Puerh Tea Fund

At last, my first post. This is something that I've written on another private forum

Posted 18th Sept 2007

KSC or Kumpulan Sentiasa Cemerlang has been approved by the SC to launch a Restricted Investment Scheme (RIS) fund which will be investing in Pur Erh tea.

FUND KEY POINTS
1. Closed End Fund for 3 years
2. Opened to 50 'Qualified' Investors
3. Minimum size is RM100K
4. 2% Management fee p.a.
5. 20% performance fees over 5% p.a.
6. 0% sales charge
7. Right to put Pur Erh tea held by Fund at cost to Hai-O at the end of 3 years, if prices are lower
8. Approved fund size RM50M

Point No. 7 is like giving a capital guarantee

If you are interested there will be a presentation at Eastin Hotel on the 6th Oct 2007. For more info you may contact KSC at 03-6203-3888.

Posted 20th Sept 2007

Some of the questions that you need to ask the fund manager are:

1. What kind of Pur Erh are they going to invest in? In terms of fermentation process (raw or cooked), age, factory/manufacturer.

2. Who has they appointed to be their advisor? I'm sure the fund manager has very little knowledge about Pur Erh tea. How much is the advisor getting? That will be the cost to the Fund.

3. I'm sure the fund manager is not going to take physical delivery of the tea. So what is the storage cost? Pur Erh needs certain environment in terms of temperature and humidity to bring the best out of the tea. It cannot be stored in sunlit area and should be kept in a odorless environment. Differrent types of Pur Erh should not be stored together. Again this will be cost to the Fund

Well, I guess if the tea can appreciate by 225% since 2005 (as claimed in the Fund fact sheet), then the question of cost is irrelevant.

However, I was told the price has undergone some correction recently. Since the Fund is only for 3 years, buying new tea may not give you much return within 3 years. Don't think the 225% return can be repeated. However, if it is an aged and rare tea like the Red Label (Hong Yin) produced in the 50s, it is hard to tell how much people are willing to pay for it. The quality of newer teas even from reputable factory such as Menghai has also dropped. I guess when the demand is overwhelming, it tends to affect quality control.

I started by buying new and cheap (relatively speaking) tea. Now I'll try to save more and buy older tea even though they are much expensive. Recently I bought one tong (7 pieces) of 7572 Menghai cooked tea produced in the late 90s for RM1700. The taste is just fantastic. The aroma alone is worth the price. It can also goes for many round. My dream is to have one sip of Hong Yin.

Btw, as I mentioned in another post, one should consider Hai-O. Over the years they have accumulated a substantial amount of tea and at a time when the prices were still reasonable or even cheap.

Posted 6th October 2007

Attended the Fund briefing today. Well, some questions are answered. Some are not. Yes, there is a cost for storage and insurance which may come to about 2%. The put option cost only RM1. Hai-O's adviser's fee should be part of the 2% management fee, I think. Otherwise it's gaji buta. Because there is not going to be active trading of tea. What they'll do is that they will buy and keep/hold.

Since there is a performance fee after the hurdle rate of 5%, I asked the question how are they going to doing the valuation since there is no 'market' price like the stock market price for these teas. Well, the answer I got is that the tea is going to be valued once a year by experts form Yunnan. Mr. Tan Khai Hee , the Group MD for Hai-O added that among the producers/manufacturers there is a market price. But I believe this applies mainly for newer teas. For aged teas, the market price for the same type of tea produced in the same year by the same factory can varies a fair bit. For me I don't care how old it is. I need to taste it and then I will decide how much am I willing to pay. Very subjective.

There is an apparent conflict of interest. This was raised during Q & A time. You see Hai-O as an advisor to the Fund is also involved in trading tea. Do you see the conflict? Well, I think it boils down to how much you trust Mr. Tan Khai Hee whose integrity is impeccable among the Chinese community. Btw, he spent 8 years in Kamunting as an ISA detainee for his socialist beliefs. Furthermore this is the first fund and I'm sure everyone involved will want to make a success of it.

I believe the downside is fairly protected by the put option. Of course the put option is as good as the party giving it which is Hai-O. Hai-O has currently RM45 million cash. Zero long term borrowings. So if the Fund reaches its max size i.e. RM50 million, don't think there is a problem for Hai-O to borrow to fulfill its put obligation if it ever need to.

The upside? Really don't know but 15% net of costs compounded annually is a fair target.

Will I invest? Well, firstly I think this kind of alternative investment shouldn't form more than 10% of your investment portfolio. So I'm out unless I can find a few others to pool our money together.

Btw, they plan to organize a trip for investors to Yunnan next spring to visit the tea plantations and factories. This is something that I will look forward to if I'm able to invest.

Finally, Hai-O closed at RM3.08 last Firday. If you have bought the share in May when I first mentioned about it, your return would have been more than 60% after the bonus issue. Fabulous 1st Quarter results. Up 50& on revenue and more than 60% on PBT. Looks like it's more interesting than Pu Erh Tea.