Froth in the FANGs

Froth in the FANGs
If August is a confusing month for many, readers can be rest assured the below post is curated to confuse them further.

1) Priced for Perfection?
As the S&P fully recovered to pre-covid levels, the dominance of the FANGs has risen to the level of comprising 25% of the S&P 500 index . FANGS are priced for perfection, the ultimate blend of value and growth. Nothing must ever go wrong in the tech sector, or else the investor perception of the US economy will be severely hit.

Privately, I have greater faith in the possibility of a turnaround in Hyflux compared to the priced for perfection scenario that the US investors are envisioning (Note sarcasm). When I start to have insomnia thinking about how US valuations are detracted from fundamentals and economic reality,  I need to reconsider my exposure to the US sector. This screams of Irrational Exuberance.

2) Fundamental changes in the traditional value investing camp
Tech was once the scarecrow of the traditional value investing space. A lot has changed since then.

Forerunners
Berkshire - Apple

Influenced
Guy Spier - Google, Twitter
Li Lu - Google

Deep Value
Seth Klarman - Facebook, Google
Michael Burry - Google

What happened to contrarian investing? Is this independent thought or simply herding behavior?
I do not know the individual thesis on why these benchmark value investors own the stocks. Is there any fundamental change in the thesis of the FANGS to even be in the portfolio for DEEP VALUE investors?
Are investors caught up in a coordinated FOMO or am I having some serious blind spots in the tech space?

3) Rush to Vaccines production
Partial vaccines without firm guarantee of vaccination may bring cheer to US investors, but a full vaccine (98% certainty) will most likely arrive late next year. With the uncertainty of protection from an incomplete and rushed vaccine, it will cause confusion rather than act as a stable solution. Least to say the probability of a virus mutating to resist the vaccine and developing immunity to it. The war against corona is not even halfway through and the investors are treating it as over. If anything else, once bad news about would-be vaccine candidates appear on the headlines, the market momentum can easily swing from Euphoria to depression.

Portfolio decisions for August
I temporary liquidated Blizzard and Google from my MayBank Kim Eng account. I am sick of incurring the custodian fees and is wary of the heightened valuations in US. This is most likely a temporary allocation out of those stocks until I can reasonably reconcile the cash flows growth and risk of the stocks along with the market valuations. I may initiate a reentry through SCB which has no custodian fees.  It might be a mistake to be out of the hottest stocks, but I am more attuned to selling high priced companies to willing and desperate buyers.

Sale of Google
I do not have special insight on most of the FANGs except for google which I researched in depth. I initiated a position back at 10 June 2019 with the thesis is that Google was a cheap compounder. The cheap part no longer holds true. I am trying to assess the probability of it continue to be a compounder  while considering the salient risks below.

i) What is the impact of congress on the tech stocks? The verdict is not out by the congress on the tech stocks and investors already celebrating? Political and regulatory risk is one of the largest risks for tech companies, which seem to be currently mispriced by the market.

ii) Will Free cash flow generative business perform well in an heightened inflationary environment? Where will all the cash be reinvested into? Google is more known for killing apps than making successful acquisitions

iii) A deep dive into the earnings revealed loss of major revenue streams from travel advertising, as well as stall in project development? The recent earnings breakdown by google is self explanatory. Although I am bullish on the monetisation of youtube, the profitability and revenue of Google appears to be tied to the real economy (global and US) and I need to revaluate where its future cash flows are likely to come from.

iv) There is a huge shift in the cost structure of Google as they have to hire much more people to resolve admin and regulatory needs like content moderating, cybersecurity. With huge increase in headcount and freeze in sacking, bureaucracy might set in and the Free cash flows margins will be hit. The compounding thesis may be severely impacted.

Sale Of Blizzard
The proposed ambiguous tech sanctions from Trump to Tencent severely affected my cash flow assessment of Blizzard Entertainment. I am less worried about the moat of Tencent compared to the cash flows and risks of Blizzard Game releases.

Blizzard is tightly connected to Tencent for game distribution in China. A majority of Blizzard game release and revenue is from the Chinese market and subject to government approval. With Trump trumpeting his warped logic and strewing chaos and worsening international relations, there is a real risk of impairment on Blizzard cash flows if US companies is banned from making transactions / dealings with China and Tencent. With the worsened risk /reward of Blizzard, I will sell the stock for now and possibly allocate back through SCB if fundamentals later proved to be intact.


Redeploying USD into Hong Kong Land
I noted the flow of hot money from USD to other asset class like cryptos, Gold, Stocks, Bonds and property. The market appears to be pricing a premium on any possible inflation hedge. Hong Kong Land (USD) is one that I am reasonably certain of its undervaluation and prospects, whereby the catalyst can simply be an urgent need for institutional investors to deploy excess cash to USD denominated inflation hedges. I initiated a large conviction position at the price of USD 3.84 on 20/08 with the underlying assumptions.

Key Assumptions
HK will not be severely impacted by proposed US embargo
From a game theory perspective, China is following a tit-for-tat strategy in their geopolitical relationship with US. The US embargo threats is not very credible on HK as HK is actually a Net importer of US goods and services. US will be hit worse if they aggravate the sanctions and will be discouraged from pushing too aggressively on this. Moreover, aggressive sanctions from the US will only push HK further towards China, whereby there is a Chinese hinterland to support it.

Quote
https://ustr.gov/countries-regions/china-mongolia-taiwan/hong-kong

U.S. goods and services trade with Hong Kong totaled an estimated $66.9 billion in 2018. Exports were $50.1 billion; imports were $16.8 billion. The U.S. goods and services trade surplus with Hong Kong was $33.4 billion in 2018.

Hong Kong is currently our 21st largest goods trading partner with $43.6 billion in total (two way) goods trade during 2018. Goods exports totaled $37.3 billion; goods imports totaled $6.3 billion. The U.S. goods trade surplus with Hong Kong was $31.0 billion in 2018.
Unquote


HK remains viable as a financial center
Regarding the prospect of HK as a financial center, I believe commercial minded financial institutes will put business concerns (HK as a profit center) over the ravings of a president whom is possibly on his last term. No rational financial institute will forego the need of a premium front office to entertain visitors and clients, especially in a country with limited land space.


HK is a strategic location for asset management gatherers throughout the globe, whom target the mainland investments through HK, and also channel funds from the mainland to the global economy. The strength of the Northbound and southbound Stock/bond/ETF connect remains intact and MSCI re-balancing is continually increasing exposure to China. The China Star market and HK (Tech index) is creating new areas to raise capital for tech investments, whereby the US no longer holds a strong monopoly. The vibrancy of the exchange and the network externalities of a sophisticated, liquid and deep HK/CN  market, as well as a hinterland of Chinese investors will continually attract asset gatherers to support the demand of prime HK property .

Negligible WFH threat in HK market
The WFH threat is not credible for HK office properties. Proper business and profit centers still need a formal front office to properly function and entertain businessman / visitors. Due to the severely congested living space of HK flats, the viability of a long term comfortable WFH strategy implementation is sketchy.


Ability of the new regime to restore order
The increased law enforcement will quell the protests and restore order and stability . The discipline of the Chinese in curtailing the spread of covid and development of vaccines will enable China/HK to have a first mover over the other ailing economies. Once the economy recovers, CN hot money flows, tourism inflows and love of property from China investors will revert the retail property and office valuation to its former levels.


Diversified prime estate property create a price floor to the book value
HKL is a property developer which portfolio assets are diversified across Asia, although most of its profit streams is still derived from HK. The massive discount to NAV seem to be unwarranted and I am willing to have a longer holding period for the market to realize its virtues.


Willing to look though revaluation losses and balance sheet backed by credible assets
HKL is net cash flow positive. Most of the recent net losses are not cash related but rather due to property revaluation. Moody's reasserts its AAA rating of HKL financial health, low gearing and ability to draw-down on its lending facilities. I am wiling to incur the capex and hit to FCFE to reinvest in development of the Shanghai property. Nonetheless, current ratio is worrying and this is not a (back the truck) position I am taking.


Management-shareholder alignment
The Jardine family have a track record of success and have a long term orientation. I like the heavy insider holdings and the shareholder - management alignment, and willing to discount the Jardine inter-co Related party transactions that is usually frowned upon without sufficient consideration. Activist shareholders cannot challenge the incumbent management as the company is largely family owned. I will need to have faith in the abilities of the management if I want to increase any further positions in it.