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Bought Back Wharf Holdings (WARFY)

|Includes: Wharf Holdings Ltd. ADR (WARFY)

This is an excerpt from a blog published earlier today: Sold 100 of AINV Roth IRA-Near Break-Even on Price/Bought 100 WARFY at $12.75

Before turning to my Wharf Holdings purchase, I wanted to discuss my reaction to today's FED's dovish press and data releases. Instead of rewriting a comment that I made earlier today, I will just drag and drop it here:

Investors were focused on whether the word patient would stay in the FED statement. The FED managed to remove the word and give an overall more dovish future forecast than its December release with the word patient. The dovish thrust came in three places.

1. The Fed members lowered their year end 2015 FF forecast to .625% from 1.125% and the year end 2016 forecast to 1.875% from 2.5%.

MarketWatch; Dot Diagram at page 3

2. That was consistent with the FED lowering their projections for real GDP growth and inflation:

3. The statement itself reeked of caution and slow mo FF increases:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term . . .

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

When the FED starts to raise rates, it will be cautious. Increases will be small and spaced out over time, giving the market time to adjust and for the FED to assess how the economy responds.

The downgrading of growth and inflation expectations, coupled with the caution, were all inconsistent with the underlying theme of the dollar bulls who had taken the USD up too much. How do foreign currency traders justify a 20%+ rise in the USD when the U.S. economy is slowing some, with low inflation and the FED signaling clearly that it will be more than patient and cautious with increases starting from a zero FF rate? How is that so different from Germany, Sweden, Australia or Canada?

In effect, the FED sent a signal that patience was still there even though the word was removed, and that was importantly linked to its less optimistic near term views about economic conditions.

The decline in the USD today was thus consistent with my prediction of what would happen with that word staying, made in my prior comment:

"Keeping the word patient could cause a spike in the Euro and other foreign currencies based on a crowded short Euro trade and that could negatively impact the USD."

It remains to be seen whether the second part of my prediction made above will come about, a currency induced rise in U.S. interest rates as foreigners start to sell treasuries as the USD accelerates to the downside.

It was a good day for me, as I received a lift from my foreign holdings due to the USD's decline.

Possibly, the Swiss Franc has reversed its recent downtrend against the USD:

USD/CHF 0.9837 -0.0221(-2.18%)

I am overweight in Switzerland owning NVS (a significant position), Roche, Zurich Financial, Holcim and about 1100 SWZ shares. Most of the gains today were currency related:

NVS: $100.40 Up 2.80(2.87%) 4:02PM EDT
Discussed in this Instablog:Dividend Growth Strategy: Novartis

Zurich Insurance Group Ltd (OTCQX:ZURVY) $33.16 Up 1.09 (3.40%)

Roche Holding AG (OTCQX:RHHBY)
$34.15 Up 1.15(3.48%)

Roche just went ex dividend a few days ago for its annual distribution.

Nestle (OTCPK:NSRGY) 77.97 +2.63 +3.48%

Discussed in Instablog: Added To Nestle (OTCPK:NSRGY) At $68.8

Holcim Ltd. (OTCPK:HCMLY) 15.31 Up 0.88(6.06%) (brings me back to almost even)

Bought 100 WARFY at $12.75 (see Disclaimer):

Snapshot of Trade:

I bought the USD priced ADR traded on the pink sheet exchange. Wharf Holdings Ltd. (OTCPK:WARFY) For securities traded on the pink sheet exchange, a symbol ending in "Y" indicates that the stock is an ADR. A symbol ending in "Y" denotes that the investor is buying the ordinary shares using USDs.

1 ADR= 2 Ordinary Shares

The ordinary shares closed in HK prior to placing my trade. I converted that price of HKD49.75 into $6.4084.

I multiplied that sum by 2 which gave me $12.8168 per ADR share. I then entered a limit order to buy 100 at $12.75 which was filled several hours after entry. I basically paid for the commission by entering that limit order below the then existing ask price.

HK pegs its dollar against the USD so there is only minor fluctuations in the currency conversion rate. USD/HKD Chart

It remains to be seen whether China and Hong Kong will join the currency devaluation parade. That is a risk, as noted below.

Company Description: Wharf Holdings (OTCPK:WARFY) is a Hong Kong based conglomerate operating in four business segments primarily in HK and mainland China: property investments (retail, office, apartments and hotels); property development; logistics including terminal operations; and CME (communications, media and entertainment).

The three significant properties located in Hong Kong are Harbor City, Times Square and Plaza Hollywood with Harbor City being the most important of those three developments. As of 12/31/14, Harbour City was valued by the company at HK$160B or about 38% of Wharf's assets (page 2).

About Harbor City (shopping area of 2 million square feet; 499 apartment units; and hotels-Marco Polo Hong Kong Hotel, Gateway Hotel and Price Hotel)

Times Square Hong Kong (900,000 square feet of retail space; one million square feet of grade A office space)

Plaza Hollywood

Peak Portfolio and Other HK Properties

With google maps, I can see these developments and take a tour of the neighborhood, something that I will do when buying a stock with significant real estate holdings.

Harbour City Hong Kong - Google Maps

Times Square Hong Kong - Google Maps

Plaza Hollywood Hong Kong- Google Maps

Wharf also owns property in mainland China, including International Finance Square and the Shanghai WHEELOCK SQUARE. A summary of the mainland China properties can be found here Wharf

Wharf owns 67.6% of Modern Terminals Limited, a leading operator of container terminal services in the south China region.

Wharf also has a variety of other investments in HK including, communications, media, entertainment and public transportation.

Wharf TTM P/E: 11.86

Estimated 2015 P/E: 12.3

Estimated 2015 E.P.S.: HKD 4.046 (ADR=HKD8.092)

P/B: .4935

P/S: 3.95

Dividend Yield: 3.64%

Sourced: Bloomberg (based on the HKD49.75 share price as of 3/17/15)

Another HK conglomerate, Wheelock & Co Ltd, controls Wharf. As of 6/30/14, Wheelock owned 54.8% of Wharf, up 2.66% from 12/31/13. Wheelock Group Results Highlights.pdf HK billionaire Peter Woo calls the shots at both companies.

In the past, I have owned Hutchison Whampoa that is majority owned by another conglomerate called Cheung Kong Holdings The boss for those two companies is the HK billionaire Li Ka-shing.

A few months ago Hutchison Whampoa jumped in price when Cheung Kong Holdings made an offer to acquire the shares that it did not already own. 0013.HK Interactive Stock Chart

There was some speculation that Wharf might be the next one rolled up, Wheelock Next? However, nothing has yet to materialize. I would not buy Wharf based on the possibility that Cheung Kong would acquire the remaining shares.

Some of the firm's history is described in its 2013 Annual Report.pdf.

I took a snapshot of some historical data from page 13 of that report:

Prior Trades: I have not yet lost money trading Wharf. In 2014, I flipped a 50 share lot three times:

SOLD Taxable Accounts: 50 WARFY at $14.82 (6/21/14 Post)-Bought: 50 WARFY at $13.08 (5/24/14 Post); Item # 6 Sold 50 WARFY at $14.51 (4/26/14 Post)-Item # 1 Bought 50 Wharf Holdings at $12.2 (4/1/14 Post)

On the last trade, I held onto the shares long enough to receive a semi-annual dividend payment. That distribution of HK$1.2 per share went ex-dividend on 5/26/14. Since 1 ADR=2 ordinary shares, that payment would have been HK$2.4 per ADR share or HK$120 for 50 shares.

Needless to say, the profits being generated by my Wharf trades are not going to pay for my nursing home expenses.

Dividends: Wharf has been raising the dividend some since 2010. I am showing the amounts paid per year below rather than the year in which the company attributes the dividend. It is fairly typical for foreign dividend paying companies to pay a dividend in one year and attribute that payment to profits earned in the prior year.

Annual Payment (paid in two semi-annual installments):

All Amounts are in HKDs

2014: 1.75

2013: 1.7

2012: 1.15

2011: 1.

2010: .97

2009: .8

2008: .8

2007: .8

2006: .8

2005: .72

2004: .6075

Sourced: Dividend History

The remaining dividend for 2014 was declared when Wharf announced earlier this month the final 2014 results. The final 2014 dividend will be HK$1.26 per share, payable on May 15, 2015 to stock holders on record as of 5/4/15. That is a raise from HK$1.2 paid in May 2014.

Withholding Tax: It is my understanding that Hong Kong does not withhold "taxes on dividends".

No foreign tax was withheld when I received a Wharf dividend in May 2014, but I was charged an a fee paid to the ADR custodian:

Chart: The Wharf ADR started to trade in 2010. The stock has mostly gone nowhere in that five year period, though there has been some up and down chop. The best up move started in May 2012, near $10, and peaked in a year near $19.5. WARFY Interactive Stock Chart The shares then slid to around $12 by March 2014 and been swinging up and down between $12 and $16 over the past year.

Yahoo Finance has a longer term chart for the ordinary shares going back to 2000 when the price was around HK$15: 0004.HK Interactive Stock Chart

Recent Earnings Report: The DJ News Service claimed that Wharfs 2014 net profit jumped 22%. That number includes a valuation adjustment for its properties. With that upward adjustment, net profit did rise to HK$35.93B (roughly US$4.62B) from HK$29.38 in 2013.

However, core profits without that adjustment fell by 7% to HK$10.47B or HK$3.46 per share (HK$ 6.92 for each ADR share)

I view the operating profit to be more important. The valuation adjustment for the owned properties is relevant in placing a valuation on the enterprise in case the company is sold.

Total assets as of 12/31/14 "amounted to HK$445 billion (2013:HK$415.1 billion)" (page 16).

The decline in core operating income caused a decline in the stock price.

Wharf 2014 Final Results.pdf

Rational: I am keeping this section simple and will focus just on the core reasons underlying a purchase.

Wharf is one of the HK listed companies that I will periodically buy. It has a strong presence in HK and is a play on the parabolic growth in China's middle class consumers through its extensive retail shopping properties.

There is some dividend support and recent dividend growth.

The shares had fallen by over 20% from a recent high when I made my purchase.

Based on the historical data snapshot, this firm looks like a decent long term hold, though that would not be readily apparent by looking at a five year chart.

I suspect that a good part of the sluggish retail sales growth was due, as the company notes, to the "Occupy Movement" and the strength of the HKD (pegged to the USD) against competitor's currencies. Those adverse items may prove temporary.

Risks: In addition to the disappointing earnings report, J P Morgan downgraded Wharf Holdings to underweight after that report and lowered its price target to HK$45. The focus of that downgrade appeared to be a "post-land appreciation tax EBIT (earnings before interest and tax) margin" of around 7% compared to JPM's estimated industry average of 21%. JPM also estimated that the return on assets for the China properties was around 2.1% compared to other developers covered by that firm of 1.7% to 6.3%. In other words, JPM is critical of Wharf's decision made in 2007 to become more active in mainland China. The shares had already corrected from HD$63 (1/30/15) to HD$49.75 when I made my purchase. That decline was 21.03%. So, even if JPM is right, a lot of the risk has been taken out by that decline.

Needless to say, there is an abundance of country risks associated with a property firm operating in China and Hong Kong. Who knows what the communist party may do?

There is at least a possibility that China and/or Hong Kong will devalue their currency. WSJ; Bloomberg View While I do not view that as likely, at least during the next year, a devaluation of the HKD would adversely impact the value of the ADR share price.

There are legitimate concerns about over building in mainland China.

Future Buys/Sells: Given the risks, and the dour assessment made by JPM, I am not likely to buy more than 100 shares. I will frequently control risk by limiting the amount of my exposure/investment. As shown in my trading history for this security, I flip this stock for small profits, hopefully capturing a semi-annual dividend payment here and there.

Disclosure: The author is long WARFY.

Additional disclosure: Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.