Value Partners

Investor seeks out the engines for mainland's through train

PUBLISHED : Sunday, 15 August, 1999, 12:00am
UPDATED : Sunday, 15 August, 1999, 12:00am

CHEAH Cheng Hye literally has a rags to riches story to tell; the rags were The Star newspapers he folded in his first job as an inky-faced 17-year-old in Malaysia, the riches have come from transforming himself from a financial journalist into a respected authority on the stockmarket.

When the good times were rolling in 1996, Mr Cheah took home a bonus of 'several million US dollars' as founder and fund manager of the award-winning Hong Kong boutique investment house, Value Partners.

Now, 25 years after selling his motorcycle to pay for his sea passage to Hong Kong, he sees the same steely determination to succeed in the mainland, where he and his staff spend a quarter of their time hunting for investment bargains.

'I was very adventurous in those days,' he said, recalling leaving The Star to take up a job on the Hong Kong Standard after he had jumped from newspaper folder to reporter.

'My generation of overseas Chinese were brought up as commercial soldiers,' he said. 'We were kind of brainwashed into the idea that you do whatever it takes to achieve a better life.' While wearing out shoe leather in the mainland, Mr Cheah is often reminded of the Malaysia of his youth.

'If you go to Shanghai and walk around, you will see people who are bursting with energy. They are hungry for education, they are hungry to get into whatever is the latest thing,' he said.

'They are willing to work very hard for what to us are very low wages. They just want to succeed. It will be difficult to stop these people.' While admitting that the mainland's economic progress has been 'three steps forward and two steps back', Mr Cheah points to research predicting the mainland will have the world's biggest economy by 2015.

'Since we are pretty convinced by the long-term prospects of the country, our object is to find suitable vehicles to participate in that future growth. The way we have done that is to cherry pick, to pinpoint very specific businesses,' Mr Cheah said.

While Value Partners has one of the largest Hong Kong and China funds - US$54 million - it also is one of the most unorthodox, reflecting the sanguine house view on the mainland.

No Hang Seng Index constituents are to be found in the top 10 holdings, which make up 64 per cent of the fund. Nine are mainland companies or Hong Kong companies with substantial business there.

The economic case for the mainland also chimes in neatly with the guiding philosophy of the house, which is value investing.

'We buy and hold for long-term capital gain. We have the kind of clients who are willing to be patient, who allow us to buy stocks and sit on them for years if necessary,' said Mr Cheah.

While many mainland state enterprises were 'intrinsically undesirable investments', there were stocks there to gladden the heart of value investors.

Mr Cheah's top holding is Brilliance China, which has transformed itself from a 'horrible state-owned enterprise from the northeast of China' into a 'story of extreme success'.

The vehicle-maker was one of the first mainland companies to be floated, listing in New York in 1992. But it was misfiring badly until an overhaul in 1994.

'They fired the senior management and replaced them with a new bunch of people who were very Westernised and educated in Western universities and who then proceeded to turn the company around,' Mr Cheah said.

He began accumulating the stock in 1997 at an average of US$9.15 and saw it rise to US$17 before a stock split. With 20 to 30 per cent earnings growth expected and a price-earnings ratio of only 6.5, the company had plenty more mileage in it, he said.

Another company on the right path for a value investor is Hong Kong's Road King Infrastructure, which operates a portfolio of 30 mainland toll highways and whose profits have soared 97 per cent to HK$414.5 million.

'We like Road King a lot; we can't get enough of it,' said Mr Cheah. While Road King offers value, he discovered an even better backdoor to it through Wai Kee Holdings, a Hong Kong construction and quarry company which holds 49 per cent of it.

Mr Cheah said Wai Kee's stake in Road King alone was worth HK$1.80 per share, yet Wai Kee was trading around HK$1.60.

Another of his top picks is Fountain Set, the world's biggest maker of knitted cotton fabric, which trades at a PE of just 2.9 from sales last year of about HK$4 billion and profit of about HK$250 million.

Mr Cheah's company's main income is from performance fees rather than management fees and front-end loading. He takes an annual 15 per cent cut from profits.

But if the price of Value Partner units drop, the company has to wait for them to recover and go above the old high 'before the taxi meter [of performance fees] will start again', Mr Cheah said.

The fund lost 2.9 per cent in 1997 and 29.1 per cent last year, leaving Mr Cheah and his senior staff with pay cuts rather than fat bonuses. His fingers are crossed that the fund this year is on the way to breasting its previous high.

'A lot has happened in my life and I can tell you that I have come to the conclusion that the job I do now of fund manager is more than anything else a test of your character,' he said.

'Making or losing money in the stock market is really all about life and how you handle it.' As he pans for mainland gold, there is a picture of Chairman Mao hanging on his office wall to provide a remainder of China's rich history, while on a shelf is a model of a Long March 2B rocket, a token of its vast potential.

'The mainland is the place in terms of the next 100 years of Asian history,' Mr Cheah said.

'It is all too evident that the mainland is on a high velocity [economic] path and . . . is also a rising military power.

'I don't think you can stop that. You cannot reverse the tide of history. I just pray to God that they will handle that power in a responsible fashion when their turn comes.'