• HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT
Tamim Asset Management
  • HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT

Stock Insights

A Look Under the Hood | 3 Stocks That Were Up 40% in July

1/9/2020

0 Comments

 
Kevin Smith takes a look at one long-term holding and two more recent acquisitions, all of which performed very well in July 2020, each stock rising by more than 40% for the month.
PictureAuthor: Kevin N Smith
High volatility has been a feature of the equity markets in the region during the past two years, with the key events being trade tension between the United States and China and the subsequent Covid-19 pandemic with the associated disruption to economic activity across the world.  Three-year annualized volatility for the Asia region to the end of July was close to 20%, well above the long-term average and a big jump from the 13.5% volatility figure recorded in the region twelve months earlier.  While volatility has been at high levels, market returns have remained well below their long-term average.  During the year to end July 2020 our benchmark index of small to mid-sized companies in the Asian region in Australian dollar terms fell by 3.1%, while our Asian portfolio net of all fees increased by 0.5%.  It is very pleasing for us as fund managers to achieve a positive return when the underlying markets are in decline.  If you had not looked at markets in the past twelve months and had avoided all news stories you would have concluded that markets had been quiet during that time with the small negative outcome for the index.  The purpose of this article is to take a closer look at our responses to three examples of highly volatile companies in our portfolio, China Lesso, United Microelectronics and BayCurrent Consulting, all of which increased by more than 40% in July, a month when the overall index recorded a decline of 2.6% in Australian dollar terms.

Picture
​We first acquired a position in China Lesso (Lesso) (HKG.2128) in the fourth quarter of 2018 at an average price of HKD 4.08, at the time of writing the shares trade at HKD 15.50 to be the strongest performer in our Asian portfolio.  During the month of July shares in Lesso increased by 48.4% from HKD 10.08 to HKD 14.96.  We have taken profits along the journey, in particular for risk control purposes, it is important not to let an individual stock position grow too large in a diversified portfolio.  Lesso was a major contributor to our performance in the past year.  Lesso typically has coverage provided by seven or eight analysts and the progression of the company share price versus their target prices is shown in Figure One.  The analysts have struggled to keep pace with the underlying share price.

In October 2018 we concluded that “Lesso meets our standards for accounting, strategy and governance. Lesso has a strategy directed towards the development of China, the company has a strong home market in Southern China and is well placed to benefit from urbanization of the interior of China and major infrastructure projects funded by local government bodies and the national government.” Lesso has 90% of sales from plastic pipe systems, revenues grew by 11.0% and earnings per share increased by 22.5% in 2019.  Figure Two illustrates the level of valuation of Lesso when we first acquired the shares in 2018 on a p/e ratio of 4.3x, the valuation has since expanded to the current (and still reasonable) level of 12.9x.  With continued growth in profits expected out to the year 2022, Lesso trades on a prospective p/e ratio of less than 10x.

​Figure One: China Lesso Share Price Versus Average Target Price
China Lesso Target Price vs Average Share Price
Source: marketscreener.com
See more:
Stock Review: China Lesso, November 2018
That expansion in multiple explains the majority of the return achieved in the past two years.  We are happy to retain a position in the company since our original reasons for investing remain intact, the company continues to score well on our measure of VMQ (valuation, momentum and quality) and high standards of governance are being maintained.  Lesso remains a key beneficiary of the urbanization of the interior of China with 25 production bases located across 16 provinces in China and a nationwide sales network of more than 2,000 exclusive distributors.
​Figure Two: China Lesso Valuation History and Forward Estimates
Picture
Source: marketscreener.com
Picture
United Microelectronics Corporation (UMC) (TPE.2303) manufactures and markets integrated circuits. The company provides wafer manufacturing, assembly, testing, mask production and design services. UMC operates 12 fabs that are located throughout Asia with a maximum capacity of more than 750,000 8-inch equivalent wafers per month. The company employs approximately 19,000 people worldwide, with offices in Taiwan, China, United States, Europe, Japan, Korea and Singapore. In Q3 2019, UMC ranked fourth in the pure semiconductor foundry industry with 6.7% market share (source: Trend Force). UMC manufactures semiconductors using advanced production processes for customers based on its own proprietary integrated circuit designs. UMC’s wafer fabrication process includes services such as design, mask making, testing and assembly services.  We believe UMC will transform into a specialty foundry, changing its business model, and focus on 28nm, 40nm and 8" foundry products, which will result in significantly improved profitability by reducing capex and R&D.  

We built our initial position in UMC during May 2020 at an average price of TWD 15.15.  There are 20 analysts producing forecasts for UMC, in July 2020 there was considerable positive earnings surprise when second quarter earnings were reported some 56% above the market consensus that is derived from those 20 analysts.  The share price of UMC responded by rising 40.6% during the month of July to close at TWD 22.35. We did not buy our position because of any particular insight regarding the next set of quarterly results, our time-frame is to take a view over several years.  We do not make forecasts for an individual quarterly earnings period however we look to form a judgement regarding the likely success of the strategy being employed by the company we are assessing.  For UMC, the company scored very well on our broad categories of value, momentum and quality and as noted above we liked their strategy of becoming a specialty semiconductor foundry with the scope to increase profitability.  The earnings increase that surprised the investment analysts in the second quarter results was a vindication of the company strategy albeit somewhat earlier than we had anticipated.  Figure Three shows that the market is now expecting continued growth of earnings in the next two years with a prospective price earnings ratio of 11.5x.  Since we take the view that the company strategy as far from complete, we are retaining our position in UMC.

Figure Three: United Microelectronics Corporation Valuation History and Forward Estimates
UMC Valuation History and Forward Estimates
Source: marketscreener.com
Picture
BayCurrent Consulting Inc. (BayCurrent) (TYO.6532) is a comprehensive consulting firm based in Japan.  BayCurrent is engaged in designing and implementing strategies relating to information technology, global growth, marketing, mergers, joint ventures, alliances, governance implementation and turn-around management.  BayCurrent has grown rapidly in recent years with the annual results reported to the end of February showing revenue growth of 36% and earnings growth of 91% over the previous year. We started to have a serious look at the business when the valuation dropped below 20x price to earnings in recent months and decided to build a position in early July at an average price of JPY 8,858.  We then watched the share price rise by 49% in the space of three weeks to JPY 13,216 at which point we sold the shares.  It is very unusual that we have a holding period of just three weeks, more typically we will hold a position for three years. In this instance the 49% share price increase put the valuation up to 31x expected 2021 price/earnings which was more than our tolerance for value.  We will be happy to have another look at the company if the valuation drops back to a reasonable level.

Figure Four: BayCurrent Consulting Inc. Valuation History and Forward Estimates
Picture
Source: marketscreener.com
​In conclusion, while the Asia regional returns have been subdued in the past two years, we have seen some extreme levels of volatility with individual stocks moving as much as 50% month to month. This article has provided three examples of stocks held in our Asian portfolio that have increased by more than 40% during the month of July.  Share price movement of that magnitude will always prompt us to review our position, in two cases, China Lesso and UMC we retained our holdings on the basis that our view of the respective strategies remains intact and the valuation isn’t too high.  In the case of BayCurrent the 49% upward price move in three weeks pushed the valuation above an acceptable valuation level and we sold our position.

Kevin Smith, also of Delft Partners, is portfolio manager of the TAMIM Asia Small Companies portfolio. Click here to learn more.
0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    Stock Commentary

    At TAMIM we are committed to educating investors on how best to manage their retirement futures.

    Sign up to receive our weekly newsletter:

    * indicates required

    TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.

    Archives

    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    December 2015

    Categories

    All
    2016 Presidential Election
    5G
    AGM Season
    Apple (AAPL.NASDAQ)
    Asia Small Companies
    ASX
    ATL.AX
    Aus Equity All Cap Portfolio
    Aus Equity All Cap Value Portfolio
    Aus Equity Growth Portfolio
    Aus Equity Income Portfolio
    Aus Equity Small Cap Portfolio
    Australian Stocks
    Autonomous Vehicles
    Big Four Banks
    Brexit
    Electric Vehicles
    Emerging Markets
    Energy
    ENN.AX
    FAANG
    Financials
    Fintech
    Global Equity High Conviction Portfolio
    Global Mobility
    Gmg.ax
    Gold
    Growth Stocks
    Guy Carson
    Healthcare
    Income Investing
    Infrastructure
    International Stocks
    Investment Thematics
    IT Services
    Mergers & Acquisitions
    Mobility
    Pharma
    Property
    Rare Earths
    REITs
    Reporting Season
    Retail
    Robert Swift
    Ron Shamgar
    SLK.AX
    Small Cap Income Portfolio
    Small Caps
    Stock Report
    Takeovers
    Technology
    Telco Stocks
    Telstra (TLS.ASX)
    Tourism
    TPG
    Utilities
    Value Investing
    Video
    Wesfarmers (WES.ASX)

    RSS Feed

TAMIM | Equities | Property | Credit
​

TAMIM Fund
Australia All Cap
Australia Small Cap Income
Global Mobility
Global High Conviction
Credit

Listed Property
TAMIM Property
Company
About
Contact
Insights
Invest Online
Login
Other
Privacy Policy
Terms & 
Conditions
​Disclaimer
Contact
Level 4, 55 Grafton Street
Bondi Junction, Sydney NSW, 2022

1300 750 007

ima@tamim.com.au

DISCLAIMER

​The information provided on this website should not be considered financial or investment advice and is general information intended only for wholesale clients ( as defined in the Corporations Act). If you are not a wholesale client, you should exit the website. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions. Where the website refers to a particular financial product, you should obtain a copy of the relevant product services guide or offer document for wholesale investors before making any decision in relation to the product. Investment returns are not guaranteed as all investments carry some risk. The value of an investment may rise or fall with the changes in the market. Past performance is no guarantee of future performance. This statement relates to any claims made regarding past performance of any Tamim (or associated companies) products. Tamim does not guarantee the accuracy of any information in this website, including information provided by third parties. Information can change without notice and Tamim will endeavour to update this website as soon as practicable after changes. Tamim Funds Management Pty Limited and CTSP Funds Management Pty Ltd trading as Tamim Asset Management and its related entities do not accept responsibility for any inaccuracy or any actions taken in reliance upon this advice. All information provided on this website is correct at the time of writing and is subject to change due to changes in legislation. Please contact Tamim if you wish to confirm the currency of any information on the website.  

magellen, kosec, clime, wilson, wam, montgomery, platinum, commsec, caledonia, pengana, tamim

  • HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT