A simple way to a double digit yielding portfolio.

Regular readers know that First REIT is one of my oldest investments in my portfolio of S-REITs. 

One of my earliest blog posts said how this was an investment for keeps. 

That was in March 2010. 

Time really flies. It has been almost 4 years.
See:
First REIT: This one is for keeps.






Over the last few years, I made use of opportunities to buy more units of First REIT's. 

These opportunities were in the form of a rights issue and market corrections.
See:
Bloodbath continues and AK71 went shopping!
and
First REIT: Rights issue.






I became an investor of First REIT's in 2007. The price was 75c a unit.

During the Global Financial Crisis (GFC), I bought more at 42c a unit.

When it had a rights issue at 50c a unit, I took up my allotment and even bought nil-paid rights from unit holders who didn't want to fork out 50c a piece for their rights units. 

Those cost me 66c a unit in total.






During a fierce correction in 2011 which people called a bloodbath, I bought more from 74.5 to 77c a unit. 

It was a decision which I used Technical Analysis to help me in, with the belief that there was nothing wrong with the fundamentals of the REIT.


Some may ask why would I buy at those prices which were higher than what I paid during the GFC or rights issue. 

Perhaps, an old blog post will throw light on this.
See:
First REIT: XR and fair value.







As income investors, we are, no doubt, interested in distribution yields. 

With Q4 DPU coming in at 1.97c, the annualised distribution yields on costs now work out to be 10.23% to 18.76% per annum.


Although the unit price of First REIT has retreated from a high seen sometime middle of last year, sharing the same fate of all S-REITs' after a mention of "tapering" by Mr. Ben Bernanke, a unit price of $1.06 today is still 1.37x to 2.52x my entry prices.

Is there any purpose in sharing these numbers with you? 

Well, if we ask what did I do to make these numbers an integral part of financial security for me today, we will have our answer.


Although some might feel that I am revealing a secret, what I am doing is just sharing a process. 





There is nothing sacred about this. It is just the way I think:

1. Know our motivations. Are we investing or trading?

2. If we are investing, are we investing for growth or income?

3. Will REITs help meet our objectives?





4. What are the fair values of the REITs in question?

5. Fair values are most probably subjective but without any idea of fair value, we will not know when to buy and avoid overpaying.





6. Know our investment well and stay updated. Know the strengths and weaknesses. Know the benefits and risks.

7. If we are investing for income, we could still trade around our long position while staying mostly invested. This could enhance returns.


See? Nothing magical. 

Anyone can do this.

Now, some have asked me if they should buy into First REIT at the current price. 

Questions like this are always difficult to answer, for obvious reasons.

Personally, I always like to buy cheaper. 

So, I like to buy a good REIT when there is a discount to NAV and when distribution yield is higher, all else remaining equal.





First REIT's NAV/unit is now 96.64c.


Of course, if people are investing for income, finding the yield acceptable and the fundamentals good, they could initiate a long position in the REIT, bearing in mind the risks involved. 

Don't just focus on what is good. 

Know also what could go wrong and if it is acceptable to us. 

It is only natural that people would have different levels of risk appetite.
See:
REITs: When to buy?







Do the right things and the rights things will have a higher chance of happening for us.


So, is there a simple way to a double digit yield? 

Yes. Not easy perhaps but simple.




Related posts:
1. First REIT: Revelation.
2. Are you ready to come out on top from a recession?
3. Motivations and methods in investing.
4. 3 points in stocks investing.
5. The mystical art of wealth accumulation.

Yongnam: Profit guidance 3Q 2013.

Yongnam's share price declined more than 10% early this morning. Reason? The management issued a profit guidance. It is more like a fair warning that the latest quarter's results will be negative and that investors should not be too optimistic. This is due to:

1. Cost overruns from 3 on-going projects, paring operating margin to new lows

and

2. A significant one-off loss on disposal of some fixed assets.

So, what did I do? Thanks to an SMS alert from a friend, I did a quick read of the announcement before buying more at 24c a share.



I believe that Yongnam's position in the construction industry is not shaken. It owns a large inventory of reusable steel struts which are valuable assets as they also present a high barrier to entry in Yongnam's niche in the industry.

The decline in share price has presented a good opportunity for me to buy into the business at a discount to NTA. I cannot see how it is a bad idea to own what Yongnam has at a discount.

Of course, cost overruns and suffering losses are unpleasant but we are buying a business with an eye on its future. So, it is important to question if such instances will become the norm? Will they happen again and again in the future? Will they be persistent?

I am of the belief that these are one-off events and that Yongnam's balance sheet will not be negatively impacted in any big way. Overall, Yongnam will still remain profitable for the year although it will pale in comparison to the year before.

Yongnam's future is bright as they will be a beneficiary of the government's drive to double the MRT network in Singapore and there will be work aplenty until 2030. Even if there should not be any iconic projects (which is unlikely), Yongnam will probably have quite a bit of work to keep them busy in the years ahead.

When one-off events like this send Mr. Market into a manic depression, they present a chance for me to buy a business with a proven track record and a bright future at a discount.

Some of us might remember there were times when Mr. Market was very optimistic about Yongnam (for example, on the Myanmar airport projects). Its share price rose to be much higher then. That was probably a bad time to buy.

Please note that I am not glossing over the challenges that Yongnam is facing. Like other construction companies, Yongnam is having a hard time with cost pressures.

With a 3Q loss, they might or might not pay a dividend for the year although a lower DPS should not be demanding. Without major CAPEX in the year, this is a possibility.

See:
Profit guidance: 3Q 2013

Related post:
Yongnam: A chance to accumulate cheaper.

First REIT: DPU increased 16.7% to 1.96c.

On 26 July, I blogged about a 16.4% increase in First REIT's DPU. That was due primarily to contributions from 4 newly acquired properties. So, a continuation of the higher DPU through the quarter that ended 30 September should not come as a surprise.

Sometimes, in REITs, we see increases in net property income and distributable income but a lower or stagnant DPU. Of course, if the gearing level should be significantly reduced, it could be acceptable. Otherwise, all else being equal, it just means that we had an incompetent management.

When I initially invested in First REIT years ago, it had a relatively low gearing ratio. It was a bit more than 10%. Now, it is above 30%. So, the higher DPU has been achieved by leveraging up. Now, I am not saying that this is a bad thing.

However, to continue growing through acquisitions is going to be more difficult especially because the management wants to keep gearing at around 30%. This was also why I cautioned in an earlier blog post that we could expect a private placement if there should be another acquisition in the pipeline.

With the management saying that they are exploring AEIs to enhance income stream and to maximise returns to unitholders instead, the prospect of having a private placement is much weaker now. I view this as a good thing.

To have a private placement in order to strengthen the balance sheet making an acquisition or development less onerous might or might not result in a higher DPU. In the case of AIMS AMP Capital Industrial REIT, DPU improved while in the case of Cache Logistics Trust, DPU declined although marginally. So, in the case of First REIT, since we have a good thing in hand, why change it? The status quo is fine by me.

The CEO of First REIT's manager, Dr. Ronnie Tan, has a reputation for accumulating the REIT's units at all price levels. His interests are more aligned with unitholders', therefore. So, this is, perhaps, a reason why First REIT has been such a good investment for retail investors.

Related posts:
1. First REIT: DPU increased 16.4% (Part 1).
2. First REIT: DPU increased 16.4% (Part 2).

Sabana REIT: 3Q 2013 results and outlook.

Sabana REIT has announced a DPU of 2.38c which is slightly higher, year on year, but slightly lower, quarter on quarter. Some other numbers:

NAV/unit: $1.06
Aggregate leverage: 37.5%
Interest cover ratio: 5.0x

The recent decision by Sabana REIT to purchase a half vacant property from AMD generated quite a bit of concern. Although the management of the REIT suggested that they are quite confident that they would be able to find tenants to fill up the space, it remains to be seen if they could deliver.

Well, you know what they say about how it never rains but it pours? It now seems that Sabana REIT's management will have more vacant space to deal with come 25 November 2013. This is because 4 of the expiring Master Leases will not be renewed.

Now, before we go into a hysteria, the vacant space represents only 6.6% of the REIT's NLA.

As investors for income, we are really concerned with how income distributions could be impacted by all these. Realistically, we have to expect some downward revision.

Taking the DPU of 0.18c from 24 Sep to 30 Sep 13 as a guide, I estimate a DPU of 2.16c for 4Q 2013. This is a 10% reduction from 2.38c for 3Q 2013.

There is nothing rigorous in this estimate. It really is just 0.18c x 12 weeks.

If I were to instil a bit more rigor in this non-rigorous exercise, I would say the DPU could be closer to 0.18c x 7weeks + 0.168c x 5 weeks = 2.1c. This is to account for the loss of income from the 6.6% of NLA vacated through the non renewal of the 4 Master Leases mentioned earlier.

Based on the closing price of $1.10 per unit, this gives us a distribution yield of just 7.64% which brings us closer to the distribution yield offered by AIMS AMP Capital Industrial REIT currently. It seems that Mr. Market is quite efficient. Does this mean that Mr. Market will not go into a manic depression tomorrow? Your guess is as good as mine.

There is a chance that Sabana REIT could manage some positive rental reversions with the sub-tenants and command a higher psf rental for the vacated space in 2014 relative to what the Master Leases were paying. If we are level headed, we will realise that as long as Sabana REIT achieves higher occupancy again, DPU will improve from my back of the envelope estimate. While there exist a chance that Sabana REIT might not achieve higher occupancy again, this probability is rather low.

At the current unit price of $1.10, I believe that Mr. Market has priced in the negatives. If there should be a 10% or so decline in unit price, I would consider it a mispricing which would give interested investors an opportunity to buy in for an attractive yield of about 8.5% with a possibility of some upside in 2014 thrown in.

See presentation slides: here.

Related post:
Sabana REIT: 2Q 2013 results.

Marco Polo Marine: Exciting times ahead!

Today, Marco Polo Marine's share price rose significantly on the back of much higher volume and the recent visit by a group of investors to the company's yard in Batam could have something to do with it:

Last week, we brought a group of investors to MPM’s Batam yard. We saw all three drydocks busy with repair operations, and the construction of a third-party 8,000bhp AHTS vessel and two similar vessels for its own fleet. In preparation for better shipbuilding times, a new slipway is almost complete. Investors were most interested in the company’s 20% net margins.

 

 

MPM and associate PT BBR are on the cusp of renewing their AHTS charters, with current contracts expiring in September to November. With AHTS supply still trailing far demand in Indonesia, we are highly confident that each vessel will be re-chartered immediately at prevailing market rates, which are 33% higher.

Source: OSK-DMG, 25 Sep 2013

 Good things come to those who wait.

Related post:
Marco Polo Marine: Will FY2013 better FY2012?

What should I do when I'm down 25%?

If you can't convince yourself "When I'm down 25%, I'm a buyer" and banish forever the fatal thought "When I'm down 25%, I'm a seller," then you'll never make a decent profit in stocks. (Page 246, One Up On Wall Street)

If we are holding stock of a good company and if the price should decline, the logical thing for us to do is to buy more since the stock has become cheaper, especially if there is a good margin of safety. 

Why sell?





Remember that Peter Lynch is all about FA and I have no doubt that TA practitioners will be able to explain why selling might be a good idea based on chart action. 

Peter Lynch doesn't believe in stop loss, by the way.

I think, as retail investors, we have to take the middle ground. 

We probably do not have the financial muscles of a fund manager like Peter Lynch and to do what he advocates, we must always have a war chest ready.





How to have a war chest ready? 

Well, we should save as much of our earned income as we could from employment, for a start. 

However, this could be painfully slow.

So, we have to be pragmatic and take some money off the table when prices run up significantly once in a while. 

We have to grow our war chests ourselves since we cannot get fresh funds from new unit holders like fund managers can. 

This way, we would be able to buy even more if prices were to plunge significantly for some strange reasons.





Obviously, there are always two sides to a coin. We could decide to sell and prices could go higher after we have sold. 

Prices could also go lower after we have bought more. Well, that is the way Mr. Market is.  

He doesn't care what we have done. He will do what he will do.

This is why many people focus their attention on asking what might be or could be happening in future. 

They try their best to guess what Mr. Market will do.





Indeed, questions in the form of "Will the price fall/rise in the next month/quarter/year?" are quite common in some quarters.

To me, the important thing to know is "What should I do?" given a certain set of circumstances. 

So, what should I do when I'm down 25%, for example?





Related posts:
1. How to be "One Up On Wall Street?"
2. A common piece of advice on saving.
3. When to BUY, HOLD or SELL?
4. Be prepared for war!
5. Risks and rewards: TA and FA.
6. Where did I go wrong?

Marco Polo Marine: Employee Share Option Scheme.

One reason why I like Marco Polo Marine is the large stake which Mr. Lee Wan Tang has in the company. If insiders have a large stake, their interests are more likely to be aligned with those of minority shareholders'. Any action to hurt the interests of minority shareholders' will likely hurt their own.

I also like the fact that Mr. Lee Wan Tang's son, Mr. Sean Lee Yun Feng, who is also the CEO, and daughter were granted share options on 24 April 2013 with an exercise price of 41.5c. 30% of the share options are allowed to be exercised on the 1st anniversary of the date of grant, not earlier.

Anyway, it is unlikely that anyone would exercise the options now even if they could as the share price is currently quite a bit lower than 41.5c. By end April 2014, up to 30% of the options could be exercised if share price were to rise above 41.5c, I suppose.



Mr. Sean Lee

This tells me that there is an even greater incentive for Mr. Sean Lee Yun Feng to steer the company towards higher earnings in 2014 (which would likely result in a higher share price) if he were to benefit from these share options. If you think that this looks like a strong alignment of the management's interests with those of minority shareholders', I won't disagree with you.

All else being equal, favour companies in which management has a significant personal investment over companies run by people that benefit only from their salaries. Peter Lynch.
Read page 235, One Up On Wall Street.

Patience is sometimes the hardest part ... There is simply no way to know when a particular stock will appreciate, or if, in fact, it will.
From: http://singaporeanstocksinvestor.blogspot.sg/2013/02/little-book-of-value-investing.html

See:
Employee Share Option Scheme.

Related post:
Marco Polo Marine: It got cheaper.

Tea with Mike: Analysis of Yangzijiang, an S-chip (Part 2).

Now, let’s address the various concerns I have with regards to investing in YZJ:

1) Falling margins for shipbuilding

Most of the fat contracts secured during the boom years in 2007-2008 are over. One should not expect margins to be fat today but I doubt we will see a free-fall in margins. YZJ's latest quarter's margin is about 20% for its core shipbuilding segment which is low by historical standards but if we compare it with Chinese peers, it’s not bad at all. Management has mentioned they will not drastically lower prices to secure deals. Although I take their word with a pinch of salt, the numbers seem to bear this out too.

2) Operation and execution risk

One of the bigger deals undertaken by YZJ that is due for delivery is the 10,000 TEU container ship. One should closely monitor the delivery as any prolong delay or problems after delivery will be serious, and I would run with my money at double quick time

 

3) Another fraud in the making?

Yangzijiang, being another S-chip, does need close scrutiny. I cannot ascertain their numbers, but there are a few things I take comfort in. They have FCF in all but 2011, and this translate to dividends, so it’s not a complete paper exercise. Due to the fact that they are dealing with ships, it is extremely difficult to fake a deal, you can check if there is indeed a deal from the customer side (Yangzijiang’s customers are renowned, big companies with ready information on their website) There is also third party website that track shipbuilding orders and the sale of 2^nd hand vessels, so chances of a fabricated deal is very low, but there is no way to track margin. E.g. they can be making a loss from building a ship due to cost overrun, but under-report the COGS in the quarterly reports, and there is no way can be sure when it comes to such nitty gritty.

4) HTM investments

This is my biggest concern. Yangzijiang has 12 billion in HTM (held to maturity) investments.  Such investment has provided them with a steady stream of supplementary income, and ensures their financial strength, which is critical in the ship building industry. The HTM investment is literally loans to companies who otherwise are unable to get loans at better rates. So, if you like, Yangzijiang has a banking arm.

More than half of its HTM is charging interest rate of more than 12%, and about 1/6 of it HTM is above 18% when the PBoC benchmark rate is about 6% and effective interest rate of YZJ loans is only 4%. (From 2012 AR)

I am concerned about the strength of the companies that need to loan from YZJ at above 12%  which is also known as the shadow banking rate. However, impairment level till 2012 is less than 5%, and from their latest quarterly report, there is zero bad loans, loans are covered by collateral pledged by borrowers.

Another reason why I find the HTM risk easier to bear is fact that about 55% of the collaterals are properties or land, and YZJ has set up a property development arm to develop land at the old shipyard when they were asked to vacant the land for other development purposes, so it seems that the management does have a contingency plan. From the interview with NextInsight, most of these land and properties are in Jiangsu where it operates. Hence, they do not have any problem that comes from a lack of local knowledge.

Ship building and its related activities still contribute up to 90% of its revenue. So, even if there should be some inflated issues with HTM, which are assets and not liabilities, YZJ should still survive.

In conclusion, if you cannot trust the numbers of YZJ, you should not invest in it. If you trust the numbers, there are several good things going for it. Hope my analysis make sense.

.................................................

Read Part 1: here.

Tea with Mike: Analysis of Yangzijiang, an S-chip (Part 1).

The recent episode with China Minzhong was viewed by many, including professional analysts, as the proverbial last straw that broke the camel's back. S-chips have been declared by them as untouchable and even toxic.

Surely, S-chips have reached a low point and are mostly unloved. In such a situation, are we brave enough to venture forth to sort through the debris to find hidden gems? See what Mike has to say about Yangzijiang (YZJ) which he is vested in.

.................................................

Before I start, to avoid losing sleep over this blog, I must say that  all information I am sharing here is to my best knowledge accurate but I cannot be held liable for any errors. Of course, please point them out if you should spot any.

I invested in YZJ because it fits my approach to investing which is to buy into an alpha company in a cyclical industry during a down cycle. In my opinion, the low valuation of this company is unjustified.

 

1. YZJ pays decent dividends, consistently paying out about 30% of their earnings, yielding about 5% based on recent share price. I like companies that compensate me while I wait for the upturn.

2. I like the management's foresight. In a time when China is competing head on with South Korea for a share of the global shipbuilding pie, many shipyards competed on costs, and offered great terms to build smaller bulk carriers and container ships. YZJ moved into “green” technology that saves on fuel costs and built large container ships. They are the first in China to build 10,000 TEU container ships for Seaspan, but lost the crown to Jiangnan Changxing, which has signed deals to build 16,000 TEU boxships.

If we followed the recent developments in the shipping sector, many are talking about LPG carriers, YZJ through an interview with The EDGE Singapore, mentioned they are in talks with companies for building such. While it is akin to counting eggs before they are hatched, it does show that the management is on top of things where industry trend is concerned.

3. I also like the management's prudence. They did not venture aggressively into the O&G sector which proved costly for COSCO, instead they developed a financing arm (Mirco-financing and HTM investment) which works well for them so far. Of course this is not without controversy and risks. I will talk about this later.

4. Although their order book has shrunk considerable from the boom years, it is beginning to grow again. Order book shows about USD3.24b with 47 outstanding options worth about USD2.54b that are not yet exercised by its customers. Their customers base has also grown since their IPO.  

5. Ratios and financial numbers? I have mentioned about low gearing, reasonable P/B of 1.1 and PE ratio of 5.4. Valuation has not taken future recovery into account. This is unlike many hot stocks which have valuations that have already accounted for expected strong growth for years to come.

6. There is favourable sector development. The PRC government is trying to reform the shipping industry. They want the top 10 shipping companies to account for 70% of the ship building contracts. YZJ is in the top 5.  Although no one will want to start a shipyard in China now, as demand recovers, domestic competition might increase and disrupt the consolidation of the industry. So, the PRC government has effectively closed off such competition by not issuing anymore license to potential new players. In addition, they also do not allow any expansion of capacity of existing builders'.

..........................................

In Part 2, we will see what Mike thinks are the possible risks of investing in YZJ.

Continue reading: Part 2.

Related post:
Tea with Mike: Approach to stock selection.

Tea with Mike: Approach to stock selection

There are many ways of selecting stocks. Some people use ratios such as PER and P/B. Some people look at charts, spotting 52 weeks highs and lows. Some look for the highest yields. The list goes on. When I first started, I felt overwhelmed and didn’t really know what to look for.

Over the years, I adopted an approach that is similar to Graham's “large companies that are out-of favour” tactic. I look at alpha cyclical companies during their down cycles and I believed that will offer some margin of safety.

I bought into 2 counters, Golden Agri and YZJ, using this approach. For shipping industry, the Baltic Dry Index (BDI) hit record bottom at 661 last year. The peak was 11,000. Even if one were to take the average, we can quite safely say the BDI was nowhere near where it would be mid-cycle. Shipping down cycle is characterized by a dearth of new shipbuilding orders, collapse of freight rates, and the bankruptcies of weaker players, and all these have happened in the past 1 year. So, I can safely conclude that we are near the trough of a down cycle. Near? Yes, because there is no way to ascertain if we have reached the bottom yet.

Then, we search for alpha companies. These are companies in the sector that have the strongest financial strength and operating efficiency. This is so that our investment does not go to the dogs and get consumed by the down cycle. I shall not go into detail about YZJ, as that itself would be a long blog but, particularly, I looked out for a low gearing level.

Both Golden Agri and YZJ have low gearing levels. More important is the amount of short term loans to be repaid. Down cycles combined with the maturity of large loans is what killed many companies. Even the biggest private shipyard in China, Rongsheng, is facing severe difficulties because of this.

Next, while profits would be affected negatively, there should not be losses, and the companies should be big enough to show resilience in earnings through previous crises. There should be Free Cash Flow (FCF) in most of the operating years too

Golden Agri’s earnings are levered heavily on Crude Palm Oil's (CPO) price, and its production levels. If we look at the last 30 years, 2013 has seen CPO price falling more than 40% from its last peak. Although inventory has been piling up, Golden Agri will not be able to increase its production at the same rate it has been able to in the past. I bought it for its vertically integrated businesses and its economies of scale. For higher production growth, one should, perhaps, look at First Resources.

This approach requires a lot of patience as the sectors are out of favour and there is very little chance that the share prices would shoot up suddenly. Also, as AK always says, cheap could get cheaper and this is especially true in such out of favor stocks. Say ship building and most people would frown. So, there might be selling pressure from time to time but if the companies are fundamentally strong, such selling pressure provides opportunities for accumulation.

I would like to acknowledge that I first got some ideas and information from Calvin Yeo of "Invest In Passive Income". A link to his blog can be found in the left side bar of AK's blog.

-------------------

AK's comment:

I was heavily invested in Golden Agriculture at one time, recognising that it was heavily levered to the price of CPO. When CPO price was rising relentlessly, Golden Agriculture was a good investment. I made a tidy sum from it. Mike's approach is valid, I am sure, but one has to be patient.

We could consider investing in Wilmar International which also has an exposure to CPO but it is less levered to CPO production which forms less than a fifth of its earnings. Wilmar has a pretty diversified earnings base. However, if we are looking for positive Free Cash Flow, then, Wilmar would fail our selection process.

As for ship builders, I would also frown when I hear the phrase. However, we can find nuggets in the sector and when we look at what Cosco and YZJ are doing, we know where to look because these yards are venturing into building for the O&G industry. This is what KepCorp and SembCorp have been doing for years. With more rigs delivered, there is a higher need for OSVs and, yes, I am invested in Marco Polo Marine which has the added advantage of a strong moat. However, if we are looking for positive Free Cash Flow, then, Marco Polo Marine would fail the selection process too.

I believe that Mike's approach is probably suitable for anyone who is more conservative since stronger companies in cyclical industries are unlikely to go bust in a down cycle. When the up cycle returns, these companies should lead the recovery.

Thanks, Mike, for offering us your perspective on stock selection. It has provided me with food for thought.

Saizen REIT: Risk free rate and unit price.

This blog post is a response to a comment from Solidcore. See his comment: here.

I am adding to his comment by saying that although understanding our motivations is important in our investment efforts, we have to remember that, alone, it is not enough for us to make sound decisions, of course.

If we believe the news, a 10 year US Treasury will have a risk free rate of 3.5% eventually. This is, however, unlikely to happen rapidly in the near future. Why? The USA is, at best, emerging from its problems and we see Europe and Japan still doing their own QEs with no sign of stopping.

So, if we are after distribution yields from S-REITs, having lower unit prices, everything else remaining equal, is good for us. This is easy enough to understand. However, at the same time, given the realities and the possibilities of the day, we want to avoid capital loss as well. How do we manage this?

For example, Saizen REIT's DPU, using their forward currency hedge rate as a guide, is likely to provide a DPU of 1.1c per annum. 10 year US Treasury now has a yield of 2.7%, if I remember correctly. It was a percentage point lower not so long ago.

So, it follows that Saizen REIT would have to provide another 1% in distribution yield to make itself an attractive investment for income. It will find this harder to achieve since its DPU will decline in S$ terms due to a weaker JPY. Of course, the REIT could have DPU accretive acquisitions in the next few months which is why analysts are saying if we want to invest in REITs, invest in those with room to grow their income distributions. More accurately, invest in those which could grow their DPUs.

All in all, a back of the envelope calculation tells me that Mr. Market would likely be more enthusiastic about Saizen REIT if it should offer a 7.5% distribution yield with risk free rate rising to 3.5%. With DPU estimated at 1.1c, this gives us a target unit price of 14.7c. Isn't that a shocker?

Well, it doesn't mean that we cannot buy at 17.7c, 16.7c or 15.7c. After all, 14.7c might not see the light of day. 14.7c is a number I concocted, after all. Mr. Market doesn't listen to me, does he? For example, I told myself in an earlier blog post that MIIF, post APTT IPO, would only be worth buying at 14c but see what happened recently? ;p

To add, Saizen REIT's loans are all domestically arranged and with BOJ bent on keeping interest rates low, the REIT's cost of debt will remain relatively low. This is demonstrated by the REIT's recent refinancing activity which has lowered its cost of debt. So, there will be some resilience in the REIT's future income distributions.

Such exercises prepare us for what could be the downside potential of our investments. This is also something we have to be comfortable with. So, if we had bought at 17.7c for the projected 1.1c in annual DPU, how would we feel if unit price were to fall to 14.7c? If we are uncomfortable with the downside potential, then, most probably, we are investing with money we cannot afford to lose.

Related posts:
1. Motivations and methods in investing.
2. Saizen REIT: DPU of 0.63c.

Marco Polo Marine: It got cheaper.

Mr. Market has been oozing pessimism and I mentioned in a comment recently that Marco Polo Marine's stock is looking very attractive to me now but I also mentioned that cheap could get cheaper. It would be safer to add to my long position if I should see a reversal signal.

Well, I think I might be seeing positive divergences. One could argue that Marco Polo Marine is such a thinly traded stock that TA is practically useless. Valid point.

Then, what about FA? If I were to use the EPS for FY2013 which I estimated in an earlier blog post to be 5.4c, at a share price of 34c, we are looking at a PER of 6.3x. I think that is pretty attractive considering that I expect FY2014 EPS to improve significantly by some 20%.

Marco Polo Marine is my largest investment right now and its current share price isn't that far from the prices I first paid more than a year ago. Those were at 31.5c to 32.5c.In fact, I also bought more at 34c in September last year.

I believe buying at 34c now provides more margin of safety and better value for money than a year ago. Now, who says opportunity doesn't knock twice?

Related post:
Will FY2013 better FY2012?

China Minzhong: What could happen and what to do?

I received an SMS from a friend that CIMB and Lim & Tan ceased coverage of China Minzhong. I responded by saying that maybe I should do it too. Seems like an easy way out of the mess. If analysts who are paid to do what they do are jumping ship, shouldn't an amateur investor and part time blogger do the same?

On a more serious note, with this event following so closely another event which recently affected a few readers, I am thinking more deeply about the future direction of my blog. ASSI today is not the ASSI from almost four years ago, after all. Blogging is meant to be an enjoyable past time for me but with the rising popularity of my blog, naturally, there will be greater expectations and, with this, greater responsibility, whether I want it or not.

It should not come as a surprise that I have been thinking quite a bit about China Minzhong since yesterday. However, it might come as a surprise that I am not too affected by the possibility of a total loss if all allegations by Glaucus Research were proven true in due course.

I am more affected by the possibility that some readers might have followed my moves to buy into China Minzhong when I did. Well, if they should make money, all well and good, but if they should lose money, then, I would be quite unhappy. This is something that is constantly on my mind now.

I was really thinking of not blogging at least until China Minzhong's management has issued a more substantial response which, hopefully, would be a point by point rebuttal against the allegations made by Glaucus Research. Although some might disagree, I maintain that unless we have heard from both parties, it is too early to conclude anything.

So, what changed my mind and why am I blogging now? Well, as some might guess, I received quite a few emails, comments and messages over this matter. To all the people who have sent me encouraging messages and who have shown concern, my heartfelt thanks. I also received a suggestion that I could share my thoughts on what am I going to do now.

I read some unkind remarks that some have made about people who are invested in China Minzhong and some also made conjectures as to how we might hold demonstrations in Hong Lim Park, asking the government to intervene and, perhaps, even to hold GIC accountable. Well, apart from being unhelpful, these remarks might make affected investors feel worse about the whole matter. I will ignore these people. It is not a productive use of time and energy to engage in a debate with them.

Instead, all who are vested should think of what could happen and what to do.

Obviously, there isn't anything we could do until the trading halt has been lifted and this is unlikely to happen until China Minzhong has issued a more substantial response. There is always a likelihood that the stock could be suspended, pending further investigation. Whether a suspension takes place or not, we might want to make provision in our books for the possibility of a total loss.

Assuming that the stock were not suspended and that trading were to resume, shareholders would have to determine for themselves if they were satisfied with China Minzhong's reply. To stay invested or to divest would depend largely on this.

I will say that even if some of the allegations against China Minzhong should be proven false, this episode would still cast a pall over the stock and might affect its share price negatively. Only if all of the allegations were proven false would China Minzhong live to see the light of day once more.

Of course, there is really no way anyone could tell for sure how things would turn out next. Instead of guessing and losing sleep, the best thing to do is to get on with life and wait for further developments.

However, for people who have invested much more than they should have in China Minzhong, this could be a tall order. This is why I have said time and time again that we should always only invest with money we can afford to lose and not more.

Related post:
Share price plunged by more than 50%!

China Minzhong: Share price plunged by more than 50%!

There are so many unexpected things which happen in life. The drastic plunge of more than 50% in China Minzhong's share price at one point this morning was definitely unexpected.

A quick search online found the probable reason behind the selling:

Glaucus Research Group which is based in California accused China Minzhong of irregularities in its sales figures, involving sales to top two customers, according to "corporate registry records".

Glaucus Research Group said they and their associates have a direct or indirect short position in the company. So, they stand to make money if its share price declines. They probably made a bundle today.

Definitely, I do not know whether the accusations are true and if they should be true, how bad are such irregularities? Since the alleged irregularities involve China Minzhong's top two customers, how significant are the contributions of the top two customers' to China Minzhong's revenue?

It is not hard to then imagine whether all other numbers reported by China Minzhong have irregularities. However, if we think logically, if there should be other irregularities, Glaucus Research Group would have tipped them all out. The more negative the news the better it is for their short position.

Since I do not know what is the total revenue contribution by the top two customers, I will make the extreme assumption that all of China Minzhong's trade receivables go to zero. This would wipe out shareholders' equity by 24%. NAV would then be RMB 5.34 per share or S$ 0.89 per share.

Looking at the year on year improvement in cash flow from operations and how the company is now in a net cash position as well as how it was able to pay down some of its bank loans, I came to the conclusion that the selling this morning was overdone and bought some shares at 52c a piece.

China Minzhong has requested for a trading halt and the company is due to release full year results on Thursday (29 August). Let us see what happens next.

See: 3Q FY2013 presentation.

Saizen REIT: DPU of 0.63c.

Despite a much weaker JPY, Saizen REIT has delivered a respectable income distribution in S$ terms, a DPU of 0.63c to be precise.

Saizen REIT's DPU in JPY terms has been improving steadily in recent years. In the last half a year, DPU in JPY terms has shown an improvement too but a much weaker JPY means that DPU took a hit in S$ terms.

Income in JPY terms climbed mainly due to new acquisitions. Of course, a buy back and cancellation of shares also helped.

As of 30 June 2013:

NAV/unit: 25c
Gearing: 38%
Interest cover ratio: 6.0x

To reduce the impact of a weakening JPY on income distributions in S$ terms, Saizen REIT's management entered into hedging transactions.

The rate for the 6 months period which ended on 30 June 2013 was JPY75.12 = S$1.00. The rate for the 6 months period ending 31 December 2013 is JPY 81.15 = S$1.00. It is going to be some 14% costlier to buy S$, it seems. So, if I read this correctly, we should see downward pressure on the next income distribution in S$ terms, everything else remaining equal.

Saizen REIT has refinanced and in so doing brought down its average interest rate as well as its rate of amortisation. Yes, regular readers will remember that Saizen REIT's loans are amortising in nature. It will also not see any loan maturing until four and a half years later in February 2018.

So, is reducing the rate of amortisation a good thing? Well, it will mean that the REIT will have more income from operation available for distribution. However, it is unlikely to mean a higher income distribution in JPY terms because the REIT is currently using its cash resources to offset amortisation in order to free up more income from operations for distribution to unit holders anyway. It will, however, mean that there is less strain on the REIT's current cash resources.

The management is also proposing to do a 5 to 1 unit consolidation. This is a bit of a déjà vu. I remember the time when AIMS AMP Capital Industrial REIT did a 5 to 1 unit consolidation too. Fundamentally, it really doesn't change anything.

Qualitatively, investing in Saizen REIT now is to invest in freehold Japanese residential properties at a discount to their valuations. If we believe that the Japanese economy will enjoy a revival as Abenomics gain traction, then, Saizen REIT could be a good proxy as the country frees itself from deflationary forces.

The REIT's numbers are good but the persistent weakness of the JPY as the BOJ stays the course with its own brand of QE is going to lower income distribution in S$ terms in the foreseeable future. A conservative forecast of 1.1c in annual DPU would mean a distribution yield of 5.8% assuming a unit price of 19c. Compared to J-REITs with residential properties in Japan, this is relatively high and although it is not particularly cheap at current prices, Saizen REIT is not overpriced.

See FY2013 presentation: here.

Related post:
Saizen REIT: DPU of 0.66c.

Tea with Solace: Getting Ready For Investment. (Part Two)

Solace continues:

Building up Investment Knowledge

To me, this is the most tedious and tiring part. I was not educated in the field of finance and accounting. So, I have to learn everything by myself from scratch.

I need to create my own personalized winning plan. In order to do it, I need to know what I want, specifically my investment objectives and risk profile. This should be the first step before I start to invest.

I am only investing in stocks but note that there are other products available such as commodities, FOREX and derivatives (Options, Futures, Contract for Difference). Many of these products, however, are riskier than stocks and often involve trading with leverage. I believe that we should not invest in something which we do not have enough knowledge in. So, I avoid these.

There are two main approaches when it comes to the analysis of stocks. They are fundamental analysis and technical analysis.

Fundamental analysis involves making an assessment of a company operations. Various factors such as profit, forecast profit, outlook for the industry, key personnel in senior appointments and members of board of director are considered in a fundamental analysis.




Three key financial statements are used:
1. Statement of Cash Flow 
(see Cash Flow Statement)
2. Balance Sheet
(see Balance Sheet)
3. Profit and Loss Statement
(see Income Statement)

They are available in the annual reports.

I watch the valuation of a company carefully. Even the most wonderful and fundamentally strong company is a poor investment if purchased at too high a price. Look out for P/E, P/B, PEG, earning yield, cash return and discounted cash flow etc.

Always have a margin of safety when purchasing shares.

Safety first!

Technical analysis is the study of a stock's actual price, to help form an opinion on the likely future direction of a stock. It makes use of charting software and looking at trends. Some of the common indicators I used are moving averages, Relative Strength Index, MACD, Stochastic Oscillator and On Balance Volume (OBV).




Conclusion

In closing, I think that we need to arm ourselves with the necessary tools to be a successful investor. I am continuously learning and discovering new things from time to time. Never think we have learnt enough about the markets, one should always continue to seek further knowledge.

The day we believe we have learnt enough about investment will also be the first day on our way to failure as we have become complacent.

Related post:
Tea with Solace: Getting Ready For Investment. (Part One)