Dear Fellow Investors and Friends

Welcome! I do appreciate you taking the time to read this.

I’m Piet Viljoen, and today is Thursday, the 15th of February, the 46th day of the year. 320 days remain until the end of the year. Yes, that’s right – this year has 366 days.

This week also marks the beginning of a new year on the Chinese calendar. This year corresponds to the fifth sign of the Chinese zodiac – the Year of the Dragon. The dragon is a symbol of good fortune and success. Let’s hope this is true; investors in the Chinese market need some good fortune.

The Year of the Dragon was also a movie about Chinese Triad gangs in New York. It was shot way back in 1985 when the Chinese were still the bad guys. Have you noticed how this has changed over the years? In many cases, American movies are now logging bigger revenues from their release in China than in North America.

Movies like “The Departed” by Martin Scorsese won the Oscar for Best Picture in 2006, and a film adaptation from Hong Kong was not screened in China after Scorsese refused to cut problematic scenes that challenged Chinese censorship. Two years later, Christopher Nolan’s “Dark Knight” was not even submitted for Chinese approval because of the presence of a dubious Chinese businessman character in the film.

It’s hard to find a Chinese bad guy in any Hollywood movie anymore.

But given how relations between the USA and China have soured, we might see a return of the stereotype. If that happens, it will confirm a big change in global geopolitics. Here’s my hot tip for the week: watch movies to discover what’s happening in the real world!

As I said, the Year of the Dragon denotes prosperity and good fortune. The RECM Foundation is hoping to bring good fortune to two Early Childhood Development Centres in the Eastern Cape. In last week’s letter, I asked you to open your wallet to help the Foundation reach its fundraising target for the cycle tour in aid of this initiative. There was some support, and we are halfway towards our target. With your help, I want to get all the way there this week.

So this week, I’m not asking; I’m telling. You can learn more about the Foundation here. Then, you can donate here.

Please be generous. Thank you!

Finally – before we get into the more stock market-specific comments, I want to share a positive experience I have had over the past few months. We have been looking for a CEO for one of the businesses in Astoria for quite a while now, and we interviewed six candidates during that time. We have found the ideal candidate now, but what I want to highlight is the absolute quality of all six candidates we spoke to. Any one of the six could have filled the position, and all of them will contribute positively to growth and job creation in South Africa; of that, I have no doubt. If the government could just step aside and let people get on with it here in South Africa, the sky would be the limit. We really do have high-quality people here.

And on that positive note, on to market news. Let’s get the bad out of the way first:

“New lows are bearish”

1. Aston Martin

Aston Martin has the undeserved reputation as “the poor man’s Ferrari” – undeserved, because the man in the street could never afford one. But we can buy the shares, which are listed on the London Stock Exchange. And if you had done that when they were first listed, you would have ended up poor. They are down over 95% from their highs post-listing:

Aston Martin chart

Except for Toyota (which I wrote about last week) and Ferrari, most car manufacturers’ share prices are doing poorly, mainly due to the threat EVs pose. Aston Martin is no exception. Like their competitors, they are struggling to lift volumes. But unlike their competitors, they have a heavily indebted balance sheet and are consistently cashflow negative.

Shortly after listing, they joined the F1 circus. And last year, former world champion Fernando Alonso joined the team. He achieved a few podium finishes, and the fan base got excited, translating into a lift in the share price – you can see it around July/August in the chart above. Fundamentally, things were just as bad for the business, so the RECM Hedge fund used this opportunity to short sell the stock. This was successfully closed out with a nice gain last week.

My take: I just don’t know – this could go to 0, or it could be a moonshot. But from here on out, I’m on the sidelines; this chart – like the company’s balance sheet – doesn’t look healthy.

P.S. We own Toyota in the MWI Global Value fund and Ferrari (indirectly via EXOR) in the cockroach fund.

2. Vodafone

Vodafone (not to be confused with Vodacom), a member of the FTSE 100 index, just hit its lowest level since 2012 this week. Historically regarded as a good dividend payer, its dividends have been declining since 2017, and they are now about half of what they were. The share price has more than tracked this dividend decline. It now yields 11,9% – in Sterling!

Vodafone has made a loss in 4 of the last 10 years, mainly due to the impairment of goodwill related to historical acquisitions. Although they are always described as non-cash losses, they do represent a write-down of cash that was expensed in previous years. But even adding back these impairments, Vodafone’s earnings have not been able to cover its dividend over the past 10 years.


The company also has extremely weak returns on capital, in the sub-5 % range. And for a capital-intensive business, that’s quite poor. No wonder the share price has been so weak:

Vodafone share price

My take: When a company in a developed market trades on a 10%-plus dividend yield, the mechanism by which a normal yield is restored is generally through the dividend being cut and not the share price increasing. Despite the attractive yield, I don’t own this share, and I am very cautious of the telecoms sector.

And now for the good:

“New highs are bullish”

1. JSE Small Cap Index

I bet you this is one you wouldn’t have guessed! This index comprises businesses that operate almost exclusively in South Africa. SA Inc writ large. Given the negativity around increased levels of blackouts, government incompetence, and infrastructure collapse, one would have thought these types of stocks would have collapsed by now. But here they are, at an all-time high:

SA small cap index

The small cap index comprises companies such as Coronation, Fortress Property, PSG Financial Services and Motus. The MWI Value fund doesn’t own any of these, as they are too “expensive” for its value bent. However, the fund owns many other small companies, which are much cheaper and less popular. Most of them are completely ignored by the market despite growing their earnings and paying dividends. Some of them are buying back their own shares hand over fist. This creates buying pressure in the absence of any other buyers.

My take: The common narrative is that South Africa is “uninvestable”. I beg to differ. There are parts of this market that are so cheap that you can’t ignore them. Just don’t put all your eggs into one basket.

2. Argent

Here’s one of those small caps no one is interested in buying…. except themselves:

Argent Industrial

Shares in issue have declined from 84 million in 2018 to 55.6 million over the past few years. And they’re still buying back more. Over the same period, the business has transformed itself via M&A. It now earns only 25% of its income from SA; the rest is mainly from the UK. Its earnings per share grew from 77c in 2018 to R4,11 in 2023. So it’s now on a P/E of 4,5 – no wonder it’s buying back shares hand over fist. This has long been a favorite of Anthony Clark, an independent small-cap analyst (You can follow him on X: @smalltalkdaily.) He expects them to earn R5 per share this year.

My take: This is a significant holding in both the MWI Value fund and the Desert Lion Capital fund (a USA-domiciled fund managed by my colleague Rudi van Niekerk). It’s a matter of time before a significant value unlock occurs here. In the meantime, we are being well rewarded for waiting.

3. Bitcoin

There are strongly held views on both sides of the fence on Bitcoin. There are those who call it a digital scam and others who call it digital gold. The fact of the matter is that regulators are increasingly accepting of it. A few weeks ago, the US financial regulations permitted, for the first time, the creation of Bitcoin ETFs. Since then, this is a major positive step toward more widespread adoption of Bitcoin as a financial asset.

And the price of Bitcoin seems to like this development:

Bitcoin share price USD

And here is the Bitcoin price in Rand. Almost R1 million per Bitcoin! Hard money anyone?

Bitcoin price ZAR

My take: I think Bitcoin has some strong use cases and will increasingly be seen as a “hard money” alternative. In the cockroach fund, I continue to have a (small) exposure to it via FRMO, the closed-end fund managed by Horizon Kinetics.

Did you know?

1. The Hong Kong property market is in trouble

If you thought the Johannesburg property market was bad, spare a thought for Hong Kong property owners. The big Hong Kong property developers like Link REIT, Wharf, Henderson and Hang Lung are all trading 40-50% lower than 5 five years ago.

During Chinese New Year, it’s customary to give and receive red envelopes (hóngbāo) with money. This practice can extend to property transactions. As a result, the Chinese New Year is normally a time when the property market is quite active. However, according to data from Hong Kong’s Midland Realty, the city’s top 10 private housing estates had no sales during the Lunar New Year holiday for the first time since records began in 2010.

My take: The Hong Kong market looks like a value investor’s dream market. But it has fundamentally changed since 1997, when it was handed back to China. It has taken a long time, but the market should now be treated as an extension of China and not as an independent territory. So, a lot of caution is warranted. As well as a wider-than-average margin of safety if you’re considering getting involved.

2. Tech companies are capital-light

Yeah, everyone knows that, right. Right? That’s why companies like Microsoft are trading on P/E’s of around 40.  They don’t use physical infrastructure.

Wait, what?

Microsoft capex

That’s a lot of capex! And growing rapidly. It’s not cheap to build those data centers to host that nebulous, intangible, and fast-growing thing called “the cloud”. So, let’s do some simple numbers – because I’m a simple guy, and I don’t understand all the technical terms that get thrown around when it comes to explaining why companies such as Microsoft will continue to dominate the market (and indices) into the distant future.

These numbers are all for 2023 and are rounded to the nearest billion or so for ease of use. In any case, what is a billion here or there for a $3 trillion dollar business?

EBIT (earnings before interest and taxes)  $90bn
Capex (investing in future earnings)  -$30bn
Interest paid  -$2bn
Taxes paid  -$20bn
Cash flows to the owners of the business:  $38bn

I might have missed a few billion here or there, but at the current share price of $410, it costs you $3 trillion dollars to earn $38bn. That represents a 1,3% free cash flow yield to the owners. Of which I am not one.

My take: Great business, lousy investment. But I’ve been saying this for a while now, so take it from whom it comes. But if I were lucky enough to have $3 trillion, I wouldn’t be buying Microsoft with it.

3. Tech companies are green

Yeah, everyone knows that, right. Right? That’s why companies like Microsoft are trading on P/E’s of around 40 – they tick all the ESG boxes.

But then I read this from the International Energy Agency during the week:

Electricity consumption from data centers, AI, and crypto could double in two years.

  • Electricity consumption from data centers, artificial intelligence and the cryptocurrency sector could double by 2026.
  • After consuming an estimated 460 terawatt-hours (TWh) globally in 2022, data centres’ total electricity consumption could reach more than 1,000 TWh in 2026.
  • This demand is equivalent to Japan’s electricity consumption.

My take: I’m sure it’s all clean wind and solar energy, though. So, it’s all good. Keep on ticking those ESG boxes.

What I’m reading

Staying with the China theme, I have been reading Dan Wang’s annual letters for a  few years now. Dan covers technology at Gavekal, a research firm to which I subscribe. In his own words, his job “means figuring out China’s technology capabilities and how quickly they’re improving. Broadly speaking, I’m trying to understand the East Asian industrialisation story: the history and the path forward. Right now, I’m a visiting scholar at the Yale Law School’s Paul Tsai China Center.”

Dan’s letters are helpful, as they give quite a good “man on the street” insight as to the goings on in China specifically and East Asia generally.

Here is the letter for 2023.

What I’m watching

I love Larry David’s sense of humor. And, like him, I also hate group activities. So this clip is the funniest thing I have seen in a long time.

What I’m listening to

1983. All the music from 1983. As some of you might know, I have been on a journey documenting the best music from each year since the year I was born, 1962. I reached 1983 this month. That was the year I came of age. I turned 21, and my father passed away. So the music holds a lot of meaning and memories. Not necessarily because it’s any good; most of it isn’t, really. But even the cheesy stuff like Wham! brings the memories flooding back – because the time was so traumatic and, in hindsight, so conducive to my growth as a person.

There was one album whose merits (or lack thereof) I remember debating with my dad. Mainly because it was such a hot mess of global influences, but also because it specifically referenced South African Mbaqanga and jive music. And this was music to which we, as white people during Apartheid, had almost no exposure. It took a British artist like Malcolm McLaren to open our ears to it.

There’s an interesting back story, which is that McLaren failed to credit a few South African artists, including Mahlatini and the Mahotella Queens. Fortunately, this was later rectified. It seems like British exploitation of the colonies didn’t stop with independence!

You can listen to the album here:

On Apple

On Spotify

The bad news (or good news, depending on your musical taste) is that I’m not quite finished with the full playlist yet. It should be ready next week, though.

So, until then – be really careful out there. Riding the Dragon is fun – but dangerous.

And donate to the Foundation!

Piet Viljoen