August 2020 Buy

A few weeks ago I ran across an article on Seeking Alpha about the Singapore Stock Exchange.  A couple of items caught my attention, namely MSCI is moving some of their indexes to the Hong Kong exchange and they are increasing their dividend.  Singapore, overall, has been cautious with Covid-19 outlining a preference for their companies to conserve cash, primarily in an abundance of caution.  For the exchange to essentially thumb their virtual noses at the government piqued my interest for further analysis.

As long as I can remember, I’ve rebelled when told I couldn’t do something.  I was certainly inquisitive, peppering my parents with how come and why nots.  This continued through my career as my employer channeled this energy into rebuilding processes and systems to take advantage of distributed networks and a newfangled thing called the internet. My life has essentially been one of figuring out the possibilities when thinking outside the box.

Which is why I set aside the Singapore research to focus on Hong Kong. Our esteemed president has now decided to play the leading role in a reprise of the 1950’s sitcom, Father Knows Best, in that a decoupling of the US and China economies is in the best interest of investors.  Sure, there have been issues – Luckin Coffee being a poster child of accounting fraud, yet what happened to the notion of personal ‘due diligence’?  What’s next … additional Bitcoin regulation?

Lest we think this is a Trump designed and engineered plan, for your consideration I present a section from Yum China’s prospectus:

 “In January 2014, the administrative judge reached an initial decision that the Chinese member firms of the “big four” accounting firms should be barred from practicing before the SEC for a period of six months. In February 2014, the accounting firms filed a petition for review of the initial decision. In February 2015, the Chinese member firms of the “big four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the “big four” accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If a firm does not follow the procedures, the SEC may impose penalties such as suspensions, or commence a new, expedited administrative proceeding against any non-compliant firm. The SEC could also restart administrative proceedings against all four firms.

        If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC, and we are unable to timely find another independent registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to delisting of our common stock from the New York Stock Exchange. Moreover, any negative news about the proceedings against these audit firms may adversely affect investor confidence in companies with substantial China based operations listed in on securities exchanges in the United States. All of these factors could materially and adversely affect the market price of our common stock and our ability to access the capital markets.”

The rightful credit this administration deserves is that they continued the pressure initiated by the Obama administration.  Whether ratcheting the rhetoric up a notch is in the best interest of investors – including the dispatch of the State Department into the SEC’s domain to warn colleges to divest – remains to be seen.  Regardless, the downside risk for owners of China securities over the next year is twofold:

  1. The potential preferential tax treatment for US or Hong Kong stocks
  2. Forcing trades to be made on foreign exchanges resulting in higher fees

With the political risks understood, the overseas news on August 25th forced my hand.  Ant Group filed its much anticipated IPO with a dual listing in Shanghai and Hong Kong.  Hopping out of bed, I placed an order to purchase Hong Kong Exchanges and Clearing Limited at $48.25.  At open, 20% of my order filled before the stock began to rise.  It closed up 2.1% for the week. 

The Hong Kong exchange, which also owns the London Metal Exchange and has a minority interest in Fusion Bank Limited, derives its revenue primarily from trading and listing fees.  A key point of my investing strategy is to buy shares of companies that are essentially toll takers – ones that extract a fee per transaction- which is why my portfolio includes the likes of Intercontinental Exchange, Nasdaq and the Toronto Stock Exchange.  With the buzz surrounding Ant Group being it may well be the largest IPO ever, imagine the fee potential!

With the stock going ex-dividend, I’m leaving my order open as the price may retreat a little next week.  If not, I’ll reassess my price point.  At least I will get a little boost in my dividends in late September.

HKXCY is an ADR that yields roughly 2.7%, payable twice per year (depending on the exchange rate) with no dividend tax withholding (US) – at least under the rules of the day.  Who knows what tomorrow will bring.

Note: Companies in my portfolio at risk: Yum China (YUMC), Swire Pacific (SWRAY), MTR Corp (MTCPY) and Hong Kong Exchange (HKXCY).

Subsequent note (Sep 4): The remaining 80% of the order executed at open at a better price point. No dividends on these additional shares until 2021.