We had the pleasure of following up with selected instructors at Asian Investing Summit 2017. We posed a number of questions to them about various aspects of investing in Asia. The following is a compilation of Sid Choraria’s insights.
How do you uncover value in your local market?
Sid Choraria (Singapore): We like to generate original ideas, companies that are off the radar with potential to grow, but the underlying principle is value. At APS, we believe margin of safety comes not just from price you pay but from knowing your companies intimately well, understanding how companies make their earnings or cash flow.
Ideas can come from a variety of places. For example, unpopular industries/stocks, new/maturing industries as well as competitor-specific leads. Investment theory in MBA schools treats all alphas the same, but as practitioners, we have found that alphas produced by different companies behave differently and must have different holding periods. This distinction is important because it determines how you research companies, including when you should sell them.
At APS, we classify alphas into four buckets. Structural alphas are produced by companies with structural themes, where the companies have a high barrier to entry. The alphas can be durable and hence we resist selling them early. Dynamic alphas are unstable. They are strong when the cycle is good and should be sold when there are headwinds. Economic alpha stocks are deep value stocks. Growth rates may be average but they sell at a fraction of their intrinsic value with assets on balance sheet. When they report a strong year of profits we are careful not to be fooled into believing that they have morphed into structural alpha stocks. Finally, opportunistic alpha stocks are those driven by a special situation event.
What are some pitfalls of Western investors?
Sid Choraria (Singapore): The pitfalls that Western investors tend to make is overly relying on reported financials or secondary research like sell-side analysts. Doing your own work cannot be emphasized enough particularly in Asia. Asian markets from China, India, Japan, South Korea to Indonesia are disparate and complex – political, regulatory, culture, languages spoken. Having a long history investing in the region has enabled us to appreciate the differences and nuances and systematically exploit the inefficiencies.
Let’s discuss one illustrative case study. In the Chinese ADR universe, JD.com, a $43 billion Chinese ecommerce company has been characterized by Western investors as China’s “Amazon”. Amazon benefited tremendously from its AWS cloud business, which has revenue of $12 billion, growing 55+% and generating operating margins of 25%. There is Kindle, Amazon Prime offering video and music, AI initiatives (Alexa) and international growth. In contrast, JD has no cloud business, no relevant AI and no international business. We haven’t discussed intense competition from Alibaba, which Amazon does not have in the US. The mistake Western investors make is relying overly on secondary research or the presence of other blue chip shareholders.
How do you assess management? Which CEOs do you admire?
Sid Choraria (Singapore): Good management will be forthcoming about mistakes and I look for that more often than the successes. Mr. Buffett as we know from reading his wisdom is upfront about his mistakes. It is critical to evaluate management alignment with shareholders and be wary of promotional management. When I come across management, who promise the moon, when their competitors are more cautious, I always wonder why. We like to adopt a Sherlock Holmes hat to evaluating management. We have a good forensic analysts in the team who are good at sniffing out accounting issues. We focus on a long track record of capital allocation. Has management been focused on core strengths? How have they been compensating themselves? Do they keep raising money from equity and bond markets, yet claim cash flows are strong? Essentially, we look for inconsistencies in what is said vs the evidence there
How do you value a business?
Sid Choraria (Singapore): To answer that question, I will start with my definition of a good stock which is getting a $1 stock for 25 cents. That’s how Benjamin Graham defined value investing. If you pay $1.50 for the same stock, that’s a bad investment. So this is my starting point for valuing a business.
What is the margin of safety, and if I am wrong how wrong will I be? Mr. Buffett’s partnership letters emphasized the importance of assigning probabilities to various outcomes – I think this is critical since in the investing world, there are lots of uncertainties. There is no such thing as a perfection information or perfect valuation.
In general, we emphasize cash flow and balance sheet analysis in valuing a business more than accounting earnings. Management and auditors can produce the set of accounting earnings that they want you to see. Price to earnings ratio is probably the most abused metric in valuation. We therefore tend to think of valuation in terms of analyzing businesses and evaluating metrics like return on capital, incentive alignment, cash flow in relation to its enterprise value.
Sid Choraria is a member of the Asia Pacific equity investment team at APS Asset Management, which was founded in 1995 by Wong Kok Hoi. APS manages over $3bn in assets focused on Asian equities employing a primary, investigative bottom-up approach. Prior to joining APS, Sid managed an Indian equity portfolio for a family office. Previously, Sid worked at Goldman Sachs in Hong Kong in the Technology, Media and Telecom Investment Banking Division. Prior to Goldman, Sid worked as a senior analyst at Bandera Partners, a hedge fund in New York performing bottom-up, fundamental research focused on value and activist small and mid cap opportunities. His experience includes working at Merrill Lynch and Morgan Stanley in Hong Kong. Sid is a member of Value Investors Club, an exclusive community of top money managers and analysts. He was awarded the Best Analyst Excellence Award in 2015 and winner of the Best Shorts Idea by Sum Zero in 2014. Sid received his MBA in Finance from New York University Stern School of Business where he was recipient of the Harvey Beker Scholarship and a member of Michael Price Value Fund, a endowment fund at NYU seeded by legendary value investor, Michael Price.