Saturday, November 26, 2022

China reopening, oil, and doing nothing

I think China is reopening.  Rising cases occur when you reopen:

But official deaths have not gone up.  A quick google search shows a median of 18 days to die from covid, so we should know the death rate by now.  The latest numbers have 1 covid death yesterday:

Source: Worldometers.com

There's 2 risks to the reopening:

  • China numbers are bullshit, so no one knows what the real hospitalisation/death rates are.  Low level officials will make up whatever numbers they think are desired.  And I'm sure no one reports bad news to Xi.
  • Everything depends Xi.  He can reinstate zero-covid tomorrow.
We're getting a lot of confusing scenes out of China.  Protests, lockdowns and confusion.  It will be localised cycles of easing and tightening as they try to flatten the curve.  If they don't lock down soon, it will be too late, and they will have to let it spread.  So there's a small chance Xi imposes a harsh lockdown soon, and a bigger chance - growing larger by the day - that they just let it spread and try to slow it down.


My "China reopening play" is oil.  Zero-covid reduced demand by an estimated 0.5 to 1.5m bpd.  Long term I think oil goes up anyway, but China makes me buy it now.  Bought more CNQ and Equinor in the last 2 weeks, now its a 9% position (at buying price).  1% more to go.

Its a very oily portfolio: 10% in oil producers, plus another 35% in things correlated to oil (Gas pipelines, palm oil and LNG).

Also mechanically adding to my shorts as the S&P500 goes higher.  And the existing shorts are also growing bigger as the market gets higher; my shorts are now in the red:


Need to remind myself not to get too short, else the bear market rally will rip my face off.


Can't find anything to buy with the remaining 30% cash.  Despite a year-long bear market, stocks aren't cheap enough yet to catch falling knives.  I wait, either for things to get cheaper, or for the macro tide to turn so I can buy cyclicals like capex commodities.

Its hard, sitting in cash, foregoing dividend income, not going long or short.   I try to imagine myself as a multi-millionaire in the future, after the current bear market, recession and subsequent commodity bull.

Doing nothing is the hardest thing.

Friday, November 18, 2022

Bursa Malaysia (KLSE)

 Malaysia's stock exchange looks cheap based on historical earnings, lets look further.

You can't buy it with Interactive Brokers, I trade KLSE stocks with a Singapore broker.

TLDR: Everything depends on KLSE trading volume, which is unpredictable, I think this stock is too expensive now.


Malaysia is a developing country.  Its a commodity producer, and I expect commodities to do well this decade.  It also exports electronics and mid-tier microchips, so may benefit from manufacturing leaving China.

Business and Revenue Breakdown

Most of their revenue is from trading:


And most of the trading revenue is from Securities trading:

So Securities trading is the only thing we have to think about.  Derivatives trading revenue is constant, and Islamic Trading is small.  This is a company with one single business.

Financials

Good financials.  All stock exchanges seem to follow the same pattern.  As of Sep 2022:
  • Large net cash position (plus some Investment Securities), no debt
  • CFO is basically PBT plus small depreciation and small working capital.
  • 40% profit margin (after all expenses, including tax) in 9M 2022.
  • Minimal Capex with high dividends:
  • The dividends are too high:
  • They are paying part of the dividend out of accumulated "cash and investment securities".  As of 3Q22, "cash and investment securities" is worth RM 565m, or roughly 9% of their market cap (@ 6.40 per share).

Conclusion

This stock exchange is a cash generating machine.  The only question is how much you'd pay for it.

Everything depends on whether we think the big jump in Securities Trading revenue in 2020 and 2021 can be maintained.  This company is easy to understand, but hard to value.

If I had to catch a falling knife, I'd probably be willing to pay 12-15X normal earnings.  Based on 2017 to 2019 earnings, the price would need to drop significantly, to around RM 3.70 to 4.00.  Not buying it now.

Saturday, November 12, 2022

Bolsa Mexicana de Valores (Mexico Stock Exchange) : BMV

Theres a big hole in my dividend portfolio from selling my REITs.  I'm looking at several small listed stock exchanges: most of them have low debt, churn out cashflows/dividends, and their costs are not affected by inflation.  They are cyclical, so the current downturn might be a chance to buy.


First is Mexico.  It has a young, growing population, and benefits from NAFTA's (re)industrialisation.  But the Mexico stock exchange is near dead, with a matching share price.

Business and Revenue breakdown

Despite its name, the Mexican stock exchange only accounts for a small amount of BMV's revenue.  I breakdown their 2021 revenue below to get an overview of their business.

SIF ICAP

16% of revenue.  SIF ICAP is an inter-dealer broker handling transactions between financial institutions.  They deal in govt/corporate bonds, and OTC derivatives (customised contracts that aren't traded on an exchange) such as interest rate swaps and forwards.

2/3rds of SIF ICAP revenue is from Chile, the remainder from Mexico.

Historical revenue:

Information Services

16% of revenue.  70% of that is from BMV market data, 30% from VALMER (Operations Valuation and market Reference, eg: used to value bonds).

Market Data historical revenue:

Valmer historical revenue:

Equities trading and clearing

13% of revenue.  From stocks traded on the BMV.  This includes foreign listings on the BMV.  eg: Apple or an S&P500 ETF, listed in Pesos.

BMV has a problem with their stock exchange.  Only 144 companies are listed, very few for the 15th largest economy in the world.  3 companies delisted this year, at least one of those wanted to re-list in the US.  One company listed this year.  The usual complaints are about low liquidity.

In 2018, a competing privately-owned stock exchange BIVA, was setup with lower listing requirements aimed at medium sized companies.  At its debut it had 52 listings, now it has 88 listings (not sure if they are all equities, or some bonds).

The value and number of BMV IPOs in recent years is below.  With only 15 listings since 2018, its growth is trailing BIVA:

Listing and Maintenance fees

13% of revenue.  In 2021, almost all of it were Maintenance fees.  This is recurring, unless companies delist.

Only 1/3rd of the maintenance is from shares. While half of it is from corporate or govt bonds:

Derivatives Trading and clearing

7% of revenue.  These are derivative products listed on an exchange.

Central Depository

33% of revenue.

A Central Depository allows every trade to be recorded, so ownership is recorded by them instead of your stockbroker.  After you make a trade,  the confirmation is sent to you independently by them.  This makes if hard for your broker to commit fraud, and theres no risk of loss if your broker goes bankrupt.  This process is slower and more expensive than just relying on your broker (like Interactive Brokers) to hold your stocks.  I do not know what percentage of individual trades go through the central depository, and what percentage go through a broker.

The Central depository records holdings from the above segments:

  • SIF ICAP (probably only Mexican, doubt it does Chile)
  • BMV.   Probably BIVA too (?)
  • and Derivatives.  

Financials

The financials seem almost too good to be true!

  • Operating margins (after all expenses, including taxes) are exceedingly high:
  • As of 3Q22, cash on balance sheet is greater than all liabilities (not just debt).
  • Cashflows follow profits closely.  Depreciation and working capital are minimal:

  • Minimal Capex:

Valuation

Reasonably priced now, not really cheap.  At MXN 36, its trading at 12-15X recent years (probably peak) earnings:


Currently at a 5% yield (before witholding tax).  The dividend payout ratio is usually around 80%:

Conclusion

Pros:
  • Excellent financials and profit margins.  
  • Mexico has long term growth potential with as NAFTA's low cost manufacturing hub.
  • Stock exchanges are a good hedge against inflation.
Risks:
  • The Mexican stock market has structural problems (low liquidity, leading to lack of investor interest, leading to lack of listings).  Note the downward trend in Maintenance fees from 2019 to 2021.  From a Mexican's point of view: if I lived next to the largest economy and stock market in the world, I'd probably want to list and trade there too.
  • Competition from BIVA.  I estimate that long term this might affect 25% of revenue ("Equities trading and clearing", plus some "Central Depository" revenue).
  • I don't know about competition or cyclicality in the SIF ICAP segment.
  • Not yet cheap, but reasonably priced.

Misc

Singapore residents pay 30% witholding tax on dividends through Interactive Brokers.

Article on VIC from 2020.

Friday, November 11, 2022

Bear Market Volatility

11th Nov 22.  My portfolio was down 2% last night.  But because I'm only half invested, it felt like 4%.

My shorts got killed, with energy only up a bit.

This rally might last a few weeks - more shorts need to be killed.  A bear market rally of 20% is common, and 30% is historically possible.  Right now, the S&P 500 has only rallied 13.3%.  And last nights 5% Nasdaq one day rally is a small one.

I plan to keep short, as I don't think the market can be predicted a few weeks out.  And I think we are still in a bear market.  May add small short positions if the S&P rises to 15%, 20%, 25% and 30%.

Friday, October 28, 2022

Added to My Shorts

Added a little to my shorts in the past 2 weeks:

My short position has also increased due to the bear market rally.  Will add a little more if it continues.  SPY is up 11% now, a 20% rally would be normal.  Wild swings in the market and the value of my short positions:


Still holding them.  At least till December.

Fundamentally, I'm not seeing anything to buy yet, except energy.  China/HK is out due to political risk.  Rising rates, a recession and an energy crisis fuck up lots of things.  Good quality companies are not yet cheap enough that I'd stick my hand out and catch a falling knife.

Monday, October 17, 2022

MetalsX (ASX)

My last piece on Tin.  There's 3 listed tin producers.  The third one produces in the DRC which is un-investible.  This one is in Australia, which is safer.

Business

A 50% JV in the Renison Tin mine, a hundred year old mine in Tasmania which is still producing.  Mine life is projected until 2030, with scope for further extension.

They also own 50% of Rentails: tailings dams from historical mining operations containing around 100,000 tonnes of tin.  Significant capex is required to bring this into production.  A new DFS should be completed this year to make a decision in 2023.

They used to own copper and nickel interests but these lost lots of money.  They sold them off and are now purely focused on tin.

Balance Sheet

All numbers are from their June 2022 Annual Report.

They has a windfall from FY2022's high tin prices.  They used it to pay down their debt, and now have 110m in net cash.   Held  as AUD.

Quick side note: They have 28m of convertible notes receivables.  After selling their Copper/Nickel operations, they lent money to develop them, and should be paid back in (MetalX's choice of) cash or shares in March 2025.  New mining operations are dodgy, especially in a recession, so let's wait to see if they get paid back.

Despite the 2022 windfall, they have not paid dividends.  I think they need the money for capex.

Capex

Sustaining capex is 8-10m per year (p10).

In addition, to continue production at Renison until 2030 (Area 5), they need 50-55m capex (p5).

Both the above can be covered by their 2022 windfall.

In 2023 they should make a decision on rentails.  An old 2017 estimate is 205m (or around half of this for MLX's share - p14).  Lets say 100m in 2017 dollars, which might be 150-200m today.  Can be funded from their cashflows if we get another tin spike in the coming years, but don't expect MetalsX to pay dividends anytime soon.

Earning, Cashflows and Breakeven

Our starting point is always the tin price:

Its hard to look at their long term profitability because past tin results are overshadowed by their money losing copper/nickel operations.  Their 2021 AR was the first time they stripped these out. My breakdown of their profits from 2020 onwards, important lines in blue:

As expected, the biggest factor affecting profits is revenue (ASP).  This company is highly cyclical.

I estimate their cash breakeven tin price at around AUD 17-22k/ton.  At that price their Cashflows from Ops would be zero.  If we also cover sustaining capex of 10m per year, we get a required tin price of AUD 19-25K (or 11.8 to 15.5K USD today).   The company estimated their AISC at AUD 17K/ton (p3), which I guess is too low.  Estimates in AUD are tricky because the AUD is so volatile.

Don't think they've been hedging the tin price, there was no mention of commodities derivatives.

Reserves

Excluding Rentails:

Misc

Information is quite skimpy.  I could not find any quarterly results on their website or ASX.  Nor any transcripts of shareholder meetings.

Yunnan Tin is the logical acquirer of this company (their 50% partner in the JV).  Unlikely to happen now since everyone hates the CCP.

Don't buy right now:

Covered copper short

Covered my COPX 4% short position on Friday.  Now around 38% short.  Specifically to do with copper, not the market.  I am following Hedgeye for my shorts.

Want to put some more shorts on to replace it, but its hard.  No one knows when a 20% bear market rally will appear.  Or if the market keeps going straight down.  If I don't make trade short term trades, I have 2 choices:

  • wait for a bear market rally (which may not appear), and scale into it, or 
  • just close you eves and stab, hoping you hit something.

Also added 1% more uranium (SPUT) last week.