Value Partners chief keeps it real | South China Morning Post
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Value Partners chief keeps it real

Cheah Cheng Hye shuns glitzy stocks in hunt for solid performers that are in the real economy

PUBLISHED : Monday, 22 July, 2013, 12:00am
UPDATED : Monday, 22 July, 2013, 2:03am

Cheah Cheng Hye hails from Malaysia and owns a car with a vanity plate spelling out "PENANG" (the chief minister of Penang state is known to use the vehicle whenever he comes to Hong Kong).

Which is apropos of very little, except that Penangites are renowned value hunters, and this is also the investment principle of Value Partners, the Hong Kong fund management firm Cheah co-founded and heads.

Born in the 1950s to a working-class family, Cheah instinctively favours non-flashy stocks that offer tangible value and are overlooked by the wider market and therefore undervalued.

For example, Value Partners owns 7 per cent of the local hot-pot chain Tao Heung. Cheah likes the company because it meets the needs of the public.

He says the chain is firmly part of the real economy, selling billions of meals each year to Hong Kong and mainland diners. It is not glitzy but it is popular and its clients are loyal. The profits consistently roll in. "This is the type of company that we like," he says.

Value Partners' flagship Classic Fund is almost entirely invested in China equities - lately a challenging asset class. China was a great horse to back up to the global financial crisis, but it has become trickier with slowing economic growth.

The fund is up seventeenfold since its launch in 1993. But it is down fractionally since 2008, and it slipped 5.3 per cent in the year to date. Cheah predicted a bull market for China shares at the start of the year and is now eating those words. "I actually told the Chinese media last year that 2013 would be a very good year. And I've been flat out wrong and quite embarrassed," he says.

Many Hong Kong investors find China equities challenging. The market is always so promising but consistently disappoints. Mainland firms routinely self-combust in governance scandals, they are notoriously stingy dividend payers, and, nowadays, the dominant story about the mainland is slowing growth.

Cheah follows a simple strategy. He looks for firms with rising profitability. As net income rises, it will push up the share price, even if sentiment is neutral. In more formal language, the price-earnings ratio may stay the same, but rising earnings will force up the share price. With some dividend payments along the way, that translates as an instant realised gain to shareholders.

"In the good old days in the 1990s, my return was about 15 per cent a year, of which 5 per cent was dividends, and 10 per cent was an increase in earnings per share. And I ground it up for 10 years, like a coffee machine," Cheah says.

Clearly, the essential step is to find stocks with rising profitability. That is easier said than done. It is hard to trust mainland firms given lax accounting and disclosure standards. Also, the listed firms are mainly state-controlled.

"Chinese listings are governed by a quota system, and in most cases regulators will only let in state-owned enterprises. They are not always the best businesses," Cheah says.

He adds that, as a matter of government policy, state-owned shareholders each year pay out a higher percentage of revenue in wages and taxes. The government wants workers to get a fair share of prosperity, but this means less profit to shareholders.

"The piece of the cake that goes to workers' salaries has been growing, and the piece of the cake that goes to tax is growing, all at the expense of shareholders and for the Chinese equity market in general," Cheah says.

The last factor working against mainland markets is a massive oversupply of initial public offerings in recent years.

"They [regulators] let in a flood of paper into the market since 2007 that to some extent killed the market," he says.

While officials halted new listings late last year, there was a huge queue of firms looking to raise funds, threatening to overwhelm investors with new share offerings.

Despite his grumbling about officials' heavy-handed interventions into the mainland market, Cheah is positive about the administration of President Xi Jinping, who Cheah says is deregulating and liberalising in the style of Deng Xiaoping's open-door policy of 1978. The China watcher, who keeps portraits of Deng and Mao Zedong beside his desk, says Xi's reforms are necessary but will cause short-term pain for share investors. Growth has devastated the environment and the wealth was not well distributed.

The model is changing to create slower but higher quality growth, says Cheah, with a better regulated economy where the main players respect the law.

"We are invested in one restaurant chain, and the boss of the chain said receipts are down 15 per cent, because of the anti-corruption drive," he says, suggesting that fewer officials are allowed to go to lavish banquets. "I was thinking, so be it."


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