10 Questions with Michael Fritzell

Author of the Asian Century Stocks blog

It's great to get to know you, Michael! Would love it if you could share a bit of your wisdom with us.

1. Tell us a bit about yourself, especially in the context of investing. How would you describe your style of investing, and could you give us a bit more context by contrasting it with other styles? Where does its edge come from?

Sure!

I was born in Switzerland to Swedish parents and have moved around a lot in my life. After university in Sweden I got my first job in investment banking in London in the mid-2000s. In 2009, I moved to China and have since worked for a variety of funds / family offices in Asia. Those years working for an emerging market fund manager in China were instructive to me, because I learnt to analyse equities in an environment where data is scarce and legal protections are weak. I finally moved to Singapore in 2014 to join a family office and I have lived here ever since. I spent a number of years focusing exclusively on Southeast Asian equities in Indonesia, Thailand, Vietnam, etc. so over my career I’ve had a broad exposure to equity markets throughout Asia Pacific.

Over the past ten years or so, I’ve experimented with different styles. But I’ve always been skeptical and a bit contrarian. I don’t easily buy into fancy growth stories that other people might. Generally speaking, I’m looking for undervalued companies that have unique products or services that protect them from competition. And ideally, there should be a catalyst that will cause sell-side earnings expectations to shift. I don’t like companies with debt because credit analysis is not my area of expertise.  

I don’t think I have much of an edge. All I can hope for is deep enough research to see the most obvious pitfalls. And then diversify and be disciplined about having a margin of safety to make up for the ideas that inevitably don’t work out. Another way to reduce competition is to stick to areas where few people are looking. That’s why I’m a little bit skeptical about high-flying Chinese tech stocks at the moment. There are thousands of people who are better at analysing them than I am. But not many people are paying attention to Philippine casinos or BAT Malaysia at the moment, and I hope that will give me an edge, however small.

2. What do you aim to achieve with the Asian Century Stocks (ACS) Substack – both ideologically and practically? How would you describe the value-add that ACS provides to its many readers?

The purpose of Asian Century Stocks is to help global clients with value stock idea generation in the Asia Pacific region. I want to provide context and guidance for those who are less familiar with this environment. Most of my subscribers are professional investors working for either funds or family offices. After reading my deep-dives, they might ask me a few questions and then decide on whether to have a call with management or do a company visit. So I’m really focused on helping them early on in the idea generation process.

The value-add I provide is two-fold: local knowledge and willingness to do the work. By virtue of having invested in a professional capacity in the region for over a decade I have got to know the background of management teams and the companies they run. I’ve found that if you meet a company one time you’ll be exposed to the most superficial of narratives. But if you meet them again and again, you’ll start to see behind the surface. The second type of value-add is crucial: buying a stock is easy but few do the necessary work in a disciplined fashion. It takes me at least 2-3 days to really learn a company, and then another day to write a thesis for public consumption. That’s a bare minimum. But Motley Fool or Seeking Alpha articles are unlikely to go into such depth.

3. What is your favorite stock at the moment, and why? Take as long as you need.

My favourite stock right now is Philippine casino operator Bloomberry Resorts. They own the most successful casino in Manila’s Entertainment City, sitting on a beautiful plot of land overlooking the Manila Bay.

The Philippine casino market is very young and the market is still not saturated. There are only a few integrated resorts. Meanwhile, the population is well over 100 million and unlike say Cambodia or South Korea, Bloomberry’s casinos are open to domestic audiences.

The founder of Bloomberry, Enrique Razon, is the owner of port operator International Container Terminal Services, whose share price has compounded at a +14% annual rate since he took in 1995. He has a great reputation in the Philippines for being honest, having a relentless work ethic and fair to minority shareholders.

The share price is down close to 45% since COVID-19 broke out. Their casino operations were hit hard in the second quarter of 2020 but have since recovered somewhat. Now that mRNA vaccines are starting to become more accessible even in emerging markets, I believe that even the Philippines will start to inoculate its population with mRNA vaccines. One year from now, I believe the situation will have improved a great deal.

In addition, Bloomberry is planning to build a separate integrated resort called Solaire North in Quezon City in the northern part of Metro Manila. There is no other casino in that population catchment area, so Bloomberry will have the market pretty much to itself. Bloomberry is also planning to build a cruise terminal right next to its main Solaire casino in Entertainment City. I think that cruise terminal is going to help bring in cruise customers from overseas to the casino.

There are a few risks as well. Bloomberry has been in arbitration proceedings with a former partner since 2013. In a worst-case scenario, they will have to pay out damages of almost PHP 5 billion, but that’s just a few percent of my estimated intrinsic value. The lawsuit is a little bit more complex than that, but definitely not a deal-breaker in my view. Another risk is that Chinese outbound tourism remains continues to be weak. But I believe that Enrique Razon is well-placed to deal with these short-term challenges and that Bloomberry will come out strong out the crisis. The balance sheet is robust and the company should be able to withstand even an extended downturn.

Right now, the P/E multiple against 2019 earnings is about 7x. So if you believe in a full recovery from COVID, the stock will easily double – if not more. Given that the underlying growth momentum in the Philippine casino market is 15-20% and Bloomberry has several growth levers, I believe that the P/E multiple should probably end up closer to 20x. I’d be surprised if the stock doesn’t double into a recovery from COVID-19.

4. In a previous interview, you discussed your criteria when picking stocks. However I’m more interested in inverting that question – especially in the context of investing in Asia, where corporate governance tends to be… less intense. What do you actively look out for to avoid when investing in companies?

A few months ago, I wrote a free article called “Simple tricks to spot fraud”, available here. There are many tricks of course, but the aspect I take most seriously is the corporate structure and related party transactions. If a sister company or the parent company involved in the same line of business as the ListCo, then you’ll want to check exactly how the companies are related. In these situations, there is always a risk that costs are being transferred to the non-consolidated entity, thus creating fake, illusory earnings in the ListCo that the company can then use to raise further capital.

Companies from Fujian tend to have a higher rate of fraud than other companies in China. Exactly why, I’m not sure. I’m careful with Internet stocks because online activity can easily be faked. And you’ll want to be careful with private Chinese companies because they typically don’t have the same access to borrowing as Chinese SOEs do and their accounting also tends to be less reliable.

A few simple tricks that any investor can use:

  • Check the share count of the company and see the share count is flat or rising. If it’s rising consistently, check where those shares came from: did insiders purchase them through private placements or were all shareholders able to participate on an equal basis (via a rights issue)?

  • Check the company’s operating margins vs peers over say a 10-year period. If the operating margin is consistently higher, try to figure out what kind of competitive advantage could explain the company’s higher margins.

  • Also check the return on capital. Companies who fake earnings tend to end up with fast-growing balance sheets (especially in line items such as long-term receivables, goodwill, agricultural land, etc) causing return on capital to fall to low levels. Single-digit ROIC could be a warning sign. The next step will be to compare operating cash flow – D&A with net profit. You’ll want to avoid companies with operating cash flows consistently weaker than reported net profit. That could be a sign of non-standard revenue recognition.

  • Lastly, it’s great if a company is buying back shares or if insiders are buying shares. That gives you some comfort that the company is not a total fraud, because intelligent insiders would never waste their cash buying shares that they think are worthless.

5. You appear to know a great deal about macroeconomics, which I feel is important to understand well when investing across such a broad investment landscape. You’ve talked a lot about China in the previous interview, so I’d like to take the opportunity to discuss other countries. What are your thoughts about current macroeconomic conditions in Singapore, Malaysia, Vietnam and Indonesia? Feel free to go on a tangent.

I know a little bit, I guess. I’ve mostly been inspired by economists such as Jonathan Anderson at Emerging Advisors, Joe Studwell, Michael Pettis, Richard Koo and Hyman Minsky.

I think the lifeblood of an economy is private enterprise. And in emerging markets, export companies tend to be the most important for economic growth. Without rising exports it’s hard to grow total factor productivity, which is what’s needed for incomes to rise sustainably. I think every country is a different phase of their credit cycle and cyclicality can cause growth to fluctuate. But in the long-run, exports are what drives productivity and middle-class consumption.

From this vantage point, I think economic growth in Southeast Asia has been relatively slow up until today. Malaysia and Indonesia are net commodity exporters. And they’ve been hit by falling commodity prices from 2010 to 2019. Recently, commodity exporting countries have benefitted from higher commodity prices, which themselves are a function of pandemic-related spending and Chinese stockpiling. But I doubt that the price increases we have seen will be sustained. China’s pace of housing construction is still excessive and that will weigh on demand for industrial commodities for decades to come. The outlook for oil is probably somewhat better.

I’m often surprised at how many strong companies there are in Malaysia. Disclosures are great and management teams are often competent. There is rent-seeking, just like in any other Southeast Asian market. But the economy seems a lot more dynamic than that of many other countries in the region. It’s possible that Malaysia will be one of the main beneficiaries of companies moving their manufacturing out of China to become less dependent on a single country.

Indonesia is currently undertaking reforms such as the Omnibus law, that is meant to boost FDI in the country. If that helps boost manufacturing exports, that would be a cause for optimism. But I’ve invested long-enough in Indonesia to be a little bit skeptical that the omnibus law will make a difference. There are many impediments to manufacturing exports, including high labour costs, poor infrastructure and government inertia. Vested interests tend to defend their domains.

The outlook for Vietnamese growth seems excellent to me. All one has to do is to observe the growth in light manufacturing exports over the past ten years: the chart goes from the lower left to the top right. Samsung moved its entire smartphone assembly business from China to Vietnam. Many others will follow suit, including Japanese and Taiwanese companies. The Vietnamese population is well-educated and the infrastructure is improving fast. I’m just a little bit careful about corporate governance in Vietnam. It reminds me very much of an early-day China.

In terms of their credit cycles, it seem like Indonesia is right now entering a down cycle, whereas Malaysia pre-pandemic was already on its way out of its recession. Vietnam seems closer to overheating. Certainly a lot closer to overheating than it was when I started paying attention to Vietnamese stocks around 2012.

6. They say that ASEAN is poised to become the next China. What are your views on this – and in the infamous words of Edwards Deming, is there any interesting selected data that you’d like to share with us?

Take total factory productivity for each of the major countries in ASEAN, for example. Look at Indonesia. While everyone has a smartphone today, it’s not so clear that productivity per capita (adjusting for capital employed) has risen over the past half century.

Conversely, in China total factory productivity has risen quite a bit since the 1980s and stalled just more recently from 2014 onwards. But over the past fifty years, several East Asian economies have bridged the gap with the major developed economies.

There are other metrics that you can also use to measure growth: for example USD manufacturing exports, incremental capital-output ratios (ICOR) and relative income levels vs developed markets in USD terms. With regards to the latter indicator, it’s clear that ASEAN Countries have become wealthier in relative terms over the past half century, but at a slower pace than in East Asia. I wrote an article about this very subject here.

That said, I’m in the camp that thinks economic growth doesn’t necessarily matter for investors. Asset prices move around a lot more than a few percent per year, and ultimately that’s where the opportunity is. The most important factor is the quality of the companies you’re investing in, how fast they’re able to compound your capital and at what price you’re buying them at.

China’s stock market hasn’t actually done very well over the past 20 years, despite their rapid growth. The reason seems to be large index exposure to banks and weak return on capital in the state-owned enterprises that have long dominated the indices. Private companies have done better, but there weren’t many private companies listed in China 20 years ago. And today, I believe that many of them fake their accounting.

I prefer to invest in a country with a rule of law (e.g. Malaysia or Singapore). But I don’t pay too much attention to the prospects for country-wide economic growth. I’m more interested in specific themes, such as Chinese outbound tourism or higher healthcare spending from an aging population. Rising middle class consumption from a manufacturing export boom is just another trend to me.

7. Now for the obligatory question about COVID-19: what are your thoughts on the pandemic at this juncture, in the context of investment strategy? Any relevant tips that you’re applying yourself which you’d like to share with us?

I think mRNA vaccines work and that we’ll eventually learn to live with the virus – just like the world has learnt to live with HIV. Short-term, there is a problem with Delta variant (B.1.617.2) causing symptomatic infections in children 10 years and older. That’s an issue because children have generally not been vaccinated. And it’s unclear whether children with symptoms will develop long-term damage from COVID, just like adults with symptomatic infection in many cases ended up with long-term negative effects (the phenomenon that’s now called “long-COVID”). So I suspect we’ll have another six months of lock-downs until mRNA childhood vaccines have gone through clinical trials. Once these vaccines become commercialised, I believe that new COVID-19 case counts will drop asymptotically towards zero.

The good news is that US and European vaccination is at an advanced stage and that mRNA vaccine exports out of these regions will boom in the next few months. Even emerging markets will have decent access to mRNA vaccines by the end of the year. So given how attractive the prices are for many emerging market stocks - including the Philippines, Indonesia and Malaysia – I think it’s an excellent time to buy COVID-19 recovery stocks.

My main focus has been solid franchises within the tourism, transport, entertainment, retail and restaurant industries. I’ve recommended Malaysia Airports, SBS Transit in Singapore, Genki Sushi in Japan, online job board En-Japan, Ichigo Hotel REIT, Major Cineplex and karaoke bar operator Koshidaka. If the region recovers from COVID-19 and cross-border travel opens up again, I expect most of these stocks to do well.

8. You seem to be a big fan of the ‘Value Investing’ cohort – Buffett, Graham, Lynch, Soros, etc. Can you share a bit of your love for it with us? Why do you think it is special, what are the most important things people should take away from it, and what are some misconceptions about it that you’d like to clear up?

Yes, absolutely. I think value investing is the way to go for the vast majority of investors.

People have come up with a multitude of strategies to beat the market. Most of them are a variation of the theme: predict where the stock price will go and hope to sell to less-informed buyers. In many cases, these investors use leverage, don’t know much about the stocks they own and try to predict the next step based on fairly vague narratives and data. I can’t think of any successful speculator other than perhaps George Soros. Whereas if you read John Train’s book, for example, you’ll find plenty of examples of highly successful investors who used a value approach to make money decade after decade.

If you buy a good and honest company with no debt at a low price there is literally no way you can lose. If you’ve done your homework, then you’ll find that earnings are likely to grow over time. The multiple is likely to expand. The company is unlikely to go bankrupt. And you’re not going to get a margin call - if the stock price falls you can just buy more.

I’m sure that some people are able to make money in the speculation game, for example the likes of Renaissance Capital. But it’s exceedingly difficult. They’re all competing against each other. And if you’re using leverage there is no way of guaranteeing that you won’t be wiped out. Imagine living with that fear – day in and day out. For the majority of people, I think you’re better off just avoiding leverage and stick to buying solid companies at great prices.

It takes some fortitude to hold unpopular stocks until they recover, but I think it’s a winning strategy over the long-run.

9. In the little time I’ve know you, you come across as someone incredibly well-read. Anything you’d like to wax philosophical about? History? Life? Love?

Thanks! And interesting question. I do have interests other than investing. Most of what I read is history. But also anything from psychology to social sciences.

I went on an Alfred Adler binge during the pandemic last year, going through everything he wrote in the early 20th century. He was an Austrian psychologist focusing on developmental issues. His writing really resonated with me because his writing is really prescriptive: it provides guidelines for how to live your life in harmony with others. Another reason I read his books is because I have a young son and lately I’m thinking about how I want to raise him – what values I want to impart to him.

Adler argued that ego is behind many of our behaviours. We might act in a certain way to confirm beliefs about our own superiority. Fearing rejection and a fragile ego, we might avoid taking risks that make sense from a rational point of view. Or blame external factors for anything that might happen to us. It comes back to our egos.

Adler would recommend to embrace reality and confront challenges head-on. A feeling of inferiority is normal and a healthy impetus for us to strive to become better. Further, he’d recommend us to compare ourselves to an ideal version of ourselves instead of comparing ourselves to others. Accepting yourself as 60% and think how you can get to 100%.

The problem with comparing yourself to others is that you’ll feel every relationship is a competition. Adler argued that it’s better to be self-reliant and not intrude on what should properly be seen as someone else’s responsibility. There is no point of judging other people. No point of praising them or rebuking them. Empathy and understanding are both healthy parts of a relationship but judging others based on our own value system is not. Each person has to find his or her own happiness.

Further, Adler thought that the goal of life is a community feeling – a feeling of contributing to the community. Your career, your studies, your aspirations are just side shows. What ultimately provides meaning in your life is living in a tight-knit community and feeling that you’re an indispensable part of it. That point of view really resonated with me and corresponds well with what I have personally experienced in life.

10. What are your deepest concerns about the human race (aside from the pandemic), and how do you think you’re making the world a better place? What would you like to leave behind for your son and his generation after you’re gone?

That’s a deep question. The most important concern I have a gradual relaxation of the rule of law in countries throughout Asia. We’ve inherited a great system of rules and regulations created by legislatures that in theory should create predictability and an equal playing field for all citizens. But over the past ten years, certain countries are actively trying to destroy rules-based societies in favour of autocracy. There’s a risk that checks-and-balances lose their relevance. Without rule of law, nothing stops a government from releasing bioweapons, modifying human genes, getting adversaries hooked on drugs, developing nuclear weapons, etc. There are not many people actively defending the rules-based-orders today. But it’s the only way to stop madmen such as Stalin from emerging yet again. I fear that what we saw in Myanmar may only be the beginning. The trend seems to be towards authoritarian rule and proponents of the rules-based order and so-called human rights are unfortunately few and far between.

11. How do you feel about the quote, “Rules are meant to be broken”?

In terms of co-existing peacefully with our fellow men, I think there are certain rules that we should all agree on. Not stealing, not inflicting harm upon others, etc. Without basic rules of behaviour, society will devolve into anarchy. Organised religion can help us maintain such peace. Or just a strong common belief system that may or may not be rooted in religion.

When it comes to competitive endeavours, however, I think you’ll want to stay more flexible. Competitive sports include dating, investing, searching for an apartment, finding a job, entrepreneurship, etc. Since you’re forced to outsmart other people, following the same rules as everybody else is bound to fail. So if by saying “rules are meant to be broken” you’re referring to the rules that everybody else is following, then I wholeheartedly agree. In competitive sports, you have to be contrarian and ahead of the curve. Breaking the rules will then be a way to outsmart your peers.

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