They had 12% revenue growth in 2023, with operating profit increasing 20% and they trade at 7x EV/EBIT and 1.4x EV/S. Other than them having a decent gaming arm as well, a big part of their earnings are subscription based.  It isn't the prettiest software business one could find, but with so much of their revenues being reoccurring and margins improving, i can see it doing a decent 18% CAGR over the next few years. 

Fu Shou Yuan International

A burial service company with around 1.4b market cap. It trades at around 6x EV/EBIT and profits increased 20% in 2023. Including the special dividend the company is paying a 7.5% dividend on current prices. They have bought back a minuscule amount of shares, but the returns of the dividend alone would be decent given that they have a good balance sheet. 

The next update will follow soon.