CV Capital

CV Capital June 2020 – quarterly update

To my fellow shareholders,

Since my last report, the market has staged a remarkable rebound from the March lows. At the end of June the ASX 200 is up close to 30% from the low set on 23 March 2020. It is fascinating to watch optimism return so quickly in spite of:

  • RBA projecting GDP to fall by 10% in the first half of 2020[1];
  • RBA estimating unemployment rate to rise to 10% by June 2020[2];
  • In 2019, 8.7 million international tourists visited Australia and spent $45 billion. It is now down to zero with no firm date for reopening of borders[3]. It is same with international student education which in 2018/19 contributing $37.6 billion to the economy[4].

The chart below shows the ASX 200 index (market) and its price earnings ratio (P/E ratio). The P/E ratio is calculated by using the market capitalisation and divided by earnings.

At the end of June 2020, the market’s P/E ratio was 19.5x, which is roughly 8% lower than where it was at the end of January 2020 before Covid-19 hit Australia. I find it remarkable that the market is just 8% lower despite the unprecedented economic headwinds we are currently facing. On a forward P/E basis (taking current market capitalisation and divided by future earnings), the market is likely to be trading on higher levels now compared to pre-Covid 19 as corporate earnings (denominator in the P/E calculation) are very likely to fall more than 8% in FY2020 and possibly into FY2021 in comparison to earnings in FY2019.

It appears to me that the market is pricing in a “V” shape economic recovery and corporate earnings to return to pre-Covid 19 levels relatively quickly. A major hurdle to this is of course the trajectory of the pandemic and humanity’s efforts to develop a vaccine. I am neither an epidemiologist nor vaccine expert but I’ve read enough to know that the besides the technical challenges in developing a vaccine, it must also be produced in large enough numbers (billions of doses) and at a low enough cost to be able to provide herd immunity for the human species. Even if a vaccine was rolled out today, there is still an economic anchor of a high unemployment rate (7.4% in June 2020) and risk that it may go higher once the Jobkeeper and other government assistance programs end. Of all the possible future scenarios, a quick recovery in corporate earnings feels quite optimistic to me.

In the short term the stock market is an unpredictable animal and over the long term it usually goes up. So even if corporate earnings turn out to be dismal it does not automatically mean that the stock market will fall. From my vantage point, there are many powerful forces driving the market higher such as the historically low cash rate and very low bond yields (for e.g. the 3 year Australian government bond yield is at 0.29% and 3 year A rated corporate bond yield is at 1.32%) which forces investors searching for yield (cashflow) into the stock market due to the higher dividend yields.

This is my long winded way of saying I think the market has run ahead of itself and I believe the probability of a correction is elevated. However, since I can’t predict market movements, my strategy is to move forward with caution. We will stay invested in good quality companies but keep a prudent amount of cash to take advantage of potential market falls.      

Fund activity

We sold our position in Capral (3.5% position in March). Overall we made a 7.5% loss (inclusive of dividends and franking credits) on this investment. Whilst I still believe that Capral is trading below its intrinsic value, I decided to sell for the following reasons:

  1. It was not a high quality business and I felt that there are currently better opportunities in the market and if the market does fall there will be even better opportunities then.
  2. Capral is a building products supplier and the demand for housing in the short to medium term looked pretty lacklustre given the near close to zero immigration and international students arrivals coupled with a 20 year high in unemployment. Cheap import competition has negatively affected Capral’s earnings for the last decade and coupled with the housing downturn, I believe the the outlook for earnings is poor.   

We participated in 4 share purchase plans (SPP) as part of the strategy laid out in the March 2020 report. These were very profitable trades from a percentage return point of view. So far we have made about $9.5k from a cost base of $100. These are very low cost trades with potential to earn an outside return but there is some luck involved as a few ducks must line up. Therefore, due to the “long shot” risks associated with this strategy, it only makes sense to put a small amount of capital to this strategy. It’s more of a side hustle than anything else.

We raised some capital in May 2020 at $1.031 per share.

Fund performance

I have decided to change the financial year for the fund to align to the Australian tax year. This will reduced our accounting fees moving forward. Given this change, 30 June 2020 will be the end of the new 2019/20 financial year (roughly 6 months) and 1 July 2020 will be the start of the 2020/21 financial year. 

CV Capital return for FY2020 (14 Jan – 30 Jun) is (11.3%) and since inception is 4.4% on an annual compounded basis. Our cash and cash equivalent positions are circa 18% of the portfolio and the unit price (including franking credits) as at 30 June 2020 is $1.11.





CV Capital

CV Capital March 2020 – quarterly update

To my fellow shareholders,

The world has been turned upside down from a microscopic parasite since my last update so there is plenty to discuss and I will break down this report into the following sections; coronavirus epidemic, market reaction, portfolio performance, fund activity and near term strategy.

CV Capital

CV Capital – FY2019

To my fellow shareholders,

Following on my 31 Dec 19 quarter report, I would like to provide a quick update on the FY2019 results (our 2nd year milestone was passed on 14 Jan 20). Last year has been a fantastic year for stocks. Most major stock markets in the world experienced eye-watering gains and the local market was no exception. The table below shows the returns of some major global markets (in no particular order).

The gains across the ASX 200 were very broad based. Out of 200 constituent stocks in the ASX 200 index, 154 (77%) stocks went up in value in 2019. To put the 2019 gains into perspective, the 20.3% price return achieved in 2019 was the best return for the ASX 200 over the last decade. Ranking returns over the past 20 years, 2019 was the third best year. The only materially stronger year was 2009 when the market recovered from the global financial crisis in the previous year. I wouldn’t count on a few more consecutive years of 20%+ gains in the immediate future.

Our performance trailed our benchmark in FY2019 and although it would be nice to beat the benchmark every year, in reality this is extremely difficult to achieve over a long period of time. We do not aim to beat the benchmark annually but rather to beat the market over the long run (3 – 5 years with preference for the latter). In any given year, our investment philosophy of selecting beaten down unfavoured stocks generally leads to underperformance in bull markets and outperformance in bear markets.

An underappreciated fact which is rarely a topic of discussion is portfolio risks. It is obvious to me that if earnings are at similar level then the index at 7,000 is inherently riskier than when the index is at 3,500. As compared to returns (which always gets the news headlines as it is easy to measure), risk cannot be measured (I do not believe price volatility to be a true measure of risk but that discussion is for another time) and therefore much harder to illustrate in a simple manner.

I define risk as the probability of a permanent loss of capital which is fundamentally different than the risk of a share price falling purely based on market sentiment.  

Conceptually, risk adjusted return is the best measure to compare investment performance. However as risk cannot be accurately measured, the risk adjusted return concept is limited to being a mental framework. In terms of our risk profile, I believe our portfolio risks to be moderate given:  

  1. Our average cash position was 20.4% throughout FY2019 and cash remains our largest position at the end of FY2019.
  2. I believe the market has yet to appreciate the inherent value in the majority (circa 70%) of the positions in our portfolio.
  3. On our large positions such as Baby Bunting and Schaffer, I believe Baby Bunting will become the “Bunnings” of their segment and it still has a long runway of growth ahead. The sum-of-the parts valuation of Schaffer is, in my opinion higher than the current market price. It has significant real estate value which is not being recognised.   

I selected our benchmark purely on the basis of it being an opportunity cost. Our portfolio looks nothing like our benchmark. At the end of FY2019, our portfolio has 16 positions with only a single position being a constituent of the ASX 200 index. Given such little overlap between our portfolio and the benchmark, there is little value in analysing difference in performance other than to say we could have gained X% if we invested in the benchmark.

These are the top 6 positions of our portfolio at the end of FY2019 and they account for circa 69% of our portfolio’s value:

FY2019 performance

CV Capital returns for FY2019 and since inception was 16.4% (to be verified by our accountant) and 11.9% respectively. Given the market’s sensational return in FY2019, I think trailing our benchmark marginally after two years is not such an unsatisfactory outcome. The table below shows out performance (before taxes). Our cash position is circa 16.7% of the portfolio and the unit price (pre-tax and including franking credits) as at 14 Jan 20 is $1.25 (rounded).

Note 1: Total returns are calculated by including dividends, franking and other tax credits. The benchmark return calculation does not assume reinvestment

CV Capital

CV Capital Dec 19 quarterly update

To my fellow shareholders,

We are fast closing in on our second anniversary of CV Capital (our financial year end is 14 January). As we come to the end of our second year, I would like to detail key mistakes and successes in 2019 which I have not previously covered.


There are two types of mistakes in investing, mistakes from action and mistakes from inaction. One of the biggest mistakes in 2019 was inaction on my part. My friend and teacher, Tony Hansen of EGP Capital invited me to a meeting with the CEO of a payment processing company which was growing strongly and was quite cheap. I thought it looked like a good opportunity but a sharp uplift in the share price within two days of the meeting caused me to wait. Mentally it is hard to buy a stock after seeing it go up 20% but about a week later, the company announced that it sold an overseas business resulting in the doubling of the share price. The lesson is that what happens in the past doesn’t really matter, if we understand the business and if the stock is cheap, we should at least buy some immediately.

The other mistake which I actually made last year but is now acting like an anchor on our returns was over weighting our investment in Steamships. Based on cost, we allocated 13.4% of the fund into Steamships. My investment thesis was that this was a “blue chip” company trading below the book value of its investment properties whose earnings would be getting a massive tailwind from the development of large gas fields in PNG (namely Papua LNG and P’nyang) and other big mining projects. The chart below shows the expected capital expenditure for mining projects in PNG including Papua LNG.

When we made the investment, the government under the leadership of Peter O’Niel was very supportive of these projects. However in May 2019, Peter O’Neil was replaced as prime minister by James Marape. After taking over leadership the new PM shored up public support by stirring up nationalist sentiment with slogans such as “take back PNG”. This led to the government attempting to re-negotiate the Papua LNG deal with the project owners. After months of negotiations, the new government finally backed down and agreed to honour the terms of the Papua LNG agreement. As a result of “losing face” over the Papua LNG re-negotiations, the government is now trying to play hard ball in the P’nyang negotiations (which has not been signed). As P’nyang is integral to the overall Papua LNG project, the entire project is now in limbo as the negotiations between the project owners and the government appear to have come to a stalemate. Given my thesis had assumed that the economic stimulus from the project would have started by end of 2019/ start of 2020, that assumption has now gone out the window. Even though I still believe we will make money from Steamships over the medium term (even without these LNG projects Steamships has property development pipeline which should grow their asset base and contribute to future earnings growth), it has acted as an anchor on the overall portfolio return given its significant weighting (our paper loss as at 31 December 2019 is circa 22%). Given the uncertain nature of PNG politics, it was a mistake to have put so much weight on this investment.


Moving onto our wins, I’ve previously discussed Baby Bunting in our September 19 report and how it has greatly contributed to the returns for this financial year. I’ve got nothing to add but to reiterate that I believe Baby Bunting is fast on its way to become as dominant in its category like Bunnings is in theirs.

Another win has been Salmat. We acquired the shares at 55 cents in the last quarter of 2018. At the time, the Company had about 40 cents of cash per share and two business segments. The catalogue business was in structural decline but the managed solutions business was growing. I figured that both businesses were worth $120 million in total (60 cents per share) and that it was a possibility that the company would divest all its assets and shut shop. Therefore, at 55 cents it was trading below its intrinsic value of $1 (cash plus value of businesses) with a possible future catalyst. Fast forward to today the Company has sold both businesses for $125 million and will no longer have any operations come end of Februray 2020. I’m quietly confident that Salmat will distribute most if not all the remaining cash to shareholders over the next 6 months. Although it looked like my valuation of the business segments were spot on, in reality I overestimated the value of the catalogue business and underestimated the value of the managed solution business. Revenue for the catalogue business fell more than my forecast and due to its fixed cost its earnings declined at an even greater pace. With the conclusion of the sale of the managed services business in February 2020, the Company should have circa $174 million in cash and 20 million of franking credits. Therefore, before closure costs and other statutory expenses, it could potentially distributed 97 cents to shareholders (cash plus franking credits). With the shares trading at 81.5 cents as at 31 Dec 2019 and including dividends received, our return has been 57% over a 14 month holding period.    

We also had success in an investment which I’m not yet ready to disclose. It is a financial institution operating in a frontier market, let’s call it Bank XYZ. I was attracted to this investment because it had close to 60% market share in its home market, growing its net profit at low teens, generated returns of equity (ROE) close to 30% which is unheard of in Australia for a bank but more importantly did not earn those high returns by lending to high risk borrowers. It could make those returns because of its dominant position in its home market coupled by a lack of competition. When we made the investment, it was trading on a price earnings multiple of 6x and was paying a dividend yield of 10%. Its valuation is cheap because it is listed on its home stock market which has poor liquidity, unsophisticated group of local investors and hardly any foreign investors. Management is aware of the problems with its local stock market and have told me a future option is to get a secondary listing in a more sophisticated stock market. If that happens, then I believe that its price earnings multiple would get re-rated to 12x instead of the current 6x. While waiting for that to happen (fingers crossed), we’re getting paid a 10% dividend yield which is not bad. Even without a secondary listing and assuming the price earnings multiple of 6x remains constant, my valuation calculation suggest that this investment could yield a 400% return over a 10 year holding period (equivalent to a 22% compound annual return). We’ve own the investment for more than 18 months and our total returns (including dividends) up to 31 December 2018 is 40%.  


In my last quarterly report, I mentioned that we were casting a wider net in search of undervalued securities. This search took me to places like Hong Kong and Russia where we have made some small investments. I would like to provide a quick summary of the criteria’s used in selecting our overseas investments:

  1. I mostly limit my selection of opportunities to stocks which are profitable and in mature industries that are not in structural decline. I avoid any turnaround stories, companies with no track records of earnings and companies which are not conservatively leveraged. 
  2. Given the higher risks associated with some overseas markets and my lack of local knowledge, I try to select stocks whose valuations are so cheap that there are unavailable in Australia. As an example, I screen for companies whose market capitalisation are below their current assets (cash, stock, trade receivables) less total liabilities value (known as net nets). These net nets are so cheap that if the carrying values of the current assets approximate their market values, an investor would make money by shutting the business down. And if the carrying values of the current assets are overstated, there are usually some fixed assets (non-current assets) which could potentially be monetised at a value greater than zero (given the market assigned no value to these assets). These net nets are extremely cheap and at this point in the cycle they rarely show up on the ASX. Ones that do show up are usually high risk, overleveraged or have dodgy management etc.

A net net which we recently discovered and invested in is a company listed in Hong Kong called Chow Sang Sang Holdings International (CSS). CSS was founded in 1934 and is the 7th largest jewellery company in the world (by revenue).  Based on Deloitte’s Global Power of Luxury Goods 2019 report, the top 8 global jewellery companies are as follows:

When I was researching the industry, I was surprised that a Hong Kong company took top spot and that Hong Kong companies dominated the list. The rise of the Chinese middle class and growth in their jewellery consumption over the past two decades has made China the largest jewellery market in the world and these Hong Kong companies have exploited this trend by expanding their retail footprint into China.

CSS’ shares suffered a 30% drop between April and Oct 2019 mainly due to the protests in Hong Kong. This resulted in its market capitalisation falling below HK$6.5 billion which looked very attractive when compared to the value of its current assets less total liabilities of HK$7.3 billion. At this level it was trading at price to earnings ratio of 6x, paying a 7% dividend yield with the share price being at a 10 year low. In my opinion, CSS is an unbelievably high quality net net for the following reasons:

  1. Its brand has a long history in Hong Kong associated with quality and trust. Most Hong Kongers would know this brand and consumer trust is essential when selling expensive jewellery.
  2. Culturally the Chinese have an affinity for gold. Not as much as the Indians but gold is traditionally given at weddings and births. I believe the demand for gold jewellery is likely to increase as the Chinese middle class expands and becomes richer.   
  3. The last financial report shows CSS had cash and gold inventory worth HK$9.4 billion and debt of HK$2.2 billion compared to market capitalisation of HK$6.5 billion.
  4. The management team is made up of descendants of the company’s founder and has jewellery retailing in their DNA. They are also the largest shareholders which suggest that their interests are closely aligned with minority shareholders.

Over the past 9 years CSS has grown their footprint in China by 130%. As of June 18 they had 534 China stores vs 87 stores in other locations (HK/ Macau and Taiwan). The chart below shows revenue growth from CSS China stores vs HK/ Macau stores over the past 8 years.

Note: 2013 marked the peak of jewellery consumption in the region. Consumption subsequently slumped and reached a low in 2016 and has since started to recover.

My thesis is that even in the very unlikely event that Hong Kong doesn’t recover from recent events, over the next 5 – 10 years, revenue from China will eventually dwarf HK/ Macau as the Chinese middle class expands and becomes richer. CSS has no plans to increase their HK/ Macau footprint but is focusing on opening 50 new stores in China annually. Although the Chinese stores on a per store basis currently generate significantly less revenue than HK/ Macau stores (as they sell products at lower price point), their profit margins are higher due to the lower rent and wage cost. This investment provides a cheap entry point for exposure to the fastest growing middle class in the world.

We did make a few more smaller investments which I’m looking to buy more of and once we’ve finished buying I’ll talk about these in more detail in the next report.


The portfolio appreciated marginally by 1.4% in the December quarter. There were ups and downs in the portfolio. Given that we are nearing our second year anniversary, I’ve decided to change how we present the results and show the returns both on an annual basis and since inception.

CV Capital’s objective is to beat the benchmark over the long term (3 – 5 years) and although some of our early investments are now coming to fruition, there are still many investments which has not played out yet. Therefore, I’d prefer to form a more concrete judgement of our performance after our third year anniversary. The table below shows out performance (before taxes). Our cash position is circa 12% of the portfolio and the unit price (including taxes) as at 31 December 2019 is $1.24 (rounded).

Note 1: Total returns are calculated by including distribution, franking and other tax credits. The return calculation does not assume reinvestment of distributions.
CV Capital Uncategorized

CV Capital Sept 19 quarter update

In my last report, I said that it was a challenging period to find bargains. My definition of a bargain is a stock that has very little downside but has significant upside potential (i.e. low risks and high returns).

Traditionally, an easy way to spot a potential bargain is to look for statistically cheap stocks, these are stocks selling at low valuation benchmarks (e.g. low price to earnings or low price to book value). Although there are many statistically cheap stocks on the ASX, nowadays these tend to be companies which are: (1) operating in sunset industries with declining revenues and earnings (2) undergoing restructuring exercises (3) highly leveraged (4) facing a threat to its business. Stocks like these do not fit my definition of a bargain.

Spotting a bargain on the ASX today usually requires insight which is much harder to achieve than compared to looking for statistically cheap stocks. An example of insight was when we bought Baby Buntings last year (I discussed Baby Bunting in the 2018 annual letter). The stock was trading at around PE of 14x when we bought the shares in June 2018, which is not by any measure cheap. I had some insight into Baby Buntings as I have young kids and frequently visited the stores. Their main brick and mortar competitors were closing down which reduced future competition and at the same time Baby Buntings’ share price had fell 50% from 12 months prior due to both the general retail sector being re-rated downwards and their margins being eroded because of their competitors’ closing down sales. The combination of these factors meant that the risk reward ratio was very good and we took a large position. As of 30 September, the return from this investment is 159%, by far the highest return in the portfolio. Unfortunately, I can’t seem to find these opportunities very often.

It’s probably not that surprising that bargains are harder to spot on the ASX given where we are in the cycle and the existence of many smart investors constantly hunting for undervalued securities.

In relation to searching for opportunities, Charlie Munger has previously said “fish where the fish are” which I believe is very true. Many a time, it is not necessarily the smartest who makes a fortune but the first. Therefore, moving forward I intend to expand our search for bargains in foreign markets with less demanding valuations or where pricing is less efficient. For illustration, I list below a few valuations benchmarks across various markets around the world.

Based on just a few valuation benchmarks, these suggest that there may be better value outside of the Australian market. As an example, I have uncovered some companies listed on the Russian stock market that are trading at low single digit PE multiples with dividend yields in the teens. If we invest in markets like Russia, given the risks involved, my strategy would be to allocate no more than 10% of the portfolio to that country and spread our bets across say 10 securities so that we don’t concentrate our exposure to any single company. I see these markets as both an opportunity and also a potential substitute for cash as their dividend yields are high.

In terms of activity in the last quarter, we exited a position and we entered into a new position.

We fully exited our position in Bounty Mining with a loss of 36%. We were fortunate not to have lost more as we trimmed our position by a third earlier in the year. Coming into this investment, I already knew that mining was a risky game and we invested because I thought the odds were in favour of Bounty given the favourable circumstances. Bounty listed (IPO) in June 2018 at a price of 35 cents or a market capitalisation of circa $120 million and its key asset was the Cook Colliery, a coking coal mine under care and maintenance at the time. Bounty purchased Cook Colliery from Caledon Coal which had gone bust after investing hundreds of millions into upgrading the existing mine infrastructure. So I figured the opportunity was good because:

  1. Cook Colliery had plant and equipment worth a few hundred million which meant that there was no major capital expenditure required to restart operations.
  2. Coking coal prices were trading at $260/ton and at Bounty target production rates of 1 million ROM tonnes, the revenue potential was substantial.  
  3. The managing director at the time was a 30 year coal mining veteran who also had a significant stake in Bounty.
  4. When we invested in November 18, the share price had halved since the IPO. At 16 cents or a market capitalisation of $60 million, I felt it was very cheap relative to their potential revenue and earnings if they could achieve their target production. All that was needed was to mine the coal.  

So why didn’t this investment work out?

The main reason was the challenging mining conditions at Cook. Bounty is still only mining 600 tonnes of coal (far short of their target production) on an annualised basis and the low volumes are causing Bounty to lose money on every ton of coal mined. To fund these losses, Bounty had to borrow from their major shareholder. Although the latest June quarterly report showed that production is on an increasing trend, albeit very slowly, I decided to exit our position because the Company was running out of funds again and the latest funding proposal by the major shareholder was in the form of a convertible note where once exercised would double the ordinary share count and significantly dilute the minority shareholders. So even if Bounty succeeded in increasing production and profitability, minority shareholders were not going to see much of it.

Before this experience, my view was that mining was a very difficult sector for a value investor but now I think it is near impossible territory. The risks surrounding commodity prices, operational and geological risks mean that for an outsider it is near impossible to tell whether a margin of safety truly exists.

On a brighter note, we bought a new position in Link Administration Holdings. Link has a few business lines but the main ones are fund administration and corporate share registry services. They also own a 44% stake in PEXA which is Australia’s premier electronic lodgement network operator (ELNO) for real estate transactions. The share price fell nearly 40% from May to August, (due to a profit downgrade announced at the end of May) which is when we took a position.

When we acquired our position, the enterprise value (total value of the company including its debt) was $3.1 billion which included the value of their interest in PEXA, which was valued on the balance sheet at $715 million. Link’s core businesses in FY18 (excluding PEXA) were spitting out free cash flows (FCF or cash that is available to be paid out to shareholders) greater than $200 million a year and with 80% of the revenues being recurring in nature (due to its contractual nature), this suggested that the $200 million FCF is sustainable. I also believe the revenues from the fund administration business to be relatively sticky because of how they integrate their systems and people into their customers operations. As an example, one of their key clients AustralianSuper has 2.2 million members who are all serviced by Link. Link calculates the balances in their super accounts, handles correspondences and operates the AustralianSuper call centre. It would not be easy for AustralianSuper to migrate the systems and people to a new provider.

In addition, the fund administration and corporate share registry services businesses have large economies of scale benefits. The investment (sunk cost) into the systems and software development cost hundreds of millions and it would be very difficult for a competitor to compete on price as Link is already the market leader in fund administration and has the second largest market share (after Computershare) in corporate share registry services. This means that they can spread the sunk cost across more clients/ members than a smaller competitor or even the super fund themselves (if they wish to DIY) so in theory should enable Link to have a competitive advantage by being the lowest cost provider.

Removing PEXA’s value from Link’s enterprise value implies a $2.4 billion ($3.1b – $715m) valuation for Link’s business. For now let’s assume the value of PEXA is about right. Based on a FCF of $200 million, this implies that the market is valuing the business at a FCF multiple of 12x ($2.4b/ $200m), which is a relatively low multiple to pay considering the quality of the business. Just as a point of reference, I calculated that Computershare, a key competitor is trading at a FCF multiple of circa 24x.

PEXA is very interesting and is potentially the jewel in the crown. PEXA was formed in 2010 to fulfil the Council of Australian Governments’ initiative to deliver a single, national e-conveyancing solution for the Australian property industry. Fast forward to 2019, PEXA has invested millions to develop its platform and is currently the only licensed national ELNO. PEXA has significant market share in real estate transactions in those states where e-conveyancing has been made mandatory. The chart below shows the take up by the states for all types of property transactions.   

PEXA is currently processing 2 million (annualised basis) real estate transactions from a total market size of circa 3.5 million transactions. Once SA and QLD make e-conveyancing mandatory (which is only a matter of time), it wouldn’t surprise me if PEXA’s market share increased to over 90%. On average PEXA charges $60 per transaction so its potential future revenue from e-conveyancing services could be over $190 million. FY2019 financial information presented by Link suggest that the operating expenses are circa $100 million per annum with R&D expenses being significant (>$20 million) in FY2019. This suggests that its operating income from e-conveyancing could reach $100 million once e-conveyancing becomes mandatory across all states.

The e-conveyancing fees are mandated to escalate at inflation (CPI) and growth in construction of new properties should provide strong tailwind for revenue growth. With a largely fixed cost base future price increases should largely flow to the bottom line. In addition PEXA is also developing tools to provide add-on services such as title searches and e-contracts. This provides opportunity to further grow ancillary revenue and earnings.

Although a competitor has emerged (Sympli), I think that it will be very difficult to compete given the first mover advantage (my understanding is that Sympli’s platform is still under development), market share (PEXA already has close to 80% market share in states which have mandated e-conveyancing) and network effect that PEXA commands. The network effect is significant because at the moment, there is no interoperability between the ELNOs and PEXA already has 8,218 solicitors and 149 financial institutions as subscribers. This means that in a property transaction, both the vendor and purchaser’s solicitors have to use the same ELNO.  

PEXA’s average cost of $60 is insignificant relative to the size of a property transaction and since these fees are passed on to the solicitor’s client there is not much incentive to switch to a cheaper provider from the solicitor’s perspective. Once a solicitor learns how to use PEXA’s platform, the human condition generally dictates that he/she would be reluctant to learn a new one.

Link’s carrying value for their stake in PEXA implies a 100% value of $1.6 billion. In my opinion, this does not appear to be a stretch given the monopolistic nature of the business. One potential strategy for Link is to list PEXA in the next 2 – 3 years and by then it is possible that the business could be worth between $2 – $3 billion.

Moving onto the September 2019 quarter results.

Since June, the portfolio has appreciated by 11.2% and we have managed to recover lost ground and pull slightly ahead of the benchmark. A key reason for the satisfactory performance over the last 3 months is the appreciation in Baby Bunting’s shares and given the concentration of our portfolio, movements in our large position have a big impact on the overall returns. CV Capital’s objective is to beat the benchmark over the long term (3 – 5 years) and although we are approaching the 2nd year milestone, I am still not placing too much emphasis on the current performance. The table below shows out performance (before taxes). Our cash position is circa 21% of the portfolio. I’ve added a column to show mathematically how long it will take to double the value based on the current rate of return. It is for illustrative purposes only.

CV Capital

CV Capital June 19 quarter update

To my fellow shareholders,

You may have noticed that I have not provided an update since April and the main reason for this is that I have decided to change the reporting frequency from monthly updates to quarterly updates. Given our long term investing strategy, changes in the monthly returns really are inconsequential in the scheme of things and an overemphasis on monthly returns can be detrimental to long term returns. Our selectivity in trying to wait for all the ducks to line up before pulling the trigger also can result in long period of inactivity where I am unable to identify any opportunities, in which case there may be nothing to report. For these reasons, I decided to move to quarterly updates.

The ASX200 is having a very strong run in 2019 and our benchmark STW is up 18.6% (excl dividends) and 21.9% (including dividends, franking credits) for the calender year to June 2019. One of the hottest sectors pushing up the market is technology and in particular software as a service (SaaS) companies. In the US, the FAANG stocks (Facebook, Amazon Apple, Microsoft and Google) are amongst the most valuable companies globally and locally we have an equivalent “WAAAX” group. This group is made up of Wisetech, Afterpay, Altium, Appen and Xero. I’ve also included Nearmap to this group as it has been the top performing stock in the ASX200 index over the last 6 months to 30 June 2019.

The table below compares valuation benchmark for the FAANGS and WAAX goups (all in Australian dollars).

LTM – last twelve months

Our local WAAAX stocks clearly trump the FAANG group in terms of gains over the last 6 months and on revenue multiple basis appear to be valued much higher than their US peers. Supporters of the WAAX group will argue that their high growth rates justify these lofty valuations. Time will tell but I strongly suspect that most will not live up to the current hype.   

In terms of activity, we have not bought any new positions over the last 3 months. The main reasons are:

  1. The last two months has been busy period for me as I’ve been doing a bit of consulting. Although consulting takes up some of my investing time, I feel that it can add value as it can give me exposure to new company, industry and contacts.
  2. With the market being at an all time high, there are fewer opportunities to buy good quality companies at attractive prices. We have come across a handful of opportunities but have not pulled the trigger for one reason or another.

A good thing about low levels of activity is that we’re not constantly paying our brokers.

I’ve reported below our results for June and July.

CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on current performance given the relatively short history. The table below shows our performance (before taxes). Our cash position is circa 24% of the portfolio. Feel free to write to me about ideas as we have cash to put to work.

 15 Jan 1830 Jun 19Gross dividends (cumulative)Simple return (pre-tax)Compound return (pre-tax)
CV Capital1.001.11-10.7%7.2%
Benchmark - STW56.761.394.1715.6%10.8%

 15 Jan 1831 Jul 19Gross dividends (cumulative)Simple return (pre-tax)Compound return (pre-tax)
CV Capital1.001.15-14.7%9.3%
Benchmark - STW56.763.154.9420.1%12.2%


CV Capital

CV Capital – 30 April 2019

To my fellow shareholders,

The market continued its strong run in April. Since the beginning of the year, our benchmark (STW) has returned 17.3% inclusive of dividends and franking credits. I have to admit that I am surprised at the strength of equity markets globally given the trade hostilities between the two largest economies in the world, USA and China. I continue to believe that investors should thread carefully and err on the side of caution as I believe there are heightened risks in today’s markets.  

I believe one of the major driving factors pushing up the equity markets is the low interest rate environment. The recent proposed acquisition of Duluxgroup by Nippon is an example of this. The proposed acquisition price offered by Nippon represents approximately 25.3 times Duluxgroup’s prior year net profit after tax. Now assume Duluxgroup can achieve 3% long term net profit growth after adjusting for inflation (equivalent to about 5% nominal growth) and whilst this is lower than recent growth rates (which I believe have been boosted by the housing boom), it is still higher than 1) long term housing stock growth and 2) population growth. This means that it will take Nippon approximately 20 years to recoup the price paid (ignoring any cost savings in combining the two entities). For a company that already dominant locally and is legally restricted from using the Dulux name outside Australian and New Zealand, it is certainly a very rich valuation and I believe the availability of cheap financing from Japan is one of the factors that enabled the high price.

In relation to the fund activities, we did not buy or sell any positions in April. I did try to add to an existing position but the illiquidity in the stock meant that we were not able to buy any shares without moving the share price. I will continue to try and add to this position.   

Our portfolio was up 4.8% in March.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history. The table below shows our performance (before taxes). Our cash position is circa 23% of the portfolio.

I will be opening the fund to new subscriptions/ investments in the first week of July. The deadline for new subscriptions/ investments will be 5 July 2019. Please contact me directly if you would like to subscribe to more shares.

 15 Jan 1830 Apr 19Gross dividends
Simple return
Compound return
p.a. (pre-tax)
CV Capital1.001.14-13.6%10.4%
Benchmark - STW56.758.994.1711.4%9.0%
CV Capital

CV Capital – 31 March 2019

To my fellow shareholders,

Our accountant has finalised the FY2018 financial statements which I have sent to you by email. They have also independently calculated our pre-tax net asset per share value to be $1.0755 (Page 4) which verifies my calculation for FY2018 return of 7.6%. 

I read that Geoff Wilson, a famous Australian fund manager once described the stock market as a much better game than horse racing because one can put a bet at the start of the race and then revise the bet according to how the company is performing. One can increase the bet if the company is doing well or remove or reduce the bet if the company is faring poorly. Contrast this with horse racing where a bet cannot be changed once the race has begun. 

That analogy provides a perfect segue for why we partly sold down our position in NZME. NZME was spun off from APN News & Media in June 2016. It is a leading media company in New Zealand with two large divisions; a news print division, a radio division and a small but growing digital division. My thesis for this investment was that the sum-of-parts was more valuable than the market capitalisation and that  the decline in news print would slow, the radio division would be flat and the digital division would grow. My first and third expectations have broadly come true but the results of the radio division have been disappointing over the last two financial years. Whilst the digital division (Oneroof) shows some potential, it is still early days for this initiative. Based on the poor performance of the radio division, I think the stock is less attractive (reduced margin of safety) than when we first bought it and therefore I decided to cop a 20% loss and sell down a third of our holding to reduce our exposure. I have not completely sold out as I still believe there is a possibility that the results of radio will improve and that the digital division will gain more traction.

In my FY2018 year-end letter, I talked about Steamships Trading and how if approved, the Papua LNG project would provide a huge tailwind for Steamships and the entire PNG economy. Well a major hurdle was cleared with the signing of the Papua LNG gas agreement between PNG government and the project partners in early April. The FEED study will commence shortly and is expected to result in a final investment decision in 2020. The signing of the gas agreement was a big deal and the prospect for Steamships over a 2-3 year period is looking good.  

Our portfolio was up circa 0.9% in March. Returns are calculated once cash is received so although STW’s March quarterly dividend has been announced, it has not been accounted for as it will only be paid in April. 

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history.

The table below shows our performance (before taxes). Our cash position is circa 25% of the portfolio.

 15 Jan 1831 Mar 19Gross
Simple Return
Compound return
p.a. (pre-tax)
CV Capital1.001.088nil8.8%7.2%
Benchmark - STW56.757.583.217.2%6.1%
CV Capital

CV Capital – 28 February 2018

To my fellow shareholders,

I have recently got back to Sydney after being away for a month which is the reason for the slight delay and brevity of February’s report.

The stock market is having an amazing start to 2019. Year-to-date (1 Jan 19 to 28 Feb 19) our benchmark STW is up 11.8% erasing all the losses experienced in the last quarter of 2018.

In terms of trading activity, we have added one new position and added to an existing position in the portfolio. These investments were not substantial and we are still sitting on 25% cash weighting in our portfolio (27% cash in the last report).

Our portfolio’s return has been flat since the last report (increase of 0.2%). As a result of our monthly returns being flat and the stock market’s return surging, we are back level with the benchmark. Given CV Capital is more than a year old, I have presented returns on an annualised basis. The equivalent simple return is 7.9%.  

The financial statements for FY2018 is currently being prepared by our accountant and I expect to be able should be able to send them to all shareholders within the next few weeks.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history.

The table below shows our performance (before taxes).

 15 Jan 1828 Feb 19Gross dividendsAnnualised returns
CV Capital1.01.079nil7.0%
STW (Benchmark)56.757.843.217.0%
CV Capital

CV Capital – Year end FY2018 shareholder letter

To my fellow shareholders,

CV Capital has recently completed its inaugural year on 14 January 2019. The past 12 months has been a story of two halves for the stock market. In the first half (15 Jan – 30 Jun) the ASX 200 accumulation index (ASX 200 index including dividends) appreciated by 4.1% and in the second half (1 Jul – 14 Jan) it reversed course and depreciated by 4.7%. A combination of US-China trade war fears, rising interest rates in the US, sharp decline in FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) all contributed to the second half being disappointing one for the market.

All in all, the ASX 200 accumulation index finished down 0.8% for our financial year (15 Jan 18 – 14 Jan 19). Our benchmark (ASX:STW) did better, ahead by 0.5% over the financial year. One reason our benchmark did better than the ASX200 accumulation index is because it includes returns from franking and foreign tax credits, whereas the ASX 200 accumulation index only includes cash dividends. As CV Capital also reports franking credits as part of its returns, the STW ETF is a better yardstick than the ASX 200 accumulation index.

Before I delve into CV Capital’s performance for FY2018, I would just like to reiterate that we are investing for the long term and that the focus on 12 month returns as a measure of success is foolish. As Warren Buffett once wrote, “why should the time required for an investment to payoff synchronize precisely with the time it takes the planet to go around the sun?” 

Given this backdrop, our 12 month return was 7.6% after costs (8.2% before costs). The main expenses was compliance (tax and accounting) and travel cost for attending AGMs. I will continue to keep costs as low as possible and as the company grows its asset base, the expense ratio (expenses as a percentage of assets) will further decline.

Although we did generate excess returns of 7.1% (7.6% minus 0.5%) over the benchmark, we gave back close to 9.5% of the gains from August 2018, which is disappointing. The paper losses we suffered since August was primarily due to 1) my stupidity and 2) random market movements (in combination these spoke for 90% of the losses from August).

My stupidity

My biggest folly for the year was Donaco. Donaco is a gaming company and operates two casinos, one in Lao Cai, Vietnam and another in Poipet, Cambodia. It acquired Star Vegas (Poipet casino) in 2015 from a Thai vendor with an arrangement where the Thai vendor would manage the casino for two years and be paid a success fee upon achieving specific earnings targets.

Once two years was up, Donaco decided to take back management of Star Vegas and during that period in mid 2017, there was a falling out between Donaco and the Thai vendor.  Donaco alleged that the Thai vendor breached the non-compete agreement by operating two casinos in the Poipet area. Business at Star Vegas slumped as the Thai vendors poached the VIP junkets. Donaco then proceeded to sue the Thai vendors in Cambodia and Singapore.

We purchased the shares in Feb 2018 after the shares fell more than 50% due to the problems. The shares were cheap and I believed that the problems faced by management were surmountable. However, the extent of the trouble was not fully disclosed by the company and some of the details only emerged much later from a recent article published in the SMH, an extract which I’ve included below.  

“According to the court documents, on the afternoon of June 30, 2017, all the slot machines at Star Vegas were turned off and the gambling tables closed. Around 4pm an announcement came over the speaker system within the casino that the Star Vegas had ceased operation and all players were required to move to the “Star Paradise”, the new casino next door. The Thai vendor allegedly took computers, kitchen equipment and corralled about 550 staff to the new casino. He also told VIP junket operators he would not extend credit to their clients and could not guarantee their safety unless they started visiting Star Paradise casino instead.” – smh article on 12 Jan 2019.

Both parties are now suing each other and the biggest risk for Donaco is if the Thai vendor (as landlord) manages to terminate Donaco’s 50 year lease on the Star Vegas land. The shares were trashed as institutional investors fled given the uncertain outcome of the litigation proceedings and potential for further underhanded tactics by the Thai vendor.

At the end of the financial year, we recorded a 70% paper loss on this investment which reduced the portfolio returns since August by 2.6%.

One of the principles at CV Capital is that success is not measured by winning or losing on a single investment but rather having a robust process that identifies low risk investments with favourable wininng odds. A simple analogy is that every bet we make, we want casino odds rather that player odds. Therefore, my folly was not that we lost money on this but the fact that I was aware of the risk of operating in a frontier jurisdiction with potentially shady characters but still overlooked it.

At the end of our financial year, the market capitalisation of Donaco is slightly above $50 million. I believe that the market has more or less fully discounted the value of Star Vegas so there is no point selling at current prices (Donaco also operates the Aristo casino in Vietnam). In the event Donaco is able to get a favourable outcome in the lease arbitration case in February 2019, this would remove a huge cloud of uncertainty over its future. 

Random market movements

Our largest position in CV Capital is Schaffer Corporation. The shares were transferred into CV Capital at $11.10 per share at the beginning of the financial year. On 15 August, Schaffer reported a 174% increase in underlying profits for FY2018. Investors responded to these solid financial results by driving up the share price to $17.05 by the end of August. From September onwards, the shares then reversed course into a declining trend and by the end of our financial year the shares were trading at $13.06.

There was no fundamental reason for this decline. In fact at the AGM in mid November, the Chairman broadly confirmed that the first half results for FY2019 would be similar to the first half results for FY2018. Nonetheless, the share price still fell and is currently trading at a level lower than where the shares were trading two weeks before the company reported their strong results for FY2018, which doesn’t really make much sense to me. Since August, the decline in Schaffer’s share price has shaved off 6% gains in our portfolio.

However, I continue to believe that the shares are undervalued and have elaborated more on this below.

Top holdings

At the end of the financial year, our top 3 positions including cash accounted for 69% of the value of CV Capital.

1Schaffer Corporation18%
2Steamships Trading13%
3Baby Bunting11%

 Note 1: Returns include unrealised capital gain, dividend and franking credits

I am quietly optimistic about our three largest investments and have given a high level summary of each one below.

Schaffer Corporation

At current prices, I believe Schaffer is undervalued by the market. The entire company is being valued by the market at $181 million and it has no net debt. It has a property portfolio worth $84.6 million net of capital gains tax.

Schaffer has two operating businesses, Automotive Leather and Building Materials (which is insignificant relative to the Automotive Leather division). The Automotive Leather division reported net profit after tax of $23.7 million in FY2018 and is expected to report similar levels of profit in FY2019.  

Backing out the value of property from Schaffer’s market value, it implies that the market is valuing the Automotive Leather division at $96.4 million ($181m – $84.6m and ignoring the Building Materials division) or at a price earnings multiple of 4 times ($96.4m/ $23.7m). I believe this is a very low valuation for the Automotive Leather business given:

  1. It has secured multi-year supply contracts with Land Rover, Audi and Mercedez Benz.
  2. It has the opportunity to increase volumes after being awarded new contracts to supply leather for Mercedez’s electric cars commencing in early 2021.
  3. Similar businesses have been sold at much higher price earnings multiple. 

In addition, Schaffer owns two development sites whose which can add significant value in the medium term. The first is a large development site for industrial use in Jandakot, Perth which is adjacent to an established industrial zone with links to a major freeway. The second is a residential development site approved for high density apartments within the Cockburn coast redevelopment project (just south of Fremantle, WA). This redevelopment project will create a township for 12,000 residents over the next 20 years. I believe the development risks are relatively low given the sites are located in already established areas and without any debt associated with the sites, it has the advantage of waiting for the right market conditions to launch the developments.

For the above reasons, I believe Schaffer to be undervalued at current market prices. FY2019 dividend is forecast to be at least $0.60 per share fully franked which represents a gross dividend yield of 7.7% based on our cost per share. I’m happy to collect the dividends whilst waiting for the market to realise its intrinsic value.

 Steamships Trading

Our second largest holding is Steamships. Steamships is the leading logistics, hotel operator and property developer in PNG. Steamships is not only undervalued by the market at current levels but it also has the potential to double its earnings over the next 3-5 years.

Steamships’ market capitalisation was $580 million (14 January 2019) and it had net debt of $133 million, valuing the company at $713 million or PGK1.7 billion (exchange rate of 1A$:PGK2.4). It owns investment properties valued in the range of PGK$1.6 billion to PGK$2 billion. Therefore, the market is only placing value on its investment properties and ignoring the value of its shipping business, land transport business and hotel business.

As Steamships is one of the largest conglomerates operating in PNG, its fortunes are very much tied to PNG’s economy. Over the last few years, PNG has been in an economic slump due to low commodity prices and cuts in government spending. However, there are huge resource projects in the pipeline with the most significant being the Papua LNG project, which once developed would be PNG’s second LNG project.

The first PNG LNG project commenced construction in 2010 and was completed in 2014 at a cost of US$19 billion. This provided a massive stimulus to the economy which resulted in profits for Steamships nearly doubling from PGK96.5m in FY2009 to PGK177.7m (FY2012).

The Papua LNG project is expected to cost US$13 billion and if history is any guide, during its construction phase it should provide an economic tailwind to Steamships similar to the first LNG project. Of course there is risk that the Papua LNG project gets delayed or does not proceed. However, with the company’s market value backed by its property assets, I see this bet as heads I win and tails I don’t lose.

Baby Bunting 

Our third largest security holding at year end gave us the highest gains in FY2018 (total returns 48.6%). Baby Bunting is the leading baby product retailer in Australia. Calender year 2018 was a watershed year for Baby Bunting as many of its key competitors including Baby R Us shut shop leaving Baby Bunting as the sole national bricks and mortar baby store retailer in Australia.

Baby Bunting has doubled its store footprint in the last 5 years to 50 stores. The company has plans to expand their footprint to 80+ stores and I believe with the closing down of its key competitors it has further scope to enlarge their footprint. It has a successful store format so replicating it into new locations should generate similar success.

The biggest threat to Baby Bunting is online shopping, i.e. Amazon. However, there are still some advantages that Baby Bunting has over its online competitors, such as:

  • Baby products are an emotional purchase so new parents would want to touch and feel the product first.
  • For first time parent (I should know) buying big ticket items such as strollers and car seats is daunting mainly because of the extensive range of products with different features, types, brands etc. Having someone explain to you the differences and the pros and cons of each product is extremely helpful.
  • Proper installation of a car seat is important. Baby Bunting provides baby car seat installation service which an online retailer would not be able to provide.
  • Some products are exclusive to Baby Buntings. For example, they have their own private label products or exclusive colours on branded strollers (very important for the stroller to match mommy’s handbag!) etc.

In addition, for big ticket items such as strollers, baby seats and cots, Amazon Australia currently only has a fraction of the product range sold by Baby Bunting. It appears to me that Amazon Australia’s baby segment focuses more on smaller items whereas the bulk of Baby Bunting’s revenue come from the big ticket items such as strollers, car seats and cots.   

So I’m quite bullish about the prospects of Baby Bunting given advantages of scale in being able to negotiate prices (higher margins) or exclusive products from its suppliers, potential growth from new store rollout and population growth. In my view, Baby Bunting is on its way to becoming the “Bunnings” of the baby speciality retail segment.


Our largest holding at the moment is cash. The current levels of cash is not 100% intentional, we had two takeovers in this financial year (Watpac and SVWPA) where we generated returns between 25% to 29% on each investment and have not been able to fully redeploy the cash. Although we are not trying to time the markets and in general prefer to be fully invested at all times, I do believe there are reasons that justify a bit of caution in today’s markets.

There are risks such as Brexit, fallout from the China US trade wars, slowing economy in China, fall in Australian house prices, sell-off in the US high yield bond market etc.

So at the moment, we’re still investing but being more cautious and selective in our investments.

The remaining 31% of the portfolio is made up of 7 securities. At 14 January 2019 we have a portfolio of 10 securities.


This first year has been a learning experience for me and I think I’m a better investor now than at the same time last year. Whilst it would have been nice to report double digit returns for the first year, 12 months is still a very short period in investing and we did manage to generate some excess return which is nice. Even though we have generated excess returns of 7.1% over our benchmark, we have decided to waive the performance fees this year given it was our inaugural year and to show appreciation for the trust that you have placed in us.

I’m optimistic about the portfolio because there are some investments which have the potential to do really well in this year. We will continue to turn over as many stones as possible to look for mis-priced bets.

Thank you for entrusting us with your capital.

 15 Jan 1814 Jan 19Gross
Return (incl franking credits)
CV Capital1.001.076nil7.6%
Benchmark - STW56.753.783.2080.5%
ASX 200 accumulation index60,54560,043n/a(0.8%)