Cheah Cheng Hye plucks a head of lettuce from a box that has just been delivered to his 18th-floor office in Hong Kong’s Lippo Center. He holds it up to a fluorescent light for closer inspection, then does the same with a pepper, green beans and a Chinese cabbage. Cheah squints at the cabbage and thumps it with his forefinger. “As far as I can see, this isn’t fake,” he says with a laugh.
Cheah has become China’s foremost value investor because he examines companies as carefully as he does fresh produce. These vegetables, as it happens, come courtesy of Chaoda Modern Agriculture Holdings, a company that Cheah’s Value Partners bought a chunk of this June, after the fruit and vegetable supplier’s share price had tumbled 50 percent in four months. The stock has more than doubled.
Cheah’s willingness to ignore market sentiment and home in on underlying value -- down to thumping the cabbage -- has made the 49-year-old former Asian Wall Street Journal reporter “China’s Warren Buffett,” in the words of a rival fund manager. Cheah insists he’s too old -- and too poor -- to emerge as China’s Buffett, but like the American billionaire investor, he can move a stock just by taking a position in it. On the day reports surfaced of Cheah’s purchase of Chaoda shares, the stock surged 24 percent.
“Cheah’s an icon for value investors in second- and third-tier stocks in Hong Kong,” says Herbert Lau Chung-kwan, head of research at local broker Celestial Asia Securities Holdings. “Every time he goes into a share, it gets a bit of a rerating, and it also frequently leads to a premium on that stock. This is a new and quite unique phenomenon in Hong Kong.”
Buffett might well envy Cheah’s recent results. Over the past three years through November 7, his flagship Value Partners A Fund has shot up 189.3 percent, or 42.5 percent a year on average, according to Standard & Poor’s. Its closest competitor, Parvest China C Fund, run by BNP Paribas Asset Management, appreciated 149.9 percent during the same period, or an average of about 35.7 percent annually.
Value Partners’ impressive numbers have drawn money from institutions and individuals throughout Asia, the U.S. and Europe. The A Fund’s assets have increased nearly 12-fold in the past five years, to $431 million. In all, Value Partners now manages $1.5 billion in five funds and six discretionary portfolios, making it Hong Kong’s largest Asian-owned fund manager.
In fact, the biggest challenge facing the firm may be its very success. Cheah and Value Partners’ co-founder, V-Nee Yeh, the scion of a wealthy Hong Kong family and a former investment banker who’s every bit as ardent a value investor as Cheah, worried that they couldn’t remain faithful to their value investing principles and absorb still more cash. So in July they closed Value Partners A Fund.
The fund is already starting to show value-related strains: The price-earnings ratio of its typical holding hit 11.8 in September, up sharply from 4.4 in 1999; the average price-to-book ratio surged from 0.6 to 1.6. The well-known, widely followed Chinese stocks that Cheah and Yeh always vowed to keep to less than 20 percent of the portfolio by value now account for 30 percent. “We have more or less reached the end of the road in terms of fund size for China,” sighs Cheah.
Cheah’s decision to invest in vegetable-grower Chaoda is a good illustration of his methodology -- and also hints at why he may have trouble sustaining Value Partners’ extraordinary momentum. In October 2002, PricewaterhouseCoopers refused to sign off on Chaoda’s accounts and forced the company to increase its tax provisions. Subsequent speculation about the company’s health drove its Hong Konglisted shares down 51 percent in just two days. In the ensuing months the company saw its stock slide further. Then, in March of this year, Chaoda reported that its profits fell in 2002’s second half, and the stock dropped a further 35 percent.
Cheah decided Chaoda merited a closer look. In June he spent three days at one of its farms in Fujian. Cheah inspected every facet of the operation, from planting seeds to shipping produce. He reviewed invoices. He examined Chaoda’s primitive information system. And he dispatched an analyst to tour produce markets to gather intelligence from Chaoda customers.
Finally, Cheah met with Chaoda’s senior and middle managers to, as he explains, “touch base with the human reality.” Chaoda founder and chairman Kwok Ho, a former military man, gives long, passionate lectures extolling the virtues of communism. Yet Cheah discerned that he “had great pride in his company.” Perhaps most important, Kwok and his top managers held stock options that were underwater, so they had incentive to improve the share price.
Cheah’s visit persuaded him that the company was a growing enterprise -- and vastly undervalued. So he bought more than 3 percent of Chaoda’s shares and, following a second farm visit this August, continued buying, bringing his holdings to HK$221.5 million ($28.39 million), or 5.7 percent of Chaoda -- and 1.9 percent of the A Fund. The company’s earnings rose 16 percent in 2003’s first half, and no further damaging reports emerged. Cheah’s initial stake more than doubled in value in five months.
Of course, opportunities like Chaoda are a lot rarer than Chinese cabbages. Now that Value Partners has shut its A Fund, what will it do for an encore? Cheah points out that because his firm is privately held, it doesn’t have to contend with “annoying” shareholders pushing for rapid asset growth at any cost. Nevertheless, Value Partners is experimenting with a half dozen new products that apply the firm’s value investing skills and recognizable brand name to other asset classes and to counries other than China. The 27-person firm already operates a fund that invests in shares denominated in U.S. or Hong Kong dollars and listed in Shanghai and Shenzhen (B shares) as well as shares of central-government-owned companies that are incorporated in China and listed in Hong Kong (H shares). It also manages Canadian insurer Manulife Financial’s $262 million GF China Value Fund and discretionary portfolios.
In September 2002 the firm launched the Value Partners High-Dividend Stocks Fund to invest in income-producing equity and debt securities across Asia; it has appreciated by a spectacular 68 percent since inception through September and now has $37.6 million in assets. A second venture, the Asia Discovery Fund, is a distressed-debt vehicle that has thus far focused mostly on Thailand and Indonesia; it has appreciated by 40 percent since its launch in April 2002 and 26 percent this year through September. This year’s gain compares favorably with the 17.6 percent increase in the MSCI Far East equity index. The Discovery Fund’s assets under management: $95 million. And in October, Value Partners began a trial of its first hedge fund, which uses the same investment guidelines as the A Fund but can also short stocks.
Still in the planning stages: a private equity portfolio built off a small fund Yeh has run for years; a joint venture to create an Asian real estate investment trust in conjunction with a property management company; and -- perhaps -- a Tokyo branch that would use the value approach to select Japanese stocks.
Cheah and Yeh, however, are determined not to let the diversification drive disrupt the firm’s value-grounded culture. “We are like a car company that is managed by product engineers rather than accountants,” says Cheah. “The only thing we are sure of is that this will remain a company run by people who are passionate about research and investing. We want the world to recognize us as one of the foremost proponents of value investing. Period.”
As it is, the firm is something of a value seminary. “Through working together on company visits and case studies, the knowledge and techniques are gradually absorbed,” says Cheah, explaining how he and Yeh inculcate the value gospel to Value Partners’ four fund managers and three analysts. “We also have numerous meetings in our office to discuss our corporate values and mission and analyze our mistakes.” Adds Yeh: “Everybody believes in value investing, even the back-office staff. It’s an intangible, but it’s the crux of our success. This firm has been stress-tested down to every single employee.” In the spirit of true believers, employees have collectively invested more than $30 million of their own money -- $6.4 million of it coming from Cheah -- in the firm’s funds. “We eat our own cooking,” says Cheah.
He and Yeh may have a bigger problem than preserving the value ethos, though. One former fund manager with a major international firm wonders if Value Partners has embarked on too much diversification too fast. “Six new products?” he asks. “It sounds rather precipitate. It’s very ambitious going into so many new products and markets almost simultaneously.”
Cheah disputes this worry. He says Value Partners is proceeding with caution and will not launch new products “until we reach a minimum comfort level.”
One European consultant sees both pros and cons to the firm’s plans. “The risks relate to the dilution of time, talent and potentially of the brand,” he points out. “You are basically shifting from a model where all the energy and talent is focused on one sole topic to having to deal with several.”
Nonetheless, this seasoned consultant tilts toward the benefits side. He reasons that if a firm grows too big in one asset class -- as Value Partners arguably has -- then it inevitably becomes harder for it to beat its benchmarks; therefore, by introducing more products, Value Partners can mitigate brand risk.
CHEAH LEARNED THE VALUE OF MONEY EARLY. AN overseas Chinese born on the Malaysian island of Penang, he and his two brothers had to support their mother after their father died when Cheah was 12. “We were the poorest of the poor,” he says. Cheah attended the elite Penang Free School on scholarship in the morning, and in the afternoon he sold pineapples.
Although honored as the school’s top liberal arts student (and its chess champion), he passed up college after graduating in 1971 to do something more pressing: earn a living. Taking a job as a reporter for Malaysia’s Star newspaper, the 17-year-old was sent on his first day to cover a police officer’s suicide attempt. “I watched the policeman die, very slowly, in front of a shrine in a Chinese temple,” he recalls with a shudder.
The teenage reporter nonetheless quickly learned his rough-and-tumble trade, and within three years he’d been offered a job by the Hong Kong Standard . He thrived at the paper, and in 1978 moved to Time Inc.'s now-defunct Asiaweek , where he covered Malaysian politics and economics from Kuala Lumpur.
It wasn’t until he joined the Asian Wall Street Journal in 1983, however, that Cheah became a journalistic standout. As the AWSJ ‘s money and banking reporter, he broke the news in 1983 that Hong Kong was planning to peg its currency to the U.S. dollar. Cheah also covered the fall of Philippines president Ferdinand Marcos in 1986 and revealed that the country’s central bank had been tampering with its financial records.
Though flourishing, Cheah was collecting a journalist’s paycheck and dreamed about making real money. “I became fascinated with investing. I was trading currency futures, then Hong Kong stocks” in simulated portfolios, he says. “I realized I had some kind of aptitude for investing -- and I wanted to make money, to have a quantum leap in my income.”
Audaciously, Cheah contacted Morgan Grenfell Asia’s head of Asian investment banking, Hsieh Fu Hua, and informed him that by focusing on small- and midcap stocks, the bank could distinguish itself from its Hong Kong and China rivals. “My common sense told me that this was where the market was most inefficient and underresearched,” Cheah remembers of his pitch. “I also observed that the mid- to small-size companies represented the fastest-growing, most entrepreneurial part of the greater China economy.” Hsieh (now CEO of the Singapore Stock Exchange) may have been taken aback by this know-it-all reporter. But he took a chance and hired Cheah as head of research in 1989. A year later Cheah had become a proprietary trader specializing in small- and midcap stocks. Proprietary trading “made good profits,” he says with a smile.
He met his future business partner, Yeh, in 1990 while at Morgan Grenfell. Cheah acted as the firm’s adviser on the privatization of Yeh’s family business, now known as Hsin Chong Construction Group. A Columbia University Law School graduate, Yeh, now 44, was a partner in the capital markets group at Lazard Frères & Co. from 1988 to 1990. He was impressed by Cheah’s tenacity in speaking up for the minority shareholders in the Yeh family business. What’s more, the two shared a passion for value investing.
They became friends and in 1993 launched Value Partners with $3 million in assets cobbled together from savings and contributions from friends and former clients. Value Partners dedicated itself to investing in undervalued small- and midcap Asian stocks, mainly in Hong Kong and China.
The boutique’s early performance was erratic -- rising 63 percent in 1993, falling 12 percent in 1994 and then rising 21 percent in 1995 -- but assets rolled in from investors eager to profit from China’s emergence as an economic power. By 1995, Value Partners had amassed more than $100 million. The firm markets mainly through fund distributors; its biggest Hong Kong intermediary is Standard Chartered Bank.
Cheah’s reputation began to grow along with his assets. When Sash Spencer, who runs a New Yorkbased private equity firm, Holding Capital Group, came to Asia in 1995 searching for a promising young financial services firm to invest in, people kept referring him to Cheah. “We visited one company and the CEO told me, '[Cheah] always knows more about our numbers than we do.’” Spencer wanted to invest in Value Partners after spending a few minutes with Cheah; he bought a 16 percent stake practically on the spot.
Cheah’s take on the deal: “It struck me that I needed an older, more experienced investor to guide me. Sash Spencer is someone I can really talk to and get good advice from. He also helped us to get good quality clients from the U.S.”
Spencer might actually have gotten more value for his money had he waited. In the 1998 Asian financial crisis, Value Partners had “a near-death experience,” says Cheah. Redemptions and horrid markets sliced the firm’s assets from $200 million to $130 million. The A Fund’s net asset value plunged 29 percent. Small-cap investors like Value Partners got no help from the government. “There was no liquidity,” grumbles Cheah. “It looked like the game was over. But with P/Es at 2.5 times earnings, I knew things had to get better.” In time, they did.
But the downdraft exposed weaknesses at Value Partners. Hong Kong’s Securities and Futures Commission investigated it for “window dressing” its year-end results. Ultimately, the SFC let the firm off with a slap on the wrist: censure but no penalty.
Still, the episode was embarrassing for Cheah and prompted him to upgrade management systems and install a more professional executive team. To pay for all this, he sold another stake in Value Partners, this one to Stamford, Connecticutbased Whitney & Co., a venerable name in U.S. venture capital and alternative asset management. (Today Cheah and Yeh together own 55 percent of Value partners, Whitney close to 30 percent and Holding Capital the remainder.)
Cheah used the cash raised to hire PricewaterhouseCoopers to review Value Partners’ operations. He then added a compliance manager; and, in August 2001, hired David Chung, head of ABN Amro’s Taiwan operations, to be CEO. “From that time we became a professional firm,” says Cheah, whose title is CIO. Chung recently quit for family reasons and was replaced by Caspar Li, a seasoned executive who has since the 1980s worked in financial services in Hong Kong for firms such as Citicorp International, the now-defunct Peregrine Capital and BNP Paribas Peregrine Capital. Li’s top priority, says Cheah, is “to strengthen our support systems and infrastructure” so that “our fund managers will be able to work with less distraction and more support.”
“EITHER YOU ARE A VALUE INVESTOR OR YOU ARE not,” declares Cheah. “If the management is right, if the business is right and the price is right, I stay in. You can’t compromise. This is the test of a true value investor.” That test, you can be sure, will have to be passed by all who want to manage Value Partners’ new products. “I am hopeful that one or more of the young fund managers now on my team will emerge eventually as one of the world’s leading money managers,” says Cheah. “Asia, including Japan, has been conspicuous by its failure in producing a truly great fund manager, someone in the class of Warren Buffett.” Cheah Cheng Hye may yet fill that role himself.
On the road with Cheah Cheng Hye
It’s 7:30 a.m. on a sunny Friday in mid-October, and Cheah Cheng Hye is embarking on one of the 500 company visits that he or his colleagues at Hong Kong investment firm Value Partners make each year to mainland China. After piling into the van waiting outside Hong Kong’s General Post Office, Cheah attends to some last-minute business -- fobbing off a banana on one of his fellow travelers. “My wife put it in my bag for me,” he explains. “She’s trying to get me to eat more healthily -- trouble is, I hate bananas.”
The Value Partners co-founder can now turn his attention to today’s two-and-a-half-hour journey, first to electronics hub Dongguan in Guandong Province for a brief meeting with an investment prospect -- cordless phone maker VTech Holdings -- then on to Shenzhen, so that Cheah and senior fund manager Norman Ho can check up on Skyworth Digital Holdings.
Cheah’s firm began buying the stock of the television maker -- whose 2002 sales totaled HK$8 billion ($1.02 billion) -- 18 months ago at HK$0.70 a share. The price had been beaten down amid investor concerns about brutal competition among Chinese TV manufacturers. But as the pricing war abated, Skyworth shares recovered, soaring to HK$1.97 by mid-October.
Although Value Partners owns 9.5 percent of Skyworth, Cheah hasn’t gone on previous visits, and he’s eager to verify assistant fund manager Louis So’s analysis of the company. Cheah has concerns that he takes up with Skyworth chairman Stephen Wong during a cordial meeting in Wong’s 16th-floor office overlooking Shenzhen. Did the outbreak of severe acute respiratory syndrome make the company’s 35 percent export growth target for this year unattainable? Can domestic growth hit its 24 percent goal? How is the overcapacity at Chinese TV manufacturers? Will profit margins improve this year? What’s the capacity utilization rate?
Wong is moderately reassuring. SARS did slow exports, so he’s not sure if Skyworth can reach the 35 percent target. However, domestic growth will hit 30 percent this year, and overcapacity problems have eased. Skyworth is operating at 100 percent capacity. Profit margins are widening because the company has kept a lid on expenses and is selling more high-end TVs.
Cheah and fund manager Ho chat about Wong’s responses as they walk to the van. Ho is encouraged by the fatter margins. Cheah isn’t wholly convinced. “Norman assures me I don’t have to worry,” he says jokingly.
Cheah’s misgivings ease, however, when they drive up to Skyworth’s main production facility in Baoan, an hour’s drive west of Shenzhen, and encounter so many trucks filled with TV sets leaving the plant that the van can’t pass through the front gate for several minutes. The seven-year-old plant was built to produce 1.6 million televisions annually; this year it will crank out 5 million. Factory manager Chu Xiao Feng tells Cheah and Ho that the plant is operating almost 24 hours a day, and that workers haven’t had a day off -- not even a Sunday -- for more than a month. “We cannot meet demand,” he reports.
Cheah is pleased. “Now I’m much more confident in this investment,” he proclaims. It’s 5:15 p.m. He and Ho clamber into the van for the trek back to Hong Kong, where Cheah, still defying his wife, orders take-out Indian. -- K.H.
