Wednesday, March 18, 2015

Sold 100 of AINV Roth IRA-Near Break-Even on Price/Bought 100 WARFY at $12.75

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments:

The Federal Reserve removed the word "patient" from its press release, but clearly indicated that no increase in the federal funds rate was imminent. The FED specifically stated that it was unlikely that there will be an increase at its April meeting. The following statements indicates to me that the FED is going to be very cautious in raising the FF rate:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term . . .

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

FRB: Press Release--Federal Reserve issues FOMC statement--March 18, 2015

In other words, when the FED finally raises the FF rate to .25%, it would not be reasonable for investors to anticipate a steady flow of increases thereafter occurring after every FED meeting. The raises will likely be small and spaced out over a long period of time.

The Fed members also lowered their year end 2015 FF forecast to .625% from 1.125% and the year end 2016 forecast to 1.875% from 2.5%.


That was consistent with the FED lowering their projections for GDP growth and inflation:

FRB: March 18, 2015: FOMC Projections materials, accessible version

The downgrading of GDP growth and inflation estimates, plus the cautious tone of the FOMC's statements, caused interest rates to decline and for the USD to fall. Prior to the release, the consensus opinion was that the removal of the word "patient" would lead to a rise in rates, but the FED found a way to delete that word while expressing both patience and caution.

I discussed the FED's dovish releases today in a comment to this SA Article.

I also copied that comment in the introduction section for the Instablog that excerpts the Wharf purchase discussed below: Bought Back Wharf Holdings (WARFY) - South Gent | Seeking Alpha

Ray Dalio, the founder of Bridgewater Associates, believes that the FED could engineer a market rout by raising rates too far and too fast. No one can put a number on those two words, and consequently the vagueness allows Dalio to claim prescience after the fact.

The analogy being made by Dalio and others is to 1937, when the FED tightened after a prolonged period of zero short term interest rates and QE that started in 1933. Those abnormal central bank policies, coupled with large scale fiscal stimulus by the government (e.g. the New Deal), led to one of the most robust stock market gains in history and an economic recovery. The FED tightened in 1937, as explained in this article, and fiscal stimulus was withdrawn as politicians became increasingly concerned about the budget deficits. The SS tax started to be collected for the first time that year too. That mixture resulted in a 50% decline in the stock market (1937 peak through March 1938) and a continuation of the depression. The FED had to reverse course and renewed stimulus was provided by the deficit spending related to WWII.

A number of hedge fund managers and bond managers like Jeffrey Grundlach, who recently called the FED a bunch of blockheads for contemplating a raise in the FF rate, have a powerful economic interest in the FED keeping short term rates at zero forever. So, I am more than just a little bit skeptical about their warnings of Financial Armageddon resulting from a rise in the FF rate after 6+ years at zero.


1. Bought 100 WARFY at $12.75 (see Disclaimer):

Snapshot of Trade:

I bought the USD priced ADR traded on the pink sheet exchange. Wharf Holdings Ltd. (WARFY) For securities traded on the pink sheet exchange, a symbol ending in "Y" indicates that the stock is an ADR. A symbol ending in "Y" denotes that the investor is buying the ordinary shares using USDs.

1 ADR= 2 Ordinary Shares

The ordinary shares closed in HK prior to placing my trade. I converted that price of HKD49.75 into $6.4084.

I multiplied that sum by 2 which gave me $12.8168 per ADR share. I then entered a limit order to buy 100 at $12.75 which was filled several hours after entry. I basically paid for the commission by entering that limit order below the then existing ask price.

HK pegs its dollar against the USD so there is only minor fluctuations in the currency conversion rate. USD/HKD Chart

It remains to be seen whether China and Hong Kong will join the currency devaluation parade. That is a risk, as noted below.

Company Description: Wharf Holdings (WARFY) is a Hong Kong based conglomerate operating in four business segments primarily in HK and mainland China: property investments (retail, office, apartments and hotels); property development; logistics including terminal operations; and CME (communications, media and entertainment).

The three significant properties located in Hong Kong are Harbor City, Times Square and Plaza Hollywood with Harbor City being the most important of those three developments.  As of 12/31/14, Harbour City was valued by the company at HK$160B or about 38% of Wharf's assets (page 2).

About Harbor City (shopping area of 2 million square feet; 499  apartment units; and hotels-Marco Polo Hong Kong Hotel, Gateway Hotel and Price Hotel)

Times Square Hong Kong (900,000 square feet of retail space; one million square feet of grade A office space)

Plaza Hollywood

Peak Portfolio and Other HK Properties

With google maps, I can see these developments and take a tour of the neighborhood, something that I will do when buying a stock with significant real estate holdings.

Harbour City Hong Kong - Google Maps

Times Square Hong Kong - Google Maps

Plaza Hollywood  Hong Kong- Google Maps

Wharf also owns property in mainland China, including International Finance Square and the Shanghai WHEELOCK SQUARE. A summary of the mainland China properties can be found here Wharf

Wharf owns 67.6% of Modern Terminals Limited, a leading operator of container terminal services in the south China region.

Wharf also has a variety of other investments in HK including, communications, media, entertainment and public transportation.

Wharf TTM P/E: 11.86
Estimated 2015 P/E: 12.3
Estimated 2015 E.P.S.: HKD 4.046 (ADR=HKD8.092)
P/B: .4935
P/S: 3.95
Dividend Yield: 3.64%

Sourced: Bloomberg (based on the HKD49.75 share price as of 3/17/15)

Another HK conglomerate, Wheelock & Co Ltd, controls Wharf. As of 6/30/14, Wheelock owned 54.8% of Wharf, up 2.66% from 12/31/13. Wheelock Group Results Highlights.pdf HK billionaire Peter Woo calls the shots at both companies.

In the past, I have owned Hutchison Whampoa that is majority owned by another conglomerate called Cheung Kong Holdings The boss for those two companies is the HK billionaire Li Ka-shing.

A few months ago Hutchison Whampoa jumped in price when Cheung Kong Holdings made an offer to acquire the shares that it did not already own. 0013.HK Interactive Stock Chart

There was some speculation that Wharf might be the next one rolled up, Wheelock Next? However, nothing has yet to materialize. I would not buy Wharf based on the possibility that Cheung Kong would acquire the remaining shares.

Some of the firm's history is described in its 2013 Annual Report.pdf.

I took a snapshot of some historical data from page 13 of that report:

Prior Trades: I have not yet lost money trading Wharf. In 2014, I flipped a 50 share lot three times:

2015 WARFY 150 Shares (3 fifty share lots) +$187.94
SOLD Taxable Accounts: 50 WARFY at $14.82 (6/21/14 Post)-Bought: 50 WARFY at $13.08 (5/24/14 Post)Item # 6 Sold 50 WARFY at $14.51 (4/26/14 Post)-Item # 1 Bought 50 Wharf Holdings at $12.2 (4/1/14 Post)

On the last trade, I held onto the shares long enough to receive a semi-annual dividend payment. That distribution of HK$1.2 per share went ex-dividend on 5/26/14. Since 1 ADR=2 ordinary shares, that payment would have been HK$2.4 per ADR share or HK$120 for 50 shares.

Needless to say, the profits being generated by my Wharf trades are not going to pay for my nursing home expenses.

Dividends: Wharf has been raising the dividend some since 2010. I am showing the amounts paid per year below rather than the year in which the company attributes the dividend. It is fairly typical for foreign dividend paying companies to pay a dividend in one year and attribute that payment to profits earned in the prior year.

Annual Payment (paid in two semi-annual installments):
All Amounts are in HKDs
2014: 1.75
2013: 1.7
2012: 1.15
2011: 1.
2010:   .97
2009:   .8
2008:   .8
2007:   .8
2006:   .8
2005:   .72
2004:   .6075

Sourced: Dividend History

The remaining dividend for 2014 was declared when Wharf announced earlier this month the final 2014 results. The final 2014 dividend will be HK$1.26 per share, payable on May 15, 2015 to stock holders on record as of 5/4/15. That is a raise from HK$1.2 paid in May 2014.

Withholding Tax: It is my understanding that Hong Kong does not withhold "taxes on dividends".

No foreign tax was withheld when I received a Wharf dividend in May 2014, but I was charged an a fee paid to the ADR custodian:

Chart: The Wharf ADR started to trade in 2010. The stock has mostly gone nowhere in that five year period, though there has been some up and down chop. The best up move started in May 2012, near $10, and peaked in a year near $19.5. WARFY Interactive Stock Chart  The shares then slid to around $12 by March 2014 and been swinging up and down between $12 and $16 over the past year.

Yahoo Finance has a longer term chart for the ordinary shares going back to 2000 when the price was around HK$15: 0004.HK Interactive Stock Chart

Recent Earnings Report: The DJ News Service claimed that Wharfs 2014 net profit jumped 22%. That number includes a valuation adjustment for its properties. With that upward adjustment, net profit did rise to HK$35.93B (roughly US$4.62B) from HK$29.38 in 2013.

However, core profits without that adjustment fell by 7% to HK$10.47B or HK$3.46 per share (HK$ 6.92 for each ADR share)

I view the operating profit to be more important. The valuation adjustment for the owned properties is relevant in placing a valuation on the enterprise in case the company is sold.

Total assets as of 12/31/14 "amounted to HK$445 billion (2013:HK$415.1 billion)" (page 16).

The decline in core operating income caused a decline in the stock price.

Wharf 2014 Final Results.pdf

Rational: I am keeping this section simple and will focus just on the core reasons underlying a purchase.

Wharf is one of the HK listed companies that I will periodically buy. It has a strong presence in HK and is a play on the parabolic growth in China's middle class consumers through its extensive retail shopping properties.

There is some dividend support and recent dividend growth.

The shares had fallen by over 20% from a recent high when I made my purchase.

Based on the historical data snapshot, this firm looks like a decent long term hold, though that would not be readily apparent by looking at a five year chart.

I suspect that a good part of the sluggish retail sales growth was due, as the company notes, to the "Occupy Movement" and the strength of the HKD (pegged to the USD) against competitor's currencies. Those adverse items may prove temporary.

Risks: In addition to the disappointing earnings report, J P Morgan downgraded Wharf Holdings to underweight after that report and lowered its price target to HK$45. The focus of that downgrade appeared to be a "post-land appreciation tax EBIT (earnings before interest and tax) margin" of around 7% compared to JPM's estimated industry average of 21%. JPM also estimated that the return on assets for the China properties was around 2.1% compared to other developers covered by that firm of 1.7% to 6.3%. In other words, JPM is critical of Wharf's decision made in 2007 to become more active in mainland China. The shares had already corrected from HD$63 (1/30/15) to HD$49.75 when I made my purchase. That decline was 21.03%. So, even if JPM is right, a lot of the risk has been taken out by that decline.

Needless to say, there is an abundance of country risks associated with a property firm operating in China and Hong Kong. Who knows what the communist party may do?

There is at least a possibility that China and/or Hong Kong will devalue their currency. WSJBloomberg View While I do not view that as likely, at least during the next year, a devaluation of the HKD would adversely impact the value of the ADR share price.

There are legitimate concerns about over building in mainland China.

Future Buys/Sells: Given the risks, and the dour assessment made by JPM, I am not likely to buy more than 100 shares. I will frequently control risk by limiting the amount of my exposure/investment. As shown in my trading history for this security, I flip this stock for small profits, hopefully capturing a semi-annual dividend payment here and there.

2. Sold 100 AINV Roth IRA Near Break-Even on Price (see Disclaimer):

I am not going to discuss this trade at length. Rather than making a snapshot of the trade, I only made a snapshot of the profit/loss calculation made by Vanguard for this trade:

2015 Roth IRA 100 AINV -7.51
With the dividends, I did eke out a positive total return.

I discussed one 50 share purchase in this SA Instablog: Added 50 AINV At $7.94 - South Gent | Seeking Alpha I later averaged down with another 50 share purchase: Item # 3 Added 50 of AINV at $7.4-Roth IRA (1/1/2015 Post) I was critical of this BDC's external managers in both posts, pointing out the dividend slash history and the net asset value per share destruction:

Net Asset Value Per Share: 
12/31/14: $8.43
9/30/14: $8.72
12/30/07: $17.71
3/31/07: $17.87
Sourced: 10-Q Filings

I was hoping that the shares would be rebound some after tax loss selling finally exhausted itself. Subsequent to my last repurchase, AINV reported 4th quarter results showing another decline in net asset value per share. More importantly, I have become more concerned over the past few weeks about AINV's exposure to energy loans. As of 12/31/15, that exposure amounted to a 13.6% weighting, Page 20 AINV-2014.12.31-10Q

For example, AINV had outstanding a "second lien" loan to Miller Energy Resources in the principal amount of $87.5M, which it valued at $85.75M as of 12/31/14 with a $85.804M cost basis. Is the FMV reasonably accurate under the circumstances?

Miller Energy Resources Inc. (MIL) is a publicly traded company whose share price is having trouble staying over a buck. For the 9 months ending 1/31/15, the company reported a net loss of $345.803M, see page 2 MILL Q3 10Q. That debt and a first lien credit facility is described starting at page 14 of the last filed 10-Q. The first lien bank credit facility has KeyBank, CIT, Mutual of Omaha Bank and other financial institutions as lenders.

As of 1/31/15, Miller had drawn $44.M from that first bank lien facility. The total first lien reserve based credit facility was then $250M but the availability of draws depends on a variety of factors.

Under the circumstances, what is the likelihood that both the principal and interest will be paid on AINV's second lien loan? Is the recovery of almost 100% of the principal amount, either through timely payment by Miller or a recovery in BK, the most reasonable current future forecast? I leave it for each investor to form their own opinions.

There are some other energy loans that cause me to have concerns about future write-downs/losses.

I have seen BDCs value loans at close to their principal amount shortly before the company filed for BK and then they would write the loan down. A case in point is shown by the BK of a public company called UniTek Global Services. With the stock trading near zero, and a BK virtually assured, three BDCs were valuing the loans to that company at close to their principal amounts, as of their 6/30/14 filing, and took write-downs only after a BK filing (e.g. NMFC: New Mountain Finance Share Offering Today Illustrates Multiple Risks Inherent In BDC Stocks - South Gent | Seeking Alpha)

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