Towards cashless society, how about a unified digital wallet

On the latest coverage on going cashless:

1. Can Singapore catch up in race to go cashless?
2. Govt agencies explore e-payment solutions for hawker centres, coffee shops

The success or failure of the drive hinges not on what Singapore want to achieve but how consumers (end users) wants. Just like for start-ups to succeed, it is not about how wonderful a product or service the company can offer, but how well it addresses the unresolved need of the consumer.

For cashless to take off, one crucial aspect is user experience which boils down to convenience. A typical user now must grapple with cash to make small value purchase in hawker centres, wet market or small groceries stores. He also uses cash to top up store value cards such as Kopitiam card for food court usage. With proper planning, he might juggle a portfolio of credit cards that no only suit his spending habits but also maximises his rebates (cashback, air miles or vouchers). Through his active life, he might also accumulate many membership cards, discount cards and so forth. He might do well to drive a car and so pick up a driver licence along the way. With kids, he might have more loyalty cards for family oriented programmes.

Taken together, going cashless and making cash payment easier only solves part of the problem and not enough to convince end users to switch. To make matters worse, as highlighted in the various articles, the need to maintain so many payment system for businesses add to the inertia for any transition.
Looking at the issue holistically, we need not only a common, low cost payment system that benefit businesses but also a common digital wallet for end users. Such unified digital wallet allows payment, whether from credit or cash accounts, and digitalised other cards such as identification, driver licence and discount cards. The back-end of this digital wallet can either be a government or third party maintained central data depository. The front-end will be an app that a user can download to their mobile phones. Payments and authentication (identity, membership, or discounts) will be done via QR code scanning (camera enabled phones are ubiquitous but not NFC ones). This way, the wallet that one carries can literally be replaced by a mobile phone completely.

Unfortunately, the downside to all these digitalisation is the challenge to help those less able to handle the cashless platforms such as the non-English literate elderly, the blind or vision impaired. For them, traditional payments and identification must still be available and not totally done away with.

Local developer's hope or dream

All signs point to a potential recovery in the property market even when the slew of cooling measures have not been lifted. However, one rule, Qualifying Certificate in particular that was in place to "By limiting foreign companies' holding period, the QC scheme was meant to prevent them from hoarding land or buying land for speculation in Singapore". Basically the developers had 5 years to build and 2 years to sell all to avoid any penalties.

However, this does not seem to deter them from aggressively biding for land recently. They do not mind bidding ahead of fundamentals, i.e. "They may bid at zero margins but by the time they launch it, they make a handsome profit out of it." In order words, they must be pretty confident they can sell them all and well.

Thus it is kind of strange when Mr Kwek raised the concern about the QC scheme. "..."Such penalties are heavy and erode all profit. I hope the Government reviews them again to steady the rate of growth in terms of price increase." What he did raise rightly was the aggressive nature of foreign developers risk pricing the locals out of the market. "If not, you can see every bid (for land) now is higher and higher than ever. Land is akin to raw material for a factory, and if we don't have that, the factory will be doing nothing. Therefore, there's no choice but to bid for the land. If you put in a cheaper bid because you think it's the right price, you'll get nothing." So its really up to the local developers to face up to the competition, wherever its coming from.

Happy Birthday Singapore!!!

Happy Birthday Singapore!!! 

Woohoo, I am back. After orbiting around my two adorable kids for the past few years, I can finally resume some blogging on my investment pursuit after a hiatus of more than four years since the last fruitful journal entry. This time though, I'll focus more on personal finance, still my favourite topic.

Looking back at what I had posted and the comments I had received, my immaturity and inexperience were obvious. I had written more to (re)assure myself I made the right equity decisions and sparring with fellow investors who bothered to comment merely exposed my decision flaws. I sincerely thanked them for coming out to comment and sharing their thoughts.

From a bachelor to a husband to a father of two school-going children, really made me mature a lot and probably age faster than I admit. My values do not change but my priorities do. Stability and certainty matters more to me now than before. Not that I avoid risks but I am now much more cautious (less aggressive). I am more willing to trade-off potential capital gains from undervalue gems for more cash-flow stability via sustainable dividend stocks. Overall portfolio growth can still be attained from compounding reinvested dividends. Nonetheless, I still do my due diligence and research to avoid overpaying for any business, a red line that I will never cross. 

I had also created a Facebook page, facebook.com/MrMarketUncle/, to share interesting articles and put up short posts. Stay tuned for more. 

Happy New Year!!!

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

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!

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

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.