Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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In his August 2012 Money Magazine article Roger discusses how company weighting in Australian market indices distort the overall performance. Read here.
Earlier this year we had the opportunity to visit China Rongsheng Heavy Industries, one of China’s leading shipbuilding companies. Rhongsheng was founded in 2005 and floated in November 2010 on the back of winning an enormous order from Vale to build twelve ore carrier vessels each 360 metres long, 65 metres wide and 30.4 metres deep with a deadweight tonnage of 400,000. The ambitious founder, 46% shareholder and Chairman, Zhang Zhi Rong, was desperate to challenge the global leaders, South Korean based, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine.
Back in 2008, Rongsheng represented all that is good and bad in China. With Government support, Chinese corporate support, recently announced offshore diversification and the cost of shipping dry goods such as grain, coal and iron-ore at US$55,000 per day, the outlook was superb.
Let’s fast forward to July 2012 and the price of Rhongsheng’ shares have declined from HK$8 to HK$1. For the six months to June 2012, China’s 1,536 shipyards have announced a combined 50% decline in orders. The cost of shipping dry goods has crashed to sub US$10,000 per day (-82%), and Rhongsheng is experiencing a number of operational and credibility issues.
With the global slump in ship orders caused by a glut of vessels, Rongsheng is trying to diversify from shipbuilding and earlier this year they won a contract to build an offshore support vessel for CNOOC, one of China’s largest government controlled oil production and exploration companies.
Last week CNOOC announced a US$15 billion offer to acquire Nexen, a US listed Canadian based oil company. Nexen rose 52% on the announcement. The US Securities and Exchange Commission (SEC) just announced various traders had stockpiled shares of Nexen in the days leading up to the takeover bid. The SEC has claimed US$13m of illegal profit was realized and the finger is being firmly pointed to a Hong Kong based company controlled by none other than Zhang Zhi Rong.
The development of China has seen some extraordinary national champions in industries like ship building, however we wonder how many of these companies will ultimately become global champions. With several front page newspaper disasters associated with misfeasance, we continue to be wary of China’s corporate governance record.
In the meantime we believe a lot of companies in commoditized industries like shipbuilding, steelmaking and cement production are likely use their upcoming results presentation as an avenue to downgrade their outlook.
The Woolworths Food and Liquor Division reported 3.8% sales growth to $37.5 billion for the year to June 2012. Same store sales growth increased by 1.3% for the year. For the June Quarter, sales growth was 3.8%, year on year, while same stores sales grew by 1.3%.
In comparison, Coles reported sales growth of 6.1% to $33.7b and same store sales growth of 3.7%. For the June Quarter, sales growth was 4.6%, year on year, while same store sales grew by 3.0%.
Both organisations reported price deflation of approximately 4% in fresh produce, and this masked both their strong volume growth and the increasing consolidation of the Australian supermarket industry.
The Montgomery (Private) Fund is a shareholder in Woolworths, and likes its 26% average return on equity.
In late 2008 Steve Keen, Associate Professor of Economics and Finance at the University of Western Sydney had a bet with Rory Robertson, who at the time was Interest Rate Strategist at Macquarie Bank. The bet was Australian housing prices would decline by 40% in two years, and the loser would walk 200km from Canberra to Mt Kosciuszko. Despite losing the bet, Steve Keen still has his supporters. Last week, Dean Baker the co-founder of US based the Centre for Economic and and Policy Research said the housing bubbles of the United Kingdom, Canada and Australia, are larger, relative to the size of their economies, than the one that collapsed and wrecked the US economy. In each county, there has been a sharp increase in the sale price of homes that has not been matched by a corresponding increase in rents. In Australia’s case, Baker claims house prices rose by more than 80 per cent between 2001 and 2009, a period when rents rose by roughly 30%. Baker argues the price of the median house in Australia is 225 per cent of the median house in the US. Given that wages in the US are higher it is difficult to see how this huge gap in house prices can make sense, said Baker.
And what are Roger Montgomery’s Value.able Insights into the latest market developments? Learn more in this edition of ABC1’s “Inside Business” broadcast 29 July 2012. Read/Watch here.
Shareholders in the 135 year old London Metal Exchange (“LME”) voted overnight to sell to Hong Kong Exchanges & Clearing for US$2.1 billion. The LME will help the HKEx, whose focus has until now been almost exclusively on equity markets, challenge the Chicago Metals Exchange (CME) and the Intercontinental Exchange (ICE) for dominance in commodity markets.
The CME and ICE and the NYSE Euronext were all trying to acquire the LME in a wave of consolidation that has swept the global exchanges industry.
The concept of traders gathering in the coffee houses in the City of London (in 1877) with an open outcry system is rapidly being taken over by 24 hour electronic trading!
We are delighted to note that the ASX has made significant improvements to its original proposal to change the capital raising rules for ASX listed companies.
The ASX’s original “placement mandate” would have authorised boards of sub-$300 million companies to issue up to 25% of equity in 12 months on a non-pro rata basis. We don’t need to explain the dilutionary impact that could have on smaller shareholders.
The following table outlines elements of the ASX’s new proposal and why I agree that the changes represent an improvement.
The changes have received regulatory approval and will be effective immediately.
Just watch out for companies seeking general approval to raise the money for no stated commercial purpose. If they seek a general approval I would ‘generally’ vote against it.
