Alpha POWER Shares (Lions) Portfolio - September 2008
Stock Performance:
Market Commentary
During the month of Sep, the shock collapse of Lehman Brothers, a 158 year-old investment bank, led quickly to the bail-out of AIG, America’s largest insurance company as well as the hastily arranged merger of Merrill Lynch with Bank of America. This series of events in the US resulted in a collapse of confidence in financial markets which spread rapidly to the rest of the world. The resulting risk aversion resulted in a global credit crunch as banks hoarded cash and anxious depositors withdrew cash from banks.
Lion Comments on Major Out-performers
S-Oil (+5.7%)
Amid the current volatile market conditions, S-Oil has outperformed due to its stable financials and high dividend yield. S-Oil is the most complex refinery in Korea and its biggest shareholders are Aramco Overseas (35 %) and Hanjin Group (28 %). S-Oil has been maintaining its high dividend policy partly due to its major shareholders’ preference for dividends. S-Oil is known for its minimal borrowing and strong shareholder return policies with relatively small exposure to foreign exchange risks. It has negligible exposure to petrochemicals and refining margins has been on the uptrend in September after falling in August. S-Oil has a 580,000 bpd oil refinery, a fuel-oil cracking center with a capacity of 148,000 bpd, PX capacity of 700,000 tpa and a lube base oil plant of 29,000 bpd capacity.
CLP Holdings – CLP (-0.99%)
Hong Kong Executive Council approved CLP’s Development Plan for the next five years with a capex of HK$39.9 bn for the extension and maintenance of CLP’s power systems to meet future growth, support government infrastructure projects (including the already announced Lok Ma Chau Loop, HK-Zhuhai-Macau Bridge, Guangzhou-Shenzhen-HK Express Rail Link and Island MTR extensions, etc). The amount of capex for each year will be reviewed by the HK government each year given changes in raw material price fluctuations. CLP agreed to cut its net tariff by 3%, smaller than expected, due to rising coal costs over the past 18 months. The tariff cut is perceived to be a non-event whilst the higher than expected capex budget came as a slightly positive surprise to the market.
HK Electric – HKE (-1.27%)
HKE released good 1H08 results with revenue rising 0.6% YoY to HK$5,878 bn and EPS growing 18 % YoY. The good results was despite lower than expected electricity sales which was 1.7% YoY lower due to cooler weather as well as various energy-saving initiatives rolled out during the period. HKE’s international business recorded a 34.6% YoY jump in renenues to HK$424 m due to better performance from the company’s electricity distribution business in Australia and the United Kingdom. HKE’s acquisition of six power plants in 2007 though a 50% stake purchase in Stanley Power in Canada also contributed to the good results.
Lion Comments on Major Under-performers
Suntec REIT – SUN (-20.55%)
Office landlords such as office REITs have been affected by the global macroeconomic uncertainty on worries demand for office space would fall. With news of Lehman Brother’s bankruptcy amidst the financial difficulty in the US, we see limited impact at Lehman Brother’s occupies 42,000 sf of space (3.2% of NLA) against the total Suntec tower office portfolio of 1.3 m sf. Current vacancy at Suntec office towers is low at 0.5% and we still expect SUN to benefit from strong rental reversions given sizeable office lease expiries in FY09 and FY10 (42.6 % and 26.0 % of NLA respectively).
Hongkong Land – HKL (-18.23%)
HKL underperformed on the back of concerns over slowing HK economy and impact on demand for office space. During downcycles, we can expect NAV downgrades as well as discount to NAV to widen and the recent global economic crisis has caused investors to reassess HKL’s prospects. The NAV of HKL is around US$5.85 and with its share price at US$2.96 at the end of Sep, it is trading at 50% discount to its NAV.
Woori Finance – WOORI (-17.99%)
A news report that WOORI may incur US$100m in US CDO/CDS losses in 3Q08 surfaced. According to WOORI, its total exposure to foreign exchange CDO’s amounted to US$339 m, split between US$15m exposure remaining in mortgage-related CDO’s and US$324 m in non-mortgage related CDO’s. In 2Q08, WOORI booked US$51 m in impairment loss on CDO’s compared to US$12 m loss in 1Q08. Adding to the weakness in WOORI’s share price is recent concerns over the health of Korean’s financial system as well as the weakness in Korean Won.
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