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  1. #21

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    Quote Originally Posted by cendrillon
    JR I understand your concern about not getting enough diversification with HSI but in terms of risk somehow I find holding HSI at a PE ratio of 15 more comforting than S&P 500 at 25. What are your thoughts on this?
    I would be cautious of analysis like this using simple ratios. The US and Chinese markets have very big composition differences, which explains part of this disparity. HSI has a lot of Chinese banks, which many people believe are essentially bankrupt and the low PER reflects the fact bank earnings are very low quality - they can essentially be made to be any number under the sun simply be adjusting bad loan provisioning. Likewise there are lots of other SoE's which are run for the benefit of the CCP rather than minority shareholders.

    You have Tencent but you also have a lot of utter dross that deserves to trade at low multiples because they don't earn good returns, the balance sheets are poor or they are simply run for the benefits of the CCP first, employees second, customers third and minorities not at all.

    Compare to the US where you have scores of strong companies, professionally run and much better disclosure and protection of minorities. There is also a strong argument that companies with stable earnings should trade at higher multiples than cyclical businesses for many reasons - the US has far more food, pharma and consumer companies than China/HK

    Anyway, simple PER comparisons neglect balance sheets( levered companies should be cheaper than unlevered companies) , consistency of returns (volatile RoE's should be cheaper than stable RoEs), capital allocation ability (companies that can profitability invest cash should be more expensive than those who can't), cash conversion (companies who generate cash in excess of accounting earnings should be more expensive than those that don't), growth runway (companies with plenty of growth ahead should trade on a higher multiple than those who have peaked out) etc etc. Many factors to consider, not just aggregate PER.
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  2. #22

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    Quote Originally Posted by cendrillon
    JR I understand your concern about not getting enough diversification with HSI but in terms of risk somehow I find holding HSI at a PE ratio of 15 more comforting than S&P 500 at 25. What are your thoughts on this?
    Personally I would not compare the P/E of 2 indices with such different industry distributions. That's because industries do not trade at the same average P/E.
    For example, property developers/REITs traditionally trade at very low P/E, and the HSI has a lot more of them that the S&P500 (in %).
    The S&P500 has more tech firms trading at higher P/E than the HSI.

    So of course, the HSI trades at a lower P/E than the S&P500. I don't see why though, this would be an indication of a buy or sell on either index. Just different P/E reflecting different industry distributions.

    (By extension of your logic, you should just buy an ETF tracking the HSI-Properties Sub Index, P/E 10).
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  3. #23

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    Quote Originally Posted by TheBrit
    I would be cautious of analysis like this using simple ratios. The US and Chinese markets have very big composition differences, which explains part of this disparity. HSI has a lot of Chinese banks, which many people believe are essentially bankrupt and the low PER reflects the fact bank earnings are very low quality - they can essentially be made to be any number under the sun simply be adjusting bad loan provisioning. Likewise there are lots of other SoE's which are run for the benefit of the CCP rather than minority shareholders.

    You have Tencent but you also have a lot of utter dross that deserves to trade at low multiples because they don't earn good returns, the balance sheets are poor or they are simply run for the benefits of the CCP first, employees second, customers third and minorities not at all.

    Compare to the US where you have scores of strong companies, professionally run and much better disclosure and protection of minorities. There is also a strong argument that companies with stable earnings should trade at higher multiples than cyclical businesses for many reasons - the US has far more food, pharma and consumer companies than China/HK

    Anyway, simple PER comparisons neglect balance sheets( levered companies should be cheaper than unlevered companies) , consistency of returns (volatile RoE's should be cheaper than stable RoEs), capital allocation ability (companies that can profitability invest cash should be more expensive than those who can't), cash conversion (companies who generate cash in excess of accounting earnings should be more expensive than those that don't), growth runway (companies with plenty of growth ahead should trade on a higher multiple than those who have peaked out) etc etc. Many factors to consider, not just aggregate PER.
    Thanks. This is really insightful and very helpful.

    Out of interest, the following comprise around 80% of the HSI by weight. Do any of these fit in your utter dross category?

    Tencent
    HSBC
    AIA
    China Mobile
    CCB
    ICBC
    Bank of China
    CKH Holdings
    HKEx
    Ping An
    CNOOC
    CK Property
    SHK Ppt
    Sinopec Corp
    CLP Holdings
    China Life
    PetroChina
    Hang Seng Bank
    Link REIT
    Power Assets
    HK & China Gas

    Thanks!
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  4. #24

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    Quote Originally Posted by jrkob
    Personally I would not compare the P/E of 2 indices with such different industry distributions. That's because industries do not trade at the same average P/E.
    For example, property developers/REITs traditionally trade at very low P/E, and the HSI has a lot more of them that the S&P500 (in %).
    The S&P500 has more tech firms trading at higher P/E than the HSI.

    So of course, the HSI trades at a lower P/E than the S&P500. I don't see why though, this would be an indication of a buy or sell on either index. Just different P/E reflecting different industry distributions.

    (By extension of your logic, you should just buy an ETF tracking the HSI-Properties Sub Index, P/E 10).
    Yeah, this is spot on. This devolves into a stock picking game very quickly. If you take the mindset that stock picking is to be avoided, then index picking is just as bad.

  5. #25

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    FWIW I'm overweight China, underweight US in my own asset allocation. It's not been the right trade.

    China is one of the few markets I pay a (well, two) fund manages to pick stocks for me. I do believe skilled managers have a better chance of outperforming passive in emerging markets than developed.

    I'm far less comfortable with an HSI or MSCI
    China tracker than I am with a Russell-2000, FTSE-250 or Topix tracker. Althiugh HK is technically a developed market, the prepondance of mainland companies negates this a bit, in my view.

    Last edited by TheBrit; 12-09-2017 at 09:28 PM.
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  6. #26

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    Quote Originally Posted by cendrillon
    Thanks. This is really insightful and very helpful.

    Out of interest, the following comprise around 80% of the HSI by weight. Do any of these fit in your utter dross category?

    Tencent
    HSBC
    AIA
    China Mobile
    CCB
    ICBC
    Bank of China
    CKH Holdings
    HKEx
    Ping An
    CNOOC
    CK Property
    SHK Ppt
    Sinopec Corp
    CLP Holdings
    China Life
    PetroChina
    Hang Seng Bank
    Link REIT
    Power Assets
    HK & China Gas

    Thanks!
    Yes. All the China banks, CNOOC, Sinopec, Petrochina, China Life, most of the HK developers. Nothing I would want to invest in over ten or twenty years, which is my default equity horizon. China mobile probably in this category too. None of those companies are run with minorities in mind.
    nivantj likes this.

  7. #27

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    Quote Originally Posted by TheBrit
    FWIW I'm overweight China, underweight US in my own asset allocation. It's not been the right trade.
    TB, can you clarify your performance matrix for this statement ? You're certainly introducing a measure of risk to this (as I would).
    pin likes this.

  8. #28

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    Quote Originally Posted by pin
    To clarify, these are stocks I have owned and have done so for quite some time (some of them going back several years), so not really initial.
    Yes pin, you made this very clear in your initial post. Your posts are always very clear. Mine however... lol... I'll rephrase, asking if you were to keep this bucket, how would it fit in your new strategy ? Why not selling it altogether and fully committing to the new strategy, and if not, why not ? Is it because you would want to retain a small bucket of say "punts" (just for fun, which is okay I think !!), or to invest in higher dividend stocks to create a little more cash-flow income for your holidays for example ?

    The reason why I'm asking, is because if you keep this bucket, it will obviously be a tiny fraction of your overall portfolio, yet because it has so many positions, it will be high maintenance if you want to convince yourself every Quarter after reading the financials that you are okay keeping these stocks. If not for the thrill or the additional cash-flow, why not transferring it to the "passive bucket" ?... Looks like a lot less hassle to me.

    Does this make sense ?

    (again, I own several of these stocks and I think they're awesome so I'm not suggesting it's a bad bucket !!! Just in the context of what you said earlier you want to achieve)
    Last edited by jrkob; 12-09-2017 at 10:04 PM.
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  9. #29

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    @jrkob - punts just for fun would probably the best way to describe them. Well that's how they started.


  10. #30

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    Quote Originally Posted by pin
    @jrkob - punts just for fun would probably the best way to describe them. Well that's how they started.
    Got it mate, alright , I understand. Perhaps, if I may and with the utmost respect, try to keep it not too too big. But then how big the punt bucket should be is very personal .
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