When to BUY, HOLD or SELL? (Part 1)

Buying and selling are natural opposites. The reasons for buying a stock and selling a stock, often, are mirror images as well. Intuitively, it feels right. How do we give form to an intuition? More accurately, how do we decide when to buy or when to sell?

Well, we often read about valuations. Some analysts might have a SELL call saying the stock is overvalued. At the same time, some analysts might have a BUY call saying the stock is undervalued. Then, there are some analysts who might say the stock is fully valued and have a HOLD call.

What can we take away from this? Valuation is subjective! Anyone who tells us it isn't doesn't know what he is talking about or does he?

There is a lot of literature on valuation techniques. If we do a search online, we will know that this is true.





So, which valuation technique to use? This is already an exercise in subjectivity. Then, each valuation technique could require us to make certain assumptions which is another exercise in subjectivity. Of course, we are only talking about bottom up approaches here.

What about a top down approach? This requires a grasp of economics, market conditions and industry specific trends, just to name a few things that come to mind. Reminder: the assumption that consumers have perfect knowledge when we discuss certain economic concepts only works in a classroom environment.

If you have zero or very little knowledge of economics and business, you might want to teach yourself by reading these books:

Timeless. US$17.61 a copy.

This book is heavy reading and somewhat pricey.
Click the book and search for
"Understanding Michael Porter:   
The Essential Guide to Competition and Strategy".
This is easier reading and much cheaper.

So, it is not surprising that experts could have differing views all the time. They could make different assumptions in their quantitative approaches and they could have different opinions on the qualitative aspects of businesses which require judgement calls. If experts have such a hard time, what can retail investors like us do?

Value investors are often looking to buy stocks at half of their intrinsic values. If a stock that has an intrinsic value of $1.00 is selling for $0.50, simply, it is a buy. Now, if a stock has an intrinsic value of $1.00 and is trading at $2.00, what do we do? You tell me.

The question is, therefore, how do value investors determine intrinsic value. They use an approach called Discounted Cash Flow (DCF). I shan't go into details here because there are many free online resources that will teach us what is DCF and we will realise that we could come up with different intrinsic values for the same stock. Why different values? We could make more conservative or more aggressive assumptions and values will change.

To understand cash flow, we will have to look at a company's cash flow statement. I blogged about it before and you can read it: here. If you want to read up on valuation using DCF, you could go to Wikipedia: Valuation using DCF.

Some people look at PER, NAV/share and NTA/share of a stock to see if it is undervalued or overvalued. Some might argue that if a stock has a very low PE and trades at a discount to NAV, it is undervalued. Well, it could be. However, if by doing a comparison, we find that other companies in the same industry have similar ratios, then, perhaps, it is just the industry norm.





I remember many years ago, I made a very good trade in Singland. At that time, most of the big name property counters rose in value but Singland was still stuck in a rut. I did a comparison of its ratios against its peers and found it was relatively cheap or, if you like, undervalued. I bought and within a couple of weeks, its price shot up. I cannot remember exactly now but it was quite a handsome capital gain. Singland was a laggard. I did not know if it was absolutely undervalued but it was relatively undervalued.

Different industries have different characteristics. Some are cyclical like the property market. So, given changing market realities, property stocks could see their share price fluctuating as well because their earnings are impacted negatively during down cycles and positively during up cycles. The same could be said of shipping stocks.

If you want to read up on how we could possibly make generalisations about stocks and have an inkling as to their characteristics, you might want to read books which I blogged about before by Pat Dorsey (here) and Peter Lynch (here and here).

By now, if you are still with me, good on you because I am not done yet. We are soldiering on in part 2.

Read part 2:
When to BUY, HOLD or SELL? (Part 2)

Perennial China Retail Trust: 1H 2013 DPU 1.9c.

Here are some numbers I pulled out:

NAV/unit: 74c
Gearing: 23.74%
Debt Service Ratio: 3.2x

So, what do I think? I did a rather detailed blog post back in February and my view of the Trust has not changed.

Buying into PCRT is really buying into the story that Chinese domestic consumption, at only a third of GDP, will grow and that the Chinese economy will stay strong. We are buying into the Trust's potential to deliver in future.

Right now, I would say that investing in PCRT is still relatively risky although the level of risk is much reduced compared to the time of its IPO.

People who invest for income must realise that much of the distributable income is made up of money from earn-out deeds. It is not cash flow generated from operations of the buildings per se. It is money that is being paid out from guarantees while we wait for the buildings to generate more cash flow.

Based on the earn-out deeds currently available, the Trust is able to continue distributing income to unit holders for another 18 months. Translated, it means that its properties must pick up the slack by end of 2014, everything else remaining equal. Of course, it is unlikely that things will not see any progress and just stand at where they are now.

A more pertinent question is how much improvement can we see? This is really something we cannot say for sure and this comes with the territory when we invest in start ups which is also why I insisted that the distribution yield must be higher for PCRT compared to CRCT for it to be attractive to anyone investing for income. Investing in PCRT arguably is not mainly for income but for growth.

Investors will want see stronger occupancy and evidence of improved cash flow from operations over the next few quarters. The management has to show better results and fast.

See slides presentation: here.

Related post:
Perennial China Retail Trust: DPU 1.96c.

Perennial China Retail Trust: DPU 1.96c.

PCRT declared a DPU of 1.96c that will go XD on 21 February 2013. It is payable on 18 March 2013. My long position initiated at 47.5c a share about half a year ago is very much in the black.

I have readers asking me whether this REIT is a good investment for income but this is not a REIT. It is a business trust that acquires, develops, owns and manages mostly shopping malls in China.

So, is investing in PCRT risky? Why am I invested in PCRT?

From a top down perspective, with domestic consumption only a third of GDP in China, there is much room for it to grow and China will need more malls. This is especially so with the government's determination to make domestic consumption another engine of growth for the economy.

From a bottom up perspective, PCRT's numbers have improved and so have its prospects. Regular readers might remember how I did not think PCRT attractive at IPO. It was offered at 70c a unit at IPO with a distribution yield of 5.3% which I thought was too low for the level of risk investors were being asked to take on. This was in the middle of 2011, if I remember correctly.

Anyway, we know what then happened to the unit price of PCRT in the following months.

I initiated a long position in PCRT at 47.5c because the distribution yield of 8+% at that price offered a more acceptable level of compensation for the risk I would be asked to assume.

I also took comfort from the fact that the Trust saw Pua Seck Guan increasing his stake and Kuok Khoon Hong and Martua Sitorus becoming substantial shareholders. They have a very strong incentive for the Trust to do well.

To invest in PCRT is to believe that it will generate stronger cash flow in the next few years. We will need a longer time horizon as by 2015, we could see 4 more malls operational. 

Now, the management has to work hard to increase the occupancy of the malls which are already operational. With occupancy at about 70%, there is much room for improvement.

What are the negatives, currently? Much of the profit declared comes from fair value gains at the moment. Much of the distributable income comes from earned out deeds at the moment. These are probably points of contention.

However, when we invest in growth stocks, if we have looked at the probable downside and find the numbers acceptable and we have to be a bit more adventurous in certain instances, we just have to be patient. If we have taken care of the downside, the upside should take care of itself.

In PCRT's case, gearing is at a comfortable 19.9%. Interest cover ratio is more than adequate at 6.9x. Weighted average interest rate is 4.62% with no debt due till 2014 and 2015. NAV per unit is at 70c and a case has been made that it should be at least 6c higher.

The management, in the presentation slides, states that the development risk present during the Trust's IPO in 2011 has been largely reduced as more than 90% of its IPO assets are now operational. This is a fact. Two more malls will be operational this year and they are working hard to secure tenants. This is also a fact.

I like the story and I like how investing in PCRT is less risky now than back in 2011.

Would I buy more at the current price? I don't think so. Why? Because I am corrupted by TA and the negative divergences I see suggest a possible pull back sometime in the future. 59.5c at XD? Could happen. If I wasn't already invested, I could initiate a smallish long position as a hedge which I sometimes do.

See presentation slides: here.

Related post:
Perennial China Retail Trust: Weak debut?

A Christmas collection of charts.

Hello Kitty Christmas Tree!
Minneapolis - St. Paul International Airport

It is now the evening of Christmas and I have spent Christmas Eve and the whole of Christmas Day at home. I slept a lot and drank a lot of herbal tea. I ate mostly porridge. You guessed it. I am ill.

Here are some charts and my gut feel. Not much rigour but in the spirit of Christmas, I hope readers would be a bit more forgiving.

Target: 28c.

Target: 42c.

Target: $1.10

Target: $3.90

Target: 62.5c

Target: 83c

Take note that these are weekly charts and I am not expecting to make any fast money.

Ho, ho, ho! Merry Christmas!

Dynasty REIT: At what price would I bite?

Recently, I received quite a few emails regarding Dynasty REIT.

With full page ads taken out in the newspapers, few could have missed the promise of an approximate 7% distribution yield. It seems that the REIT is generating quite a bit of interest in the current low interest rate environment.

I have not subscribed to any IPOs in many years, believing that they are on terms which are more in favour of the issuers. Of course, there are cases in which IPOs have done quite well because Mr. Market's sentiment towards them was favourable.

So, for people interested in IPOs, they should develop the ability to read Mr. Market's mind! Personally, I already have great difficulty reading Mr. Market's mind with the help of charts. Without any trading history (i.e. no charts), it is a tall order indeed for me to read Mr. Market's mind towards IPOs.

For example, some people were saying that the unit price of Religare Health Trust would probably do very well because the public tranche was 13.5x over subscribed. On the first day of trading, it tanked 10%. It is still trading below its IPO price today.

What about Dynasty REIT? Could its unit price tank 10% on the first day of trading too? Who knows? I have said before that as an investor for income, I am more concerned with the distribution yield and that any capital gain is a bonus. Of course, we want to avoid any loss of capital at the same time. How do we do this? Buy when things are inexpensive. So, is Dynasty REIT's IPO price inexpensive?

Shanghai International Capital Plaza:
29 floors office and retail building plus a basement.
Committed occupancy rate: 86.8%

The promised distribution yield of about 7% per annum is largely achieved through a waiver of entitlement to income distributions by sponsor units. Now, the sponsor is not being altruistic or generous. It has to do this in order to make the IPO attractive. Without the sponsor waiver, the distribution yield would approximate 4% only. A big difference.

Of course, there are many assumptions that could be made for a possibly higher income distribution over time which could make up for the loss of the sponsor waiver by December 2017. However, we would be counting the chickens before they are hatched and in this case, we are not even sure we have the eggs for counting.

This IPO is heavily engineered and, in my opinion, at 85c to 91c a unit, it is not a good value proposition. I could be interested in initiating a long position if its unit price were to be closer to 55c a unit.

You might also be interested in these blog posts:
1. Religare Health Trust: 8.5 to 9% yield.
2. Perennial China Retail Trust: A weak debut?

Perennial China Retail Trust: Weak debut?

On 19 May, I did a relatively lengthy blog post on why I found Perennial China Retail Trust (PCRT) unattractive as an investment.

At that time, they were going to price it between 70c to 76c per unit. Ultimately, the trust was offered at 70c per unit, the lowest price in the range, and it was only 1.6x subscribed. The suggestion that the market is not enthusiastic about the IPO is not far off the mark.

Today, it closed at 61c or 12.86% lower than its IPO price of 70c. A weak debut? That would be an understatement.

Would I be interested in PCRT if its price were to weaken further? Yes, I would be interested if its distribution yield for 2011 were to be much higher than the 5.3% at its IPO price of 70c.

At today's closing price of 61c, its distribution yield has improved to 6.08% for the year 2011. However, it is still not attractive enough for me to invest for income. In my last blog post on this, I compared the distribution yield to CapitaRetail China Trust which was offering a distribution yield of 6.83%.

So, unless PCRT trades at a much higher distribution yield and this is really to compensate for the rather risky investment that it is, I would not be tempted. At 54c per unit, PCRT would trade at a distribution yield of 6.87% and, perhaps, I would be interested then.

Read article here.

Related post:
Perennial China Retail Trust.

Perennial China Retail Trust.

Perennial China Retail Trust (PCRT) is focused specifically on shopping malls but with a China focus. Although I am not usually interested in IPOs, I am curious about this one since I have vested interest in CapitaMalls Asia which has a large exposure in China.

PCRT has two objectives:
1. Provide unitholders with long-term capital growth from a steady growth in net asset value (NAV).
2. Provide unitholders with regular distributions from the income of its completed and stabilised assets.

PCRT will have an initial portfolio which includes:
1. 50% stake in Red Star Macalline Global Home Furniture Lifestyle Mall, Shenyang.
2. 50% stake in Shenyang Longemont Shopping Mall, Shenyang.
3. 100% stake in Foshan Yicui Shijia Shopping Mall, Foshan.
4. 100% stake in Chengdu Qingyang Guanghua Shopping Mall, Chengdu.

Only Red Star Macalline Global Home Furniture Lifestyle Mall, Shenyang, which was completed on 30 Sep 2010 is income contributing at listing date. The rest of the initial portfolio is expected to be completed from 3Q 2010 to 2Q 2014. If we are investing for income, this is not very reassuring.

However, PCRT has zero debt. This is attractive and also important as it would seek NAV growth through acquisitions. It has at least S$3.0 billion of pipeline projects in prime high-speed railway commercial development projects. Zero debt would probably mean that it would not have to be overly reliant on equity fund raising in the form of share placements and rights issues, at least in the early days.


PCRT's IPO has a price range of 70c to 76c and would raise between S$785,187,000 and S$852,580,000.

PCRT's forecast distributions (representing at least 90% of PCRT's distributable income):
2011's DPU 3.71c, representing a yield of 4.88% to 5.3%.
2012's DPU 3.86c, representing a yield of 5.07% to 5.51%.
Distributions are made half yearly.

From 2013, PCRT will distribute at least 50% of its distributable income. This might or might not mean a lower DPU since the rest of its initial portfolio would be contributing to distributable income by then with the exception of one property.

NAV per unit at date of listing is estimated at 67c.

Up till this point, there is little to interest me in the IPO. A distribution yield of 4.88% to 5.51% in the years 2011 to 2012 also does not provide enough compensation for the risks which investors are being asked to bear, in my opinion.

How does PCRT compare to CapitaRetail China Trust (CRCT)? Here are the numbers, as of 31 March 2011:
NAV/unit: $1.10
Gearing: 32.6%
Annualised DPU: 8.6c
Last done price: $1.26 which means a distribution yield of 6.83%.

With zero gearing, could PCRT do better than CRCT in future? Will the management be able to execute its future plans successfully? Forecasts are easy to make but whether the numbers would be realised is something else.

If PCRT's unit price were to fall to a much lower value and, in the process, offer a much higher distribution yield to compensate for the perceived risks, I could be interested then. Not now.

See PCRT's prospectus here.
See CRCT's 1Q 2011 presentation here.

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Perennial seeks to raise $843m in Singapore IPO: Update
Thursday, 19 May 2011

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