Market Uncle's Blog

Happy New Year!!!

2012-01-01T00:10:00.003+08:00

Though I can't really find the time to blog anymore (at least in the near future), I can still squeeze a few minutes to wish all a very happy new year. May 2012 be a better year for all! Huat ah!

2 predictions I'll like to voice out (just for fun, for serious readers, please stop reading):

#1. The worst should be over for Euro-zone, its just too big to fail, sounds familiar?

#2. Singapore property market will crash? Doubt so, looks like a few more cooling measures are necessary.

Awaiting my 2nd bundle of joy

2011-05-08T10:55:00.003+08:00

Almost exactly two years after my 1st bundle of joy turn into a cheeky toddler, 'terrible two' that many called one, I'm expecting another one to join us to make this a noiser and messier home. I find balancing my limited time amongst family, work, investing, blogging and photography a very difficult task, especially when I need to dedicate much more time amongst the first 3. I am aware of my priorities, as much as I need to make tangible investments from the resouces generated from my work, I also need to make intangible investment of my time in my family. Thus blogging and photography (the only 'brainless' hobby that I can indulge in to let my brain rest) will have to take a back seat. If opportunities arose, I will still write an article or two. Otherwise, it will be a long while before I can return to serious blogging. I thank all faithful readers and fellow value investment bloggers who have contributed invaluable comments and ideas, and made my investment journey so far a very rewarding one!

Watch out for the Intangibles!

2011-03-05T13:41:00.005+08:00

Motivation

A friend recently approached me to help him take a look at Healthway Medical. Once of the most glaring thing that struck me when I thumbed through its latest financial statement was the huge intangibles on its balance sheet. After I explained to him my concerns, I thought I might as well highlight it on my blog too.

Risk of high intangibles

Intangibles on the balance sheet arose primarily from when a firm acquires another business and pay a price higher than its the net tangible assets. This translates into goodwill that the acquiring company reports. Another common intangibles can be copyrights or patents that royalties can be collected. Whichever it is, intangibles have to be revalued periodically and amortized (write down) accordingly if necessary. Basically, intangibles are valued by how much revenue it can generate, forecast into the future, and discounted to present value. Thus should any estimated variables (forecast revenue) change, the value of the intangibles need to be readjusted. Thus, it is always easier to value licence, copyright etc, than pure good will.

What happens when an intangible asset is marked down? The same amount has to be reported on the income statement as a deduction against the revenue. If the amount is huge, a 'loss' is reported even though the company is actually profitable. On the surface, this might not seems to be a serious concern since the impairment does not even impact the cash flow. But the fact that a huge amount of intangibles got wrote off either meant the business acquired earlier on was worth much less (goodwill) or the copyright or licence couldn't bring in as much revenue as forecasted. Either way, the drop in net asset value following the amortization meant the price-to-book ratio will jump, a simple litmus test to indicate overvaluation.

Case study 1 - Healthway Medical

A look at Healthway Medical's latest financial statement shows that it carry $177.6m of intangibles out of total assets of $242.2m as of 31st December 2010, i.e. about 9.5cts out of 10.48 cts of NAV is intangibles! A check on Healthway Medical's Annual Report reveals that the intangibles are mostly made up of goodwill which comprises of discounted future cash flows from various clinics under its management. The anticipated growth rate of the revenue was 2-4% for 2010 to 2013 and 4% infinitely. Discount rate was 7%. Thus if these clinics failed to performed as targetted, significant amortization, and hence net loss, could occur. Against the NAV of 10.48 cts, the company's share price was trading at around 13.5 cts.

Case study 2 - IPCO

IPCO has $66.4m of intangibles out of total assets of $195.3m as of 31 Oct 2010, i.e. about 3.7cts out of 7 cts of NAV is intangibles. The intangibles also arose from goodwill contributed by the valuation of future earnings of its subsidiary, Excellent Empire, which holds a 90% equity interest in three companies supplying natural gas under 30-year exclusive contracts in the cities of Anlu, Dawu, and Xiaochang in Hubei Province, China. However, due to past aggressive (possibly unsustainable) growth rate in revenue, chances of future earnings unable to hit projections become very likely. Anyway, against the NAV of 7 cts, the current share price of 2 cts continue to seem attractive to me.

Case study 3 - Armarda

Let's now look at what happens when the intangibles got amortized. Armarda had a string of acquisitions since IPO and as of 31 Dec 2009, had amassed HK $98.8m of intangibles against 229.2m of total assets. The intangibles also arose from goodwill contributed by various businesses. Unfortunately, most of their revenue failed to meet targets used to value them. Thus Armarda amortized these intangibles every quarter (resulting in net loss of each quarter). As of 31st Dec 2010, only about HK $11m of intangibles remain on its balance sheet. Its NAV is now 2.3 cts and the company is trading at 7.5 cts. I discarded the remainder my Armarda.

Conclusion

Not all cash generating assets are tangibles and ignoring these is a gross error in valuating a company. However, one must be cautious and mindful of their presense in the balance sheet, especially if the intangibles form a very significant portion.

STI vs SGS bond yield

2011-01-15T15:59:00.009+08:00

Just being curious

One of the common finance wisdom states when the economy is booming, funds shift from bonds to stock market for better returns (surging stock market and rising yields in bond market). During a recession, the opposite occurs where money exits stock market to seek refuge in the bond market, further depressing the meager yields.

Thus I was curious to find out whether this relationship actually holds true over a long run. If so, will there be a relatively reliable yield to serve as an indicator to enter or exit the market? i.e. going into the stock market when bond yields drop below a certain threshold and exiting when yield surge beyond another value? Even before I look further, I already knew things shouldn't be so simple, so its more for fun rather than a serious exercise to change my current investment strategy which already worked well for me.

Chart

Anyway, let's see how the graph will look like:

The above graph is made by plotting monthly STI closing value versus monthly average of SGS (Singapore Government Securities) 3 month T-Bills' yield. The STI closing values can be downloaded from yahoo finance while the T-Bills yield can be obtained from SGS website.

Pattern?

If the theory above holds true, the bond yield curve should track the STI index. i.e. when times are good, funds exit bond market to chase higher return in stock market, pushing up stock index and causing bond prices to drop and yields to rise, and vice versa. Looking at the chart, it seems to me this is only somewhat true during 1999 to 2009 and about 1% yield might be the indicator to enter the stock market while 2.5 to 3% yield could signal the exit. However, for both instances, one will either enter or exit the market too early, by as much as 2 years.

While no clear pattern between bonds and stocks seems to occur prior to 1999, what is surprising to me, is the divergent trend after 2009. Though the stock market continue to surge, the bond yield continue to stay severally depressed. This 'abnormally' can be dismissed as the consistent trend mirroring the current global low interest environment brought about by the quantitative easing in USA to stimulate growth and recovery from recent economic recession. It can also imply that with all the hot funds flooding the region from overseas, substantial amount flows to both stocks and bonds. So does that means the there is still much more funds being amassed in the bond market that can be liberated to push the stock market much further into a bubble bigger than the last? Only time can tell. Meanwhile, I doubt I'll be pumping in any more money as most of my businesses are quite favorably acquired at reasonable price. So its more of sit back, relax and accumulate profits and parked them away for the next burst.

Portfolio update for Q4 2010

2010-12-18T13:51:00.003+08:00

The past 3 to 4 months is a rather rewarding period for me. I had been busy restructuring portfolio and at times, havesting the sweet returns from the seedlings planted during the recent global financial crisis.

Switched from Food Junction to Food Empire on 16 August 2010

While Food Junction continue to struggle in its food court and F&B segments (~2% drop in revenue and 20+% drop in profit), Food Empire's business surprisingly rebounded with a spectular recovery of 60% increase in revenue and nearly 70 fold increase in profits. Fortunately, food junction is very thinly traded all these while that I've invested so that I didn't really suffer material loss on the sale. Even more furtunate that no one seemingly cared how well Food Empire recovered so that I can buy more of its shares cheaply. If I can trust their opinions about their business outlook, I'd rather bet on Food Empire for a continued sustainable recovery, well ahead of Food Junction.

Selling coffee for cash, took profit on Super Group and bought Matex on 14 September 2010

This is the 2nd time I made hefty gain on Super Group (formerly known as Supercoffeemix Manufacturing). I was lucky to buy this again during the financial crisis and just slightly over a year, the stock price doubled. While I still think its business fundamentals are still strong and there is still potential for further growth, I doubt the share price had equal amount of potential. So as my usual habit, I sold halve to recoup my principal.

With new funds, I turned my attention on one business waiting on my watchlist, Matex. Normally I shunned manufacturing companies due to their poor margin, i.e. high expenses and pricing pressure. But Matex is different. It got cash. It is another typical cash rich cigar butt that I just can't ignore. When I bought it, it was trading at slightly below its cash and equivalent less term loan per share. Business wise, though the company is still making loss, it has narrowed significantly. Together with the disclosure that the company is looking at other emerging markets (South America, Middle East and India) besides overinvested China, I am quite optimistic of a recovery in the near future.

Selling healthcare for water, took profit on Thomson Medical Centre and bought Darco on 4 October 2010

Similar to Super Group, I was fortunate to be able to buy TMC in the midst of the global financial crisis and since then, price also doubled. And like Super Group's case, I also sold halve of my stake. This turns out to be a good move as in just a few weeks later, Peter Lim, the legendary remisier king, offered to acquire TMC at $1.75 a share. I straight away sold my remaining stake without much hesitation. No matter how much business potential there is over the long term, I doubt the share price has significant upside after it hit $1.75. That's pricing it at 3.6 times book!

Looking at my watch list, I selected Darco. I am well aware of the fraud case that hit its Taiwanese subsidiary. But judging from the impact ($8m SGD) versus its cash and eqvialent of $20m SGD. I judge that its significant but not dangerous to threaten the company to function normally. With a huge discount to its net tangible assets and the slew of contracts the company manage to capture recently, I am optimistic the company can turn around in the very near future. Thus I used part of the TMC profit to acquire some Darco shares.

Increased stake in Manufacturing Integration Technology (MIT) on 11 October 2010

In the midst of the global recession brought about buy the financial crisis, orders for semiconductor equipment almost grind to a halt. This is when MIT show their resilience by translating that semiconductor know-how to produce laser scribers to make solar panels. Since then, semiconductor equipment orders started to improve and their expansion to renewable energy seemingly began to bear fruit with their first major order announced on 30 September. The future for MIT is never brighter.

Acquired Metro Holdings on 1 November 2010

This is one of the most controversial business I acquired. Metro is known for its retail business but its stellar business performance is actually attributed to its property business in China. Metro enjoyed strong cashflow from the rentals it derived from the properties currently under its management and from another perspective, it is basically a REIT but a very different beast, net cash and trading at nearly 50% book value.

Acquired Hour Glass on 24 November 2010

One thing that caught my eye about Hour Glass is its strong balance sheet (nil debt and trading at discount to book value) and good business recovery (~57% increase in yoy 2Q profit, ~38% in yoy 1H profit). With the increased well heeled gamblers the two integrated resorts bring to Singapore, I see that the luxury segments (including watches) should stand to benefit. Wish them good luck!

Subprime Crisis, Singapore's version?

2010-11-26T22:59:00.002+08:00

The Year 2006

A few years ago, my wife and I are the 'fortunate' few to buy left over HDB flats under the walk-in scheme. As the flat came in standard condition, i.e. totally bare, we visited a few condominium showflat for renovation ideas. My wife was tasked to absorb as many ideas as possible while I entertain the agents as a prospective buyer. That was when I started to pay attention to the loan, interest rate etc.

Most mass market private property then was going around $600,000 for a 3 bedder of equivalent size to a 5 room HDB. Based on our combined income, the maximum loan the bank would grant us is sufficient to service the maximum 90% valuation of the property, as allowed then.

The Year 2010

With the economy out of recession with an expected double digit GDP growth for the full year, demand for private property surged strongly and continued to do so even with recent cooling measures. I am thus curious to find out more, especially from the perspective of not so deep pocket buyers on the street. We went to the Spottiswoode Residences near Tanjong Pagar to take a look. After the usual tour led by the agent, we found ourselves talking to a banker (I never met one in 2006) to assess our financial capability. My eye almost pop out when he worked out the maximum loan the bank will grant us. No, our combine income never shoot the roof. Though our income did increase, but definitely far far below the 300% jump in maximum loan allowed, in just 4 years. It never take too long to realise the key difference, 1.5% effective interest rate (not the initial year promotion interest rate). That's 40% lower than HDB's concession interest rate of 2.6%!! I can't remember what's the effective interest rate in 2006, but definitely higher than 2.6%. Using 50% of disposable income as a guide for maximum installment potential a month, no wonder we can take on such a huge loan!

Made in USA

First they lower their key interest rate to nearly zero, then they print money, then they printed some more. The net effect is the ultra low interest rate environment property buyers are 'enjoying' at the moment. Let's assume a typical couple with pockets of reasonable depth decided to buy a private property. Even if they are not crazy enough to take on the maximum loan that will shave off half their monthly income, they would still be forking out much higher monthly installments as they would like when the interest rate eventually recover to a more reasonable figure of 3-4%.

Potential Problem(s)

For the best case scenario, the interest rate raises to the 3-4% eventually and these genuine non-deep pocket buyer-stayers are able to folk out the higher monthly installments. A worse scenario would be the eventual burst of the property bubble and valuation drops below the outstanding loan. Bank theoretically can only loan up to 70% of valuation, so if valuation drops, they can lend less, and the buyer has to pay up the difference. But according to the Banker, so long as the buyer promptly pay up the installments, banks don't normally execute such 'margin calls'. The worst case scenario would be the burst of the property bubble coinciding with the next recession. i.e. drop in property value and loss of income.

Risk

From the buyer's perspective, the risk is personal. But from the banks' perspective, it seems to me that even the maximum 70% valuation limit on the loan is not quite sufficient to limit the number and amount of potential bad loan if the unreasonably low interest rate is used to justify the maximum loan allowed in a growing property bubble.

The yearn for financial independence

2010-10-31T11:11:00.004+08:00

Have you heard from Robert Kiyosaki, the author of Rich Dad Poor Dad?

"Have you heard from Robert Kiyosaki, the author of Rich Dad Poor Dad?.." I heard this many times and this has ALWAYS been the starting line to introduce some MLM (Multi-level marketing), land banking or other 'alternative' paths to financial independence quickly. I get to hear this again just a few days ago. My wife's friend offer to share with us, over breakfast, a business scheme that will bring us to financial Independence in 2-5 years. Her only prerequisite for participants who want to benefit from this business is to sacrifice several hours a week. My alarm bell went off immediately when she mention 2-5 years and rang even louder at the weekly effort required to succeed in the business. Anyway, it didn't take long before she got to the point, being a sales agent for Amway... and of course, nothing fruitful emerge at the end. Anyway, it seems to me that my wife had an affinity with acquaintances, friends or colleagues dealing with MLM business. Recently, while accompanying my wife to meet up with her piano blog reader on a premise for some discussion (she thought it has to do with piano or music in general) that turn out to be a presentation on e-spring water filter system, which also happen to be another product from, yes Amway again.

As far as MLM's business structure is concerned (quoted from wiki):

"Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. "

Coupled with their products (few are wildly popular items), it seems to me that out of many who tried, probably a much smaller percentage will ever make it big. But the success of the latter is sufficient to entice people to try. Thus I am absolutely puzzled how one can generate sufficient sales (personal effort or combined downstream effort) to get enough commission to attain financial independence in 2-5 years.

Why not insurance or property?

If one has the sheer mental grit to persevere in such a low hit rate sales environment such as MLM, won't it be more rewarding to try being an insurance or property agent? It is almost no brainer Singaporeans are generally under insured (just taking an inaccurate empirical consensus amongst my friends), they want the payout when things happen but dreaded the costly premiums (especially the riders) that are 'wasted' if they don't claim. As for property, whether downgrading or upgrading, agents get to earn commission from each transaction.

Looking for a short cut

There is a common trait I observed amongst all of them who tried MLM, not only do they want success (financial independence), they want it safe and they want it fast. Working and saving is too slow. Venturing out to do business is too risky. Although it is simple logic that risks are inversely proportional to returns, many continue to believe logic-defying novelties. Take land banking for example, one of my wife's colleague got into this (yes, I also wonder why my wife got so many such lobangs). He's a sales agent from Walton International, a company involved in land-banking. The objective of land-banking is to purchase raw land and hold them until its profitable to sell. It is again sold as a low risk high return venture as raw land is cheap and once selected for development, the returns is huge. However, the problem here is how much do the investor know about the land they are buying? How do they assess their potential? How sure are they sure that they are getting a good deal? Even in land scarce Singapore and Hong Kong, there are reserve land to last many years.

The slow way to success

As the saying goes, anything that sounds too good to be true probably is. Unless we are extreme lucky to strike lottery, most of us either have to trade skill or time for money and ultimately hard work pays off. The more enterprising ones can take on more risk to venture into business and reap enviable rewards if they succeed. Lazy or risk-adverse people like me will prefer to reap what others sow by buying bits and pieces of listed businesses and make our money work harder. But whichever way we choose, it really takes much longer than 2-5 years to achieve financial independence, and I'm perfectly fine with delayed gratification.

Financial magazine review(s)

2010-09-25T09:50:00.002+08:00

Motivation

I have been faithfully subscribing and reading the Economist and the Edge for the past few years (ever since I started investing) until I decide to stop the latter. Instead of just saying why am I dissatisfied with The Edge, I might as well write a simple review of the three finance or business magazine I deemed useful for my interest.

The Economist, my main workhorse of info after the newspapers

Besides the news on papers or over the Internet, I get the most useful geopolitical, macroeconomic information from The Economist. Though I might not agree with all the articles, some are actually biased collection of facts to shape reader views, most articles are nicely written and well argued, especially the articles in the 'Business' and 'Finance and economics' sections. I like it most whenever there are 'special' coverage of a particular topic, e.g. the economy of a particular country, her strengths and weakness, her challenges and opportunities. Price-wise, it really depends on how good a deal one can squeeze from the distributing agent. I always bargain for a 2-year subscription (at quite a steep discount to newsstand price) at the World Book Fair and get the agent to throw in 1-year subscription of any magazine for free (that's how I got The Edge). Anyone with an even cheaper but timely alternative (other then reading from the library free) please let me know. Thanks!

The Edge, thanks but no thanks

I have to say I like to read The Edge... whenever there are nice articles, especially when they ran exclusive coverage of certain companies or particular fields of business. But unfortunately, these articles made up just a tiny portion of each issue, with advertisements, charts, stocks and property listings almost practically filling the rest of the pages. I find myself reading less than 10% of each issue. Info per dollar wise, each 'useful' content in The Edge is really expensive. Thus after renewing for a year when my free subscription of The Edge ends (that comes with The Economist), I terminated it.

Pulses, a better replacement to The Edge

I need to find a finance or business related magazine that give a more Singaporean perspective, the local businesses, the market environment that's closer to me etc. I discover this magazine while loitering around a newsstand when I was too bored, can't remember whether I was too early for an appointment, or the person I'm meeting was late. Anyway, at least 50% of the magazine is 'useful' material. The magazine can be subscribed from SPH:

http://circulation.sph.com.sg/worldatyourdoorstep/product_detail.asp?pd=94&pt=M

Conclusion

We live in an information age and sieving through the tonnes of garbage for useful stuff is getting harder each day. Life can be more pleasant if there are better one-stop, customised source of useful information one can easily digest to become knowledge and attain the wisdom to translate these into concrete results.

Investing is similar to gambling?

2010-09-17T22:48:00.002+08:00

Motivation

I read with interest an article published on Asiaone "Casino not so different to stock investment":

In the article, Kwon Oh-nam, CEO of Grand Korea Leisure, South Korea's leading foreigner-only casino was quoted as saying:

"... Some people get so obsessed with stock investment that they sit in front of the computer monitor to check Dow Jones all night long. Even if they do, some lose big money, but such cases are not criticized as much as gambling...".

src: http://news.asiaone.com/News/Latest%2BNews/Asia/Story/A1Story20100916-237501.html

This is something I totally disagree. Hey, that's not investing, that's stock speculation! And yes, to all things in life, there are plenty of opportunities to speculate, not just in stocks and casino, but in properties, commodities, currencies etc.

Stock investing vs Gambling

I've been to a casino once only, the one in Genting Highlands with my wife. We changed RM$50, yes one single $50 note, to chips and played at the "big-small" game table. Our chips are too few to warrant a seat, so we just stand around. We played till we are left with with $10 chips and en-cashed them back to cash, to 'complete' the 'process' of 'gaming' experience at Genting. I'd say the experience is thrilling and fun... at one point we almost doubled that $50 we started with and that occurred in less than 30 minutes of play. Such quick and solid returns can only occur in a gambling environment.

It is the same thing when one speculates. The 'bet' is quick and the 'returns or loss' are fast. Stock punters normally don't care whatever a company does for business (or still in business?) so long as its stock volume is huge and the price swings are there, buying and selling for potential quick profit is what they are after.

For investing, one have to study the company, read up on its past, its present and using available data, project its future...then buy, hold and wait... and the wait can last several years... no thrill, no fun to speak of. In short, its plain boring.

Its all about odds

If I define gamble as just a bet on an outcome one desires. Then all kinds of bets are merely subsets of gambling and the single factor that differentiates the groups is the odds. For investing, the odds are to the investor's advantage over the long run. For speculation, the odds are cleared staked against the punter.

For gambling at the casino, the odds are staked against the player and for stock speculation, the odds are staked against those with no insider info or those dependent on 'inaccurate tips'; but for investing, the odds of winning are higher the greater the margin of safety and a longer time horizon they are willing to wait, i.e. delayed gratification pays off.

Conclusion

Come to think of it, it is not only about the odds or what's right or what's wrong... but also knowing what one is doing. Its one thing when one knowingly gamble, but quite another when one confuse speculation with investing.

Stubborn HDB Property Bubble?

2010-08-28T09:33:00.004+08:00

Some of my friends painfully resisted buying a flat for the past few years, hoping that the property bubble will pop when the global recession erupted. But to their disbelief, the prices and cash over value (COV) continue to defy gravity and broke new highs. This prompted me to take a closer look at this bubble, why is it so stubborn!?

Demand

Looking at the past prices (available data from 04 to present):
src: http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatResaleIndex?OpenDocument

it can be seen HDB resale prices hit the bottom and remained there after '97 Asia Financial Crisis to late 2006. Though this period included the dot com bust (2000 to 2002) and SARS crisis (2003), there is still generally good economic and population growth (local + foreign). Thus it is quite unthinkable that demand for flats will remain stagnant for nearly 10 years!

Supply

From HDB FAQ, it can be seen that they massively overbuilt in 1997 and and apparently took them nearly 10 years to clear their stock:

...

With the BTO System, flats are built based on real demand. Before any BTO project proceeds, we need to have a clear indication of demand - where to build, what type of flats to build, how much to build.

In this way, there is better management of supply and demand. Before the BTO System, when we tried to build ahead of demand, we ended up with a huge oversupply situation when the financial crisis hit in 1997. Prices were depressed which did not benefit anyone.
...

src: http://askhdb.hdb.gov.sg/Home/hybrid/Themes/HDB/Answers_internal_check.asp?MesId=4604291&isCFP=&FolderID=0&ProjectId=7875909&reAskpage=answer.asp&SelectedCategory=&RecordQuestion=

So if HDB is not going to build ahead of demand anymore and thus assuming there will not be an over supply of flats in the future, then prices will have already found a floor and the ceiling will be determined by demand. HDB will continue to launch BTO until all the demands (genuine ones) are answered, judging from the number of projects launched in first half 2010 (already more than last year), more coming up in second half 2010 and even more in 2011 if necessary.

(src: http://www.hdb.gov.sg/fi10/fi10296p.nsf/PressReleases/B6B5E10434F42EB64825776900154FF8?OpenDocument)

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/1073777/1/.html)

With the recent drive to sustain economic growth based on productivity growth and not via cheaper foreign labour, the demand for flats should be moderated further. Thus I see that price increase will slow down and subsequently stay flat, but not come all the way down since there will not be a repeat of large number of excess HDB flats.

Conclusion

The era of cheap HDB flats (when HDB overbuilt or even cheaper during my parents time when flats sell at cost) is over. Whether or not the current prices or cash over valuation is justified is not really easy to answer. But should young couples continue to wait for a major price correction? They will need to weigh the opportunity cost of waiting for the price to come down versus the risk of paying much more should their combine income exceed $8,000. It will not be an easy decision.

Portfolio restructuring over the last 4 months

2010-08-14T09:39:00.002+08:00

Partially divested First Ship Lease Trust(FSLT) into Pacific Shipping Trust(PST) on 29 June 2010

I can count myself 'unlucky' that FSLT had 2 of its ships returned prematurely and took a big hit to its total outstanding contractual revenue and just blame this on the 'business' risk. But looking further into the business to understand that the risk is actually much higher than I thought actually attributes more blame to myself. The high yield comes at a price that I sadly have to pay. Most of the contracts are made when shipping rates are over inflated and ships overvalued. When all things come crashing down, the odds are basically heavily stacked against FSLT. It is already fortunate that only 2 ships are returned. The only good news in this midst of this gloom is that the worse for shipping seems over. Though the global economy is still not on firm footing for full sustained recovery, at least the chance of another big recession is quite slim.

I have a habit of raising funds from one sector and putting them back there. Though this make no investment sense, but nonetheless, its just my preference. I decided to divest part of my FSLT into PST. PST also have simiar structure like FSLT but with a more sustainable distribution payout policy and loan repayment scheme. Its recent distribution accretive acquisition is the main factor that entice me to cross over. Though I'm aware that they do not yet have the funds to acquire them and most probably will require equity raising in late 2010 or early 2011, I believe the yield will still be higher post capital raising.

To put things in perspective. There are two deep cyclical sectors I'm vested, Shipping and Oil & Gas (O&G) Support. Both are still going through pretty bad storms (poor demand and oversupply of vessels) and no one can tell when the storm will blow over. But I'm pretty sure when the sunlight burst through the clouds, the returns will be good. No better time to invest other than bad times.

Partially divested Singapore Airlines(SIA) into Singapore Airport Terminal Services(SATS) on 6 July 2010

If I'm optimistic about the future of SIA (versus the aviation gloom that just ended), I'm even more optimistic of SATS. As more people fly, both companies will benefit. In addition, for SATS, its newly acquired food business (Singapore Food Industries) is fast becoming a fat cash cow. From its annual report, it can be seen that its benefiting from the opening of the two Integrated Resorts. It is also venturing into Pig farming in Jilin province in China. My view is that SATS will become a strong food supplier as it diversify its income stream away from airport support services, an area that will only become more competitive as more players are brought into Changi Airport.

Took more profit from Cambridge Industrial Trust(CIT) into Starhill Global REIT on 29 July 2010

Though CIT was giving a yield of more than 10% versus that of Starhill Globals's 6%, but in terms of discount to net book value, at 50 cts, CIT is trading at 15% discount while at 58 cts, Starhill Global is trading at more than 35%. Looking through the assets of Starhill Global (Ngee Ann City, Wisma Atria, freehold David Jones Building in Perth, Australia, freehold Roppongi Terzo and PRIMO in Tokyo, Japan) I personally think they don't really deserve to trade at such a 'steep' discount when Capitalmall Trust trades above its net book value! Thus for Starhill Global, I'm looking for at potential for capital appreciation rather than cash flow from dividends like CIT.

Conclusion

While the worst of the global recession seems over, the economic recovery does not seems to be on firm footing yet. Some of the stimulus spending initiated by governments across the globe are not terminated yet. In fact, US actually pledges to further increase their stimulus spending. Thus I presume most of the financial performances reported so far do not reflect their true potential when the global economy fully recovers. Hence I see more investment opportunities ahead, as market overreact to negative news that comes out once in a while.

Shopping vs Investing, behaviour peculiarity

2010-08-06T22:52:00.001+08:00

Sale!!!

Whenever there is some genuine sale giving 'huge' discounts, e.g. 50%, 70% off original price. There'll always be enthusiastic crowds grabbing the items as if things are going for free. I recently encountered one for branded handbags near my working area. Most shoppers are predominantly ladies who seems to have a mental database of each item and their prices. They knew their 'true' worth and face no problem telling which are the real bargains. Thus seldom do I see them regret their purchases.

Stock market sale

While Great Singapore, Christmas sale happens regularly once a year and some sales never seem to end (e.g. Courts), sales in the stock market occur much more unpredictable and sporadic. In contrast to sales in Orchard Road that drew crowds, sales in the stock market scare away people. The greater the discount, the thinner the trading volume.

Inflation

When energy prices goes up, people complain of higher transport cost, higher utility bills, higher food prices. No one is happy. But when the stock prices shoot up, the trading volume increases. The crowd are happy. The higher they go, the happier they are to snap one the shares like hot cakes.

Conclusion

On the surface, it seems like people have 2 brains, one for daily use, the other for stock market. The latter is obviously faulty. However, drilling a little deeper, I can think of 2 reasons for the apparent difference. First, perhaps, have got to do with valuation. While it is quite easy to know the 'true worth' of an IPHONE 4 or a LV bag, it is not so easy to put a value on a particular stock. And when the price of that stock one had been painstakingly research drops like a rock, the further it goes down, the more the person doubt his analysis. Second, greed. It might seems easy money to buy and sell something that continue to worth more with each passing second. Doesn't matter if one is buying high to sell higher, so long as there's a ready idiot to buy from them. While the problem of valuation could be mitigated by diversification and margin of safety, the problem of greed can only be solved when one become the last idiot to buy at the highest price.

I bought Mermaid Maritime, United Envirotech and Aspial

2010-04-25T14:21:00.019+08:00

No longer had the luxury of time to blog on each and every transaction within days, I might as well consolidate them into a single article and post them when I had the time. Anyway, it will still serve my intended purpose to track what I do over the years and still garner some feedback, though not as timely as I hope to. But life is all about compromise, isn't it?

New addition to my portfolio since the MacArthurCook Industrial REIT error

Mermaid Maritime on 19 January 2010
United Envirotech Ltd on 22 March 2010
Aspial 22 April 20

Qualitative Reasons behind Actions

1. Mermaid Maritime

Despite seemingly increased effort to cut dependence on oil by going into other forms of energy or greater 'green' efforts on energy conservation, I doubt the demand for oil will be drop in the next 10 years, enough for me to double my returns on all my oil related businesses. After SPC, CH Offshore and KS Energy, Mermaid Maritime is my latest acquisition in this business. Other than SPC, all of them are involved in support related services in the Oil & Gas industry. For Mermaid Maritime, they are primarily involved in tender rig drilling and sub-sea engineering. What attracted me was their seeminly good financial health (cash and equivalent slightly exceeds outstanding debt) and actually traded below net tangible assets.

2. United EnviroTech

If I'm crazy about oil & gas, I think I as crazy over water too, the other critical resource. I actually got into Dayen Environmental Ltd and got out immediately after I discovered a can of worms. The problem with me was that until I'm am vested into something, I could not find the energy to drill deep enough beyond the business nature, prospects and reported financial. When I knew Dayen actually had disclosure issues (one of them relates to reporting profits and projects clinched but not losses incurred), I got out as soon as I can and fortunately market irrationality allow me even to exit with some profit!

Anyway, back to United Envirotech Ltd (UEL), though registered in Singapore, they derived their revenue predominantly from their business in China. The Chairman and CEO, Dr Lin Yucheng was recruited by the Singapore Economic Development Board in 1990 to conduct research and development work in SISIR (Singapore Institute of Standards and Industrial Research), Singapore. He subsequently set up a subsidiary under the Singapore Productivity and Standards Board (PSB)- formed from the merger of National Productivity Board (NPB) and SISIR. The company was involved in environmental, health and safety standards consultancy and environmental engineering. This will later become a subsidiary of UEL.

Now, UEL is involved primarily in turnkey projects or building and running of waste water treatment plants in China. The latter provides increasing amount of recurring income and stablises their profitability. One interesting thing about UEL is that it is in almost net cash, not really because they are that great in utilising internal resources for building projects but always raising equity when they need the cash, as the recent two placements show. If I am a major shareholder, I won't be happy with the dilution. But as a small shareholder, I am pretty fine so long as I still get my returns.

3. Aspial

Aspial had 3 business, jewellery via Lee Hwa, Gold Heart and Citigems; Pawn brokerage services via Maxi-Cash and property developement. It is the 3rd business that attracted me to this company. By now, the property bubble in Singapore is already too obvious to ignore. If so, why do I still choose to buy Aspial? The reason being that Aspial seems to buy only freehold land for development and was 'fortunate' enough to buy most land at relatively low price before the surge in 2H FY09, though it could be much cheaper even earlier after the global financial crisis erupted in FY08. Anyway, the way I read it was that if the bubble continues, they can develope properties to sell at a handsome profit, else, they'll just have to sit on their land, anyway, freehold land don't depreciates.

Conclusion

Wow, that's 4 transactions squeezed into one article. Hopefully as my baby girl grows up, I can still find the time to blog, though my primary 'duty' is still to spend as much time as I can with my beloved baby girl. Once I can get her a little sister or brother, hopefully I can outsourced the attention to themselves, mutual perpetual attention supply via playing, quarreling or fighting ;)

Valuer for HDB units, an easy job?

2010-03-20T10:38:00.007+08:00

After years of painful search and watching the property prices continue to defy recession forces, a friend of mine finally settle for flat in a mature estate with about $50k above (already high) valuation. Querying the valuation of the flat, I discovered it is valued at the higher tail end amongst recent HDB resale transaction. And yet my friend is paying $50k above this.

HDB valuation methodology

I came across a recent article to the Straits Times forum from the Singapore Institute of Surveyors and Valuers commenting on HDB valuation:

...
For homogeneous properties such as HDB flats, the common valuation method adopted is the direct comparison approach. This approach is similar to that used by a potential buyer when considering the purchase of a flat. He would look at the location, consider the age, size, design, height and other important characteristics of the flat and compare the prices paid for comparable flats in the locality.
...

src: Straits Times Forum: HDB flats: No new valuation method

However, it seems to me the valuer simply value the flat based on recent transaction, pegging to the sales in the higher percentile.

Valuer and Stock Analyst

I commented on market-biased analyst before in my earlier article, Analyst's analysis --- to be taken with a tonne of salt? that many simply value stocks based on market sentiment, i.e. using high P/E ratio to derive stock valuations during market exuberance and conversely using low P/E ratio when sentiments were poor. Valuing HDB properties by tagging on to the high end of recent transacted prices is no different.

Boom Bust Cycle - here we go again

Sentiments in the property market is definitely pointing north. By valuing flats based on the higher percentile of recent transactions and willing buyers paying hefty cash over value over the inflated valuations to form the next higher transaction price, only lead to self-sustaining perpetual runaway valuations. The stock market parallel being investors bidding up stock prices fueling analysts to issue buy calls with even higher valuations by finding means to justify higher P/E ratios.

The Tipping Point

Any sane investor who lived long enough will know that surging prices will not reach the moon one day. Many events, usually unexpected, could put an end to all such craze and caught many by surprise even if there will be more 'experts' coming out to warn people as prices continue to defy gravity. The direct opposite will occur when prices tumble as all tried to exit the market at the same time. Stock analysts will slap stocks with ever lower P/E ratios as market sentiments continue to worsen. When sellers of HDB flats begin to sell below valuations that they finally agree to be over inflated, this leads to lower transaction prices and hence even lower valuations for other sellers.

Conclusion

While price surging and plunging in accordance to economic cycles is a natural phenomenon, the amplitude can be better managed if all valuers (analyst and property valuers) can be more impartial in their analysis, anchoring their judgment on solid fundamentals instead of ambient sentiments. Buyers (flats or stocks) need to do their part too, in not outbidding each another to ridiculous prices.

Do we need to monitor the stock market so closely?

2010-03-06T11:39:00.005+08:00

Hectic but fruitful life after a new entrant

Ever since my girl was born and my confinement lady left, life have been very hectic, tiring and sometimes frustrating. Eventually, when she learnt to smile at us, its had been one of the happiest moment of my life and instantly felt all this was worth it :). Looking back, my last post was more than 3 months ago and I haven't really got the time to meddle with my portfolio or look up company reports ever since.

Missed opportunities?

As my girl grow up, nearing her fourth month on earth (not counting the time she spent evolving in my wife's womb), she finally seems to be able to adjust to our earthly culture and give me some peace to do my stuff without constantly crying and requiring us to decipher what she want. So finally I an able to find time to stock take on my portfolio, read up a little on my companies and what had gone on in the last 3 months. Surprisingly (at least to me), I neither didn't miss much of the action nor any really great opportunities. As far as fundamentals go, the reporting seasons only occur once every 3 months and the last one was just concluded. Looking at the results and outlook stated in the financial reports of my companies and those I'm interested in, none really warrant much action and there isn't really much changes in their stock price for me to bang wall on missed opportunities.

Investment style for the busy

I recall speaking to friends or colleagues on investing. Many who believe in the need to invest would rather outsource the task via funds, citing the reason of being too busy to monitor the stock market. Looking at my current situation and looking back, I can confidently reiterate that self driven investment doesn't really need to take up alot of one's time.

Exploiting economic cycles

For the ultra-busy who have nothing much to spare other than to breathe, they can easily exploit economic recessions the likes of 1983, 1997, 2001/02 and 2008/09 to pick up decent blue chips are cut throat discounts. All they need to do is understand the business of these blue chips and are confident they will survive the economic crisis. Once the storm blow over, they will be siting on huge paper profit.

Exploiting business changes

For those who can afford a little more time, they only need to check SGX every 3 months during reporting seasons for updates. There will still be some meat left to exploit business turnarounds (which will take a few quarters for the company to return to solid performance) or new lucrative business ventures (which will also take several quarters before these new directions pay off handsomely in terms of better profits).

Conclusion

Looking forward, I will not have the time to invest or blog as much as I like to, but I can be sure I will still be able to realise my goals for my investment.

Investing in REITs - Really for the yield?

2009-12-26T14:04:00.019+08:00

Business model of typical REIT

People invest in Real Estate Investment Trust (REIT) primarily for the stable dividend yield. REITs are supposed to provide good source of passive income for those with neither the cash nor the leverage capacity to invest in typical properties for passive rental income. Is this really so?

Before answering that question, let's look at the business model of a typical REIT. In layman terms, REIT acquire properties and lease them out for rental income. The funds for acquisition comes either from shareholders (share issue), banks (loans) or both. REIT is supposed to pay out ALL profit from rental income less all other business expenses (including bank loan interest) required to keep the REIT alive.

During Good Times

When the economy is booming, demand for factory, office and retail space pushed up rents and hence the record rental income for REITs, pushing up the dividend per unit (DPU) of these REITs. However, the prices of these REIT surge even higher, and hence the yield is actually very low. For blue chip REIT like the Capitalmall Trust, yield got as low as mere 3 to 4% in 2007. At such yield, I am quite puzzled whether the investor are indeed after the dividend yield.

During such time when demand for practically everything is high, profit is easy to come by and credit is even easier. DPU accretive property acquisitions continue to be made even when property bubbles seem to form. Perhaps the REIT management think no matter how much they pay for the properties, with easy credit, they can always milk much more from the tenants. Perhaps investor think the same way too, and look pass the current depressed yields for brighter future returns.

During Bad Times

Unfortunately, all good things must come to an end one day, especially those built on excesses. The subprime crisis put an end to the easy credit and the ensuing recession saw demand for factory, office and retail space plunge, driving down rents and rental income for REITs. Since REITs pay out all their profit, little is left to repay debts and when the loan are due, some faced problem refinancing their debt. Investor confidence in such REITs sunk like a rock in water. For example, Cambridge Industrial Trust, without a strong sponsor and concern was material that it might not survive, its annualised yield at one point went above 25%!

Inherent to the REIT's business model of growth by debt and paying out every cent less all expenses, continual injection of funds is their sole source of life sustaining blood. Thus capital call in form of debt refinancing (at prevailing interest rate) or equity raising exercise via rights or placement is inevitable.

For debt refinancing, the consequent is dip in DPU if interest rate is much higher than before.

But for equity raising exercise, dilution becomes a significant concern for those who do not have the funds to subscribe to rights entitled to them or left out cold in an event of private placement to new shareholders. The latter is especially unfair to current shareholders and normally met with angry shareholders like the recent case of MacAuthurCook Industrial REIT's dilutive recapitalisation plan.

Whichever route the REIT take, by virtue of their business model, high DPUs or high dividend yields are never sustainable.

Conclusion

If high yields or high DPU is not sustainable, is REIT never a worthwhile investment? I don't think so. Like all businesses, each have their intrinsic business cycles and one can benefit by exploiting the ups and down. For REIT, during recession, rents are low, property valuation are low, credit are difficult to come by and share prices depressed. At this juncture, the moment they can sort out their outstanding debt issues (i.e. refinancing, rights, placements), there is no better time to buy them and await the eventual economic recovery.

Thus in my opinion, REIT is better as a one-off capital appreciation investment than long term passive income generator.

6/6 Hindsight vs 0/6 Foresight

2009-12-11T12:43:00.015+08:00

6/6 Hindsight

Comment and analysis articles started popping up everywhere after Dubai World requested creditors to delay debt repayments for 6 months. Articles explaining how the collapsed of these property castles built on shaky grounds of leverage was just a matter of time and listed so many warning signs that any idiot could predict this crisis with ease. This kind of postdated prediction also occured after the subprime crisis erupted in the United States.

While it is true that genuine warning signs were indeed present and if people took heed, many of such crises could have been avoided. But in this era of information barrage, where one has to sieve real information from fake, good from bad and useful from useless, spotting a few true red flags from countless fake cry wolves are always a challenge.

0/6 Foresight

Future cannot be predicted but with adequate preparations and precautions, adverse consequences could be mitigated or potential opportunities exploited. That's precisely the reason why I neither believe nor made sense of technical analysis. Looking back, any bottom or peak looked so obvious, but looking forward, how many times had a double-top resulted in even higher 'top' when the forward 'obvious' would have been a sell down or profit taking? But understanding and appreciating economic cycles would give one a much better 'foresight' as all good things must come to an end one day or fine weather will one day re-emerge after a terrible storm.

Mistakes in investment

Commenting on the China-based firms listed on SGX and their corporate governance concerns following a year of scandals afflicting a few such firms, SIAS chief, Mr David Gerrad, mentioned business failure and human failure. I could not agree more that investors are already prepared for the first failure but not the second. That is what investment is about. Looking at my past mistakes (right up to the most recent one involving Macauthurcook Industrial REIT, MI-REIT), I need to add that human failure has another dimension- human failure by the investor.

Human failure on the corporate end cannot be tolerated but sad to say, can't really be avoided (if the management is out to be shady). But human failure on the investor side can be avoided if he exercise more care in his research on the company. Blame my luck if the CEO or chairman runaway with the company's cash but blame myself if I count my beans wrongly. Thus MI-REIT is my most painful mistake despite being one of the least costly simply because it is a systematic error on my part.

To me, business failures are random errors that can be mitigated by diversification & margin of safety. 0/6 foresight dictates that luck plays a part in the eventual outcome. However, human failure by the investor is a systematic failure that will skew the final result for the worse.

Conclusion

I neither bother to improve my 0/6 foreight nor believe it is ever possible unless I have privilege information, so all I can do is to be more careful and meticulous (being careless or lazy is a fatal flaw for any investor profile) in my future investment adventures.

I bought MacArthurCook Industrial REIT on 18 Nov --- a bet gone wrong?

2009-11-21T14:20:00.009+08:00

Some history

6 November 2009: MacArthurCook Industrial REIT (MI-REIT) announced a severely value destructive recapitalisation plan on the 6 November 2009.
11 November 2009: Cambridge Industrial Trust (CIT) annouced the usage of $10.5m out of $28m from recent private placement to acquire 9.76% interest in MI-REIT.
16 November 2009: CIT alerted MI-REIT unitholders to the value destructive nature of the recapitalisation plan and urge them to vote against the resolution at the EGM on 23 November. They intend to vote out the managers of MI-REIT and install themselves as the manager of the REIT.
17 - 20 November: Separate rallying announcements, newspaper ads by CIT and MI-REIT to seek support against and for the recapitalisation plan respectively
20 November: MAS announced that it will not approve managers of CIT to manage MI-REIT due to potential conflict of interest.

The recapitalisation plan

Issuing 78.5m new units to AMP Capital Investors (AMPCIL) at 28 cents
Issuing 142.9m new units to Cornerstone Investors at 28 cents
Issuing 975.6m rights at 15.9 cents (2 rights for 1 MI-REIT unit) to all unitholders, including AMPCIL and Cornerstone Investors.

With 266.4m outstanding units as at 30 September 2009, new units constituted a hefty 83% of existing units! No wonder the dilution and value destruction are so severe!

Value destruction

From the proposed recapitalisation plan announced on 6 November, the financial effects pre and post recapitalisation are stated as follows:

Before

NAV per unit: 92 cents
DPU (half year): 3.45 cents
Yield (annualised): 16.8% (based on MI-REIT unit traded at 41 cents)

After

NAV per unit: 31 cents
DPU (half year): 1.04 cents
Yield (annualised): 9.3% (based on MI-REIT unit traded at 41 cents)

Issuing new units to AMPCIL and Cornerstone Investors at 28 cents a share at a discount of 30% to traded price of 41 cents before the recapitalisation plan was announced and 70% discount to NAV was upmost unfair to existing shareholders!

Better to let it fail?

Before the announcement of the recapitalisation plan, MI-REIT was trading at about 40 cents, or 56.5% discount to NAV. After the recapitalisation, if the market continue to value it at the same discount to NAV, it would mean a share price of about 13.5 cents!

Allowing MI-REIT to fail would mean a fire sale of its properties. Though the process will take some time and most, if not all, would go at a huge discount to last the valuation on Sep 2009, existing unitholders can use the NAV per unit to guage how much they will get back. Assuming a 50% discount to NAV, each unit can still fetch 46 cents! This is already much higher than the 31 cents NAV per share after recapitalisation and even higher than the 41 cents before its announcement!

A bet gone wrong?

It was only after CIT highlighted the severe value destructive nature of the recapitalisation plan that I find out more about it. Satisfied that the ridiculous plan is indeed a totally unfair deal for existing shareholders, I am willing to bet that they will not support such a deal. Since it was a bet, I decided to risk less and bought less than what I normally would for other investment. Thus I bought some on 18 November.

I was hoping that the plan will be rejected, CIT take over MI-REIT, and come up with a fairer recapitalisation plan, e.g. rights, new loan facility etc; restructure it, sell off unperforming assets and ulimately merge the two REITs.

However, that hope was dashed when MAS announce it would not approve CIT's managers to manage MI-REIT on concerns for conflict of interest. Thus my only hope left was to see the recapitalisation plan get voted down and have MI-REIT liquated to unlock its value for existing shareholders.

Conclusion

Investment is all about risk and I am willing to take calculated risk. I did my sums and theoretically, the ridiculous recapitalisation plan should be voted down. However, as there are sometimes no logic in market behaviour, I can't be too sure until the votes are counted.

Cut loss on United Food and Ocean Sky, invested into Suntec REIT on 28 Oct 2009

2009-10-31T10:03:00.015+08:00

United Food Holdings

Mistakes are mistakes, no matter how they are packaged. United Food Holdings is one of the most spectacular value destructing business on my portfolio. Starting with a huge cash horde which translates into a large cash per share, it can easily qualify as one of my best cigar butt. But as time go on, the management demostrated outstanding capability to drain it with seemingly failed but huge investments (land, soya beans).

Ocean Sky International

Unlike United Food Holdings, I did not classify Ocean Sky as a cigar butt in the beginning. However, just like any typical manufacturers hit hard by the falling orders due to the ongoing economic recession, they are driven into quarterly losses.

Suntec REIT

Looking at the falling office rents, sliding occupancy rates, Suntec REIT might not seem to be a good investment option. However, even at current dismal rents and occupancy, Suntec REIT already offer nearly 10% yield based 3Q DPU and the price I bought.

Going forward, I have reasons to be optimistic about rising rents, occupancy rates and hence DPU. Looking at the Prime Grade A Office Rental Trend posted in the 3Q presentation slides, rising and falling rents just mirror cycling economic trends. As such, once the economy regains firmer footing, the demand for office space and retail space will resume, and especially after the completion of Marina Bay financial centre and Sands IR that further bring more vibrancy into the area. But in the short term, rents and hence DPU for Suntec REIT could worsen before it get better.

Action

I can choose to sit on United Food and Ocean Sky, especially the latter, and wait for them to recover with the broader economic situation. But going through my options, I see more potential in Suntec REIT than Ocean Sky, in terms of recovery.

Took profit on Cambridge Industrial Trust and Courage Marine on 2nd October 2009

2009-10-18T16:02:00.004+08:00

Rationale

Both had almost doubled in share price since I acquired them. For past investments, I would have sold 1/2 of my holdings to recover my capital and let the 'profit' grow. But for Cambridge Industrial Trust (CIT) and Courage Marine, I decided to trim my holdings by about 1/3 each instead.

I decided to keep more of their shares because I am still confident of their potential to grow much further once the regional and global economy recover strongly.

On the other hand, I still took some profit because no matter how big that potential is, I prefer to diversify and raise cash for future investments.

Reinvested remaining proceeds from SPC into KS Energy on 29 September 2009

2009-10-10T12:12:00.010+08:00

Motivation

Despite the recent oil price correction from above USD $147 last year to current level fluctuating around USD $70, I believe the demand for crude oil for energy needs, and accompanying support services will surge again as the world economy gets back on its footing.

KS Energy

KS Energy operates in the oil & gas industry. It has 2 main core business segments, trading of capital equipment and provider of capital equipment chartering, drilling and rig management services. It is the latter that I see potential.

Business Performance

Ignoring other operating income that normally arose from divestment of investment or interest income, profitablitiy seems to turn the corner since 3Q 2008. With a lower base in 3Q 2008, 3Q 2009 should see a better improvement in earnings.

Reason to be optimistic - leveraging on more economic locomotives

The surge in world demand for resouces in 2007 to 2008 might be only a prelude to a much bigger one in the next decade, 2010-2019. The global economy used to be pulled by one major (US) and several smaller (Eurozone, Japan) locomotives. The next decade will see, for the first time in recent history, several huge locomotives in operation together. These include US (awaiting recovery), China, India and Brazil. Together with the support locomotives from Eurozone and Japan, the pulling force in the next decade could be very powerful.

The consequence is a surge in demand for resources and services the world can ever produce. Unfortunately, the demand cuts both ways. On one hand, asset and security prices will be boosted and the next bubble that dwarf the one that burst in 2008 may well occur. On the other hand, inflation will break through the roof and governments around the world will have a hard time containing it.

Unless there is a concrete switch into alternative sources of energy, demand of oil and gas and its supporting services surge again, on a much larger scale. This is where I believe KS Energy, CH Offshore (that I invested earlier) and many other (currently more expensive) providers will stand to benefit.

Risk

One of my main point of concern for KS Energy is its debt, though it manage to reduce it somewhat via recent fund raising activities. KS Energy's growth and expansion strategy is much more aggressive than CH Offshore and I hope it does not more grow broke. Even though the recent credit crunch is easing, there is still a high chance it can occur again in the near future.

Conclusion

With the investment in KS Energy, my investment in oil & gas industry is more or less completed. I'll turn my attention to food commodities now, for the same reason I go into oil & gas segment.

Investing in gold, a worthwhile option?

2009-09-19T10:49:00.009+08:00

As gold price rose past USD 1,000, there seems to be a renewed interest in investing in gold. I am pretty curious to find out whether this is a worthwhile adventure.

USD quoted commodities

As with many commodities such as crude oil, gold is quoted in USD. When USD depreciates against major world currencies, gold prices tend to rise in assumption that value of gold remains unchanged (neglecting inflation to keep the discussion simple). If this assumption is true, then investing in gold for anybody leaving outside United States becomes more of a forex investment than a commodity investment.

Is gold expensive now?

The following charts shows the gold prices in USD and USD/SGD exchange rate over the same period.
source:

gold prices: http://www.goldprice.org/gold-price-history.html#36_year_gold_price
currency: http://sg.finance.yahoo.com/currency

Indeed, for Singaporeans, the gold price looks like a mirror image of USD/SGD exchange rate chart. Thus, is gold expensive or cheap now?

In January 2005, gold cost about USD $430 an ounce and 1.63 SGD fetch 1 USD then, thus it was about SGD $700 an ounce. Today, 18 September, gold cost about USD 1,014 an ounce and now 1.4149 SGD fetch 1 USD, thus gold cost $1,434.70 now (about twice as expensive). That is a growth of slightly over 100% versus inflation of about 10% in the corresponding period. Thus I do think gold IS expensive now.

A different conclusion might be derived using data stretching beyond 2005 but I could not find these historical figures. Nontheless, looking at historical gold prices:

gold was never more expensive.

Investment opportunity?

As with ANY rationale investment, I aim to buy low and sell high and profit from the difference. While buying high and selling higher can be potentially profitable, the risk could be disportionately higher and not a route I am keen to take.

However, assuming quoting gold in USD is a thing to stay (similar problem afflicts crude prices), as USD budget deflicit widened and current account deficit worsen as US try to spend their way out of recession (essentially printing USD), USD against major currencies (incl. SGD) could continue to slide, thus providing a strong lift for gold prices.

How far US deficit will grow, how far USD will continue to slide and how much lift could be provided for gold is anybody's guess and I'm NOT comfortable with betting on it.

Alternative investment?

On the assumption that US cannot allow fiscal deficit to grow indefintely and hence USD will not depreciate beyond gross cost of paper it's printed on, USD (against SGD) could be a better bet. i.e. an even riskier bet of buying 'cheaper' USD now, wait for the US recession and budget deficit storm to blow over (how long?) and buy gold when USD regains its strength. By then, gold price will have come down and USD will have traded much higher against SGD. Gold becomes cheap once more.

Physical Gold, anybody?

It is quite apparent I'm not keen on gold as an investment. But I did toy with the idea of buying some physical gold for fun, i.e. just to feel shiok. No, I'm not talking about gold jewellery, but real, solid gold.

Phyiscal gold can be purchased from UOB at a premium above traded price and prevailing GST. While a kilo-bar is too expensive to buy and crazy to leave it at home, a bullion coin is nice to keep as a souvenir. Maybe I'll get one when the gold becomes cheap, again.

Reinvested funds from SPC divestment in Thomson Medical Centre on 28th August 2009

2009-09-01T23:04:00.014+08:00

Motivation

I see potential in SPC and was prepared to hold on for the long term since I got it when the oil industry was in its doldrums. I was still hopeful that more than 10% of minority shareholders of SPC could hang on to their shares. Unfortunately, PetrolChina easily collected more than 90% of SPC's shares and 'forced' me to divest my holdings. As a consolation, at least I'm fortunate to make slightly over 120% on my investment in SPC.

Anyway, with funds I raised from my sale of SPC, I plough some back into the market and bought Thomson Medical Centre, my 2nd investment into 'growing or recovering' but neglected businesses, after Food Junction (all in one day).

Thomson Medical Centre, TMC

One can read about TMC from their website and financial reports. In short, they aim to be a leading healthcare provider for women and children and its developments over the years indeed indicate that they are moving in the right direction. Other than the usual obstetrics and gynaecology (O&G), paediatric services and fertility treatment services, they set up the Thomson Women Cancer Centre, TWCC. TWCC is dedicated to the prevention, diagnosis and treatment of breast, gynaecological and colorectal tumours in women. Recently, they announced the setting up of the Thomson Chinese Medicine Pte. Ltd.

Performance

Is it explicitly mentioned in TMC's 1Q 2009 financial statements that the group seeks to grow organically. That explains its low gearing below 5%. As such, the fact the TMC can grow steadily over the years is quite impressive, at least to me.

Reasons to be optimistic

Branding (Singapore, not TMC)

Singapore's status as a Medical Hub in the region boded well to attract a healthy load of clients for TMC's services. Though the fertility rate of Singaporeans is pretty low, the countries in the region are still very productive. Given the growing affluence in the regional countries, especially the higher income group, more will come to Singapore and TMC will be one of those to benefit.

One of the first choice among private hospitals

Among my friends and colleagues, if not KK, TMC is the overwhelming first choice they choose for O&G services. It seems to me that TMC is the most affordable private hospital if couples choose to pay more. To gather more clients, TMC actually have 7 Thomson Women’s Clinic spread across the island to refer perspective mothers to TMC.

Risk

TMC seems to be more like a hotel than a hospital. In an attempt to grow, their services become more commercialised than personal. A few couples I know choose not to go back to TMC for subsequent child and instead headed to Mount Alvernia or Gleneagles Hospital (basic package is just slightly more expensive than TMC). Hopefully TMC will take note of all customer feedback and improve their services as they grow.

Conclusion

As the region's economies grows out of the current recession, there should be more babies to come along and help TMC to fulfill is dream to be the leading healthcare provider for women and children.

Traded Tsit Wing for Food Junction on 28th August 2009

2009-08-29T14:13:00.014+08:00

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

2009-08-16T10:18:00.006+08:00

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:

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

2009-08-08T10:01:00.027+08:00

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.

Interest rates are often pegged to SIBOR, Singapore Interbank Offered Rates and historically fluctuated between way below 1% to as high as 8%.
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.
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 :)

First Ship Lease Trust - Back to Earth

2009-07-26T16:23:00.014+08:00

2Q 2009 Results

First Ship Lease Trust, FSLT announced its 2Q 2009 quarter results on 21st July, 2009. Forward DPU forecast came in at 1.5 USD cents, much lower than the 3.08 USD cents ever announced. Rather then feeling disappointed, I felt reassured of my investment instead. The forecast of 1.5 USD cents DPU was arrived at by setting aside 50% of free cash flow to pay off debt, rather than distribute to shareholders. This, in itself, is more prudent and sustainable in keeping FSLT afloat.

Impact on FSLT

The following table illustrates the impact of DPU cut and the increased voluntary debt payment will have on FSLT:

Assuming 50% of operating cash flow is used to pay off debt totally, the amount of outstanding debt by 1Q 2012 (first bullet payment becomes due) is reduced by 20.62% to 395m USD. The value-to-loan ratio will have been 175%. Interestingly, the current loan-to-value ratio is 176%. Against the value-to-loan covenant of 145%, seems to me 30% is the comfortable margin the management intends to maintain.

If so, unless FSLT is slabbed with higher interest rates by the lenders, chances for further cut in DPU is unlikely.

Personal Performance

So what does the cut in DPU mean to me, as a shareholder? The following table illustrates my own valuation of FSLT on my portfolio:

From a huge paper loss when FSLT plunged way below 40 cents in March earlier this year, the share price of FSLT had recovered to paper gain for me (factoring dividend payout so far). As shown in the projected future payouts using 1.5 USD cents as a guide, my investment in FSLT will only remain barely profitable, unless the equity value improves instead of decline (factoring dividend payout) as projected.

The missing piece

Cutting the DPU and making higher loan repayment is only one critical step in the right direction. If the managment is really sincere in creating value for shareholders, more had to be done.

Firstly, once the share price recovers to a more realistic value, say 87 SGD cents (10% annualised yield), the management should seriously consider a rights issue to clear the debt and make DPU accretive acquisitions again given current down-to-earth valuation of ships. The dilutive effect will be significant, but it will go a long way for supportive shareholders who does see a future for FSLT beyond 2012.

Secondly, once the credit market resume back to 'normal' before the subprime induced credit crisis, the management should re-negotiate a more realistic and sustainble amotizing debt repayment scheme with the lenders.

Conclusion

Now that FSLT is back to earth, it should seriously consider making more earthly decisions to grow FSLT in a more sustainable and profitable fashion. Just like Tsit Wing, I hope to make good money (ROI), not merely breakeven. For now, I still see a potential in FSLT.

Returns on Investment

2009-07-18T15:21:00.023+08:00

Joke

I came across the following phrase (can't recall the exact words but should not be too far off) via some SMS joke:

人生最遗憾的事是人死了，钱还没花光。
人生最悲惨的事是人没死，钱却花光了。

Just in case the underlying message is not clear, let me punch in further with the following crudely drawn graph:

I assume most of us come to this world naked and debt free. For the majority (or is it minority now?) without access to FMS (father-mother scholarship), it's normal to take up some loan to see themselves through tertiary education, thus it could be well into a third of our life (point C) that we manage to pay off our debt and start to pile on our net worth.

The interesting thing about the phrase above is whether most of us will actually reach point D. I do hope to move on before reaching point D, and leave behind some inheritance, either to my children or some charity. But looking at current advance in medical science, chances are I'll survive beyond point D and have the medical bills drag me into negative equity.

We only live once

Depending on the state of maturity, one will begin to differentiate between wants and needs. But looking at life's many uncertainties (natural calamities, sudden illness, accidents, terrorist attacks etc), why don't I pamper myself or my love one a little more, so long as the want is affordable? Anyway, we only live once right?

Yes and No

The key to the answer is no one knows when he or she will depart. (Oops, I'm going to rule out suicide here) One can indulge in anything all he wants, so long as he is 'fortunate' enough to leave this planet before point D, but so long as the probability is material that he might survive beyond point D, it always make sense to be a little more prudent.

Returns on Investment

I'm not discussing the investment in the specific sense (equity, bonds, commodities etc), but investment in general - i.e. what one gets as returns for something one gives up in the first place.

How long I will live, I don't know and I'll just let fate have that juridiction. I'll just focus on my life and my love ones. Having said that, I would think it will make more sense to ensure an effective and efficient use of my resources, be it time, money or energy (e.g. my attention or effort). In other words, if time, energy or money are my 'investment', the product, services, accomplishment etc i.e. 'returns' I get back must be worth the hours, dollars or effort put in. Returns on Investment must be maiximised.

Tangible and Intangible

It is always easier to focus on the tangible:

Investment: Money
Returns: Material Goods & Services such as Car, Condominiums, Grand Piano, Concerts

But overlooked the intangibles:

Investment: Time, Energy, Opportunity Cost (Could have done something or bought something else)
Returns: Sense of accomplishment, Satisfaction, Unintended opportunities

Thus while it might look crazy to some (especially myself) why there are people willing to take up huge loans, slog themselves like a hamster on a jogging wheel, just to buy the Continental Car, the Condominium with the great view or for interest sake, a Grand Piano of respectable standard etc, we must understand that the perceived returns on their investment is huge.

Margin of Safety

It will be another matter altogether if the perception is wrong in the first place. To borrow an equity investment concept, it is beneficial to be prudent and 'invest' only when the estimated, perceived 'returns' is much more than the 'investment'. Should the 'returns' fall short of expectation, chances are the 'returns' is still higher than the investment, i.e. hopefully, it will still be money well spent or worth the effort. Saving one the trouble of banging the wall.

Conclusion

Every Return is valued differently by different individual, as long as by ones' standard, the returns far outweighs an affordable investment one puts in, his or her resources is optimised for the life he or she desires.

(For all Tsit Wing minority shareholders's info) Meeting at Leng Kee Community Centre

2009-07-12T11:13:00.003+08:00

Just doing my part to disseminate the following information to interested minority shareholders of Tsit Wing:

Date: 29July09
Time: 1800 - 1900 hrs

Place: Leng Kee Community Centre, Room 02-05
400 Lengkok Bahru, Spore 159049 (7 mins walk from the Redhill MRT station)

HDB Prices - Still so sticky???

2009-07-11T10:10:00.005+08:00

In my earlier post on property prices in February this year, I shared my view on why I think there are still room for the prices to drop further. However, one waiting since then will be quite disappointed to note that the prices are still very sticky, especially HDB resale prices:

(src: http://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20Resale%20FlatStatistics%20-%20Resale%20Price%20Index?OpenDocument)

High prices to stay?

I came across at least one article that doubts the prices can be sustained for long. But prices seems stuck on an up trend, although at a slower pace. To provide potential glimpse of the future prices, HDB had voiced their position:

Mr Mah continued: "If there is increased demand, yes, we will push out new flats. But we cannot be building new flats to cater to every last person who wants a new flat because if you do that, you are overbuilding and you don't want to do that. So some of the new demand will have to be met by resale flats."

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/441255/1/.html)

Comparing DBSS and Resale Condominium in the suburbs

If high resale prices are indeed here to stay, what alternatives are there? Personally, if I can afford to wait, I'll prefer the more reasonably priced BTO in the suburbs. Anyway, I'm living in Sengkang but my parents live in Queenstown and my in-laws in Toa Payoh, though my wife and I do hope to live near them.

But for those who value location above everything else, they can either get the resale flat they wanted and pay the hefty cash overvaluation or the DBSS. The latter does not come cheap either. The recent launches, Park Central @ Ang Mo Kio, Natura Loft @ Bishan and The Peak @ Toa Payoh averaged above $500 per square feet.

I had a chat with my colleague and he brought my attention to 'competitively' priced resale condominiums in the suburbs. To my surprise, the price difference over HDB resale flats is really very small. Projects such as The Warren near Choa Chu Kang MRT, Astoria Park near Kembangan MRT and Compass Heights beside Sengkang MRT averaged about $600 to $700 per square feet.

As the DBSS prices get higher with each new launch, buyers should really think hard whether they are really getting value for their hard earned money. Staying in Bishan, Ang Mo Kio or Toa Payoh does not make much difference compared to Kembangan or Choa Chu Kang if the morning gridlock are there to stay. Taking the trains nearer town just means more crowded trains or not able to get on the first arriving train. But at least you got a pool to cool your heads in the condominium.

Conclusion

Other then the rich and wealthy, a property to normal working class couples should be just a decent roof over their heads, a place they retire to after long hours of hard work each day. Taking into account the hefty debt one must take on, it pays to be prudent in selecting ones' cave in this modern age when income security is always a challenge.

Downside to Value Investing?

2009-06-18T20:39:00.003+08:00

The story

The controlling shareholder, Wong's Brothers, decided to delist Tsit Wing at an offer price of 27 SGD cents. The rationale behind the delist is due to poor interest in its stock (low market valuation that does not reflect its worth) and to facilitate restructuring by easing capital investment into the business as a private status.

Downside to value investing

Entering my 4th year of investing, I finally experienced a downside to value investing - voluntary delisting of an undervalued company. I have myself to blame (or at least someone, or something to blame) if I wrongly valued a company and overpay for the business. I will be glad to analyse what went wrong and avoid making similar mistakes.

But when a company is to be delisted just because its value is not recognised (that's precisely the reason why I invest in it), then I really feel like banging the wall all these years for nothing.

Delisting unvalued firms not equivalent to value trap

I must stress here that such misfortune is not tantamount to a value trap. Value trap occurs when an investor overpays for a business with the wrong assessment that it is undervalued.

The risk

Thus I just realised another risk of value investing - voluntary delisting. Though I did not suffer any loss on Tsit Wing, in fact I made a meagre profit of a few hundred dollars after factoring the lucrative dividends all these years, I am obviously not please to make a few percentage gains after these years of patience - the ROI is too low!

Lesson

I pondered with the idea of not investing into companies with low liquidity and/or those whose controlling shareholder holds a unfair majority, but after cooling my head and thinking it through, I rejected this idea.

Firstly, one common attribute of an undiscovered gem is low liquidity. If many know about it, the volume will not be so low and the potential upside (or rather the margin of safety) will not be so high.

Secondly, even if the majority shareholder does not delist an undervalued stock, there is no stopping them from selling the business if an offer is deemed good enough.

Conclusion

I can only control what I can control. Those that I can't, I leave it to my two trusted aides, margin of safety and diversification to help me.

I bought CH Offshore on 25th May 2009

2009-05-30T09:06:00.012+08:00

Before I go into the rationale behind my purchase, I will like to share some thoughts on the oil & Gas industry (from the investment context) and value investment in general. I had quite a fruitful discussion on the above topics in one forum thread and exchange of comments with a reader on my blog entry when I purchased SPC.

Oil & Gas Industry from an investment point of view

The first thing that came to mind when one discussed about the industry is crude oil price. As far as investment is concerned, unless one buys a crude oil index exchange traded fund (ETF) or equivalent, using crude oil price as an indicator is not so straight forward.

The meaning behind crude oil price

It is quite easy to miss the forest for the trees. Once the crude oil price surge, the immediate sentiment is that oil and gas industries must be making money but this is not so. Crude oil price is just a barometer for supply and demand. Whether emotional, speculative or real, it just signifies meeting point between them. And it is that simple.

Oil and gas activities can be divided roughly into 3 categories:

upstream (oil and gas exploration and production)
downstream (crude refining)
support (offshore support, rig manufactures etc)

When real or anticipated demand exceeds real or anticipated supply, oil price surges and vice versa. The movement of the supply and demand curve moves the crude price and had varying effect on players in the above 3 broad categories. Note that demand and supply curve (whether real or emotional) must move first before crude oil prices barge.

Upstream

Players in oil & gas exploration and production players are the first to benefit when price surge and first to suffer when price plunge (especially so when price plunges below production cost, i.e.

Profit = function (crude oil price)

Downstream

Players are mostly refiners who use crude oil as raw material and sells refined products. Their profit are heavily dependent not on crude oil price, but crack spread (the profit margin between crude and refined oil). Most of the people I talked to focus on this, but that is only part of the picture. The next part is demand. Profit is a function of sales volume and profit margin:

Profit = function (crack spread, sales volume)

Downstream players are more sensitive to crack spread and sales volume rather then crude price. When economy is booming, the demand for crude generally rises (emotionally or real) more than supply can keep up. The effect is rising prices. The crack spread might suffer, but profit can still go up if the increase in sales volume more than make up for the declining spread. Problems arises when the crude price surges to a point that affects demand, then both sales volume and crack spread drops and hurt profitability. It is these dual factors that gave people the wrong impression that profitability of refiners had nothing to do with crude oil price. It does, but indirectly via demand and supply curve instead.

Support

Support players are very much affected by crude prices but lags crude price cycle a big deal. When the economy starts booming after a recent recession, it will take some time before demand catches up again with supply. It will take even longer before crude price surges again to a point that makes oil and gas exploration or extractions lucrative. Further lengthening the cycle is that support projects typically have long gestation periods. It takes many months to build support vessels or oil rigs and sustained efforts during exploration. Activities can persist for months after oil bubbles burst.

Actions

Thus, once the euphoria for oil and gas industry subside with the collapse of the oil bubble, I believe there are opportunities to look for bargains. First, I bought SPC, now I bought CH Offshore. The former is a typical refiner (though it has some exploration and production segments) and the latter is a typical support player. Compared to other companies (such as Ezra and Swiber) operating in the support segments, CH Offshore stands out with its less (nearly none) leveraged business model. The downside is its growth will not be as speculator during the upturn. I could have got it way cheaper a few months ago, but alas spare cash don't come easy these days.

A few words on Value Investing (and fundamental analysis)

From the forum discussion, it becomes apparent that some believers of value investing would ignore cyclical businesses because they find them hard to value. Value investing preaches buying things below their intrinsic value with sufficient margin of safety. Intrinsic value is an estimate. Just because cyclical businesses's intrinsic values are difficult to ascertain due to the highly fluctuating profits and losses does not mean value investing cannot be applied.

Look at it another way. Highly cyclical businesses have such huge peak to through fluctuations in earnings (and hence share price) and these fluctuations are recurring in nature. Hence, the magnitude in the fluctuations safely assumes that purchases near the through when a cyclical sector collapses (not price bottom since one cannot predict the bottom) should provide the sheer margin of safety.

It is for this reason I bought Courage Marine when BDI crashes below 800 when I believe the shipping bubble had more or less burst.

Conclusion

There are always many routes to a destination. Some are more established while some are less travelled. By sticking only to the established route, one misses out the many hidden opportunities that could have been better.

Matrix for Personal Finance Planning

2009-05-23T09:08:00.012+08:00

Rationale

As I was working on a long term planning project, I came up with a matrix to put various initiatives in perspective. It suddenly dawn on me that I could apply that matrix I developed to personal finance planning. I promised my friend to blog on it, so better keep my promise :).

Personal Finance Planning Matrix

The above shows the personal finance planning matrix I've created for a typical, non-financially independent individual like myself, still slogging to make ends meet. Basically, annual income can be spent or set aside for future use. Spending is typical a reaction to a need or want and hence 'reactive' versus saving where money is set aside for future use, i.e. pre-empting future rainy need.

Risk provides another dimension to consider when spending or saving. Merely spending on needs make life boring and meaningless while merely savings lose out to inflation. Thus inducing the individual to pamper oneself with some discretionary spending on wants. For the more adventurous, dabbing in some investments for higher returns.

Self-profiling

Before one consider how much to spend, to save or to invest and much is enough, how much is too much, one could consider using the matrix above to put things in better perspective. The following shows a annual budget profile for an individual, drawing some 14 months salary during a typical, non-recession year:

By looking at his or her profile, one can easily come to conclusion whether he or she is comfortable with the distribution, in terms of months of annual salary actually used in each section.

One potential contention or confusion is differentiating between 'need' and 'want'. Since each individual have different value system (i.e. what is important to one may not be important to another person), differentiating between needs and wants need not be a painful exercise, just allocate things one can do without into wants.

How much is enough?

To answer the question of under or over allocation in each section, one can take a stock of his or her current status:

The above chart assumes an individual currently had 6 months of savings and 12 months worth of investment (current liquidatable value equates 12 months of gross salary). Thus in times of crisis (loss of job or can't work), he or she can easily survive more than a year (assume investment value plunges by about 50%). But is this enough? With his or her financial profile visible now, it is up to the person to decide. e.g. "am I comfortable with 6 months savings?"

Setting a target

One can now set a long term, say 10 years, target of his or her financial position:

By saving only 2 months of salary (and not spending from that pool of funds) and investing only 1 month salary, the accumulated pool amounted slightly over 3 years (assuming investment give about 5% annual returns).

Assuming the individual is not satisfied with the above 10 year situation, one can easily set a comfortable target in terms of accumulated savings and investment and work backwards, invariably having to spend less and save/invest more.

Where to place insurance?

A few (several) words on insurance before I close this article, I see insurance as a service to help one take care of unforeseen financial consequence one is unwilling or unable to afford. Thus if it is a service, it must be an expense. If such a service is a need, then it should go into the 'needs' spending section. However, one point of contention arises because today's insurance products are typically very much convoluted with investment components. Investment is a pre-emptive product meant to generate returns for the risk involved.

The fact that many life policies provides insurance coverage (expense) yet provide surrender value above total insurance premiums paid over the years (returns) once the policy matures, depends heavily on investment returns that is far from certain. The underlying assumption is that the investment component of the life policy generates sufficient return to cover insurance expenses (insurance company's expenses + insurance agent's commission) and insurance premium paid by the person assured. When the investment component does not perform as well as planned, the assured will be quite disappointed to learn his or her policy have not 'break even' after paying the premium for decades. It would have been better to separate the two, i.e. buying term policies and investing the 'excess' premium separately.

In conclusion

It is quite difficult to plan one's route or know where one's going without a map. The matrix above provide such a map to locate oneself, and the destination one hope to go, and plan the route accordingly. Charting for myself, I'm happy to see my current location and see that I'm going in the right direction. Hope this is helpful for you too.

I bought Soup Restaurant on 4th May 2009

2009-05-06T22:39:00.005+08:00

Rationale and Action

This is the first time I bought something not for investment, or rather, investment is not my primary concern. My wife like the food very much and I just came across its announcement on 30th April 2009 about Shareholder privilege card scheme, i.e.15% discount for shareholders with at least 2 lots.

Investment grade?

As for investment assessment, I have my reservations. Unless it have a strong franchise potential (which I can't see), I think it'll be like any other restaurant business that will have difficulty generating sufficient value above cost of capital for shareholders.

More on the card

To get the discount card, one need to fill a form to proof ownership of at least 2000 shares by disclosing ones' CDP account number. I presume they'll check it there. However, once I get hold of the discount card, I can't think of a way to verify I'm still a shareholder the next time I dine at Soup Restaurant. The staff at Soup Restaurant can't be checking with CDP everytime a customer produce that discount card right? So what is stopping anyone from buying 2 lots, get the card and sell it off?

Conclusion

This post is short. This blog is my diary so might as well pen this down for future reference. Anyway, I got hold of some 12 lots just in case Soup Restaurant proof me wrong and is able to create more value than I think possible. Look forward to my privilege card :)

First Ship Lease Trust's Distribution Reinvestment Scheme (DRS)

2009-05-04T21:40:00.013+08:00

DRS Summary

In short, DRS is a scrip dividend scheme for FSLT to make payments through issuing new shares in place of cash. FSLT had 2 strategies to reduce cash payout in terms of dividend, one is via direct reduction in distribution (from almost 100% to 75%) and second is via DRS. While a 25% cut in direct distribution conserve about USD 4m, how much DRS can conserve depends on the take up rate, up to a potential conservation of about USD 12m. To entice shareholders to take shares instead of cash, the shares are offered at a discount of about 5%.

Shares or Cash dividend?

I had an enjoyable discussion on the topic with a reader and the our correspondences (via comments on one article) can be found here. After the fruitful exchange with better insight, I summarise the key points and add a few more.

Qualitatively, if the market ultimately recover (before 2012 when the first bullet payment is due), choosing shares might seems a better option. But in current market sentiment where cash is king, many might choose cash that is immediately tangible. If the shares crash further, the cash can buy more units than those offered at a discount under DRS.

Those who should know better

Is there other hints for a better decision? The management and the sponsor should hold the key to the answer, if they don't know, who would know better? Along with the annoucement on the discounted price of the new shares under DRS, the take up rate of the key directors and sponsors are disclosed as well. If all of them subscribe 100% to new shares, I would almost do the same without much thought. In contrast, if the unamious choice is cash, I'll take cash and run fast. However, shareholders looking for a mark of confidence is still disappointed. The key directors take up 100% while the sponsor choose only to take up the 25% of the distribution in shares. 'Insiders' show their confidence, sponsors shows their reservations.

Quantitative Analysis

So qualitative analysis doesn't help here. How about quantitative analysis? The following is table tested the outcome if I choose shares entirely while 25% of other shareholders choose shares.

Under this scenario, my dividend entitlement for the next distribution will rise by about 7.2% to compensate me for taking shares instead of cash now. This compensation will fall to a meagre 2% if all shareholders take up distribution in shares. (Note that the actual DPU falls by 2.5%. The fall is even larger at 7.2% if all choose shares).

Over a longer period, until 1Q 2012 when the first bullet payment is due, the comparison for taking shares all the way versus taking cash all the way is illustrated:

Here, I assume the DRS only applies until 3Q 2010 when the USD 65m tranche is due for first installment (the distribution cut to 75% should be enought to service this installment) and dividend continues until 1Q 2012 when the 1st bullet payment is due. It is quite clear that taking shares might be a more worthwhile option, provided the shares are still worth something by 1Q 2012.

Benefits to FSLT

I've been talking from common shareholder's point of view. How about from FSLT? Cutting distribution to 75% generated about USD 4m and assuming all shareholders take up shares, will yield another USD 10m (the sponsor already pledge to take up 25% distribution in shares). But against the loan of some USD 500m, it might seems meagre. Noting that one of the value-to-loan covenant is 145%, a USD 10m reduction in debt will improve value-to-loan ratio by about 3.5%. But the expected reduction will be much lower since I don't think most shareholders will opt for shares.

Conclusion

I'll take up shares for now and see how other shareholders react. In the long run, I'm still confident that if the management can make use of the (slightly) better financial position to improve distribution in the future (via more distribution accretive acquitisions), it is still better to take up more shares.

I bought Singapore Petroleum Company on 27th March 2009

2009-04-04T14:32:00.018+08:00

Rationale

Ever since the crude oil prices hit around US$ 30 sometime ago (from a record high of above US$ 140 last year), I believe the business fundamentals for oil companies (e.g. SPC) have made a U-turn.

There are a two main sources pressuring their income statement:

Inventory write down (declining oil prices)
Declining revenue (from falling demand and refining margin)

Given the speed at which crude oil prices had collapse by Dec 2008 (around US$ 40), the inventory write down should more or less been completed by the last FY report, ending 31st December 2008.

While demand will take some time to recover, the downside will be limited given current widespread dependence on crude oil for basic subsistence.

I could have bought it earlier, when SPC share price languish slightly above $2, but spare cash is a rare commodity nowadays and it is only recently that I am able to scrape enough to buy some.

Potential for more inventory write down

Oil prices trends

The following is the crude oil future contract compiled from Energy Information Association:

For a relatively long time in modern history ( 1986 to 1999), the world seems contented with crude oil around US$ 20. Assuming an inflation rate of around 3% to account for rising living standards (greater convenience in life centred around electricity use and motor transport) and adding another 1% for world population growth, the resultant stabilised oil price is still about US$ 30 (9 years from 1999).

Cutting supply to boost prices?

The following chart is also compiled from Energy Information Association:

Despite a few relatively small crisis, Asian financial crisis in 1997/98 and SARS in 2002/03 (compared to the present) from 1997 to present, there was no notable cut in supply even though prices took a sharp dip (see oil futures chart above) in both periods. In fact, supply continue to grow steadily over the years. Cutting supply to boost income doesn't really make sense unless the surge in price is sufficient to offset the (promised) plunge in volume. Since the volume normally does not drop as much as promised, the price is not boosted as expected. On the contrary, if demand continue to drop, the oil producers instead have to increase production to sustain their income, more so in a bearish oil market.

Taken together, the potential inventory write down in coming quarters is still material but not as significant as when the crude oil price was above US$ 100 per barrel.

Declining revenue

The following charts is the refining margin published by BP, annual average and weekly average respectively:

Given current volatility in crude prices, margins are volatile as well. But generally, on a broader scale, as crude price stablise and demand falls back to earth, a margin of around US$ 2 to 3 should not be too much to ask for. When refining margins were that low (2002, 2003), SPC's downstream activities could still deliver about SGD 30 to 50m operating profit (or about 1.5% operating profit margin).

Upstream activities

Perhaps, the only cushion to the declining revenue (and profit) from the downstream activities is from the exploration and production (E & P) activities. However, with a sharp drop in crude prices, the contribution from E & P will also drop drastically compared to 2008 but still higher than the downstream activities.

Risk

The only risk I can see (other than oil price collapsing to zero and people stay indoors to burn candles) is the hedging activities carried out to hedge against oil price exposure. Despite stating that the SPC adopted a prudent risk management policy, unexpected high volatility in oil prices can render such activities useless and even implicit damage to the income statement.

Conclusion

Not too long ago, when oil price was aiming for the moon as it surge to US $147 per barrel, all sorts of infrastructure investment was launched to increase production. Now, as the price crashed back to earth, many investment was scrapped (also due to the ongoing credit crisis) as the projects are not justifiable at current crude prices. Thus setting the ground for future supply crunch again. Anyway, as fundamentals reach or about to reach a turning point, its about time I collect some for the future.

Yield Investing versus traditional Value Investing

2009-03-14T09:27:00.013+08:00

Motivation

No one doubts that the current economic crisis is one of the worse the world experience since the great depression in the 1930s. However, the silver lining is that it brings one of the greatest investment opportunities too. I remember $20,000 is not even sufficient to buy one lot of DBS or UOB, now this same amount can buy one lot each of DBS, UOB and OCBC (with some to spare if not because of the rally on friday).

I had wrote before that market price always lag (not lead) fundamental changes. Even though stock market are generally forward looking, and can stage a sustained rebound months before the real economy turn around, fundamentals must improved first before that happens. But I have yet to see any improvement in fundamentals. Many companies, across varying industries, are either seeing substantial drop in profits or making losses (due to heavy overheads or intangible asset write-downs).

Thus, other than waiting and grabbing shares of firms going way below their (deteriorating) fundamentals, is there any alternatives?

Yield Investing

I began to toy with a new the idea after I bought in First Ship Lease Trust (FSLT) and Cambridge Industrial Trust (CIT). Despite the volatility (generally downwards) of their share prices and that of other shares in my portfolio, both paid generally consistent and substantial dividends. I recall my target cost of capital was about 15% compounded annual returns, so that I can double my investment approximately 5 in years. Both could easily exceed this expectation solely on dividend payout (even after factoring reduced payouts).

Given the uncertain economic outlook, spare cash might not be easy to come by as I need to set aside cash for more rainy days ahead (thus no longer money I can afford to lose). My source of funds to grab bargains shrunk substantially as a result. Fortunately my quarterly dividend income come in nicely to fill the gap.

As a result, why don't I increase my dividend yielding equities using whatever limited spare cash I can squeeze and use the regular payout to fund my bargain hunting on good businesses going below their value? Unless there is a specular recovery of the share prices of all companies across the board, I am sure the dividend income will come in time to grab a few still neglected by the market.

Criteria for Yield Investing

Not all high yielding equities (predominantly Business Trusts such as REITS and Shipping Trust) are suitable for yield investing. There are a few criteria to meet which are derived from the objective of yield investing:

To provide sustainable, regular, and frequent dividend income.

Thus the criteria are:

Low volatility in business revenue, cash flow, payout policy and consequently payout, i.e. distribution per unit (DPU)
Simple and understandable business model
Sustainable business model
Relatively high yield (>20%)

FSLT and CIT easily met the 4 criteria with their clear and simple business model (buying assets and lease them on long term binding contracts) and sustainable DPUs. I was tempted to just invest in FSLT given it's current yield is in excess of 40% but I had to be rational and act with prudence. I need to diverify to ensure a sustainble and regular dividend income stream.

My Watchlist

Going forward, my current targets are Pacific Shipping Trust (PST) and Hyflux Water Trust (HWT). PST is simple, easy to understand and able to sustain its DPU. I had already talked about PST and will just discuss more on HWT.

HWT had long term concessions to run water treatment plants in China and revenue should be fairly stable so long as they are able to meet certain minimum treatment volume, though current economic climate could threaten the demand when companies pull out of the industrial zones the plants operate in. A greater concern arises on the yield itself. At last done price of 29 cents, the yield is about an annualised 19.24%. But the DPU for 2008 and 2009 included a 31.5% waiver from the sponsors who still hold on to some HWT units (i.e. giving up their dividend entitlements). Discounting the waiver, the actual yield would have been merely 13.2%. Further reducing its attractiveness, is the fact that the payout is only half yearly, compared to quarterly for REITs and shipping trust.

However, I see the long term prospects (and dividend) of HWT. If not due to the ongoing credit crunch, HWT could have raised more funds to take over more water treatment assets from Hyflux to boost its revenue stream (and dividend). Thus, if the price is right, I will consider getting some HWT to further strengthen my dividend income.

Conclusion

In a time where cash is king and conserving cash is key for short term survival, I must not lose sight of my long term objective and risk underinvesting for the future. In the midst of my resource planning, I came up with the concept of yield investing to fund my long term investing needs. Anyway, this should only work now as such ridiculously high yields will be a thing of the past when the economy recovers.

Property prices, how much lower can it get?

2009-02-22T10:49:00.015+08:00

I read with interest an article published today on Sunday Times, 22nd February 2009, Keen to cash in on mortgage sales? Quoting from the article,

'... potential buyers are "coming in floods", asking to be on her company's list or calling about properties on offer. ... but it is very difficult for us to strike a deal because the buyers are putting in very low offers. They want to go only for a killing...'

looks like the current economic crisis have lured out these buyers, waiting to pounce on distressed fire sales. Though prices had came down recently from the peak, I do wonder whether these prices are reasonably cheap, even under a fire sale?

A picture tells a thousand words

A picture tells a thousand words, so 4 pictures should tell an even better story:

*2008's GDP growth and GDP are taken from advance estimates.

src: The data for Singapore GDP comes from www.singstat.gov.sg; STI index from finance.yahoo.com; HDB resale price index from www.hdb.gov.sg; private property price index from www.ura.gov.sg

I compile 4 graphs into one above, trying my best to align them in the same time line I could. The graphs are, from top down, Singapore GDP and growth, STI index, HDB resale price index and private property price index.

Indicated on the graphs are 4 red lines, each indicating the 4 significant events affecting Singapore's economy, namely Asia Financial Crisis, Dot Com bubble burst, September 11th terrorist attack in the US and SARS crisis.

From the graphs, I found the following:

Property prices (both private & HDB) are much higher now than during each of the 4 crisis.
GDP growth is badly hit during each of the 4 crisis and Singapore entered into recession (-ve growth) during 2 of the them, Asia financial crisis and SARS.
V-shaped GDP growth recovery seems to mark the bottom of the property prices, around beginning of 1999 and during the period from 1Q02 to 1Q05.
No conclusion to be drawn for relationship between property prices peak and GDP growth.

Reasons to wait further

If it is true that the current economic crisis is worst since 1930s great depression and even worse than Asia Financial Crisis (this time the crisis affects not only Asia but US and Europe as well), then I don't really see how the prices at current level are justified in any way.

In simple reasoning, the fire started in US, then spread to Europe. They contributed most of the demand for goods and services produced or outsourced to emerging economies, particularly in Asia. With US and Europe in trouble, the vast factories in emerging economies producing goods for export became idle or redundant. The MNC branches in these economies either scale down their operations (restructuring leading to retrenchments) or simply closed down.

For Singapore, I believe (no data to support my opinion, just reasoning) most of the housing rental demands are driven my foreign talents, expatriates or just simple foreign workers including permanent residents. It does not make sense for them to buy properties if they meant to leave Singapore eventually. Thus it becomes lucrative to purchase properties, especially private condominiums and renting them out. During the last few years, the rentals had been shooting for the moon and I remember seeing on TV some expats complaining about the rents are getting more and more unreasonably high.

Similar to any other economies, when companies restructure, it is a natural consequence that many laid off are foreign labour. Their departure will meant downward pressure on rents. Property prices will follow suit when the severely reduced rents no longer make holding these assets at high mortage payments sustainable.

Conclusion

Graphically and logically, property prices have a long way to go before the price is deemed reasonable. Property is a game of patience and tolerance. The owners of crazy sky high buys will try to hold as long as they could while the fire sale type buyers would have the capacity to wait too, they are not desperate to get a roof over they heads, I presume.

Global Interest Rates and Foreign Currencies

2009-02-08T16:24:00.027+08:00

Almost every month, there are news of some central banks in some corner of the earth slashing their interest rates to fight the ongoing credit and financial crisis. These came along with aggressively generous economic stimulus packages by various governments, drawn from reserves or borrowed from future generations. Theoretically, the potential amount of money flooding the market is sufficient to create a tsunami, devaluing their currencies and loosening credit. But I see no sign of any minute rise in tide across the horizon.

Global Interest Rate Trend

The above chart shows the Interest Rates of some key central banks. The aggressive slashing of the interest rates can be seen quite clearly and if extrapolating the trend make any sense, all are headings towards 0%, following the lead of Bank of Japan (BOJ) and US Federal Reserve (FED).

Signs of bottoming?

It seems to me that various currencies (against SGD) have more or less bottom out not because things had gotten better. Some governments are still borrowing, some are still printing money quite aggressively. But because most of what can be done are already done. Doing more actually does not have much impact now (other than potentially creating new bubbles for the future). What's left to do really, is to let the market consolidate, weed out the excesses and patiently wait for the dust to settle, i.e. clear the debris and start afresh.

Potential Actions

Without taking into account whether MAS will change its stance on SGD policy in the next deliberation in April, I am considering the number of options I had to take advantage of bottoming currencies.

Foreign Currency Fixed Deposits

A check on UOB foreign currency fixed deposit rates show some expectedly disappointing rates (mirroring the recent aggressive rates cuts above). USD, for example, had no interest on 3 months fixed deposits and NZD only offer 1.83%, a far cry from a year ago. Thus, unless my intention is capital preservation, these fixed deposits are still not appealing at all.

Equities quoted in foreign currencies

A check with SGX shows up a list of equities trading in foregin currencies, e.g. USD, HKD and AUD. Most of these equities are quoted in USD, a number in HKD and AUD. HKD is still pegged to USD and the equities quoted in AUD are mostly (unappealing to me) property developers. Thus what remained interesting are those quoted in USD.

A few interesting ones are Chemoil Energy Limited, Lyxor Commodity CRB Fund and Pacific Shipping Trust. Chemoil Energy is an integrated supplier of marine fuel products. It is currently trading slightly below book value and about 5.2 times rolling P/E. It could bounce back when the marine sector recovers. However, at about 4.3 times debt-to-equity ratio, it remains to be seen whether it can survive the ongoing credit crunch.

Lyxor Commodity CRB Fund tracks a basket of future contract on commodities, especially energy, metals and agricultural products. Assuming demand on commodities will eventually recover, there should be sufficient upside if one is willing to take a long term view on this.

The most interesting one is none other than Pacific Shipping Trust. Without any short term refinancing risk and no asset-to-loan covenant to worry about, Pacific Shipping Trust should be able to ride out the current storm quite comfortably. Perhaps the only treat to its dividend distribution is one or more of its charterers going bust. Its relatively high dividend payout per quarter of about 0.9 cents USD (about 24% yield) should be quite sustainable despite having to pay off an amortizing loan due to its long term leases.

Conclusion

Most major economic power houses in the developed west are in recession and the export-oriented emerging economies are beginning to struggle despite building up massive reserves after the Asia Financial Crisis. The aggressive interest rate cut by so many central banks almost all at the same time and seemingly racing toward zero simply meant a collective weakening of their currencies. But currencies are relative in nature. Thus, I believe their value vs SGD have neared or reach a bottom. Other than riding on severely battered equities for the huge potential upside when the business cycle eventually recovers along with the general economy, why not give it a an additional boost of forex leverage.

First Ship Lease Trust 4Q 2008 results - Desperate measures in drastic times

2009-01-21T21:41:00.013+08:00

4Q results at a glance

First Ship Lease Trust posted its 4Q results today, 21st January 2009. DPU for 4Q will be USD 3.08 cents but will be cut to about USD 2.45 cents from 1Q 2009 onwards. i.e. Using last done price of 46.5 SGD cents and assuming 1.5 SGD to 1 USD, the yield will be cut from current annualised 39.7% to 31.6%.

Rationale behind distribution cut

It is mentioned in the press release that the distribution cut resulted from a change in distribution policy, from a target distribution of 100% distributable cash flow to 75- 80%. The reason stated was to conserve cash to reduce debt and take advantage of any potential opportunities arising from this crisis. The following is quoted directly from the press release:

...
Beginning 1Q FY09, FSLTM will provide DPU guidance on a quarterly basis until longer term visibility returns. For 1Q FY09, FSLTM is targeting a DPU of US2.45¢, which represents about 75 to 80% of expected distributable cash flow. The retained cash will be applied to reduction in financial gearing and potentially to funding growth opportunities when they become available.

Mr Cheong Chee Tham, Chief Financial Officer of FSLTM, said: “Given FSL Trust’s secure long-term cash flows and lack of near-term refinancing needs, we believe that we are extremely well-positioned to take advantage of attractive opportunities which we expect will present themselves in the next 24 months. Our revised payout strategy will give us the needed financial flexibility to take advantage of these opportunities and will result in a more balanced yield / growth equity story for the capital markets.”
...

Rationale analysis

Reduction in financial gearing

A DPU cut from 3.08 to 2.45 cents meant a savings of 0.63 cents per quarter, or annualised 2.52 cents. With 501.27m units in the market, this implies a savings of 12.63m per year. Against, its current debt of about 515m, the 12.63m will seem quite insignificant. So it is quite difficult to see how this will actually help in "reduction in financial gearing".

Funding growth opportunities when they become they become available

As for "funding growth opportunities when they become they become available", what can 12.63m buy? The following summarised the recent acquisitions by FSLT:

12th May 2008: 3x Containerships for USD 210m from Yang Ming
21st April 2008: 2x Crude Oil Tankers for USD 140m from Geden Lines
7th November 2007: 2x Product Tankers for USD 113m from Groda Shipping
1st June 2007: 3x Product Tankers for USD 45m from James Fisher

With the exception of the 3 product tankers from James Fisher, the other vessels are acquired at an average price of about USD 70m. With the collapse in shipping rates, BDI from more than 10k to around 800 and container shipping rates for free, prices of ships should be under pressure (more on FSLT's loan covenant later). A check on current ship prices shows that ships are still going from a few million to tens of millions, but not many around 70m.

So if there is a fire sale, there is still a chance FSLT can acquire for a bargain.

Drastic times call for desperate measures

However, I see things differently. The change in distribution policy is just a signal for more changes in the horizon.

Loan-to-market value (LTV) covenant

FSLT had on its books vessels totalling 905.6m against about 515m of debt or 175%. The required level before a technical default is effected is 145%, implying a remaining margin of 30% or 154.5m. Its ships are under pressure for further devaluation and breaching the convenant is a real possibility. Each USD 12.63m FSLT manage to save will give it an extra margin of about 2.45%. A further cut in distribution payout ratio will not be surprising.

Equity raising via rights issue

Exceptional times call for exceptional measures. The only threat against debt-based securities like business trust such as FSLT is debt itself. There is no sign the storm will ease up in the coming quarters (or even years as many feared) and there will definitely be further consolidation as weaker players exit the market. Drastic times call for desperate measures. Each player, including FSLT, will take desperate steps to survive. If it is cash they need, they will get it somehow, anyhow. If equity raising is punitively diluting, the medicine will be swallowed, no matter how bitter. Thus I will not be surprised if FSLT go down the road of rights issue in coming quarters, to reduce debt or even fund further asset acquisitions at bargain prices.

Conclusion

The current economic crisis offers both pitfalls and opportunities. No matter what FSLT does to survive, if it survive, it should emerge much stronger and see DPU (and yield at current price) recover spectcularly.

The risk is high (to balance the returns) and seems like the only way for FSLT (and other business trusts as well) to survive is to borrow there way out of this crisis, be it loan or equity. If United States can do it, so can FSLT.

This might seems crazy, but if one look at the number of vessels being taken out of the market, either due to ship building order cancellation or shipping firms going bust, one will know that the shipping market will be in for drastic drop in ship vessel supply years down the road. But can FSLT last that long? Only time will tell.

Digging a hole to fill another

2009-01-05T23:01:00.019+08:00

It is said that the current financial crisis is the worse the world have seen since the last depression in the 1930. So it is not surprising that big problems requires big effort to deal with them. The problem then becomes even bigger in itself when the effort turns too drastic.

The world greatest printing machine

A special report was published on cnn website sometime in early December 2008 that summarised the amount of bailout money US allocated and spent. The table does not include the recent auto industry bailout. At the time the report was published, 2.6 trillion USD was spent, out of 7.2 trillion allocated. On top of this, the coming US president, Barack Obama, is currently putting together an economic recovery package, possibly amounting to just under another trillion USD. United State's current account deficit is now about 700 billion USD, or 4.5% GDP, according to the latest issue of The economist, dated January 3rd-9th 2009. And the US government budget for 2009 is projected to be a deficit of USD 1.2 trillion, or 8.3% of GDP!!

One of the reason US can continue to borrow and spend is because they borrow in USD, and pay back in USD. Unless the creditor countries such as China and Japan stop lending to US, there is virtually no disincentive for US to print their way out of this crisis. The lending will not stop, China and Japan (and other export oriented economies) lend to US, so that US can continue to consume their exports, a 'win-win' situation?

This is like running a business, and keep selling to clients on credit. The business keep recording rising profit (foreign exchange reserves) year after year, and the credit (receivables) snowballs. The only difference is the client do repay one day, by printing money.

Thus, its either everyone will be millionaires or billionaires in USD one day, or the lending stops, and plunge the world into deep recession. Either way, printing the USD solves the problem now, by creating a bigger problem later, hopefully a few Presidential elections away.

Worldwide Easycash

With the onslaught of credit crunch, threatening a world wide recession, global interbank rate cuts are announced one after another, chasing each another to near zero (FED and BOJ), short of borrowing for free.

The following links shows the global interbank rates changes for 2008 and 2009:

FED at 0-0.25%, Bank of Japan (BOJ) at 0.1%, Bank of England 1.5%. Sooner of later, European Central Bank (ECB) will cut rates too. While there are warning of potential global recession leading to a wide spread deflation, the aggressive rate cuts is just setting the ground for hyper inflation many years later.

The current credit crunch, due to the over paranoid banks unwilling to lend for fear of losing a single cent more than losing business, will not see cheap money flooding pockets any time soon. But once most of the market excesses have been cut back, restructuring completed, scaling back done, business projections brought back to earthly expectations, really cheap money will start to flow. People will start to borrow to spend. Business will start to borrow again to expand to meet demand. The problem will be back, with greater vengeance.

Cheap oil

What goes up must come down. It is a nice surprise to see this principle applies to oil as well (at least for now). For crude oil future contract to crash from almost USD $150 to below USD $40 in about 6 months is really spectacular.

Expensive crude oil spur the aggressive hunt of alternatives and escalating conservation to cut the reliance. Many of these efforts make sense with crude staying above some emotionally expensive value, e.g USD $100 or economically viable value for alternatives (USD $80 to extract tar sand or produce biofuel).

Thus the problem of cheap oil could just slow current efforts to boost exploration for more oil, find alternatives or improve efficiency and cut wastage. To make matter worse, those efforts that are financed by debt might terminate prematurely in the current credit crunch. The future isn't bright either.

Cheap food

Food crop prices (crude palm oil, soya bean, rice etc) have corrected quite significantly. When real demand and speculative demand (anticipated rising demand) chase prices to unsustainable high, the high price itself (like oil) provided incentive for greater effort to produce and research to increase supply.

With the plunge in prices, the incentive disappears. Whether or not the unprecedented demand in 2008 is real or speculative, it does serve as a warning. Unless sustained effort is made to ensure that there is ample food supply to feed the growing (and also more affluent) world population (especially in emerging economies), a real food crisis could really occur not so long into the future.

Conclusion

It is always easier fill a hole by digging up another. But the problem neither goes away nor get any better. Going forward, investment might be easy, survival may not.

Popularity comes at a price

2008-12-27T13:56:00.038+08:00

My wife's recent Hunt for Piano

I knew practically nothing about Piano and consider myself musically challenged. But after months of accompanying my wife on her hunt for a replacement to her 40+ year old Schubert Piano (the company went out of business in 1937), I found a striking similarity to the way I search for my car and the way I approach investment in general.

Established brands

The search began on piano forums such as Piano World Forums and familiar names of Yamaha and Kawai came up in recommendations more often than other names. We went from showrooms (Yamaha @ Plaza Singapura, Robert Piano @ Parkway parade) in major shopping centres to 2nd-hand warehouses (Asia Piano @ Citimac Industrial Complex). All sale persons we spoke to (all could play the piano quite well, at least to a music idiot like me) gave their recommendations. As expected, all recommend established brands like Japanese made Yamaha or Kawai, either exorbitantly expensive first hand or more down to earth prices but exorbitantly old (20 to 30 year old) 2nd hand ones.

'Unpopular' brands

We went on to look at other brands, particularly non Japanese brands (the supposedly 'better' but ridiculously expensive European brands are not in her consideration list). There are Chinese brands like Pearl River, Hailun and Korean brands like Samick and Young Chang.

Shortlist

While all the pianos sound beautiful to me, so long as I'm not playing it, my wife could tell the difference. Once she finalise her needs, a upright piano with a height of about 120cm (taller pianos are better, but disproportionately more expensive) she went through her choice:

Yamaha U1: 121 cm, $8,600 (new), Japan
Yamaha U3: 131 cm, $4,000 (26 years old), Japan
Hailun HL125: 125 cm, $3,600 (new), China

The shorter Japanese made U1 can buy 2 Chinese made Hailun. Even its 26 years older ancient cousin cost more than a brand new Chinese made one! Much had happen to Chinese made products, from food to toys to clothes... that the consumer confidence had plummeted over the years, but the difference in pricing is seemingly alarming.

Before coming out as a brand call Hailun, the piano company had already been manufacturing for prestige brands in the West. Being establised as Hailun only in 2000, bored down as a Chinese brand, made Hailun highly 'unpopular'. Thus the Hailun piano is fine. The music is pleasing (to my wife) and the piano design is comparable to most standard piano. The manufacturer is confident of their design, as seen from the 10 year defective parts warranty (compared to 6 for Yamaha).

Thus if she are to buy the Yamaha piano, is she paying for quality or brand? Chances are the Yamaha piano could indeed be better than the Hailun Piano, but for each difference in dollar, I would think more is attributed to popularity in branding than absolute quality. If the China made produce could one day improve in their general quality and weed out unscrupulous manufacturers keen to take consumers for a ride, and if people finally realise the true quality of the Piano, I am quite sure the price difference of a Yamaha and Hailun would not be this huge.

Anyway, my wife is a happy owner of the Hailun HL125 piano, judging from the din of the piano music in the background as I am blogging now. :)

My Hunt for Car 6 months ago

I recall my car hunt about 6 months ago. My wife had been 'emphasising' how inconsiderate most people in trains and buses who are oblivious to pregnant women standing around them and a car would be a nice thing to have if we can afford one. Her specifications to me was simple, she doesn't need prestige, power, look etc... She just hope to have 4 wheels. So out I went, looking for 4 wheels, any 4 wheels.

6 months ago, COE was far more expensive than $2 sold recently. After some financial estimates and budgeting, I found that we could only afford a car below $50,000 comfortably without being a slave to the car. We drive the car, no the other way round.

Popular brands

As a newbie, the first thing that came to my mine was Toyota. I still remember I told my friend back in University that I'm contented with a humble Toyota when I have more disposable income. When I found out that a Toyota Vios cost about $57,000 then, I realise I couldn't even afford a humble Toyota.

Shortlist

After searching sgcarmart and comparing the specifications, I simplified my preferences:
1.6L sedan
Safety features such as Airbags and Anti-lock Brake System
Spacious

and narrowed now my list to two cars:

Mitsubishi Lancer GLX - $47,000
KIA Cerato Variant 2- $46,999

Specifications (Mitsubishi Lancer GLX)

Engine: SOHC 16V, in-line 4 cylinder
Power: 106 bhp
Torque: 142 Nm
Dimensions: 4535 x 1695 x 1445mm
Wheel Base: 2,600mm
Kerb Weight: 1,140kg
Safety features: Dual Air bag, ABS
Fuel Consumption: 12.74km/Litre

Specifications (KIA Cerato Variant 2 )

Engine: DOHC CVVT
Power: 121 bhp
Torque: 143 Nm
Dimensions: 4500 x 1735 x 1470 mm
Wheel Base: 2,610mm
Kerb Weight: 1,266kg
Safety features: Single Air bag, ABS
Fuel Consumption: 12.92km/Litre

Unpopular brands

Kia, being a Korean brand was obviously not as popular compared to major Japanese brand like Toyota, Honda, Nissan and Mitsubishi. Japanese cars of similar specifications are Toyota Altis, Honda Civic, Nissan Slyphy, all way beyond my budget. The Mitsubishi Lancer was within budget because it was an old model giving way to the new Mitsubishi Lancer Evolution X.

After going to showrooms, chatting with colleagues and friends, the reputation of Korean cars came across as one with low resale value (more expensive car obviously have higher resale value since it depreciate from a larger number), poor reliability (what is the regular maintenance for?) and poor fuel consumption (I don't drive like there is no tomorrow).

Hence am I paying for popularity (brand) or quality? Car technology don't really jump by leaps and bounds compared to computer technology. Thus I am more willing to bet on a new Kia Cerato Variant 2 (just released in late 2007) compared to the Mitsubishi Lancer (released in 2005). In order to stay in business, the Koreans would have tried their best to catch with with the Japanese. It is only a matter of time people realise their worth.

6 months down the road, I am still a happy owner of my Kia Cerato Variant 2.

Stocks and Popularity

Considering the way the Piano is chosen by my wife and how I choose the car, it became apparent to me that popularity comes at a price. Just because more people know how good some thing is, it commands a higher price.

The same goes to stocks. An undiscovered gem can go unnoticed for months, years. The price will languish at some ridiculous level, thinly traded (nil volume for days) with huge bid-ask spread. But when some analyst finally discover this gem, and started to initiate coverage on it, more people knew about it, the price starts to jump, so does the volume. When the market capitalisation grow big enough, the bid-ask spread flattens and trading volume surge, the institutions got in. That is when everyone starts to talk about it. By this time, the price will have been prohibitively expensive.

I am often questioned why I look at stocks with almost NO volume. How am I going to sell them? For good or bad I cannot be sure (despite all the margin of safety and diversification), at least I know most people do not know or care about them... yet.

When I bought Golden Agri-Resouces back in 2005 as I foresee the palm oil demand, the volume was so thin and bid-ask so huge. There can be days when it is not even traded. Fast forward to 2008, it was almost on top volume EVERYDAY.

Conclusion

When something is good, it only make sense to get it when it is cheap, and not wait until it became popular and expensive. Popularity does not make something good. It is the goodness that ultimately make something popular.

I bought Cambridge Industrial Trust ... again on 12th December 2008

2008-12-14T12:09:00.027+08:00

Update

On 11th December 2008, after trading hours, Cambridge Industrial Trust announced their successful refinancing deal of 390m, 3 year tenor term loan at an effective interest rate of 6.6% per annum.

Rationale

Qualitative Assurance - fear allayed

By 2009, many REITs would have hefty term loans due for refinance, Cambridge Industrial Trust is one of them. The on-going credit crunch saw many banks cutting back on their lending. They would rather earn less than to suffer potential loss if the money lent cannot be recovered. One REIT in Japan had collapse after it had trouble repaying its debt. I was afraid Cambridge Industrial Trust could also face trouble refinancing its loan. I excited Cambridge in October 2008 at a significant loss (I sold at 30.5 cts comparing to acquisition cost of 49.5 cts). Looking back, I wonder whether my fear then had been irrational. Fortunately (or not?) I manage to get it lower now, at 22.5 cts.

My fear is allayed when Cambridge managed to refinance all its debt. While there is no foreseeable respite to the credit crunch in the near term. I am quite confident the credit market should stablise within 3 years, when its term loan is due again.

Quantitative Assurance - Impact on forward DPU for 2009 and beyond

I compared the new term loan facility with the existing one found in 3Q 2008 results:

Existing loan (At 30 September 2008):

Amount: 369.3m
Effective interest rate: 3.19% p.a.
Estimated borrowing cost per annum: $11.78m
Estimated borrowing cost per quarter: $2.945m
Actual borrowing cost in 3Q 2008: $3.126m ~ $3m

New loan facility

Amount: 390.1m
Effective interest rate: 6.6% p.a.
Estimated borrowing cost per annum: $25.75m
Estimated borrowing cost per quarter: $6.437m ~ $6.5m
Estimated additional borrowing cost: $6.5 - $3 = $3.5m

Impact on DPU

Using 2Q and 3Q results as a guide, quarterly distributable income is about 12m.

Estimated quarterly distributable income: $12m
Estimated additional quarterly borrowing cost: $3.5m
Estimated new quarterly distributable income: $12m - $3.5m = $8.5m
No. of units (At 30 September 2008): 796,405,934
Estimated DPU per quarter: 1.067cts
Estimated annual DPU: 1.067 x 4 = 4.269cts
Estimated yield (using purchased price of 22.5 cts): 18.97%

Current DPU per quarter (3Q 2008): 1.49cts
Estimated annual DPU: 1.49 * 4 = 5.96cts
Estimated yield: 5.96/22.5 = 26.49%

Estimated reduction in forward DPU: 5.96 - 4.269 = 1.691 cts
Estimated reduction in yield: 26.49 - 18.97 = 7.5%

According to the new debt facility announcement, the DPU impact is about 0.9 cts. But my estimation showed a higher cut of 1.691 cts. Anyway, after factoring the higher effective interest of the debt facility, the projected yield of 18.97% is still very attractive. (Could have been more attractive, but I didn't notice the annoucement until 12th December 2008. After digesting the news and doing my sums, I could only get it at 22.5 cts).

Risk

At 18.97% yield, the yield is still high or the assumed risk is high. There are quite a number of events that could affect the future payouts, i.e. DPU:

Term loan failure - The loan is still subject to completion and part of the loan is subjected to syndication on normal market conditions. Nobody will know what can happen is the last minute to scuttle the deal.
Declining rental income - Whether by defaulting or exiting tenants, this risk is mitigated by the relatively long term lease contract of average 5 years or more and average security deposits of 16 months.
Loan covenants - There is a gearing limit of 60% imposed on REITs in Singapore. Cambridge's gearing ratio is currently 37.6% and hence there is still significant margin for a downward revaluation of its assets.
Bank failure - Even though HSBC, RBS and National Australia Bank are huge banks, there is no certainty these will not fail under existing climate. (Seems to be over paranoid in thinking). Creditors of failing banks can force Cambrige to repay its loan or liquidate its assets, a near impossiblity in the current market condition.

Conclusion

Though Cambridge had to refinance its debt at a signifcantly higher interest rate (6.6% compared to 3.19% previously), they were relieved borrowing is still possible under the current credit crunch. Other REITs with debt due for refinancing in 2009 will also face the same problem and similar, if not higher, cost of debt. Their yield across the board should be reduced significantly.

Property vs Equity as an Investment

2008-12-06T16:01:00.044+08:00

Rationale

I happen to have chat with my former colleague on the investment merits of equity versus property, in the context of passive income as primary concern and capital returns being secondary. Under this context, an investment must be one that provides a stable cash flow, either from monthly rentals or dividend payouts.

Property vs Equity

Rents vs Dividend

At first glance, property provides stable rental returns, usually in substantial monthly figures that can supplement or even substitute active incomes from work. Monthly rental figures in the magnitude of $3,000 to $5,000 are reasonable for renting out entire 3-room condominium units in reasonably attractive locations, close to basic amenities like MRT station, food centres etc.

On the other hand, dividend from equities are usually paid out once a year and are far less stable than rents. The amount are usually meagre and are regarded more as extra annual bonus than monthly income supplements.

Leveraged vs Unleveraged Portfolio

But on closer look, the significant difference in payout can be attributed to leverage. To obtain the rental figures listed above, a typical condominium would have cost anything from $700,000 to above $1,000,000. A typical well-to-do middle income household that can afford to purchase a second property would typically have to draw down a housing loan ranging from 80 to 90%. Few from this group will be expected to 'cash and carry' their property.

In contrast, few sensible people who invest in stocks with objective of getting stable dividend returns would take up any loan to finance their purchase. If the typical well-to-do middle income household above who can afford to pay a 20% down payment or $200,000 on a $1,000,000 property, instead use the down payment to for share purchase, it would have earned them only $14,000 in dividend annually or $1167, assuming a 7% dividend yield (a respectable figure in 'normal' times). This is way below the $3,000 to $5,000 for rents above. The difference attributed to leverage can hence be seen quite clearly.

What if they are willing to take up a $800,000 loan to buy shares? Combined with their original $200,000, there annual dividend income would have been $70,000 or $5833 monthly, a equally respectable figure. But in both scenarios, I have not taken into account the cost of borrowing. Since equity loan are usually unsecured and the cost of borrowing will be much higher than a comparable housing loan.

Fall out from current financial crisis

Every crisis offers new opportunities. The current credit crisis is no different. Property prices and rents have started falling and could plunge further given weaker demand and greater supply in the years ahead as more new property projects are ready. More information can be found in the URA's website.

If falling property prices offers opportunities, plunging equity prices offers even greater opportunities, though the risk should be higher (risk must commensurate higher returns). Once built, the condominium should remain there but there is no guarantee the company still exist to honour the claim by the shareholder.

I extract out 7 relatively high and stable dividend play equities from SGX and summarise them in the following table:

The 7 are well represented by 3 shipping trusts, 2 REITs and 2 food industry related business. The stability in yield arises by nature of the business, e.g. Singapore Airport Terminal Services and Pacific Andes, or by long term contracts e.g. The shipping trusts and REITS.

Taken together, these 7 offers an averaged yield of about 26%. Reusing the example of the middle income household above, a $200,000 investment would give $52,000 annually or $4,333 monthly, without leverage!

But the fact these equities offers such high yields is due to the underlying risk. Other then Singapore Airport Terminal Services, the other 6 businesses are highly leveraged and there is no certainty all will survive the current credit storm. Even if they could, there is a high chance dividend could be cut due to lower income and hence reduce the yield significantly.

Conclusion

Given the current credit storm, if I have the funds to purchase a private property, I would rather threw them into equity. The chance that all 7 high yield stocks above turn into useless scrap paper ALTOGETHER is actually quite low, at least, that's what I think. Unfortunately, I don't have such funds now...still waiting for Singapore Pools to give me a hand.

Can 'we' afford that HDB flat?

2008-11-23T15:06:00.028+08:00

I read with interest an article in the Straitstimes on Saturday, 22nd November 2008, "The longest crisis ever?". Much have been mentioned about the economic crisis, credit crunch and technical recession and the article is not really interesting at first glance. However, what really caught my eye was the fact that in each economic crisis that hit Singapore, CPF employer contribution rate was tweaked time and again to save jobs in Singapore.

Hence, as a follow up to my last article on property prices, it brings me to wonder what is the maximum price tag on a HDB flat that a young couple, just starting out, can afford comfortably if it is to be fully financed by CPF funds. i.e. not a cent of cash.

Current CPF contribution Rates and Amount

I began with a hypothetical scenario biased on the side of optimism. If this fortunate couple can only afford a HDB for price $X, surely less capable ones shouldn't be overstretching themselves by getting anything more expensive.

The following table is drafted for a successful, fortunate individual with the following profile:

Age: 25
Salary: $4,500 per month (maximum CPF contribution for employee is capped at $4,500)
Average bonus: 2 months (inclusive of 13th month)
Profile: Able to be gainfully employed until age 62 (earning at least the above)

A few points (and simplifications for more concise analysis) to accompany the above table:

Total contribution drops progressively from age 50, from a high of 34.5% to a low of 10% after age 65.
Maximum contribution (capped at a salary of $4,500) to Ordinary Account drops progressively from a high of $1,035.40 at age 35 & below to $45 after age 65.
The maximum accumulated CPF funds column displayed accumulated CPF contributions up to that juncture, e.g. by age 55, the individual would have accumulated $173,961,71 in the special account.
Funds in the ordinary account is not compounded because all of which will be used to pay for the montly HDB loan mortage.
Funds in the special and medisave account are compounded annually at 4%.

Coincidental Assumptions

This individual found a corresponding successful and fortunate partner with equal, if not better, earning power and employability
Both initially earned less than combined $8,000 on application for their love nest
Both got promoted and earned more than $4,500 each when they began to service their loan at age 25.
They choose to take the maximum allowed 30-year HDB loan.

Under such a scenario, their combined mortage payment power is two times of $378,054.34 or $756,108.68 at the end of 30 years, or age 55.

Using the Total Interest Calculator available on CPF website, $756,000 is sufficient to pay for a principal of $525,000 and interest of $231,642. They can afford to buy a flat that cost nothing more than $525,000 if they only want to finance it solely with CPF funds and not a cent in cash.

CPF contribution rates in major crisis since 1985

The following rates were sourced from either the CPF website or from an article, "The longest crisis ever?". The CPF employer rates were revised down during each crisis and restored (though seldom to the initial rate before the crisis) slowly thereafter.

In 1986 (cost outpaced productivity), employer rate was cut from 25% to 10%.
In 1998 (Asia Financial Crisis), employer rate was cut from 20% to 10%.
In 2003 (SARS), employer rate was cut from 16% to 13%.

Historically, CPF employer contribution rates had been slashed (towards 10%) in each crisis to bring down cost and hence save jobs, payment power via CPF ordinary account will hence be threatened in each juncture.

Buy within one's means

Many new 5 room (and even some 4 room) flats launched recently are in excess of $525,000 each. This brings one to wonder whether those young couples who bought them can actually afford them comfortably. Given major risk factors like employer contribution rates and employability as one ages, the chance for a cash top up sometime down the road is quite material.

If new flats are expensive, resale prices are even more prohibitive.

Conclusion

If the above couple was really able to fully finance their flat with their CPF ordinary account funds, they'll have about $273,396.74 each should they retire at 62. Buying a 30 year,2.5% compounding annuity then will translate to a monthly payout of $1,061.97 or equivalent of $510,40 in today's dollar (assuming inflation rate of 2% over the next 30 years), not really a glamorous sum. But since the flat is fully paid with CPF, they should be cash rich by then to retire comfortably...provided they are prudent with their spare cash.

Singapore Dollar to weaken against the US dollar?

2008-11-15T15:46:00.018+08:00

I read with interest the recent prediction by Morgan Stanley that Singapore Dollars will depreciate against the US dollar to $1.80 by next year. I decided to explore this prediction further, fundamentally.

Monetary Authority of Singapore Policy (MAS) on Singapore Dollar (SGD)

A check with policy statement of MAS's website shows that MAS manages SGD exchange rate. The following is quoted from the website:

... The objective of Singapore's exchange rate policy has always been to promote sustained and non-inflationary growth for the Singapore economy. Since 1981, monetary policy in Singapore has been centered on the management of the exchange rate. MAS manages the Singapore dollar against a basket of currencies of Singapore's main trading partners and competitors.

The trade-weighted exchange rate is allowed to fluctuate within a policy band, and where necessary, MAS conducts direct interventions in the foreign exchange market to maintain the exchange rate within this band. The exchange rate policy path and the band are regularly reviewed to ensure that they remain consistent with underlying economic conditions. ...

In order words, MAS manages SGD exchange rate directly and regularly review the strength of SGD against major trading partners for sustained non-inflationary economic growth for Singapore.

In fact, MAS reviews the exchange rate policy twice a year and publish them on its website.

Trade-weighted Exchange Rate

It is explicitly mentioned in the policy that the exchange rate is trade weighted. MAS neither reveal the exact currencies in its basket of currencies nor their weightage, thus I decided to compile a list of major trading partners of Singapore and estimate how the various currencies' will affect SGD.

A few points to note on compiling the above table:

Other than the interest rate which is current, the rest of the data are full year results for 2007.
Estimated trading volume are estimated by totaling import and export to these economies. These data are taken from Statistics Singapore.
Due to the difficulty (or rather, my laziness) in compiling data for the entire European Union (EU), I estimated EU's data with France and Germany, two large entities in EU that are somewhat representative.

Major Conclusions that can be drawn from the table above

1. Simplistic trade weighted equation?

In the simplest case:

SGD = 0.18 x MYR + 0.15 x RENMINBI + 0.145 x USD + ...

If SGD exchange rate is derived simplistically as above, SGD's strength (or weakness) against any single currency will just depend on that currency against all others in the basket. In other words, SGD should not fluctuate much against major currencies. If so, the recent USD devaluation is less about the strengthening of SGD, but more of a weakening of USD against all other currencies.

2. Strengths of currencies in the basket

Assuming most (if not all) of the currencies in the table are found in the basket and my simplistic trade weighted formula approximates the SGD exchange rate, then the strength (or weakness) of SGD will very much depend on how well these currencies perform.

While many factors affect the strength of a currency, important ones include economic growth, trade balance, current current balance, central bank rates etc. Prolonged current account deficit can be sustained so long as influx of capital continues, either due to high central bank interest rates (high yield attracts capital) or high demand of goods and services (including commodities).

Australia is a case in point. Its account balance is highly negative (even higher than United States in terms of percentage of GDP) but it has sustained so for a relatively long time due to its high interest rate and huge demand for its resources. With the onslaught of global financial crisis (sparking a cut in its interest rate) and ensuing drop in demand of its raw resources, Australian dollars plunge against major currencies.

Looking at the current central bank interest rate and their current account balance of these economies, those with huge account deficit, high interest rate or both are most prone to weaken. These include, United States, Australia and United Kingdom. Together, these accounted for 21.3% of 'my' estimated basket. If these were to weaken against the rest of the 78.7% of the basket, then it is more probable that SGD will strengthen against them.

Conclusion

Though being a major and important trading partner, Singapore don't just trade with United States alone. The basket of currencies is meant to price SGD to sustain Singapore's economic growth. Since US borrow in USD (selling US dominated bonds), they can and are already printing USD as much as they need, it will be quite surprising if USD does not depreciate against major currencies and consequenty against SGD. Unless MAS intervened (directly or indirectly with a policy change) for the sake of Singapore export oriented economy, it is more likely SGD will appreciate against USD.

I bought Courage Marine on 3rd November 2008

2008-11-08T11:11:00.013+08:00

About Courage Marine

Courage Marine Group Limited is a relatively young and small dry bulk shipping company serving mostly in Asia and Russia. It currently run about 10 carriers, consisting mainly Panamax and Hanysize series. It transports dry bulk commodities such as coal, cement, iron ore, minerals and wood chips.

Uncle must be crazy I - logical analysis

Dry bulk shipping demand is tied quite closely with demand for commodities. With the bursting of the commodities bubble, the dry bulk index (which measures the demand for shipping capacity vs the supply of dry bulk carriers) had practically collapsed (from a high of above 11,000 sometime in May 2008 to just over 800 now). In fact, shipping rates have fallen below the cost of running the ship!

It might seem surprising, why then did I raise cash to buy into a sinking ship? The reason is actually very simple. Shipping is known to be highly cyclical, with huge trough-to-peak fluctuation across boom bust cycles. Since, shipping is at its doldrums now, what better time than now to buy something at its fundamental bottom (or rather, somewhere near the bottom).

The following chart compares Courage Marine's share price with BDI index for the last 5 years. It can be seen that Courage Marine's share price (top chart) tracks BDI index (bottom chart) quite closely. The former can easily be a proxy purchase of the BDI index.

The BDI index is 829 as at 7th November 2008, just another 829 points to go before shipping becomes free. Thus I would assume that the current share price of Courage Marine already factored in the current depressed shipping rates.

Uncle must be crazy II - fundamental analysis

If I'm so sure I am getting in near the bottom of the shipping cycle, what makes me think Courage Marine can survive until the shipping boom? There are several strengths in Courage Marine that I see could help it ride out this winter:

1) Debt free shipping play:

The current economic crisis centres around a severe tightened credit atmosphre where banks are not willing to lend to businesses and are driving financing cost sky high. While many shipping firms are highly leveraged and any failure to refinance their debt will mean their demise, Courage Marine on the other hand consistently maintained a healthy balance sheet with net cash position. Courage Marine can practically hibernate without much of a problem.

2) Second hand vessels:

It is part of its business strategy to acquire and run only second hand vessels. While these vessels have higher operating and maintainable cost, the group can count on the experience and expertise to keep these cost low. The lower capital cost of investment required and resultant lower depreciation of these vessels resulted in higher profit margin. It is the aim of the management to renew its fleet with younger second hand vessels when the opportunity arises. Given its healthy cash horde of about USD 54.8 million (or about 7.5 SGD cents per share) after taking into account recent acquisition and disposal of vessels, they are in a good position to acquire new and good vessels should a fire sale by other shipping firms occur.

3) Small and nimble

By industry standards, Courage Marine is a very small player with less than 10 vessels. They could easily ride on excess demand via spot market or idle their ships when demand plunge suddenly like the current situation.

Conclusion

As I had said in earlier post, I would try to avoid leveraged businesses until this credit storm blows over for fear that they are unable to secure debt refinancing. I had already averaged into First Ship Lease Trust and that's about the maximum risk I'm willing to take.

The current stock market tumoil continues to open up opportunities to buy into sound businesses at attractive prices and acquiring Courage Marine to take advantage of the eventual trough-to-peak flunctuation in shipping cycle is just the beginning. I am still waiting for my year end bonus, if any, to continue my buying spree.

Property Sale - Anytime Soon?

2008-11-01T14:21:00.017+08:00

Rationale

I had stayed in Queenstown all my life. After getting married, I found that I could not afford a HDB flat there and moved to Sengkang. In fact, during the time I'm looking for a flat, a new 4rm flat in Queenstown actually cost much more than a new EA in Sengkang. It has always been a dream for me to move back to Queenstown. It is so much more convenient there, no jams, no ERP... With the subprimed induced stock market crisis that is now spreading into the real economy, I might realised my dream of moving back sooner than I thought.

HDB supply and prices

A check with the HDB website seems to indicate that about 8000 (BTO) units are planned each year. A further look at the price index of HDB resale flats shows that HDB prices tend to be sticky. At each of the last few crisies, e.g 1997, 2000, the price takes about a quarter or two to come down. Thus it is quite understanble that the resale price index actually rose 4.2% in 3Q 2008 from the previous quarter even though Singapore already went into technical recession.

Thus the recent DBSS at Bishan where a 5rm can fetch up to $739,000 could easily mark the peak for new HDB flats. At $525 per square foot for a 99 year lease hold property, one can easily find a full (but resale) condomium in reasonable locations.

Private property supply and prices

A check with the URA website shows that there are 10,007, 6,049 and 8,450 units under construction and scheduled to be ready by 2009, 2010 and 2011 respectively. Most of these projects are located in the central regions. A further look at the residential price index shows that private property came down faster compared to HDB prices, but still slower then the stock market and technical economic downturn. The index for 3Q 2008 declined from 2.2% to 5.3% from a quarter ago.

Outlook for private (landless) property

I already had a HDB flat and the last thing I will do is to sell it and 'upgrade' to a private property. I'd rather buy another one if the price is right. (HDB flats bought with HDB loan are shielded from creditors in the worse case scenario of bankruptcy). Looking ahead, I am optimistic the prices of lower end, 99 lease hold projects in reasonable locations will come down to 'earthly' levels for the following reasons:

A sheer number of projects due for completion within the next 3 years
The local banks are turning cautious in granting loans for property purchase
The economic downturn could affect those who live beyond their means and could not substain the hefty monthly installments of the property bought during the housing bubble in 2007.

Conclusion

I will be monitoring the private property transacted price on URA's website closely for potential bargain hunting over the next few years. Hopefully, my dream can be realised before 2012, else I will be rooted to Sengkang ... might not be a bad thing afterall.

First Ship Lease Trust - Risk Analysis

2008-10-19T14:24:00.029+08:00

A few corrections on the DPU projections under the section "Risk versus Returns".

Rationale

The recent credit crisis, almost on a global scale, threatened to freeze up the available credit to companies. Many companies are dependent on such leverage to grow or sustain their business. Without these loans, some might not survive. The threat of the credit crisis to heavily leveraged businesses such as REITS and Shipping Trust are even higher.

The recent steep sell down in these collective group of debt based instruments is hence understandable. However, First Ship Lease Trust (FSLT) plunged the most among them, even reaching a intra week low of about 37 cents. This imply a staggering yield of 48.9% (assuming a quarterly DPU of USD 3.08 cents and exchange rate of 1.47 SGD to 1 USD). Is the associated risk for FSLT substantially higher compared to other shipping trust or REITS that the market would priced in such high yield for compensation? I will like to find out.

Creditors

The following is the list of creditors which provide FSLT with 3 loan tranches totaling 515 million USD:

One of the greatest risk these banks can post to FSLT is for one or more of them to collapse. Their creditors could go after FSLT for immediate payment for one or more of its bullet payment facilities due on 2014. The ensuing fire sale of ships without demand for them in this market will almost result in the demise of FSLT.

The following list summarises the profile for the above creditors:

Few things to note:

Bank of Tokyo-Mitsubishi UFJ Co. Ltd (BTMU) and Bayerische Hypo- und Vereinsbank AG (HVB) provided the bulk of the credit facilities granted to FSLT. As far as perceived (my perception) risk is concerned, BTMU belong to one of the 3 largest banking groups in Japan and hence could pass the "too large to fail" criterion for possible bailout. But the same could not be said for HVB.
If the Tier-1 capital ratio can be trusted as a guide to measure the capacity of the bank to withstand reasonable loss, the HVB is obviously precarious compared to the rest.

Lessees

The following is the list of lessees of FSLT:

One of the greatest threat these shipping firms can post to FSLT is to default on their lease payments. This will force FSLT to recall the ships and look for new lessee in this slowing global economy, not an easy task.

Compared to a collapse creditor to FSLT, a defaulting lessee post less threat to FSLT. The immediate consequence is a cut in DPU.

The following list summarises the profile for the abovel lessees:

Few things to note:

Most of the lessees are privately owned. This resulted in insufficent financial data to ascertain their risk by retail investors like me.
Of those listed with readily availabe financial data. It can be seen that their credit risk is very high due to their high gearing. These are actually very large firms that should not fail in 'normal' times. But in this 'unusual' credit crunch where even banks can fail, their collapse due to insolvency is indeed material.
The only consolance is the midst of uncertainty is that most (except Yang Ming's 20%) of the lessees do not account for more than 15% of FSLT revenue. Though each of the lessees could post high risk by itself, collectively, the risk is mitigated by virtue of diversification.

Risk versus Returns

The above data is sufficient to show that investing in FSLT is indeed a VERY risky adventure due to the ongoing credit crisis that have yet to show signs of abating, the question now then becomes, is the returns worth taking the risk?

The above shows the hypothetical scenario of investing about $10,000 in FSLT at a unit price of 38 cents.

The following are the assumptions behind the projections in the table:

About 4 to 5 million USD per quarter could be diverted to pay off the recently secured tranche of 65 million USD loan for 3Q 2010 onwards. This could potentially reduce distribution income for FSLT by about a third, thus arriving at 2.05 cents USD.
The USD exchange rate is projected on the basis of eventual USD devaluation due to the series of capital injections and bailouts.
The DPU projections ignore the scrap dividend scheme that could provide funds to service part of the quarterly repayment (3Q 2010 onwards) for the 65 million USD credit facility.

Potential returns depending on how long FSLT can survive and whether they manage to refinance their existing loans:

Loan facilities:

7 year non-amortizing USD$250 million ("Tranche A") --- repayable in full on 27th March 2014
4 year non-amortizing USD$200 million ("Tranche B") --- repayable in full on 2nd April 2012
USD$65 million amortizing loan ("Additional facilitiy") --- linearly amortize from USD$65 million to USD$35 million from September 2010 to 2nd April 2012.

3Q 2010 - Principle recovery

Looking at the table, assuming FSLT manage to keep afloat until 3Q 2010 when the loan repayment to the 65 credit facility begin, full capital recovery (breakeven point) in terms of dividend would be collected.

1Q 2012 - 45.9% returns

Before April 2012 when the 2nd bullet payment of USD$200 million ("Tranche B") is due, accumulated dividend will provide a profit of 45.9%. Over a period from Oct 2008 to Apr 2012, i.e. about 3 years, dividend return translates to about 13.4% compounded returns.

1Q 2014 - Double returns

Assuming the credit crisis is over by April 2012 AND assuming FSL manages to refinance the USD$200 milliion loan at reasonable cost that does not affect the DPU much, then before March 2014 when the bullet payments are due, accumulated dividend will already double. Over a period from Oct 2008 to Feb 2014, i.e. about 5 years, dividend return translates to about 15% compounded returns.

All 3 milestones assumes FSLT shares becomes worthless at each juncture, when the payments are due.

My Action

The ensuing credit crunch post material threat to all leveraged businesses in my portfolio. I have no faith they could survive this credit storm. After some consideration, I decided to consolidate my leveraged businesses into few counters. I sold off Surface Mount Technology and recently acquired Cambridge Industrial Trust (both at a significant loss) and averaged into FSLT. Thus only two significant leveraged businesses in my portfolio remains, Multi-Chem and FSLT.

Going forward, I will not pump more cash into leveraged businesses. There should be more great businesses going at further discount as this financial crisis dragged on. There is not better time than now to acquire as many good businesses at attractive prices. Fire sale do not occur everyday. The only problem I face is insufficient cash to invest. So patience is still the key.

Conclusion

While the crisis brood fear and anxiety amongst the market. It is also during such times that opportunities began to appear. Looking back 10 years from now. I believe I will not regret investing now.

Credit Crunch vs Asian Financial Crisis

2008-10-13T22:48:00.007+08:00

It is not difficult to notice that majority of the news nowadays centred on the ensuing credit crisis and the potential knock on effects on the economy. Though Singapore had technically entered a 'recession' after 2 consecutive quarterly contraction, the 'real' one have yet be felt... there are still queues at restaurants and the ERP rates had not gone down.

I happen to watch some evening news on Channel 8 a few days ago. An analyst (I think he is) commented that the comparing the current credit crisis with the Asian Financial crisis in 1997, the proposed solution by the US and European nations then for Asian nations stand in stark contrast to that for their current problems. I decided to verify his comment and pen my thoughts.

Similar problem, different solutions

Both crisis are the consequence of severe economic excesses gone wild (the almost inevitable product at the tail end of a boom-bust cycle). And coincidentally, both have similar roots with a property bubble that burst. The prescription by IMF included cutting back government spending to reduce fiscal deficit, allowing insolvent financial institutions to fail as punishment. This was aim to restore confidence.

Fast forward 11 years to 2008. To treat the current problem where many financial institutions have over leveraged, the prescription now was to bail them out if they had grown too big to fail in order to restore confidence. The consequence of such action could result in deep fiscal deficit for these European nations and United States.

Proposed solutions

From US to Europe, government and central banks inject tremendous amount of money into the financial market. Approving, pledging trillions of dollars to bail out or provide loans to banks and other financial institutions almost dying from the current credit freeze. The concerted effort seem to look like a last minute massive blood transfusion to revive a patient strugging to survive from a huge gapping, bleeding wound.

Health status

Looking at the current health status of the 'rescuing' countries who are trying to donate blood when they had none or little, I am quite surprised how they can realise the amount they pledge. The following two links shows the current account surplus or deficit of major countries and their foreign reserves:

Current account surplus or deficit measures the trade balance while the foreign reserve measures the foreign (liquid) assets of the country. Both are indicative how financial sound the country are in terms of crisis survivability.

From the list, it is easy to see how deep in the 'red' are the major countries hard hit by this credit crunch, i.e. US, United Kingdom, France etc.

Potential consequences

There are a huge number of financial institutions that had over leveraged. The painful de-leveraging process and the asset write downs that could easily terminate them if not because of the massive bailouts by central banks and government.

The worst case scenario I could foresee is a series of bailouts and nationalization of financial institutions until the central banks and government ran out of resources and implode on themselves, i.e. government default like Russia in 1998. That would then spark of a global recession and Asia will just have to survive on growing but sustainable inter country trade, waiting for these industrialized western nations to crawl out of financial nuclear winter.

The 'best' case scenario, or rather a moderate one, would be an eventual devaluation of their currencies, British pound, US dollar and Euro. They could supply, pump in, guarantee all deposits, debts etc. But the eventual flood in money supply would be met with a severe erosion in value, to be felt in months or years to come.

Conclusion

There is no fast solution to this credit problem. Any such thoughts are too native and simplistic. The rally today could just a few sparkles in an otherwise dying heap of fire. Australia and New Zealand dollars had devalued as expected when they had to cut their unsustainable interest rate, soon or later, more frequent trips to European or American tour would be possible.

Stock picking and chicken rice

2008-10-04T10:10:00.019+08:00

Motivation

The recent stock market turmoil unsurprisingly caught the attention of many man on the street. A friend happen to chat with me and chance upon this topic. She asked whether it is the good time to enter now and if so, what stock should she buy.

I wouldn't comment on the first question. Market timing is an impossibility for mere humans. On the 2nd question, I offered my point of view.

Stock picking and Chicken Rice

If a friend approach you one day and ask you to invest $10,000 in his Chicken Rice stall, assuming you are keen in pursuing this business opportunity, what will you do? Assuming he is indeed a friend you can trust, will you just hand him the $10,000 and wait for him to hand you your share of profits some time later? Or assuming he is someone you just met, will you just hand him the $10,000 and hope for the best?

Most probably you'll choice neither options. A rationale person will at least do most, if not all of the following:

Try out his cooking
Check out his chicken rice stall
Survey the location, the customer turnover potential
Assess the competition, e.g. how many chicken rice stall in the vicinity
Discuss the partnership details, profit sharing etc.

In other words, you will want to UNDERSTAND the business you want to buy. All investment has inherent risk and you will want to satisfy and convince yourself this business is worth risking your $10,000 of hard earn money.

Investment vs Gambling

It is completely rationale for one to buy into some business he or she can understand. But when it comes to stocks, why should it be different? If one simply treats a stock as a mere number on the screen when one login to POEMS and buy for anticipation the number will increase one day, what different is this venture compared to driving up to Genting and putting a chip on a number on the casino table? Even buying 'blue chip' stocks this way does not necessary constitutes as investment. Buying one in times of irrational market excuberance will see the 'number' shrink tremendously during bear market with irrational fear.

As Benjamin Graham puts it,

"...An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative..."

Understanding is the key

The effort to perform 'thorough analysis' into any business or investment vehicle before one part with his or her hard earned cash should not be underestimated. It can be tedious, time consuming but nonetheless rewarding. She asked me how I started, what books I read and when I told her I started reading in 2005 and had completed the list of books on the left column (and still reading more), she almost show her disbelieve.

To drive home the point on understanding, one need to look no further then the DBS High Notes 5 issue due to Lehman's bankruptcy. Several blogs and articles had been written on this topic highlighting the plight many conservative investors who thought the product was very safe. They were unaware of the risk involved. Had they actually read and understood the product, they could have done otherwise. Any investment product comes with a prospectus that the potential investor should have read before parting with his or her cash. But how many actually went through those font 1 arcane details? Even if one went through, how many are able to finish and decrypt the wordy lines seemingly meant to discourage understanding?

Conclusion

Invest in something one can understand. If the product seems complex, it is either beyond your realm (I don't think so) or its structured to hide something. Either way, its better be left untouched.

I bought Cambridge Industrial Trust on 18th September 2008

2008-09-20T09:38:00.010+08:00

About Cambridge Industrial Trust

Cambridge Industrial Trust is a real estate investment trust (REIT) with a portfolio of 43 industrial properties spread across Singapore. The REIT have diversified property types and tenant base in various sectors such as logistics, warehousing, industrial, car showroom and workshop. The trust is currently seeking Shariah compliance to tap into a wider capital market.

Once in a life time buying opportunity

The subprime induced string of failures in giant financial institutions in the United States in a matter of weeks, the bailout of Freddie Mac and Fannie Mae, the collapse of Lehman Brothers, the sale of Merrill Lynch to Bank of America and climaxed (temporary?) on brink of collapse of AIG, helped to create rare buying opportunities. Almost every business, good or bad, are on sale. Almost a fire sale. Akin to a genuine closing down sale where everything must go.

How can I miss such a good opportunity. A better opportunity might come later (i.e. things could go even cheaper if the US government rescue initiaitve doesn't really work) but I'm enticed (and contented) by the sale right now, greed has no end.

Unfortunately, I do not have the cash and scanning through my portfolio, I decided to liquidate my remaining Super Coffeemix shares, currently still sitting on (declining) paper profit, to fund my new acquisition.

Rationale

I highlighted my renewed interest in REITs sometime back in July 2008, and raised a few attractive attributes about Cambridge Industrial Trust (CIT):

Diversified industrial portfolio in many sectors, manufacturing, service & commerce etc.
Long term lease of 5 to 15 years
Strategically located properties in key industrial zones spread across Singapore
Built-in rental escalations to provide organic growth

The yield then was already close to 10% and but I was hoping something higher. At 12.5% yield at the price I got, I am satisfied.

Dilemma

In fact, 2 opportunities cried out for my attention that day, namely CIT and First Ship Lease Trust. The latter plunged more than 10% that day, pushing the yield to a ridiculous high exceeding 20%!!! I was actually more tempted to buy into First Ship Lease Trust than CIT. Troubled AIG held about 8% of First Ship Lease Trust and this might had contributed to the drop but without concrete statements, no one know for sure.

Based on raw yield, I could have chosen First Ship Lease Trust. But I already had quite a bit of it. I do not want to end up in a situation where my portfolio is dominated by one company, not matter how good it is. My personal strategy, philosophy , principle is diversification. The last thing I want is to be caught off guard if that one dominating brilliant company in my portfolio collapse because of some bizarre reason beyond my control.

Thus after intense internal fighting going through my brain, the policy division in me triumph and I proceed to welcome CIT into my portfolio.

Risk

Nothing comes without risk. Both REITs and shipping trust are intrinsically debt funded vehicles. Given the current credit crunch, both will face severe resistance for growth in the best case case scenario and survival in the worse case scenario.

Syarish Compliance

Though CIT tried to seek syariah compliance to tap into a huge capital market, whether it could do so successfully and whether achieving that status will actually help CIT is a big question mark for now.

Refinance risk

CIT will need to refinance all its outstanding debt and negotiation with HSBC is currently underway. It is expected to complete it in 3rd quarter 2008. Under current liquidity crisis plaguing the market, credit will neither come cheap nor easy.

Conclusion

No one knows for sure how long the current credit crunch will last and whether the slew of government, central bank actions around the world will really help restore confidence in the finance sector. But what I do know is this crisis open up huge buying opportunities not seen since the Asian financial crisis. While many are bailing out, it is those who dare to invest, stay vested and hold till the next crazy boom in market that will walk away with handsome rewards.

Public Transport Companies --- a good buy?

2008-09-14T15:42:00.029+08:00

I read the recent articles on Singapore public transport with both interest and concern, especially on the recent fare hike and restructuring. Public transport is meant for the mass and providing the services at a 'reasonable' and 'affordable' rate should be the main objective for their existence.

Many blog posts and articles were already dedicated to this topic, debating and questioning the need for the increase. I'll hence look at public transport issue from a different angle i.e. investment grade of the public transport companies.

Monopoly?

Valuation

No complex analysis or elaborate ground survey is required for one to conclude that the local transport companies, SMRT and SBS Transit operate in near monopoly in their respective fields, namely rail and bus services. Elimination of service duplication (waste of resources) is the rationale behind the seemingly lack of competition, e.g. removal of bus service once the train starts to run.

If so, aren't these companies a good buy? The following are the litmus test, valuation ratios for SBS and SMRT:

SBS

P/E: 12.3
Rolling P/E: 15.3
P/B: 2.5

SMRT

P/E: 20.2
Rolling P/E: 19.9
P/B: 4.2

A moderately high P/E (above 10) and P/B (above 2) do suggest this from a valuation point of view. i.e. the market could price these with monopolistic premium.

Financial Performance

How about their financial performance? Do they perform as well as a typical monopoly (my criteria) does? i.e.

high profit margin (>10%)
good profit growth annually (>10%)
respectable ROE (>20%)

The following table list the financial performance of the last 3 financial years for SBS and SMRT:

A few conclusions can be reached almost immediately by looking at the table above:

Firstly, SBS's financial performance pales badly compared to SMRT.
SBS's profit margins are below 10 and deteriorating while SMRT's improving and way above 15%.
SBS transits operating expenses rose more than twice as fast as SMRT.
Other than SBS's improving ROE, all its key financial ratios fail to make the grade for a monopoly.
SMRT performed far better. All the key ratio made the grade.
Perhaps that's the reason why they trade at almost twice as expensive as SBS (i.e. 4.2 times book value versus 2.5 for SBS)
Direct government grant (in the various forms to offset asset purchases, trains & buses) as a percentage of earnings is extremely low for SBS as compared to SMRT.

Investment grade analysis

At first glance, SMRT might seem to make investment sense. Looking at the financials results, SMRT are able to achieve record profits year after year with commendable ROE (20's) and profit growth (~10%).

However, things are not rosy as it seems. It could not raise fares as it like. Possibly due to its performance, its fare increases were not approved by Public Transport Council (PTC) while that of SBS were mostly approved. This is the characteristic of a regulated industry.

Looking at their financials and fare approvals/disapprovals by PTC, it seems to me that there is downside protection for both companies. i.e. it is almost impossible to make loss, this is because the companies can be sure to pass on rising business cost to the consumer should the former threaten the bottom line. On the other hand, there is a ceiling to their upside. There is a fare adjustment cap forumula to regulate the fares.

Short Term Outlook

Both companies operate in a tightly regulated industry with SMRT performing obviously better. As a defensive play where the investor is more concerned whether a company will risk bankrupcy, he can definitely sleep well owning SMRT.

Long Term Outlook

A check on the Land Transport Masterplan shows many changes affecting public transport in the coming decade. While SBS and SMRT are expected to continue their existence, by virtue of operating in a tightly regulated, non-competitive industry means that whether they could thrive or die will depend almost solely on the transport policy in the future. Gambling was never legal in Singapore in the past. Two casinos will be ready in the next few years. No one can tell the future.

Conclusion

Public transport is meant for the general public. Keeping it afforable is one of the main objective for the regulators. But to the transport companies, being listed stipulates them to maximises profit for their shareholders. How they manage these conflicting interest will always be a thorny issue.

Analyst's analysis --- to be taken with a tonne of salt?

2008-09-07T10:41:00.025+08:00

I read with amusement the morning news about the effect of quitting of Japanese PM on NIKKEI, on Channel NewsAsia on 2nd September 2008:

0846 hrs: Japanese shares open lower after PM's resignation
0917 hrs: Japanese stocks turn higher after PM resigned

How do these analysts know the stocks went up or down due to his resignation? Apparently they didn't, reversing their views just around an hour. This brought me to recall what I heard when I attended the analyst briefing of Surface Mount Technology sometime this year when its CEO commented:

... there are two professions who does not need to take responsibility for what they say, one is the weather forecasters, the other is stock analysts...

As a whole, their hits and misses are seemingly so evenly distributed that it became common sense to take them with a huge tonne of salt. Thus it is rather surprising (at least to me) that people still believe them (else why ask them for opinion) and even more surprising why they are still employed and so highly paid.

Reasons behind salty analysis

I read somewhere, in one of the books on the left column (can't recall which) that it is human nature to attribute cause and effect, e.g. trying to find a pattern when there is none. It works pretty well during hunting, i.e. aiming and throwing a spear ahead of a speeding deer instead of directly at its body when one can almost predict (correctly) that it will run straight.

But it is altogether a different story making forecast in a stock market, especially on a short term basis. It's as good as trying to predict the next roulette spin. The reason is that the sheer number of participants and events affecting a short term outlook in the market make the next price movement almost a perfectly random event.

I do not believe these highly educated professionals, with their training and experience could not understand the fundamentals causes behind macroeconomic events unfolding before them. But many seemingly like to make straight line forecasts. If that is so easy, anybody can become an analyst.

Lastly, being an accredited analyst, market expect them to give an answer, a projection. They have to call a number (any number is better than no number). "oil will hit 400 usd per barrel" sounds much better than "I don't know, probably the oil price will be very volatile".

Layman's view

I do not need to call a number if I don't know and I am under no pressure to kid myself. So it is great to look back at my past comments to see how I fare in my own macroeconomic views.

SGD vs USD (and other foreign currencies)

When USD was fast depreciating in 2007 and most of 2008, many analysts are calling ever lower targets with each record high achieved by Sing dollar against the USD. The lowest target I recall is 1.32. Might as well say parity. But the fundamental events clearly pointed otherwise as I wrote the article on 10th May 2008:

10th May 2008: High-yielding notes a good buy?

In it, I pointed out the limitations on how far US can allow its currency to drop and how badly it will hurt Singapore if MAS continue to strengthen SGD endlessly. Ironically, after being so bullish before the August decline in Sing dollar, many analysts now forecast a steeper decline in Sing dollar. Given MAS's policy of using SGD as an inflation fighting tool and mounting US debt, I doubt there will be a clear trend in SGD vs USD. It will most probably be volatile exchange rates until the dust settle down in the next few years.

On a separate note, my post was actually targeted at the prevailing interest then to buy high yielding fixed foreign currency deposits but I cautioned against the risk involved. There must be a reason for the high interest attached, and it is definitely not risk free.

Since that post, New Zealand dollar, NZD had depreciated about 7% against SGD:

and Australian dollar, AUD by about 7.5%:

Thus offsetting the 'high' interest rate on these fixed deposits (about 6 to 7% then). I'm not the first to see these fundamental changes, I read them somewhere, so can these 'analysts'.

Oil prices --- aiming for the moon?

When crude oil crosses USD 140 a barrel in June this year, analyst again extrapolated crude oil to shoot for the moon. Supporters of peak oil (oil supply had peaked but growing demand will ensure rising prices without conservation or alternative sources) are right to point out that growing global demand (esp. due to rising demand from China and India) will drive up prices.

However the run up in prices are seemingly more of a speculative adventure then a shift in fundamentals. I wrote another article on this back then on the unsustainable crude rise:

1st June 2008: Oil bubble or trouble?

When it hit above 140 a barrel, some predicted a 200 a barrel by year end. Now, when crude collapse below 110, some predicted it to retreat back to 80. In the long run, I do not doubt crude demand will definitely outpace supply unless more economically exploitable fields are discovered or more serious adventure in alternative fuels takes off. The following figures put the key consumers in perspective:

Crude oil consumption per capita per year:

US: 68.81
China: 4.96
India: 2.18

GDP to Crude oil consumption ratio:

US: 1.65
China: 0.94
India: 0.86

Crude oil consumption in absolute terms (1,000 barrels per day):

US: 20.59
China: 7.27
India: 2.53

Crude oil consumption if China & India's consumption per capita matches US:

US: 20.59
China: 100.86
India: 79.86

Even if China & India become as efficient as US in terms of consumption per GDP:

US: 20.59
China: 12.76
India: 4.85

(But this assumes China and India's economy remains unchanged. At the rate they are growing, both economies will match, if not surpass, that of US within the next decade. Thus at the same efficiency, both consumption will exceed US by a significant margin)

However, in the short term, it is somewhat incredible for oil to double in just 2 years. Similar to SGD vs USD, going forward, crude oil price could just be as volatile in the near future before it settles down to a price dictated by fundamental supply and demand.

Conclusion

It is sometimes amusing to read analyst reports on stock valuations. Many like to use P/E ratios. It is a convenient tool because it allows practically any number to be called for a stock valuation. In a bull run, for a forward or historical earnings, just pluck a high P/E ratio and you get a huge target price. Conversely in a bear market, with the same earnings, pick a low P/E ratio and you get a much lower target price. It is as good as a doctor trying to diagnose you with a wheel of fortune.

It is no wonder they are so handsomely paid. Not because their job are difficult to do, but its difficult to keep because any Tom, Dick or Harry can become one. Fortunately I do not depend on analyst reports for my stock picks.

Disclaimer

I am not saying all analyst are not up to mark, but the significant number of black sheep amongst the good ones are indeed bringing a bad name to the collective lot. It is those that can and dare to give better quality comments and reports that will capture the trust and confidence of rational investors.

Buy high, sell low --- the most common strategy?

2008-08-23T10:40:00.010+08:00

I chanced upon a the following chart depicting the common problem plaguing the herd mentality amongst most retail investors:

(src: http://www.retro.ms11.net/InvestorMind.gif)

Looking at the chart made me recall the mistakes I've made when I started out, being toyed by Mr. Market and yet don't know why. Chasing the surging volume and ever pricier stock price was easy money until the correction came. Instead of buying high and hope to sell higher, most of the time, its buying high and liquidating at a lost at a much lower price, whatever price. Even though it is common sense to buy low sell high, but the most common strategy became buy high sell low.

New insight

I had already put that behind me long ago after discovering value investing. Fortunately I only took up the buy high sell low strategy for a few months. Otherwise, I could have burnt myself severely enough not to touch investment at all.

Test of resolve

The subprime crisis in the US (brought about by the bursting of US housing bubble) led to massive write down in assets by many gigantic banks across US to Europe who held CDO (collateralized debt obligations) containing sub quality bank loans. The ensuing liquidity crunch these banks cut back on their loans spark a global credit crunch.

The threat of credit crunch had already impacted both consumers and firms, especially those depending heavily on leverage (i.e. US consumers and many 'growing' firms). The eventual result is a plummeting demand from US and Europe in general. Unless domestic demand in huge emerging markets like China and India could keep up, their export oriented economy will take a beating.

(The only region spared from this trouble is the Middle East. The torrent flow of oil money is driving the local inflation sky high and their economies continue to steam ahead in break neck pace. Even when current oil price had came down from $140++ to $120--, its still more than double compared to just a few years ago)

The global slow down is beginning to take shape. After hitting record profits quarter after quarter in 2007 last year, many firms are beginning to report lower profits this year, (some even went into the red).

In Singapore, my portfolio is not spared. This year, 2008, only 3 out of 13 reported growing profits. 2 even reported loss. Not only is the market going through a sentimental bear, the business fundamentals are also going through a bear. However, according to the boom-bust model, if my portfolio can survive this storm, they will emerge stronger to make me proud.

Opportunities amongst crisis

With each boom-bust cycle, economies generates excesses. i.e. over supply, growing at sustainable pace on leverage etc. It is during the crunch time, the ensuing recession that excesses are trimmed, cut back and removed from the system. Most of the time, the cutting is overdone and supply again falls short of demand. Production began and supply picks up, eventually exceeding demand. The cycle repeats.

At the onset of recession or its vicinity, trimming of economic excesses resulted in exiting of less competitive businesses and consolidation of those that remains. The resultant is businesses that can rise from the ash emerge stronger and better.

Almost all businesses' share price are affected by any recession or similar crisis. Purchasing those with storm weathering credentials during the crisis and holding them until the sun comes out again (the next boom) should yield lucrative returns.

The key question then centered on how to identify any business with storm weathering credentials. I have no answer to this, but one good place to start looking is management, balance sheet and their core business.

Dilemma

While the business fundamentals are clearly deteriorating, their market price are punished more than the drop in their fundamentals. In value investment's context, it still make sense for me to average into them.

However, as the spectre of recession looms ahead, more opportunities in other firms could arise at a price almost impossible to find during 'normal' times. Unfortunately, resource is not something I had readily available and going forward, decision is tough. Walking through a durian plantation with only one small basket and so many to pick from, so many seemingly good... it is really difficult to make a choice.

Conclusion

Recession brings both troubles and opportunities. I once heard (can't find the source) one need to go through a few recessions to become rich, I might start to believe it. But that' only provided one can keep his/her job during such difficult times.

China Sky Chemical Fibre - Disproportional receivables, a point of concern?

2008-08-11T21:54:00.006+08:00

First glance

A friend came upon a buy call on China Sky by CIMB in TODAYonline and ask me to take a look. The target price is SGD $2.25, a three-fold increase from today's close price of 74 cents. Thus, there's enough margin safety? Another undervalue counter, a product of current market tumoil?

Closer look

The bad- disproportional receivables

Comparing 2Q 2008 and 2Q 2007, revenue rose 11.5% from RMB 569.4m to 634.8m. Comparing 2Q 2008 with last quarter, 1Q 2008, revenue rose a meagre 4%. However, receivables (uncollected cash from sales) shot up 69% (YOY) year-on-year from 231.2m to 390.7m. Comparing with last quarter, receivables was also up 68% from 232.7m.

A closer look at the cash flow statement shows that from the reported earnings (accounting earnings), receivables was up 157.9m from 23.3m last year. This made up 71% of reported earnings and are all clocked in 2Q 2008 alone. i.e. For each dollar of reported earnings, 70 cents are not collected ... yet.

The quarter announcement offer a few clues (quoted directly):

...
The volatility in oil prices will have a ripple effect on our raw material prices. The PRC government’s counter inflationary measures and the general tightening of credit in the PRC will have an impact on our customers. Their capacities to react to these measures could affect the extent of our ability to pass on dramatic increases in our raw materials costs to them and our need to extend longer credit periods to them.
...

The (significantly) longer credit periods could account for the 677.7% increase in receivables compared to the 11.5% increase in sales. Thus there could be a great risk for bad debt.

The good- gross margin maintained

Across the pass few quarters, gross margin had maintained at around 34%. This meant that China Sky is able to pass on the rising raw material price to consumers. However, as noted above, their profitability in the near future depends on whether they can continue to sustain their gross margin.

Share options expenses contributes significantly to administrative expenses up to 4Q 2007. Going forward, bearing any substantial slow down in sales, net profit should enjoy a double digit growth if and only if the current gross margin can be maintained.

However, management already warned of a possible bad quarter in 3Q 2008 due to the closure of certain industries in China for the duration of the Olympics, hurting demand in the process. If 3Q 2008 is the only bad quarter ahead as predicted, there should be no adverse effect on general prospects of the company in the long run.

Conclusion

I could not find the actual report on issued by CIMB on China Sky and hence have no idea how they arrived at $2.25. I have also not done a thorough, detail analysis on China Sky to arrive at any valuation but using rough estimation on the information at hand, $2.25 seems high.

Tsit Wing's 2Q 2008 results - a worrying disappointment

2008-08-10T10:27:00.007+08:00

At first glance

While sales improved by 8.1%, or HKD 7.3m, this is more then offset by:

a huge jump in cost of sales: -10.8m
other operating income (loss): -2.7m
distribution costs: 2.0m

This resulted in Q2's profit to plunge by 7.9m or 83.7% to 1.5m from 9.4m a year ago.

Worrying signs

Poor performance in China

While sales in first half of 2008 rose by 77%, operating profit dropped by 50%, a result of high material and operating costs. Looks like the expansion into China is far from successful yet. Ever since Tsit Wing ventured into China, the segment had been loss making and they had successful narrowed their loss year after year. This segment finally posted a marginal gain in 2007. But now, the marginal gain could easily be eroded and a segmental loss could be posted this year.

Closing down of small independent tea bistros

With high inflation, rising cost in both materials, labour, rental etc, small bistros are struggling to survive. Tsit Wing anticipated many to close down and hence impacting their sales even further.

Piling inventory

Inventories shot up significantly from 74.9m from 55.5m in 1Q 2008. Thus there is a sudden built up of 19.4m. This stockpiling could be management's answer to the rising cost of raw materials. Like any other commodities, the prices of tea and coffee had been very volatile lately. Such stock piling (locking-in at current prices) could back fire if the cost of commodities are to plunge in near future.

To manage the cost of raw materials, the management reported that they had engaged in hedging and trading activities. While rising demand due to growing global economies and population in the long term could lead to increase prices, however, commodity prices could be subjected to short term irrational, unpredictable forces depicted by Mr Market. The following tables illustrated how volatile the prices can be:

Thus, in my opinion, such hedging and trading actions is very dangerous. Indeed, Tsit Wing had incurred a marked-to-market loss of 2.2m since 30th June 2008. Fortunately, 1.7m is unrealized and are reversed in July.

Encouraging developments

Strengthening USD

Raw material cost is not a one way street. Commodity prices are ultimately subjected to supply and demand changes. With rising cost, demand will have to go down ultimately, resulted in over supply and a resultant drop in prices. The cycle repeats.

Part of the reason of the rising inflation and cost had to do with the weakening HKD. Hong Kong dollar is pegged to USD, about 7.75-7.85 HKD to a USD and the recent depreciating USD takes a toll on the inflation of Hong Kong in general where most items are imported.

I had already highlighted the reversal in fundamental for USD in my earlier post in May 2008 that the strengthening of USD is expected in the horizon, just that I don't know when. Thus the recent jump in USD against major currencies is not surprising.

A strengthening USD, and hence HKD, will bring a much needed respite to the inflation problem to HKD. Hopefully for Tsit Wing, the 20% increase in cost of sales (mainly due to raw materials) in the past quarters could be reduced in the coming quarters.

Strong balance sheet

They had little or no debt and huge cash horde of about 71m HKD. While the road ahead is challenging, at least they are in good financial shape to tackle the storm. Given the past boom in the Chinese markets in almost every sector, many companies had over expanded on increase leverage. During crunch times with falling demand, tight liquidity and rising interest, their eventual exit from the market should bode well for conservative and sound companies like Tsit Wing. However, until then, there is no foreseeable recovery for Tsit Wing in sight.

Going forward

The near future is dismal. Sales will definitely be hit and falling profits ahead is no longer surprising. Fortunately, they are in a strong financial shape to weather the storm ahead and hopefully, they can emerge stronger.

Singapore Airlines' 36th AGM on 29th July 2008

2008-08-02T10:10:00.001+08:00

Being a blue chip company, there is sufficient press coverage for their results and AGM. Having attended the AGM, I will just like to highlight a few things not covered by the press thus far.

Interesting questions raised

Organic growth vs Acquisitions

One shareholder quizzed the management why SIA seems to be more eager in expanding organically then via acquisitions, since the latter will eliminate competitors. The answer given was that regional airlines are heavily guarded and any purchase are normally not possible. The most interesting answer, came not from the management, but from a fellow shareholder. He brought up the failed bid by SIA on Ansett Austrialia . Its a painful but well learnt lesson for SIA. He cited this as a reason why it might be better for SIA to pursue growth organically rather than via acquisitions.

The rationale behind acquisitions is understandable. Besides eliminating competitors, acquisitions is one of the few available options to break into otherwise inaccessible markets. SIA had been eying the highly lucrative kangaroo route- (Australia - UK) for years. Attempts to enter this route directly had failed so far. Thus the only way it could do so is via acquisitions, hence the rationale for acquiring Ansett. However SIA did achieved limited success in carving out a pie from the kangaroo route via Virgin Alantic.

Turning to the lucrative Chinese market, SIA failed again at acquiring a 25% stake in Chinese Eastern Airline. While talks to sell a stake to SIA could resume after the olympics, there are just too many things that could prop up to scuttle the deal.

Labour issues

Besides the escalating fuel prices that constitutes 36.5% of total expenditure, staff cost came in 2nd at 16.6%. Labour issues with the aircrew union erupted once in a while and hence I queried the management on what strategy they had in tackling this problem and also about retaining their staff against poaching by other airlines.

On the labour issue, the strategy the management adopted is via communication, it is about letting the staff know how well (or badly) the airline is doing and I translates that to expectation management. On the staff retention, the chairman cited that not only are they facing competition from other airlines, they are facing pressure from the local service industry, particularly with the construction of the two integrated resorts. Politically correct answer of paying a competitive package is offered but I would think staff cost could escalate faster in the near future.

Fuel hedging

There was a significant jump in "other operating expenses" in 1Q 2008. The jump was about $130m SGD. Without this increase, 1Q's results would be comparable to that one year ago. From their CFO, these include various unclassified expenses such as forex losses.

Further on in the Q & A, it was reviewed that gains in fuel hedging (quite successfully done in SIA and which contributed significantly in containing the escalating fuel cost) was offset by forex losses.

If I assume that fuel contracts are paid in USD and since SGD appreciates against the USD, shouldn't the fuel contracts become cheaper than first contracted? How does the forex lost comes in? Maybe I can raised this in the next AGM? One bad thing about myself is I can't think on my feet (this is something I need to brush up). I tend to get smoked in AGM Q & A and I needed time to think, digest what they say... and by the time I realised I received a smoke bomb, it is too late to ask the question again.

Other interesting happenings at the AGM

Food and retirees

Comparing the sumptous standing buffet lunch that Food Empire offers at its recent AGM, that of SIA is a disappointment. It is a simple tea break with bee hoon, fried carrot cake etc. The fortunate thing the food is topped up in a timely manner... if not, most people who make it out of the function room will be greeted with empty trays.

Once the door opens at the end of the AGM, the retirees fanned out and rush to the trays like they had starved for several days and just pile the food onto their plates (these are smaller ones, for tea, not lunch). Can't they just exhibit some professionalism as a shareholder and take the food in a more graceful manner?

While I would not rule out buying into as many SGX listed companies so that I can have access to 'free' food from AGMs/EGMs the whole year round in my twilight years (who say there is no free lunch), but definitely it could be done with more professionalism and dignity.

Multi-Chem's 2Q results - unexpected disappointment

2008-07-31T22:22:00.011+08:00

Performance at first glance

While revenue and gross profit remain flat, profit plunged 183% against 2Q 2007 to end with a loss of 1,255m SGD. Given the world wide electronic slump, poor performance is expected but a loss is obviously not expected. Furthermore, Multi-Chem have two drivers of earnings, its struggling PCB drilling segment and a healthy IT security products distribution via its group of M. Tech companies (Mtechpro). The latter should have provided a cushion to the plunging profits.

A closer look

The sudden plunge in profit is actually due to a provision of bad debt, to a staggering 3m SGD (2.966m to be exact). Given that quarterly profit of Multi-Chem normally reached 1.5m, without the provision, profit could have remained flat (i.e. far from making a loss!).

The 3m of doubtful debt is attributed to 2 PCB customers in China. Given that the revenue attributed from China is 8.5m in 2Q 2008, against 8.4m in 1Q 2008 and 6.8m in 2Q 2007, the 3m in doubtful debt is indeed very significant! This brings me to wonder the risk profile of the customers Multi-Chem had OR the quality of the earnings reported in earlier quarters.

Sunshine beyond the storm?

Assuming that the provision of bad debt is a one-off "unlucky" event (I will watch this carefully, else I will issue myself another uncle warning). A look at their reported cash flow statement still show a strong cash generated from operations. So the warning light is still off, for now.

Segment review

PCB drilling

While the electronics sector is Singapore is still gloomy with no sign of recovery, the situation in China is still encouraging, at least for now. Revenue from PCB drilling in China improved 24.6% from 6.8m in 2Q 2007 to 8.5m in 2Q 2008. This includes a significant jump in revenue from laser drilling, i.e. from 0.19m in 2Q 2007 to 1.5m in 2Q 2008. Laser drilling is attributed to higher demand in handset PCBs while mechanical drilling is attributed to the automotive, computer and server PCBs.

IT security distribution

After several quarters of breakneck growth, this segment began to show signs of slowing down. However, given the fact that Mtechpro only recently expanded into India and Taiwan (and now into Australia), Mtechpro's still have many subsidiaries in their infancy. Once these centers become as matured as those in other parts of Southeast Asia, their revenue (and consequently profits) contribution to Multi-Chem will continue to augment that from PCB drilling.

Conclusion

Baring unforeseen circumstances, I am still hopeful Multi-Chem's potential is good beyond the dark clouds. Once the electronics cycle start to make a upturn some years down the road, their true potential will be shown, not forgetting the significant contribution from the Mtechpro then.

Inflation-linked bond funds, a good buy?

2008-07-22T23:08:00.011+08:00

I read with interest an article on inflation-linked bond funds published n Sunday Times, 20th July 2008.

With inflation escalating around the world, and much higher rates closer to home in Southeast Asia, it seems like inflation threatens emerging economies here more than the prospective of a recession. For this reason, other then the traditional oil & gas and other basic resources investment theme, inflation busting vehicles are grabbing the limelight too.

Like any hot vehicles that are created at the onset of sudden interest (bubble tea & lohan fish), which mostly under performs once the interest wanes, does inflation-linked fund belong to the same category? I will like to find out.

How Inflation-linked bonds worked

In a conventional bond, a principal is fixed at inception and the borrower promised to pay a fixed interest, typically yearly or half yearly called a coupon. For an inflation-linked fund, the principal is not fixed and actually grow at the inflation rate and the interest is calculated on the adjusted principal.

For example:

Conventional 10 year bond:
Principal: $100
Interest: 5%
=> Yearly coupon is $5 and principal recovered in 10th year is $100

If inflation rate is 5%
=> Annual return = 5%
=> Real return = 0% (5 - 5)

Inflation linked 10 year bond:
Initial Principal: $100
Interest: 5%
Inflation: 10% yearly

=> (year 1): Principal becomes $110, coupon becomes $5.50 ($110 x 5%)
=> (year 2): Principal becomes $121, coupon becomes $6.05 ($121 x 5%)
...

Since inflation rate is 10%
=> Annual return = 15%
=> Real return = 5% (15 - 10)

The idea is that whatever the inflation rate, the bond holder get the promised interest rate. If I can have access to such a bond and my aim is just to protect my wealth (I'm still trying to build some wealth to protect), I will be happy to invest in one.

How Inflation-linked funds worked

Such funds aims to protect the investor's capital in times of high inflation. Thus the primary objective is to beat the inflation; generation of real returns above the inflation is secondary. To achieve that, these funds can (not exhaustive list):

Invest in inflation-linked bonds issued by governments in the emerging economies
Corporate inflation-linked bonds
Utilises sophisticated finanical instruments such as derivatives, interest-rate swops and forex contracts

How they actually perform

According to the article, only Fidelity Global Inflation-Linked Bond fund is available to retail investor. Hence I research a little more into it. The brochure can be downloaded here and the prospectus can be downloaded here. Since it is still relatively new, no track record is stated in the prospectus. The closest clue I can find it the following prospectus from MAS's website. The compounded annualised return is actually not very fantastic, it is about 2%.

Singapore's inflation rate (year on year changes, see my other article on inflation) normally hovers below 5% and hit an abnormal high of above 20% in 1974 and 1975. Assuming Singaore's economy stablises in the last 20 years, the annual compounded inflation rate is about 1.5%. Thus, most probably, after factoring the 0.5% mangement fee and sales charge of up to 5.25%, the fund will at most break even for investors.

Conclusion

Unless I can have access to an inflation-linked bond (which I think there's almost no possibly of losing money unless the bond issuer default), I will not consider such funds.

Re-looking into REITS

2008-07-19T09:30:00.004+08:00

The recent bearish sentiment that plagued the stock market actually opened up many opportunities for serious investor who have the capacity to take a long term view. Rational investment during such bear market market will reap respectable returns when the bull returns, even if one does not catch the bottom. Such is just a regular recurring phenomena in boom-bust cycles as I had mentioned in my earlier article. In fact, quite a number of stocks have corrected to a level not seen since 2004. Many claimed to miss the boat during the last irrational exuberance prior to Aug 2007, yet so few are willing to pick up the same stock at a fraction of the price they claimed to miss.

Tip-off from e-mail

I received an e-mail regarding my view on REITs, given the recent correction. I recall a few years back when REITs suddenly clogged the limelight for being capital protective yet delivering relatively high yields. Their prices had appreciated quite a bit and lost their attractiveness in terms of yields. With the recent sell down that plagued almost every sector, they seems to look attractive again.

Some research

On the surface, REITs seems to be simple enough to understand. Their underlying assets are buildings and their revenue are lease or rental income which, after expensing all fees and expenses, are distributed to shareholders. More on REITs and business trust in general can be found on SGX website. Comparison amongst the many REITs can be found on a very informative blog, SGX - REIT Data.

A look beneath the skin

Yields

At the price they are trading, quite a number REITs are delivering yields above 8%. The question is whether this yield is sustainable. A typical REITs will have to take on a sizable debt to purchase the land and buildings and refinance them every 2 to 3 years. Hence their interest expense are subjected to change. Lease income, on the other hand, tend to be fairly stable as many usually have long term lease contracts with the tenants. The risk to the yields are then the variable expenses for the REITs and the default risk of the tenants. Given current high rentals, it won't be surprising if a number had to vacate for lower rentals else where.

Net Asset Value

Net Asset Value (NAV), or Net Tangible Assets (NTA) less intangibles, compared to share price are usually a guage whether the stock is trading below value or not. Quite a number of REITs are already trading below their NAV. At first glance, this might seems to mean these are undervalued, but a closer look tells a different picture. The main asset of REITs are their land and buildings. Their prices can be quite sentiment driven. During property gloom (between 2002 to 2005), most property are going at depressing levels. But only after 2006, their prices started to rocket and the bubble only started to deflate recently. Thus, the NAV of REITs are just as volatile as sentimental property prices.

Risk

Given the high leverage (common also to shipping trusts) securing funding is crucial to the survivable of REITs. Thus their ratings are of paramount concern. This is the reason why Allco REIT had to go all the way to take legal action to fight a lowering of their rating by Moody. Downgrading of a rating not only jeopardizes refinancing, but also make it harder (or more expensive) to raise debt for more acquisitions.

On my watchlist

Screening through the various REITs, I have decided to place cambridge industrial REIT into my watchlist. I would not consider a purchase if the yield does not cross 12%, the minimum I desire for any investment. The attractive nature of cambridge are (quoted from its annual report):

Diversified industrial portfolio in many sectors, manufacturing, service & commerce etc.
Long term lease of 5 to 15 years
Strategically located properties in key industrial zones spread across Singapore
Built-in rental escalations to provide organic growth

Conclusion

While it is still too soon for me to go into REITs now, sub 10% yield is still not attractive enough, I believe this bear market is still at its infancy and hence could create more attractive opportunities in months to come. Patience are always rewarded.

I upped my stakes in Manufacturing Integration Technology on 4th July 2008

2008-07-13T11:08:00.004+08:00

Rationale

I had just purchased more of Manufacturing Integration Technology (MITech) at 12 cents a piece. At 12 cents, this is my 2nd purchase of any net cash company trading near or below its cash balance per share. (My first is Armarda). MITech had almost NIL outstanding loans but SGD 27.3m cash & equivalents. Against last known common shares of 218.8m, its cash per share is about 12.48 cents. Hence I just got another company for free. Fortunately, its had a very strong balance sheet to ride through it without any debt to hold it down.

Prospects

SIAS research recently issued a sell call on 9th July after MITech issued a profit warning on 4th July. Against the gloomy outlook of semiconductor industry and manufacturing services in general in forseeable future, MITech will be in for a rough ride through the storm.

The two most hopeful segment for MITech is the recently acquired AMS Biomedical and Aerospace component manufacturing using the existing Shanghai precision engineering plant. As Singapore continue to push into Biomedical and related services, it is a reasonable expectation that MITech, via AMS Biomedical, can get a share of the expanding pie.

The Aerospace component manufacturing is still in the infancy. According to the latest Annual Report, management expect it to stablise in only after 2 years. Profit contribution could take longer. One positive aspect is by leveraging on existing Shanghai plant means that little capex is required.

Thus I would expect MITech to exhibit a turnaround in 3 to 5 years. Going in now might seems too early, but so long as the price is right, there's no way I can tell how the future will turn out.

Conclusion

If the share continue to trade below its cash per share, I'll be happy to buy more for free... if I had the cash :). Incidentally, the chairman is still buying, the latest annouced purchase was on 9th July 2008.

Food Empire - Uncle Warning One, Potential Shenanigan?

2008-07-03T22:53:00.000+08:00

Rationale

My current interest in Food Empire was due to the disproportionate increase in its account receivables for the last 3 years. Thanks to fellow value investor, donmihaihai, who brought this to my attention by leaving a comment on my earlier article and contributed significantly to my follow up article on its AGM. On his advice, I picked up the book, Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, by Howard M. Schilit. I am nearing the end and can't wait to finish the last few chapters before re-looking into Food Empire.

Financial Performance, a re-look

A few things to note from the above, especially those highlighed in red:

There was a restatement in financial performance in 2004 (due to some accounting changes) and coincidentally, sales started to languish from that year.
Net Profit, however, held up pretty well, with a particularly huge jump in 2004.
Since 2004, receivable growth had been outpacing sales growth.
Cash generated from operations had been lagging behind net profit for all years excluding 2003.
Since 2006, there is a huge plunge in the percentage of cash generated from operations with respect to net profit, accounting for around 20+%.
Free cash flow reduced drastically since 2006, partly due to the recent acquisitions.

The picture becomes clearer with the following graphs:

Interpretations - Potential Implications

Account receivables outpacing sales

The fact that net profit (Pt 2 above) is holding up well usually imply that sales should be comparatively strong but that's not the case (Pt 1). To add to the confusion, account receivables growth outpaced the slowing growth in sales. In fact, account receivables to sales ratio had been increasing almost every year since 2001. My guess is that either Food Empire is more aggressive in recognising revenue or giving a more favourable credit terms to boost sales.

Real hard cash falls short of net profit

Cash from operations (cash flow statement) is a fraction of net income (Pt 4 & 5). This is something rare in other companies in my portfolio. To me, its seems to confirm there's some sort of aggressive accounting here. Its pretty fine when cash flow from operations sometimes dip below net profit, but not all the time! What's alarming for Food Empire is that its cash flow from operations is only 20 odd percent of its reported net profit. It really bring one to wonder the quality of its reported earnings!

The larger number items that cause the reduction in cash flow from operations compared to net profit is usually:

Increase in receivables (under working capital changes)
Increase in inventories (under working capital changes)

Both of which are not a good sign for a company claiming outstanding financial performance.

Negative Free Cash Flow

Free Cash Flow (FCF) turned negative since 2006, partly due to recent acquisitions, e.g. Petrovskaya Sloboda brand. Negative FCF is not necessary a bad thing, if it's due to huge investment which can imply improved future returns. But for Food Empire, the negative FCF is due to plunging cash from operations and acquisitions (investment), hence another sign of concern.

Changing of reporting currency

With effect from FY 2008, Food Empire begun using USD as the reporting currency. Even though the reported reason for this (quoted from 1Q 2008 quarter report) was to better reflect the Groups' results as majority of its transactions are in US dollars, I would think the underlying reason should be due to the depreciating USD against SGD.

USD transaction had been dominating Food Empire's business for many years, why the change now? Using SGD will paint a even more deteriorating picture, not something pleasant. Already in the published, unaudited FY 2007 results, it was mentioned (quoted):

... Currency fluctuations affected the Group’s results as the vast majority of its transactions are in US dollars while its reporting currency is in Singapore dollars. If the Group’s performance were reported in US dollars, revenue would have increased by 25.5% (unaudited) and profit after tax and minority interests would have risen by 24.8% (unaudited) ...

It seemed to me that the reporting currency would be chosen based one whichever painted a nicer picture. (USD used to be relatively strong right up to 2006, so no incentive to change the reporting currency). I would be please if the good results are due to operational performance, but not due to 'better packaging'.

Comparing with Super Coffeemix, Tsit Wing and Viz Brandz

Super Coffeemix's cash from operations began to dip below net profit since 2006 while that for Tsit Wing was always way above net profit. Food Empire and Super Coffeemix shared one thing in common, both displayed specular growth story (in terms of sales and profit) in the double digits while Tsit Wing languished in the single digits.

However, it might be unfair to compare this way because Food Empire and Super Coffeemix sold to consumers while Tsit Wing sold to retailers, bistros etc. i.e. They operate with different models.

To further quash my doubts, I looked at Viz Brandz. It also sold to consumer (like Super Coffeemix and Food Empire) but had cash flow from operations exceeding net profit. However, it also show signs of preceding the two:

FY 2007 sales improved 18% to 137.9m from 117.2m for FY 2006
FY 2007 profit improved nearly 6 times to 9.213m from 1.627m for FY 2006.
Cash flow from operations only improved marginally to 11.5m from 12.9m
Account receivables jumped 33.7%

Seems like the genetics for growth are the same of coffee businesses?

In Conclusion

I would say the numbers Food Empire (possibly Super Coffeemix too) churned out are a cause of concern, but not a red flag yet. Anyway, I would monitor future announcements and results closely, and wait for my chance to quiz the management again in the next AGM or EGM, which ever earlier, and decide my next course of action from there, no hurry... yet.

I upped my stakes in Singapore Airlines on 12th June 2008

2008-06-21T09:47:00.000+08:00

This is the only 'blue chip' company I had in my portfolio of 13 companies. The sheer amount of media coverage on any blue chip company actually does not warrant me to say anymore about it, but since I'm treating this as my diary, penning down my thoughts now would still be helpful to my learning experience when I review them several years down the road.

Rationale

Given the slowing economic growth, escalating fuel cost, falling demand due to more expensive air tickets, it is almost taken for granted that the global airline industry is facing increasing dismal days ahead. It looks almost certain that Singapore Airlines, SIA, one of the most profitable airlines in the world, will also not be spared. If so, while many airlines are already cutting back flights to stem mounting losses, why is SIA still boosting flights?

I believe it has the capability to weather the storm and emerge stronger than ever before... and I have the reasons to believe, at least I think I have :)

Revenue strength

Branding, SIA had put in great efforts to build up its brand that is synonymous with quality flying experience. This enables them to charge more per ticket then competing airlines. It is not surprising that they repeatedly got voted for best airline of some sort almost every year.
Corporate travel contributed significantly to the bottom line of SIA, particularly the business class. It is not uncommon that business class seats sold out like hot cakes on popular routes. It is hence not surprising when SIA started to launch all-business class flights.
Price insensitivity amongst client base. Most who choose to fly with SIA are either tourist who would rather pay more for the flying experience or businessman who's tickets are their companies' problem. Either way, unless the ticket becomes unreasonably expensive, they will continue to fly with SIA.

Cost management

Managing Jet Fuel. Fuel cost made up about 36.5% of total expenditure. With the strong branding and relatively price insensitive client base, it is able to partially pass on the rising fuel cost via fuel surcharges, 3 times within 3 months. Coupled with somewhat successful fuel hedgeing (at about USD $100/BBL vs current $166/BBL) and positive currency translation for fuel paid in USD, SIA seems to be managing its fuel cost well.
Newer planes with better fuel efficiency. SIA currently operates more fuel efficient Airbus A340, A380, Boeing 777 and disposing off less efficient Boeing 747-400. It is expecting to take delivery of Boeing 777-300ER and Airbus A330-300 later this year.
Staff cost accounted for 16.6%, with pilots accounting significantly. It helps (from the business perspective) that SIA operates a flying school that churns out relatively cheap pilots bonded for about 7 years commencing from 1st officer.

Outlook

Two major factors are threatening the profitability of SIA (others are talking about loss management). Firstly, the escalating fuel cost, if not managed properly, will definitely eat into earnings. But from my earlier post, I have reasons to believe that fuel price will not aim for the moon. It will come down, sooner or later. Secondly, the rising ticket prices are obviously hurting travel. but from the reasons above, SIA seems well positioned to ride out this storm.

Inflation --- will it get worse?

2008-06-08T13:52:00.001+08:00

Ministry of Trade and Industry Singapore had recently revised the forecasted Consumer Price Index, CPI inflation for 2008 to be between 5.0 to 6.0%, up from 4.5 to 5.5%.
(src:http://app.mti.gov.sg/data/article/13881/doc/ESS_1Q2008_PR.pdf)

Looking at recent events unfolding before me, I would think the situation would get worse before it get better.

Stocking the fire

Current inflation resulted primarily from price spikes in commodities and oil, (the latter driving up transportation cost which further pushes up the price of the former).
While many fingers are already pointing, actions to looking for scape goats (from global warming induced poor food crop harvest to hedge funds speculation in oil market) are fast and furious but actions to remedy are slow to come by.

A few factors are already fanning the fire:

Crude Oil Production

1) Under investment in oil refining and extraction capacity due to oil price languishing at low levels in the 1990's right up to 2003.
2) Political reasons that prevented increase in supply to meet rising crude demand
3) Disruptions to crude supply from producers due to various reasons, sabotage, war, freak weather etc.

Commodities supply (esp. food)

1) Growing disparity between stable food crops and biofuel food crops. It is more logical for poor farmers to grow lucrative biofuel food crops to basic food crops.
2) Rising transportation cost
3) Freak weather destroying farms and crops
4) Underfarming due to languishing low food prices for decades

In general, due to past low prices, supply is obviously not catching up with demand (especially with the rise of the emerging economies, e.g. China, India, Brazil, Russia and ASEAN nations). Whether or not the past prices are unrealistically under priced is not the issue.The issue is at those prices, it does not make economic sense to produce more or invest in the production, resulting in the current situation.

In fact, the last 2 inflation crisis are also induced by the oil spike, once in 1973, the other in 1979:

(the figures are obtained from: http://www.singstat.gov.sg/stats/themes/economy/hist/cpi.html)

Potential consequences

Slowing economic growth

The most direct consequence of surging inflation is to drive up the cost of doing business. For the small businesses, it is a matter of survival. Not only do they have to grapple with rising cost, i.e. the problem of passing on the increase to the consumers, but also falling demand for their products and services as a result. The bigger companies could ride through the crisis with falling profits, or worse with a few quarter of losses (they've done it before in previous crisis, Asian Financial crisis in 1997, 9-11 in 2001 and SARS in 2003).

In general, for businesses, there would be falling profits, scaled back investments, restructuring to cut excesses etc. For the people on the street, they would be more belt tightening, i.e. more savings and less spending (due to pay freeze, cut or even retrenchment from restructuring). The reduction in demand for goods and services becomes a self-reinforcing cycle between business and consumer. The net effect will be a slower economic growth at its best and an out right recession at its worst.

Regional Instability

Rising inflation obviously hurts the poor more than the rich. Food, transport and utility bills accounte for most of the spending for the poor. Any increase in these categories literally send their 'real' inflation rate through the roof.

To make matter worse, most of the Asian emerging economies have heavy fuel subsidies. With surging oil price, the diversion of previous government revenue required for other national uses to feed the growing subsidies is obviously not sustainable. Countries like Indonesia and Malaysia are already cutting back the fuel subsidies and it is not going to go down well with the masses, so used the subsidies. Every government in the region, rich or poor, face the increasing pressure to tackle the inflation with each increasing percentage point in CPI, any mismanagement could cost their political survival.

Silver lining

Under the free (or pseudo free) global market economy, the market ultimately sets its price when supply and demand rebalances. Any disturbance to the system will result in a short term turbulence before setting down at a new equilibrium.

While I won't go as far as the author of the following article as to celebrate (people are suffering in this part of the world):

Commodities, Oil Bubbles Are Reason to Celebrate

I do agree with him that resource bubbles (commodity and oil) wake people up, changes habits and eventually bring about conservation and greater efficiency in usage of previous resources.

Conclusion

I care less now about my portfolio (most have strong enough balance sheets and business to ride through this storm ... anyway I'm taking a long term, 10, 20 years view on them) and more about how this current surge in inflation is going to affect my life (and that of people around me). I have no doubt that the system will ultimately find a new footing and life gets back to normal, what I'm concerned is how long it will take. I'm not optimistic.

Oil bubble or trouble?

2008-06-01T16:12:00.001+08:00

I refer to 3 articles I came across in the latest issue of The Economist, May 31st-June 6th 2008:

Oil bubble?

Believers of peak oil (a point in time when oil production rate hits the maximum and go decline from there) would doubt the current surge in oil price as a bubble, pointing to the sluggish crude production last few years while demand from emerging economies (esp. China and India) powers ahead.

In contrast, others believe the high oil price would had dampened demand (signs are showing) and the current surge is just the act of speculators (traders of crude future contracts, funds and other investment institutions).

If it really is the act of speculators that result in the price surge, I'll not be so worried, since all bubbles must come to a spectacular burst one day.

Oil price --- sustainable?

Whether or not its the act of the speculators, after reading the 3 articles above and doing a bit of research myself, I do believe current sky high prices cannot be sustained for long. It would have been better if the speculators are indeed responsible because the eventual price correction when the bubble burst would be substantial and swift. Otherwise, it will be a long and painful journey ahead before any respite occurs when the demand and supply curve rebalances again.

Less demand or more supply?

Sustainability of demand

According to the 3rd article,

...
Emerging economies accounted for more than the whole increase in world oil consumption last year—because demand in the rich economies fell...

While US and Europe are fighting slowing growth (analyst, experts etc kept saying US is in recession but its GDP always manage to scrap through with a positive figure), the emerging economies continue to power ahead.

Growing economies resulting in growing demand for crude oil comes as no surprise. But most of the fuel sold in these countries are heavily subsidised. As the crude price escalates, the government subsidies balloons, diverting resources from areas that the money could have been better spent (education, health and infrastructure). Subsidies as such cannot grow indefinitely and many are already cutting back. The eventual result of a rising crude price will see a plunge in demand, even in emerging economies, either a direct result of more conservation or slowing growth.

I- Increase in supply --- more aggressive search for oil fields

The runaway price of crude oil already spur a surge in oil explorations. Announcements of oil field discoveries are not uncommon nowadays, given such intensive search. However, even with these, supply will not jump suddenly because it takes years before the first commerical drop of oil is extracted, more so for new fields that are found in deep waters or difficult locations, .e.g. the Arctics.

II- Increase in supply --- alternative sources of fuel

As the price of crude oil climbs, alternative sources of fuel become viable. A google search for "alternative sources of fuel" easily turn up 800,000+ results. Research into these areas are already underway ever since the first oil shock.

Tar sands
Oil shale
Coal & gas conversion
Thermal depolymerization
Biofuel (from sugarcane, rapeseed, soya bean, palm oil and even algae!)

These alternative sources of fuel are not cheap and requires a sustained crude oil price to remain feasible. If crude prices remain sticky for a sustained period (a few years???), supply from the above sources would obviously jump.

Other factors

Continue weak USD

While the plunging USD was blamed for the initial surge in crude oil price from USD $80++ per barrel to $100++, not one article mentioned about the USD devaluation now. Seems like the search for the scapegoat have moved on. I would wonder when the USD eventually strengthens, would oil price come down? I doubt so, because strengthening USD should be a result of a recovering economy, brining along an increase in fuel consumption again -- another excuse to keep the crude price up.

What this means to me

While I have no choice but taking a much passive reactive approach in my life, i.e. tighten my belt with the current oil spike induced inflation (food, transport etc), I can continue to be active in my investment.

Market sentiment is obviously bad right now and the only remaining sexy sector are the oil and gas (or related) sectors. Thus I would think the Great Singapore Sale on SGX should not come to a close anytime soon, even though it had lasted so long, from August 2007. While I'd avoid the oil and gas sector, I believe there are still bargains to look out for.

I bought Asia Enterprises Holdings on 29th May 2008

2008-05-29T22:37:00.000+08:00

About Asia Enterprises Holding Limited

Asia Enterprises Holding Limited (AsiaEntH) is a distributor of a wide range of steel products to industrial end-users in Singapore and the Asia-Pacific region. It is focused primarily in the shipbuilding and marine-related sectors, accounting for about 60% in revenue for FY 2007, with construction accounting for 8%. Stockists, traders, precision metal stamping, manufacturing and engineering/fabrication industries accounting for the rest.

Rationale

Financial performance (internal environment)

AsiaEntH is able to achieve consistent ROE (with comparable ROA) above 17% for the past few years. (Even when steel prices plunge in 2005, they could achieve an ROE of 17.1%). Net profit margin is consistent at about 10%. All of these are achieved without little or no debt. At around 1.1x book, I won't say its cheap, but at least it is inexpensive.

Business environment (external environment)

According the data from EDB, Singapore's transport engineering main achievements:

70% global market share of the conversion of Floating Production Storage Offloading (FPSO)
70% world market share in jack-up rigs
Among the top 3 global centres for oil & gas (O&G) equipment manufacturing and servicing
#1 in Asia by production volumes for 6 of the top 10 O&G equipment players

Moreover the major infrastructure and other big projects to rejuvenate Singapore over the next several years already annouced, the demand for steel products should be sustainable in the foreseeable horizon.

Major Plus

Due to the cyclical nature of the business, the company had been able to weather many storms due to its strategy of keeping a sound financial position (NIL debt). The following is quoted from the management Q & A with shareholders:

... We believe that our management expertise, experience and strong financial position are key in mitigating the risks arising from fluctuations in steel prices. With zero net gearing, we are not under significant pressure to liquidate our stocks during unfavourable periods. To cite an example, when global steel prices corrected steeply in 2005, the Group managed to sustain its net profit for the year, ...

Major Minus

Instead of one external cycle for typical companies, AsiaEntH is subjected to 2 cycles, Global Steel Prices and Ship Building & Marine Related Cycles. The worst for AsiaEnt could occur when the troughs of these two cycles coincide. Then, at least it has the financial capacity to sit on its stock pile of raw steel and hopefully enough to outlast its competitors.

Conclusion

I'm fully aware that the current outstanding business performance of AsiaEntH is the result of the current oil and commodity bubble. The final test would come for all the companies in this sector when the bubbles burst eventually. Hopefully, AsiaEntH will emerge as a stronger survivor.

I upped my stakes in Surface Mount Technology on 27th May 2008

2008-05-27T23:02:00.000+08:00

History

I had gone in and out of Surface Mount Technology (SMT) in the past few years while I'm still new to investing. Then, I'm pretty pleased with getting things below book value and even better when their ROE was high. That was when I got Surface Mount Technology.

25th September 2006
Bought SMT at 45 cents. I've thought I found a good business at a bargain, 15% below NAV and ROE > 15%. I learnt later that this was not sustainable.

29th June 2007
Sold SMT at 46.5 cents. While fundamentals are still deteriorating, I managed to sell them all during a period of exceptional market euphoria.

New Insight

After reading several books, especially Financial Statement Analysis and Security Valuation - Stephen Penman I am able to really understand why some companies trade for a premium above their book value (good businesses) and why others trade below (cigar butts). It all boils down to ROE, the quality of the ROE and its sustainability. Good ROE (I won't use the word 'high' here because ROE can be boosted with leverage or other tricks) means company is adding value for shareholders, resulting in having an intrinsic value above book. Bad ROE means management is destroying value, hence an intrinsic value below book.

Value investing just means buying a stock below intrinsic value. This was why Charlie Munger taught Warren Buffet: "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price". This is in contrast to the pure Benjamin Graham style of buying purely below book value.

My Insurance

While acquiring a wonderful business at fair price is obviously better than getting a cigar butt, the problem is how to identify that business. i.e. how sure am I that the business I've identified as good (after going through years of financial statements, annual reports, product & services analysis, business analysis etc) is sustainable?

Lucrative business ultimately attracts competition and drive returns to cost of capital by the theory of regression to the mean. The only guard against the latter is competitive advantage and sad to say, I've not acquired the business sense to identify one.

Hence, my only solution (until I picked up the business sense to identify one good business with sustainable competitive advantage) is diversification. I had 'good' business as well as 'cigar butts' in my portfolio. As far as cost of investment is concerned, each business in my portfolio take up similar chunks. This way, I minimize the cost of my mistakes. The flip side is I limit my gains too. Anyway, my investment objective is to insure against retrenchment, not to get rich (not that I don't want to get rich, but its not my foremost priority, I'm more paranoid about retrenchment and lost of income).

Bought again, with a clearer picture

If I bought SMT back in 2006 as a green horn to investing, now I won't have excuses any more. I gone into the mud with my eyes wide open, fully aware of the risk involved. Anyway, on 27th December 2007, I got in again at 26 cents a share, which is about 52% discount to the NAV then.

Grabbing the falling knife

Today, I upped my stakes again, at 13.5 cents a share. According to the unaudited Full Year results, it's about 75.3% discount to NAV. Looking at the balance sheet, (assuming the balance sheet numbers represent true and fair values):

Current Assets

Trade receivables per share----------------------26.0 cents
Inventories per share-----------------------------24.3 cents
Cash per share------------------------------------9.1 cents

Total current assets------------------------------------59.4 cents

Non-current Assets

Plant, property and equipment------------------80.2 cents

Liabilities

Total Debt-----------------------------------------88.1 cents

Assuming plant, property and equipment is fairly valued, together with a little of current assets, there is more than enough to cover all the liabilities. This means that at least 50 cents per share can be recovered if the company go into liquidation now.

If inventories are worthless in a fire sale, 50 cents less 24.3 cents equates to 25.7 cents. (nearly 2 times of 13.5 cents).

Risk

For a company to be sold at such a sorry price is not without reasons. The following might be enough to justify a discount (but not such obscene discount):

Profit margin squeeze (rising cost, pricing pressure from competition)
Profit to loss making
No recovery in sight (at least not in the next few quarters)

Conclusion

For companies like SMT, the management is obviously destroying value for shareholders. The resources could have been deployed elsewhere for much better returns.

The only way I'll be rewarded now is to wait patiently (but for how long???) for a coporate raider OR a complete turn around in the business. The good thing about cigar butts is the situation is normally pretty bad and are already condemned to the recycle bin by the market. Hence any improvement (from very bad to bad is also an improvement) will be rewarding for the shareholder who dare to catch the falling knife.

I trimmed my holdings on Super Coffeemix on 20th May 2008

2008-05-20T21:56:00.000+08:00

Review on 1Q 2008 results

At first glance, Super Coffeemix's profit dropped about 27%. On closer look, removing other income or loss (mainly due to equity investments), net profit actually rose 33.5% from 7,543m SGD in 1Q '07 to 10.072m SGD in 1Q '08.

However, equity investment is a regular activity for Super Coffeemix, hence I can't ignore them this way. This only means their core operations is still doing pretty well and would have been better if they don't deal with the equity investments altogether.

Looking at the cash flow statement, at least cash flow from operations is still pretty strong.

Thus I can say the results are pretty encouraging, at least their core operations are still holding up in the midst of intense competition, pressure from runaway raw material cost and other operating expenses.

Rationale for trimming my holdings

While the results clearly showed good performance, I'm pretty skeptical these justify the current market valuation. To say its overvalued is just an understatement. However, my experience with Armarda and Golden Agri-Resources taught me not to underestimate the power of irrational market exuberance. So long as the market rumour on possible takeover is not formally clarified, I won't know what price it will aim for... and I'm not taking chances with my capital.

Thus, with today's run-up in prices, I'm happy to disposed about halve of my holdings at $1.15 a share, a neat gain of 78.3%, and almost covering my principal.

High-yielding notes a good buy?

2008-05-10T13:27:00.000+08:00

I read with interest an entire page of Sunday Times, invest on 4th May 2008, dedicated to foreign currency investment:

Forex Fundamentals

While tonnes of books are dedicated to deal with the topic in detail (similarly to the topic of investment), I'm more interested in seeing it from a practical, non-academic layman point of view.

It seems to me that the strength of a currency boils down to 2 factors:

Demand (and supply)
Confidence

1. Demand (and supply)

It follows from simple logic that demand pushes the price of any item highly sort after, while too much of it will drive prices down. The same holds true for currency. To drive up the demand, a central bank rate for the relevant currency can pay a high yielding interest (e.g Australian or New Zeland Dollars) or the currency can be a common currency used for most market transaction (e.g USD).

To drive it down, the market can simply be flooded with tonnes of the cash, i.e. the country can just keep printing money.

2. Confidence

Confidence here does not refers to blind faith about any accurency. I'm referring to the confidence in an economy. The stronger the economy, the stronger or more stable its currency. Strength about any economy can be estimated or projected from the leading economic indicators such as GDP, GDP growth, trade balance, current account balance, productivity etc.

Forex Investment Vehicles

Given my limited knowledge in forex, the only vehicle that make sense to me is foreign fixed-deposit. If I want to bet currency X will appreciate vs Singapore Dollars, all I need is to open a fixed deposit account for currency X with any bank that offers one. My returns will be the capital appreciation (or depreciation) plus interest. Trading cost is negligible too.

High yielding notes are a good buy?

Fundamental investment logic states that returns must be proportional to the risk involved. Let's see whether it applies here.

On the table (taken from link 3 above):

Australian dollars:
Interest Rate = 6.74%

New Zealand dollars:
Interest Rate = 7.75%

Wow, these are few times risk free CPF rates! If these currencies don't appreciate, the interest rate is already very attractive! However, the concern is whether they will actually depreciate?!

Under the table:

Recall that the strength of a currency is a function of demand and confidence, i.e.:

strength = f ( demand, confidence)

Demand?

High interest rate can at least sustain demand, else how does United States continue to sell its bond for so long until China and Japan got stuck with overwhelming USD foreign reserves.

Confidence?

How about the economic numbers for Australia and New Zealand? The following data is obtained from the wikipedia:

Australia:
GDP: 908.826B
Account account balance: -50,960B
As a % of GDP: 5.6%
GDP growth: 4% (2007 est)

New Zealand:
GDP: 128.141B
Account account balance: -9.973B
As a % of GDP: -7.78%
GDP growth: 3% (2007 est)

Comparing with US:
GDP: 13,843.825B
Account account balance: -747.100B
As a % of GDP: -5.39%
GDP growth: 2.2% (2007 est)

In terms of % of GDP, both Australia and New Zealand ran a current account deficit even larger than US! Unless they can continue to maintain their GDP growth rate, any slow down will just widen the deficit, cutting rates will just be a matter of time. The resultant rate cut will then result in a currency devaluation, similar to USD depreciation when FED cut interest rate from 5.25% to 2% within a short time.

Thus the risk with high yielding notes are the 'hidden' potential for currency devaluation. However, most fixed deposits are short term, 1 mth or 3mth. So depositors are implicitly betting against devaluation within these periods. Yet again, how many of such depositors think about current account deficit or other economic indicators when they put money into foreign fixed deposits?

USD, out of the woods yet?

In an earlier article, I wrote about boom bust theory and value investing. In short, market perception (or reaction) always lags fundamental changes. For USD vs SGD, I believe
the fundamentals have change, but the market is still one step behind.

Common market perception is the believe that USD will continue to depreciate against SGD. The main supporting factors are:

The continued SGD strengthening policy of Monetary Authority of Singapore, MAS to fight inflation
The continued rate cutting by FED in US to avoid a recession

I believe otherwise, i.e. while short term volatility or even slight depreciation in USD is possible, downside is very well limited while appreciation is pretty much in the pipeline.

1. MAS's SGD strengthening policy

Singapore's economy is obviously better diversified (away from electronics) now compared to a few years ago when we were badly hit during SARS crisis, Asian financial crisis etc. While MAS is trying to fight inflation by allowing SGD to float higher against a basket of currencies, the higher SGD float up, the less room they have for maneuver. The sole reason is we are still a export oriented and services driven economy. There's a financial limit to breach before it start to hurt foreign investment and our competitiveness.

As for current inflation, I do not believe it will last very long. Overheated inflation can persist as long as the economy powers on at breakneck pace, e.g. China, Russia, Middle Eastern countries and other fast emerging economies. Inflation coupled with recessive factors just dampen demand eventually. Inflation should wane. If so, there is less incentive for MAS to continue to boost SGD.

2. Continued Rate Cutting by FED

To avoid a recession, FED rapidly cut short term interbank lending interest rates from a high of 5.25% in mid 2006 to the present 2%. However, the rapid rate cut resulted in a rapid devaluation of USD ever since. This seemingly resulted (controversially) in an escalation of commodity prices (mostly traded in USD), especially oil. The latter also resulted in a spike in food commodities because transportation cost went up.

Traditionally, FED used interest rates to control liquidity of USD in the market, thereby controlling inflation or spur the economy, depending on circumstances. However, current 'recession' (greatly anticipated, greatly discussed, but not seen... yet) is spurred by a liquidity crisis. The massive write-offs by so many major banks in US and Europe that arose from the defaults in sub-prime mortages in US almost render the cutting rates useless. Nobody seems to be willing to lend anymore.

Hence, it seems to me that FED can no longer use short term interest rate to control the current financial crisis, it had to look for something else. It is not to their best interest to see the USD depreciates against major currencies any further. I came across a few articles suggesting the same. Further rate cutting could just devalue the USD further and spur the commodities, especially oil price to shoot through the roof.

What other measures they could try I do not know. But I do believe that USD vs SGD will just make a U-turn from here. The question is how long the trough of the 'U' is, this I had no answer.

How would a stronger USD affect my portfolio?

An appriecation in USD will have a bigger impact on 2 companies in my portfolio, namely First Ship Least Trust and Multi-Chem.

First Ship Lease Trust

Their revenue streams are in USD and hence their quarterly payout is in USD, converting to SGD. Thus my dividend would see an appreciation in quarters to come.

Multi-Chem

I already wrote in another article that because USD make up a substantial portion in Multi-Chem's debt and payables, Multi-Chem's debt used to be 'shrinking', resulting in a huge forex gain. This gain will be slowly eroded away. Anyway, its a bonus to have forex gain, not a business critical earnings component.

Conclusion

One has to be careful of the hidden risk in investing in 'low risk' foreign fixed deposits.When the yield is high, the alarm bell should ring and careful analysis should be be done. There's no free lunch.