Haier is an Elite Companies AAA rated Hong Kong-listed household appliances maker that Bordia has owned for roughly two years. It is the eighth-largest holding in both his funds.
Haier develops, makes and sells appliances ranging from fridges, freezers and TVs to air conditioners and dehumidifiers; it owns the Hoover and Candy brands in select countries and in 2016 paid $5.4bn to buy GE Appliances from the US-based conglomerate.
The shares registered on the screens Pzena uses to identify the cheapest available stocks with relatively strong earnings because it was being pummelled by fears around the health of the property market in China. The assumption is that consumers buy new appliances when they move home, and so when the housing market freezes, so too do sales of new fridges and freezers.
‘We did the work,’ Bordia said. ‘And today more than half their revenues come from outside China for GE Appliances – in the US and Europe. Of the revenues that come from China, almost 80% is pure replacement demand, because all these appliances have between eight and 15 years of useful life. The real exposure to construction for Haier is about 10% of their total revenue.
‘So if China didn’t build a single new home from this point on, you have 15% downside to profitability. But if it grows at even 2% GDP growth rate, the stock is very cheap; if it grows at 4% or whatever number is coming out of China if you believe them, it is very, very cheap.’
Overseas and oversold
The story with AA-rated China Overseas Land & Investment (HK:688) is similar. The company is a residential and commercial property developer and real estate investor. The shares, also listed in Hong Kong, have lost half their value over the past five years as it was hit first by Covid, and then by the ensuing crisis in China’s property market. The company is the third-largest holding in both of Bordia’s funds.
Around 90% of revenues and 80% of its profits come from new property development, primarily residential while the commercial assets it owns are high-quality with close to 100% occupancy rates and solid returns.
As part of a deeper dive, the Pzena team also looked at the group’s portfolio region by region, identifying the parts of China to which it was particularly exposed. The main focus is on top tier cities.
By contrast, China’s property crisis has been focused on less developed cities where there had been too much construction and land purchases. In short, Bordia believes China Overseas Land & Investment has been oversold.
‘We’ve seen this so many times. When a certain sector or particular country is unloved, the stock market is indiscriminate about it. People don’t care. They think every company in the sector is untouchable,’ Bordia said.
There were other reasons that prompted the team to buy into the stock roughly three years ago. First, the company has one of the strongest balance sheets in the industry. ‘That makes them a significantly advantaged player and they can deliver properties at a much lower cost than the competition,’ Bordia said.
And second, that lower cost of funding has meant the property group has actually been a net financial beneficiary of the crisis because it has been able to snap up the choicest land banks as other businesses have become forced sellers. He described the company as a one of ‘those gems hidden in those dark spaces’.
Diesel opportunity
With AA-rated Weichai Power (CN:00338), the investment proposition is different. The Shenzen-listed company develops, makes and sells diesel engines, including for power trains and heavy commercial vehicle. It makes car parts and farm equipment and has a ‘new energy’ arm that produces drives, power systems and batteries.
Sales and profits have fallen over the past two years and operating margins are very slim. The company has no net debts and plentiful cashflows – but the shares have halved in value since 2021.
While diesel engines are on the way out over the medium to long term, Borida argues its still not clear what will replace them. The battery systems that would be required to power a very large digger or truck, say, are simply too heavy.
‘Hydrogen is considered the potential winner for large trucks. And interestingly Weichai is one of the most advanced players in that technology in China,’ Bordia said.
‘The way we think about it is the company is so deeply discounted that if you just take the cashflow of diesel engines going down every year for the next 10-12 years and then eventually going away, you’re getting paid for the business already.
‘They are the leaders in the hydrogen technology which could be the potential winner, and if that happens then the upside from that is quite humungous.’