Traded Tsit Wing for Food Junction on 28th August 2009

With this, I officially threw in the towel on Tsit Wing, making a meagre 8.5% (taking dividend into account) over 3 years. I could either continue to wait for their restructuring efforts to pay off (assuming they aren't taken private successfully) or look somewhere. I chose the latter given the lack of visibility on how long the wait could be amid deteriorating performance, beginning even before the financial crisis started.

Food Junction

As the world economies embark on the uneven road towards recovery, opportunities to invest in cyclical businesses trapped in cyclical doldrums get harder to come by. After SPC, Courage Marine and CH Offshore, I had to look elsewhere and turned my attention towards stable, recovering businesses that is still thinly traded to signify lack of interest... yet. Re-investment into Super Coffeemix marked the beginning to this change of approach and Food Junction is the second one.

Business performance


If profit after tax (excluding other income) for 4Q exceed $595,000, I will be quite confident they are on the road towards a more convincing performance in 2010 and beyond, riding on the wave of economic recovery in Singapore and the region.

Reasons to be optimistic

Mass market food provider

Despite its effort to upgrade its existing food courts into lifestyle food courts, it is nonetheless a mass market food provider. However, I don't really see anything wrong with such a business plan. Food courts are a natural successor to hawker centres in Singapore. Given the current inflation level and upgrading of coffee shops (means rental to increase), the price to pay for a 'simple' meal is almost the same everywhere.

Friendly neighbours

Food junction, along with other major operators, Kopitiam, Food Republic seems friendly to one another, I seldom see food courts from different operators locating in the same building or beside each another. If they do, the crowd in the area will justify it. Thus, during meal times, all major food courts are always packed with people.

Renovation mostly completed.

Most of the renovation works were already completed and without further disruptions to operations, revenue and profit for forward quarters should be better compared to preceding ones.

Risk

One of the few risk I see is its attempt to venture overseas. Food Court culture (born from hawker centre style of eating) is still quite a Singaporean thing. Replicating this concept to the region is not so smooth sailing, as seen from their failure in Hefei Food Court in 2007. Thus I view their acquition of Malone’s American Cafe & Restaurant chain in Shanghai, China as a risky one. Incidentally, they had to delay their Malone expansion plan in Suzhou until market condition improve.

Conclusion

Signs are pointing that many businesses are picking up from their doldrums in the last few quarters. However, judging from the volume and jumps in prices in many counters in general, the market consensus seems to be pointing to a remarkable economic recovery. Refusing to subscribe such irrational optimism, I'm still looking out for neglected businesses trying to stand up from recent injuries.

I bought Super Coffeemix Manufacturing Ltd AGAIN on 13th August 2009

Rationale

Super Coffeemix just announced its 2Q 2009 results which I deemed as encouraging (though not as superb without its fair value adjustments on its investment securities).

Performance over the last several quarters

The table below summarises its quarter performance:

A few things to note:

1. Operating profit seems to bottom out in 4Q 2008.
   
2. Ignoring fair value adjustments of its investment securities, net profit seems to bottom out only in 1Q 2009.
3. Revenue also seems to bottom out in 1Q 2009.
   

Conclusion

It remains to be seen whether improvements in 2Q 2009 is sustainable but looking the general numbers, its performance does seems encouraging enough (to me) to re-enter into Super Coffeemix... again.

Condominiums - Opportunity or Trap

Upgrade or downgrade?

I came across the following article in the 联合早报: 是享受还是受罪. It described someone nearing retirement who 'upgraded' to a condominium of 102 sqm and a new mortgage to pay off, by selling his fully paid up EA flat of 145 sqm. When enquired about his rationale, the simple answer was " no choice, for the comfort, for a better external outlook, will have to suffer a bit".

Selling like hot cakes

I read with both amusement and amazement of the recent craze for condominiums, with new units flying off the shelf like hot cakes. Am I missing something? Are residents here are getting really affluent in the midst of recession or is money raining in corners of Singapore I'm not aware of? While foreign investors could possibly scoop up a substantial number of private properties, residents made up a significant half of recent purchases, as I found out when I went 'sight seeing' in one the recent showflats.

A natural upgrade?

Two independent friends of mine are pressured by their spouses to 'upgrade' to condos as a natural passage of life improvement process. While the financial commitment is substantial (as I will show later), the rationale of their spouses distilled from their conversations summarised as "if so many can afford, why can't I?"

Significant commitment

I worked out a simple table showing the commitment for getting a condo of various sizes under different prices per square foot and interest rates. My assumption is 20% down payment and 80% loan for 30 years.


A few things to note.

1. Interest rates are often pegged to SIBOR, Singapore Interbank Offered Rates and historically fluctuated between way below 1% to as high as 8%.
2. If a HDB upgrader intends to buy the condo as a 2nd property (i.e. retaining his/her HDB flat), only funds in excess of the minimum sum in the CPF account can be used for down payments and instalments. Otherwise, the 15% down payment in Cash or CPF and the monthly instalments will have to be paid in Cash.
3. After a few good years of locking in the mortage loan in low interest rate on purchase, the interest rate will be readjusted thereafter (usually higher). If refinancing at lower interest rate is not possible, the buyer will just have to service higher instalments.
   

Looking at the table above and my current instalment of about $1,100 for my EA HDB, no way I'll swap the monthly payments for that of a condo of equivalent size.

Benefits: Hedge against inflation?

Despite the higher commitment, I'm often told that land constraints in Singapore will always make property investment a rewarding adventure. I do not have the stats for property prices before 1993, but comparing the inflation rate and property price difference over the same period (very dependent on the choice of period of comparison, so the following is just an illustration):

Singapore Inflation Rate from 1993 to 2008 = 24.3%
(src: http://www.singstat.gov.sg/stats/themes/economy/hist/cpi.html)

Private Property Price Index from 1993 to 2008: = 62.5%!
(src: http://www.ura.gov.sg/pr/text/2009/pr09-35.html)
Thus there IS truth in this 'conventional wisdom'.

Risks: The other side of the coin

I do not doubt the investment quality of property as a inflation hedge (but I still think equities are better investment, see my article on this issue), but one must not ignore the other side of the coin in property investment. If one have ready cash to pay off the mortgage loan any time (but choose to prudently invest the cash else where to take advantage of the good debt), then the risk of using property as inflation beater is tolerable.

But if one is taking the maximum loan of 80% to invest in property, then I do not think its a wise choice at all. Should one or both the spouses takes a dent in income (pay cuts, lost of jobs etc), the financial pressure of paying off the hefty monthly instalment is immense. As one bad thing normally urshur more bad things to come, recession that trigger the income drop normally also meant a drop in property values. In one of the worse case scenario possibe, a couple who hope to 'downgrade' from a condo might not be able to easily dispose the condo at a depressed market, especially when they find themselves in negative equity (outstanding loan greater than value of private property)

Conclusion

I still subscribe to a better conventional wisdom that I know: "Live within your means". An improvement in life do not mean less spare cash to indulge in little things I can enjoy. The last thing I want to experience is trapping myself in a condo because I can no longer afford to drive my car, take my family out for restaurant treats once in a while or have an overseas trip once in a longer while. That thousands of dollars in monthly instalments is enough for a short trip for 2 or 3, and combined a few months of instalments, a long trip overseas for more!

Put it another way, if I can afford the hefty condo instalments, I can afford to go for holidays overseas every month, a life style I hope I can retire to :)