806:HK- Value Partners Group Limited

[stahleyp]

Value Partners Group is an asset management firm based in China.

 

I found out about the company from a Graham and Dodd Breakfast Speech video I found online.

 

While I can't say the company is extremely cheap (that may scare some people off!), I do think they're could be a ton of value. As of this writing, I do not currently have a position (except maybe in a mutual fund holding at anytime).

 

 

VPG is chaired by Mr. CHEAH Cheng Hye. He cofounded the firm in 1993 and has grown it into a firm with slighlty less than $8 billion under management. The firm is one of two publicly traded asset managers in Asia (and only one out outside of Japan). He takes a very value oriented approach that I'm sure many hear will appreciate. If you're interested in learning more about him or the company, this is a pretty good video.

 

http://www7.gsb.columbia.edu/valueinvesting/events/breakfast

 

Now, from a valuation method, the stock isn't cheap, but isn't really all that expensive relative to the possiblities. I don't claim to have any special knowledge of Chinese asset managers or anything like that. However, I do feel that China will grow a lot over the next 20 years. He seems like an honest guy and is really ambitious. Honest guy + value investor + plus rapid growth = possible big opportunity.

 

 

Okay, so here is why I think it's not too terribly expensive. According to Morningstar, the company has net margins of 60.2%. I would imagine that would go down over time (probably quite a bit). If we look at other value type shops, BEN and TROW, they come in at 26.2 and 28.5, respectively.

 

Let's look at bit more about AUM.

 

BEN comes in around $353 billion, TROW at $338 and VPG at $8.

 

If we compare that to market cap

 

BEN $21 billion, TROW $14.2 and VPG a little under $1 (based on my calculations)

 

Now, I know BEN and TROW are much more complex, but if we do a very simple back of the box estimate and compare market cap to AUM we get the follow breakdowns. To me, this shows what VPG might become over the next couple of decades or whatnot.

 

BEN's market cap is about 5.94% of market cap , TROW 4.02%  and VPG is 12.5%

 

BV for BEN is 2.5, TROW 4.4 and VPG is 3.6.

 

Now, VPG net margin is over 2x of BENs or TROWs...so, it should be a lot more expensive. Again, that will probably compress quite a bit long term.

 

Bottom line, you're getting a team filled with value investors, seems pretty ethical and not too bad of valuations in quickly growing country with burgeoning middle class.

 

Oh yeah, and Royce owns quite a bit of the outstanding shares, too.

 

 

 

 

 

[MrB]

It seems to be a great company, but to be a great investment the price has to be right.

 

At what price would you consider it cheap and why?

[stahleyp]

Mr. B,

 

I was really hoping to get help with trying to price and value it. From the ordinary metrics like BV and margins, it looks like it isn't overly priced.  It seems like an interesting idea, and I was hoping more experienced investors here might share some insight.

 

Based on what I see, I think now it seems relatively cheap (not cigar butt cheap by any means, though). I say that because the BV is less than TROW, margins are higher and it has a lot better growth opportunities. Plus, management seems pretty knowledgeable and ethical. I know that really basic stuff though. Anyone know how to determine how much insider ownership for HK listed stocks though?

 

 

[MrB]

Valuation

http://mercercapital.com/media/File/Understand%20the%20Value%20of%20Your%20Trust%20Company%20-%20Matthew%20R.%20Crow%20and%20Kristin%20C.%20Beckman.pdf

 

Insiders (Apol for the format)

 

Capitalization Summary 

 

Tradable Shares O/S 1,755,203,000

Float (%) 44.00%

Free Float 765,593,026.00

Insider/Stake Ownership (%) 56.38%

Holders 

 

Displaying records 1 - 11  <<First  <Previous  Next > 

 

Holder Name  Position  % O/S  Market Value (In $USD)  Report Date  Source

Cheah Company Ltd. 499,730,484 28.47% 282,427,894.22 08/19/11 Other Substantial/Declarable

Yeh (V Nee) 298,689,324 17.02% 299,746,121.18 12/31/10 Other Substantial/Declarable

Affiliated Managers Group Inc 137,244,000 7.82% 117,456,314.62 06/30/11 Other Substantial/Declarable

Scenery Investments Ltd. 26,704,583 1.52% 15,092,373.56 08/19/11 Other Substantial/Declarable

So (Chun Ki Louis) 26,641,583 1.52% 25,173,634.73 03/18/11 Hong Kong Insider

Oyama (Nobuo) 390,000 0.02% 228,431.30 10/04/11 Hong Kong Insider

Tse (Wai Ming Timothy) 100,000 0.01% 94,490.01 03/11/11 Hong Kong Insider

Coorey (Michael Francis) 60,000 0.00% 58,027.53 01/28/11 Hong Kong Insider

Chan (Sheung Lai) 50,000 0.00% 50,176.91 12/31/10 Hong Kong Insider

Ping An Life Insurance Company of China, Ltd 0 0.00% 0.00 06/30/11 Other Substantial/Declarable

Ping An Property & Casualty Insurance Company of China Ltd 0 0.00% 0.00 06/30/11 Other Substantial/Declarable

 

[zippy1]

One way to value asset managers is to use the % of AUM, I thought.  In one of Martin Whitman's books, I think he mentioned that often time the M&A typically occured at 4-5% of AUM.  Thus, he thinks 2% AUM is not a bad price to pay for asset managers.

[stahleyp]

Thanks guys. I appreciate the insight! :)

 

Mr. B, where did you find the insider information?

[Baoxiaodao]

I watched that video too. Thanks for bring this up because I did not know they are publicly traded.

 

Some comments:

 

1. It is going to be a tough period going forward to invest in asset management companies. In this business, the rising water lvl is likely to lift all boats. However, the bad market condition will make it difficult for even the best one stand out. That being said, if you buy shares in asset management business, timing is almost everything.

2. In the presentation, I heard the guy talking about exploiting the herd effect. The mainland market is actually a copy of the HK market, and people in both places mostly use technical analysis. However, even he recognize that it is becoming more difficult in recent years to exploit the market.

3. The growth in Chinese economy has nothing to do with wealth creation in the stock market. I was the victim in the 90s and since then I stayed out of it.

 

Fan

[oddballstocks]

Yeah, % of AUM is the standard for an asset manager.  Recently valuations have been moving up, I remember reading in Barrons some fund manager stating that 7% of AUM is a fair value now.

 

There are a lot of managers selling for 2% worldwide, two that come to mind are Charlemagne Capital, and Argo group.  I own Argo (ARGO.LN) they're selling for less than net-cash, and the company is buying back shares like crazy.

 

What you want to look at is asset growth, compensation structure.  Both Charlemagne and Argo are hedge funds so you get the 2/20 kicker, they're both cheap because they're well below the high water mark.

[MrB]

Argo is cheap, but its cash is sitting in Cyprus banks and management sold some subs to the company.

Main fund has a credible track record and they focus on the right areas; emerging markets/distressed.

Liquidity is awful though; you marry the stock.

 

Oddball; have you spoken with management? What's your take on them?

[MrB]

Re the valuation of asset managers; the % of AUM is only the starting point. It has to lead you to the cash generation, because that is ultimately what drives the value.

The link I posted actually run you through the maths and one concern is that 20% EBIT margins might be at the high end.

 

Privately I won't pay more than 2% of AUM, one year after the date of sale. 1% at the date of sale and 1% one year in.

[Tim Eriksen]

Okay, so here is why I think it's not too terribly expensive. According to Morningstar, the company has net margins of 60.2%. I would imagine that would go down over time (probably quite a bit). If we look at other value type shops, BEN and TROW, they come in at 26.2 and 28.5, respectively.

 

Let's look at bit more about AUM.

 

BEN comes in around $353 billion, TROW at $338 and VPG at $8.

 

If we compare that to market cap

 

BEN $21 billion, TROW $14.2 and VPG a little under $1 (based on my calculations)

 

Now, I know BEN and TROW are much more complex, but if we do a very simple back of the box estimate and compare market cap to AUM we get the follow breakdowns. To me, this shows what VPG might become over the next couple of decades or whatnot.

 

BEN's market cap is about 5.94% of market cap , TROW 4.02%  and VPG is 12.5%

 

BV for BEN is 2.5, TROW 4.4 and VPG is 3.6.

 

 

I'm not sure where you got your AUM figures but I don't think they are correct.  BEN had 694 billion in AUM as of 10/31/11.  TROW had 453 billion as of 9/30/11.  That will greatly reduce your market cap as a % of AUM calculation. 

 

Mr. B - your link was related to more to private trust companies than publicly traded asset managers.  In general an asset manager that reaches scale has 35% operating margins and thus should have 20% net margins.  BEN has 28%.  TROW typically runs slightly higher.  In general equity mangers trade higher due to higher fees (65 to 90 basis points) than bond managers or sub-advisory managers (35 to 50 basis points). 

 

[oddballstocks]

Mr B,

 

I haven't contacted management directly, but I do have a take on them.

 

I like them, and I think their end game is to get their company back and possibly go private.  The company was founded by two brothers and was a private company until 2007 when they sold out to Absolute Capital Management.  Absolute ended up going out of business and the brothers negotiated a spinoff transaction to keep Argo together.  I believe they hold about 32% currently.  There were some lawsuits regarding the spinoff that were resolved recently with no action taken against the company.  This was a big dark looming cloud, so clearing this up was good.

 

So with the history the brothers have been buying back shares which in turn increase their holding percentage.  Additionally there was a pretty big option grant of 5.9m shares (68m outstanding) at 24p.  The price of the grant is bullish, 10p above the current market price (71% increase for an exercise).  If they hit this their holding will bump up to about 37% not including any buybacks.

 

The one killer with Argo is their Real Estate Fund, it's been on the rocks for a while.  There is some concern the fund might breach a debt provision in 2012.  So in light of that it was a bit strange that they essentially doubled down and purchased more properties.  Along with the purchase they also lowered the high water mark to the price of the secondary offering for the fund.  I have to think these guys know what they're doing but this is the concern for me.  The fund has it's own website since it's listed with financials on it.

 

Liquidity - spot on comment

 

If they do go private I'd expect at least 30p a share

[MrB]

Thanks for that Oddball.

 

Tim, I agree. Any good research on the topic?

[stahleyp]

Tim, thanks for that. I am wrong (it happens fairly often). I got my numbers from Morningstar. Thanks for that!

[petec]

Re: Argo, is there a specific reason to fear Cypriot banks?  Or just a general wariness of emerging market banks?

[MrB]

http://www.news.cyprus-property-buyers.com/2011/11/08/cyprus-top-three-banks-downgraded-by-moodys/id=009643

 

I won't keep my money in a Greek bank or a Cypriot bank and I am surprised these guys do. Why take the risk when Argo has the spread of global banks in London at its disposal? I friend of mine recently had a good chunk of his assets frozen, because it was sitting with MF Global. In his defense it was an unknown risk. Here you have known risk, so why take it?

 

To invert I will ask the question. What is the upside for Argo to bank with a Cypriot Bank?

[Guest ajc]

Eric Chow: Finding value in China

 

"In 2000, Eric Chow, a Hong Kong-born, Australia-educated 25-year-old, was toiling at the Bureau of Statistics in Sydney. The job was boring, and he grew despondent. He began haunting the Sydney public library, where he discovered Robert Hagstrom's The Warren Buffett Way.

 

Soon, Chow was devouring investing books, and delving into piles of annual reports, so many that "it was making my lifestyle very unhealthy." He resolved to move back to Hong Kong and get a job investing. Chow landed at asset manager Value Partners, a Greater China specialist, in 2002. The Hong Kong-based firm had just 15 employees, all looking for small-cap stocks according to the principles espoused by Benjamin Graham and David Dodd: A risk-averse approach and a high margin of safety..."

 

 

 

http://online.barrons.com/article/SB50001424053111903891504579127852842223822.html#articleTabs_article%3D0

 

(Googling 'Eric Chow Finding value in China' and view as single page should work, if there's restricted access to the article)

[Guest ajc]

Value Partners Announces 2013 Final Results

 

Financial highlights

 

(In HK$ million)                                                              2013      2012      % Change

 

Total revenue                                                            1,027.6    651.6      +57.7%

Gross management fees                                              603.9    461.8      +30.8%

Gross performance fees                                                317.0    112.1      +182.8%

Operating profit (before other gains/losses)                468.2    254.4      +84.0%

Profit attributable to equity holders of the Company    384.3    376.4      +2.1%

Basic earnings per share (HK cents)                                21.9      21.4      +2.3%

Diluted earnings per share (HK cents)                            21.8      21.4      +1.9%

Final dividend per share (HK cents)                                10.7        6.3      +69.8%

Special dividend per share (HK cents)                                Nil        9.7

 

 

http://www.valuepartners.com.hk/assets/files/VPG%20Announcements/20140313_VPG(806)_2013%20Final%20Results_PR(E).pdf