Fundamental Buy: Kuwait China Investment Co

December 27, 2009 by Keynesian

KCIClogo

A tiny niche of Kuwaiti companies qualify as being operationally sound, especially when one looks at investment-specialized ones. When individuals thinks of investing in “operational” companies in the Kuwait Stock Exchange, they may settle on National Industries only to be shocked that a mere 5% of their revenues come from selling bricks! Other investors may settle for buying Zain only to be bored by its pending marathon takeover-run which seems to be never-ending. Another group of investors may take a chance at Agility only to be shocked by the unveil of a major lawsuit. Banks are exposed to such companies deeming them “not the best” of investments.

The Kuwaiti stock exchange has lagged nearly all worldwide markets in 2009 and especially Emerging markets. Think BRIC* countries and you will not be disappointed: markets up an average 70% year-to-date. Fortunately, Kuwaiti investors can get exposure to such  growth through an ideal company of their own: Kuwait China Investment Company (KCIC). The company is headed by an internationally-experienced Harvard alumni and most employees which I personally know are very well-educated and trained. Not only that, but also the company’s returns speak for it. It recently listed in the Kuwait SE and is worth a serious look.

KCIC is currently trading at 93 fils, below its 100 fils IPO price. It is treated as another commodity in the investment companies space which is utterly unfair. KCIC is deeply undervalued at these levels. As of Sept. 30th, the company had KD25.5 million of cash on its balance sheet with no long-term liabilities. This accounts to 32 fils of cash per share which provides ample downside protection and illustrates a strong balance sheet in a sector sickened by over-leverage. KCIC earned 15 fils for the last 9 months. If we assume they earn 5 fils next quarter (which is very reasonable since they earned 15 fils during the last 3 quarters), the total comes out to 20 fils of earnings for the year. This means the company is trading at a P/E of merely 5 times earnings!

Savvy investors may argue that KCIC only earned 3 fils during the last quarter and they have a point. However, even if we normalize such trough earnings of 3 fils per quarter, KCIC would earn 12 fils during a year. If we put a 10x P/E multiple on it, KCIC should be trading at 120 fils. A ten multiple is considered low as the US market, BRICs, and some GCC countries all trade above 15 times earnings.

Based on the aforementioned reasons, I recommend adding KCIC as fundamental buy to your Kuwait SE portfolio.

*BRIC: Brazil, Russia, India, China.

Below is a snapshot of KCIC’s Q3 financials:

KCICfinancials

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20 Responses to “Fundamental Buy: Kuwait China Investment Co”

  1. abdulateef says:

    hi
    nice analysis, but i think the Pe for investment sector in kse is below 10 and also u should calculate adjusted Pe for the sector to measure the fair value for kcic.

    regards
    Abdulateef

    [Reply]

  2. peteyb says:

    dear writer -

    on the face of it your comments seem sound but let me put forth the following:

    * be very careful with those tables from the KSE website as i have many times found inconsistencies and inaccuracies when using them. since you can’t really sue the dirty sods they don’t care how much you lose due to bad info. [crosscheck alert]

    * from what i know (and its not much) about KCIC’s MO, they invest in many funds on a commitment basis and i think these would be considered off-balance sheet liabilities not clearly evident. im not sure if they have to mention them in the notes but a look at the full financials wouldn’t hurt. in their defense, the more undrawn commitments they have vs. existing assets could mean they get in at better valuations through their underlying managers although the BRICs have bounced back quite precipitously.

    * given the structure of the company as more of an investment fund (see mgmt and placement fees vs. investment income in the financials), their returns are quite likely to be lumpy so it may be wise to take the very lower end of the range and discount further.

    * following on the preceding point, a close inspection of their assets is required to make an adequate estimation of investment asset value but, since they’re not officially a fund, i doubt they are required to reveal all or any of their holdings. this would be important to come to a fair (read:not the beholden auditor’s) assessment.

    i still think you may be on to something though. good luck and keep us posted.

    [Reply]

    Keynesian Reply:

    Hey peteyb,

    * I know! I tried to get the financials from Bloomberg or KCIC’s website, but with no avail. I only found 2008’s annual financials which helped me a bit as far as KCIC’s major exposure to MSCI Hong Kong.

    * Intriguing point.

    * Your point is valid as a major negative. Refer to the (“Unrealized” gains on investments) part of the balance sheet to get what I mean. Their unrealized gains for the first half were 8823. For the last quarter, they were a mere 122. This significant fluctuation warrants a closer look, but then again we have limited insight from these headline numbers. Thus, I guess that is why I approached it also from normalizing the 3 fils made last quarter just to be on the safe side and it still was a buy.

    I will ask a friend of mine that works there for a more detailed financial statement which will make things much easier. Nevertheless, the stock is trading below the 100 fils IPO price which is a real bargain. I see KCIC as a diamond in the rough.

    [Reply]

    peteyb Reply:

    * on a loosely related note: what is the relevance of the 100 fils IPO price in your opinion? i’m not making a judgment here at all but simply want to understand the reasoning and why this number seems to serve as an anchor in people’s minds.

    * standing farther back and assuming this is a good deal on an value basis, what would be the catalyst to take this stock closer to its ostensible fair value?

    thanks.

    [Reply]

  3. abdulateef says:

    you can compare kcic with ifa investment company , the company had cash nearly 37 million this account 50 fils per share of cash, ifa currently trading at 102 fils and its book value is 219 fils for 30 sep 2009. although 80% of their projects in dubai is sold.

    [Reply]

    Keynesian Reply:

    I guess the turn-off on IFA is the taboo word these days, “Dubai.” However, very interesting to note that excellent point.

    Investment sector P/E in Kuwait is negative since almost all companies are turning in losses. As opposed to nearly all (if not all) investment companies in Kuwait, KCIC invests outside the GCC region and mostly through the Hong Kong index (China exposure). This fact makes it unreasonable to compare KCIC to the investment sector in Kuwait and it is more fair to assign to it a P/E similar to investment companies in China, but adjusted down for being listed in Kuwait. I believe KCIC deserves to be assigned a premium compared to other paper-investment companies in Kuwait.

    [Reply]

    peteyb Reply:

    btw – is there any analyst coverage on this company besides our rudimentary discussion here?

    [Reply]

  4. [...] More here: Fundamental Buy: Kuwait China Investment Co « Alpha Dinar- talking … [...]

  5. [...] fils PAR value. An example would be Kuwait China Investment Co which was trading at 93 fils when I recommended buying it 2 weeks [...]

  6. avs says:

    nice analysis, can we have more recommendations?
    some of the cement companies are available at good bargain.

    [Reply]

  7. Keynesian says:

    Thanks. Keep tuned for more! I will try to cover cement companies soon.

    [Reply]

  8. Bo6air says:

    Good Call

    Though I agree that KCIC was undervalued when its owners decided to list it (and hence partially cash out – to meet margin calls perhaps??.) it is really nothing but a fund of funds + some private equity. There were few of these around when the internet boom took place. and they faded along w/ the demise of the rich valuations that marked that sector. If I wanted none sharia exposure to china and india, am better off running w/ an index fund that is liquid and much lower fees! hence I think at large, the continuity of the business model itself is questionable.
    You could take it as a value play for some time, but in the LT, i would never be a Long Term investor in a questionable business model

    [Reply]

  9. CFA says:

    Just briefly – its incorrect to normalize their earnings and apply a multiple as they are mostly non-recurring investment gains which are unpredictable.

    Therefore you should try to calculate their NAV and compare the market price to the NAV.. their recurring fees are miniscule, but generally one could make an arguement for a sum of the parts valuation where you add the NAV of their investments, to a multiple on their normalized fee business.

    [Reply]

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    [Reply]

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