My New Hobby

From: Derek Hillen
Sent: Tuesday, October 18, 2011 3:50 PM

To: Derek Hillen
Subject: My New Hobby


“Books are for people who wish they were somewhere else.”  - Mark Twain

As I write this Hong Kong is tanking, down 800 points. China is off 2.3% and we don’t have any good news to hang on to. So sell! Tomorrow, maybe Buy! Such is the volatility of the market as investment horizons shrink down to a week. At most. Clients I speak to are tired of being slapped around like a red-haired stepchild – by Mr. Market, not Mr. Hillen. The environment reminds me of when I used to work in Alaska, “The Last Frontier,” the land of flannel and very few women. (This was the reason I probably left). But I noticed how hard everyone worked there, even when it rains. In California where I grew up, if it rained you cancelled all outdoor activity and went inside, like a little girl. Real Alaskans work outside no matter what the weather because waiting for a sunny day they wouldn’t get a damn thing done (even with 18 hour daylight in summer). It is raining in equity markets worldwide but we just have to pick up our petticoats, go back outside and get on with it. I still think it will rain some more but we are still working at ideas here at Mirae and trying to service a very soggy and sullen client base.

Difficult times are good times to take stock (or sell stock) and pick up new interests such as herpetology, or colonic irrigation, or ballroom dancing. Maybe join a book club.


Occupy Wall Street” has gone global and we had our own mini-protest here in Hong Kong. Activist demands are unclear but strident and I sympathize. Yesterday I saw four tents pitched under the HSBC Building – ground zero for capitalism. Today, that number is closer to 12. Here is a photo taken with my iPhone a couple of hours ago:


Keith Yeung, head of property research and a multi-decade observer of Hong Kong’s property market, is beginning to notice something interesting at the edges of the real estate game here. Yes, we are negative on the sector and believe residential prices will fall 12% 2H this year and another 15% next year. Rents haven’t been impacted yet but that is, I hope, coming. (And Keith, why don’t you tell my freakin’ landlord? Our two-year lease is up and he wants to raise our rent –> 44%! It wasn’t like we were getting a deal to start with either). Anyway, Keith is hearing that mainland Chinese investors are starting to unload their property portfolios here due to tight money back at home. Yields here are 2%, expectations of price appreciation are diminishing and they can lend the cash out in the local curb market for 30-50% annualized returns. One of the main reasons property prices have soared is because of expected inflows (“they are buying everything”) and real inflows from China: 10% of total transactions H1 11, vs. 4% four years ago, and 15.4% in terms of consideration. At the high end of the market they reportedly bought up to 1/3 of recent offerings. Hard numbers are impossible to come by because mainland property investors don’t want to advertise what they are doing, naturally, and a lot of transactions are through local companies or offshore entities but mainland money it is. Pull this out or even hint that it is leaving Hong Kong and we could easily see a correction in property prices. This story we are following closely and for now, we maintain our Hold recommendation on Sun Hung Kai (16 HK), Henderson (12 HK) and Sino Land (83 HK). See attached note, “Smart Money.”


Bored with PetroChina (857 HK) and Sinopec (386 HK)? Gordon Kwan, head of energy research, has an interesting take on potential M&A targets on the global oil scene. With rising structural energy demand, flat domestic production and ever more volatility in the Middle East, Asian governments have been pushing energy security higher up the priority list. Overseas acquisitions not only increase resources but can also provide extraction technology countries, such as China and India, lack. Sour memories of CNOOC’s failed bid for Unocal in the US six years ago means we will see smaller deals like the recently announced acquisition of Daylight Energy (DNE CN) by Sinopec. Gordon and team screened for mid cap companies with existing proven oil and gas reserves that are EBITDA positive. His top picks are Salamander Energy (SMDR LN), Gulfsands Petro (GPX LN) and Southern Pacific Resource (STP CN). See attached note.


Fed up with markets, I joined a book club. Here is what they are sending me.

I started on this:

But put it down for this:

And threw that away for this:


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA


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