Tea with Mike: A fundamental analysis of SPH (Part 1).

SPH is a media company and many believe it has a dying media business. However, in the short to medium term, I think we cannot be so sure to deliver such a verdict.

First, let us look at the table below.

Click to enlarge.

 

Advertisement revenue has some correlation with economic activity, and the number we look at here is the GDP.

 

Margin is also not declining in a straight line but is rather volatile, with better margin during boom years, as can be seen in 2010 and 2004.

But, what about the onslaught of digital platforms? Do they not have an impact on SPH? Well, the answer is  "no". Huh? Am I contradicting myself here?

Advertisement comes from three segments: Display, Classified and Magazine & Others.

As I have posted in a forum before, if we track the revenue of these segments from 2009 to the most recent quarter (i.e. the most recent trough to recovery), the weak 2008 Q4 to 2009 Q4, Classifieds and Recruits ads suffered the biggest drop as compared to Display. When the weak recovery started in 2010, total advertisement revenue was smaller than in 2012 and 2013 YTD, yet Classified's revenue was higher in 2010 than in 2012 and 2013 YTD.

Hence, declining business was due to the decline of the Classified segment, which included the Recruits segment. It makes sense too, if you want to buy a house, or look for a job, you may no longer turn to the newspaper Classified segment anymore as there are many websites offering such services.  However, if you are talking about M1 or other telcos, or the supermarkets trying to market their promotions, chances are they will still do it through the Display segment of the newspapers.

The "Display" sections will probably be around for a long time and might even grow from strength to strength due to Singapore's growing economic strength with a bigger domestic economy over time.

The "Classified" section revenue was 28% of 2012 Ad revenue, at 218 million and continues to shrink in 2013.

Now, to look at it from the perspective of whether SPH's other businesses can offset this shrinkage, a 5% annual deterioration is only $11 million which is about 1.3% of annual advertisement revenue and less than 0.5% of total revenue. I seriously do not think it would be a tall order to offset this.

Another concern is circulation figures, the circulation of printed papers have been in constant decline, 2012 figures was pumped up because they included digital subscriptions, which I feel resulted in double accounting as the print and digital version would likely overlap (i.e. people who subscribed to print would automatically be given digital accounts).

 

So, if circulation keeps falling, wouldn’t Display advertisement revenue be affected too? My personal opinion is that as long as there is no drastic fall in circulation, Display segment revenue will be more affected by economic activity than by circulation, simply because SPH is a monopoly (and we might want to remember that they have a stake in Today too) and there are no credible alternatives.

 

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In Part 2, Mike will talk about SPH REIT and what it means for SPH: Continue reading here.

Sabana REIT: Panic selling at $1.055 a unit.

Sabana REIT announced a private placement of 40,000,000 units at $1.00 each.

See announcement: here.

This will increase the number of units in issue by 6.2%. Everything remaining equal, it would dilute the DPU by about 5.84%. However, everything will not remain equal since the money raised will go towards the purchase of a new property, 508 Chai Chee Lane, which will bump up DPU. So, the reduction in DPU from the placement is ameliorated.

See announcement: here.

The fall in unit price earlier this morning to a low of $1.055 which was a decline of some 6.3% from yesterday's closing price of $1.125 was overdone.

Indeed, if expectations of positive rental reversions are realised by November 2013, at current prices (of under $1.10 a unit), Sabana REIT looks like a pretty good investment for income. We might be counting the chicks before they are hatched, of course.

Related post:
Sabana REIT: 2Q 2013 DPU 2.4c.

$2.00 breakfast and $1.00 dinner.

It has been a while since I bought vegetarian bee hoon for breakfast as I usually have oatmeal from home.

$2.00 for a big packet of bee hoon with vegetables and tofu. Extravagant compared to my usual oatmeal but I should pamper myself once in a while, right? Yummy!

Here is a photo of my simple and delicious dinner:

$1.00 is just an estimate. Half the price of my breakfast and I got lots of vitamin E from the Kiwifruit too. Eating less at night these days. Well, I try to anyway.

Related posts:
1. Low budget dinner.
2. Sunday brunch.
3. Have an extra $1,200 a year.

Tea with Solace: Valuation, PER and Value Trap (Part 2).

In order to study sustainability of earning, I have learned to identify the economic moats of company. Successful growth companies should still be profitable in the years ahead.

Recommended Reading:

The Five Rules for Successful Stock Investing, Chapter 3

To study the qualities of earning, I tend to look at whether a company is well managed with growth prospect. I sometimes refer to Philip A. Fisher 15 investments points as guide. I check whether a company has worthwhile profit margin? Does the management have the determination to continue to develop products or processes that will still further increase total sales potentials?

Recommended Reading:

Common Stocks and Uncommon Profit, “Fifteen Points to look for in a Common Stock”


I look for a stock that has a higher earning yield compare to a lower one. Businesses that return a high return of capital are better than businesses that earn a low return on capital.

Points taken from

The Little Book That Beats the Markets

Making sure that a company is in good financial health without excessive bad debts is another thing I pay close attention to.

Recommended Reading:

The Little Book of Value Investing, Chapter 11 -14

 

Finally, if analyzing individual company is really too challenging and tiring. We can just try to buy the whole basket of stocks that track the index. Exploring the idea of investing in index fund can also be rewarding in the long term.


Recommended Reading:
The Little Book of Common Sense Investing

 

Learning to identify truly undervalued companies with good fundamentals while avoiding value traps is truly a skill that will take time to master. This is a huge topic which can be further discussed in the future.

Read Part 1: here.

Read other guest blogs by Solace:
Tea with Solace.

Tea with Solace: Valuation, PER and Value Trap (Part 1).

This guest blog by Solace is very helpful to any new investor looking for some pointers and I also feel that it is useful to investors who might be in need of some defragmenting regardless of the number of years they have been investing in the stock market. I know I need this from time to time.

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From: http://singaporeanstocksinvestor.blogspot.sg/2013/08/how-to-be-one-up-on-wall-street.html

Once, a relative who had 30 years of stock market experience told me that we need to distinguish between a growth company and a growth stock.

 Many times, growth companies are not growth stocks because the hype of expected growth had already been reflected in the share price. Growth stocks are stocks whose prices are likely to increase because their values or business fundamentals are unappreciated. We should try to look for growth stocks not growth companies.

A very popular valuation ratio is price to earnings (P/E Ratio). The easiest way to use P/E ratio is to compare it against a benchmark, such as

 

1) Stock P/E to the average P/E of the entire market,

 

2) compare against another company in the same industry,

 

3) compare the same company at a different point in time, company’s Historical P/E.

Some of my friends think that P/E of more than 20 is considered overvalued and P/E of less than 12 is considered undervalued. If only life were so simple.

When looking at P/E, we need to open our eyes and see whether the E makes sense.

The most common way to calculate the PE ratio is to use price divided by a company's reported earnings per share over the last 12 months. This is known as the trailing twelve month (ttm) PE ratio, or the historical PE ratio.

What happens if the company sold its asset or business in the last quarter? It is going to have a very big E, and results in a lower P/E. The stock may suddenly look cheap, but in reality based on operating earnings, the stock isn’t that cheap!

Some investors prefer to look forward and project next year's earnings. This is known as forward P/E. Very often, estimates of future earnings by professional analyst are too optimistic. If enough investors believe in the wrong projection, a bubble will develop. An earnings disappointment will result in a steep price drop!

Some stocks trade at low P/E for a reason. When we are looking at stocks that seem very cheap, we need to look deeper. They could be value traps, in that the stock price would go lower as the company continues to have problems in their operations.

So when we look at stocks that are cheaply price, it is important to look at the quality of earnings and the sustainability of the earning. We have to make sure underlying business is sound before buying into low P/E stocks.

And how are we going to make sure the company fundamentals are sound? Based on my current limited knowledge, I will do a short sharing on some of the points going through my head whenever I try to look at stock that appears cheap.

Continue in Part 2: Here.

Buffettology: Hard cover at US$9.98 a copy.

If you missed out the last time, 5 copies just became available at US$9.98 a copy.

Free shipping worldwide.

Follow the link to the special deal in this blog post:
Good deal on "Buffettology" (hardcover)

Inflation hits dental fees.

I spent $87.50 this evening at the dental clinic. Scaling and polishing. Ouch! Yes, painful. Don't misunderstand. I meant the bill.

I remember my last visit cost me about $60.00 only. Well, maybe a bit more. OK, to be fair, that was about two years ago. OK, to be more accurate, maybe it was a bit more than two years.

Still, takai des ne.

They would advise me to visit once every six months. When I was younger, I did that but I cannot remember when I stopped and, now, I would visit once every two or three years. I am terrible. I know.

However, I really take care of my teeth very well. I brush properly twice a day. You would be surprised how many people don't know how to brush their teeth properly. I only use Colgate Total toothpaste. I floss. I use Listerine mouth gargle.

Although it is more than two years since my last visit, the dentist gave my teeth a clean bill of health. No decay and not too dirty either. Just had some stains in places I could not reach normally.

Not smoking and not drinking coffee probably helped as well. Another reason to give up smoking and Starbucks coffee for those of you who are addicted. Hint, hint, nudge, nudge, wink, wink.

After thinking a bit more, I guess it is OK to pay S$87.50 since I saved $240.00 by not seeing the dentist every six months in the last two years, assuming that the price was still $60.00 per visit.

Reminder to myself:
Try to see the dentist at least once a year.

Related posts:
1. Inflation: What to do?
2. Inflation hits fried bee hoon.
3. Inflation is not going away.

Old Chang Kee: Lessons from Mr. Han.

Added on 12 April 2017:

OLD CHANG KEE DI INDONESIA
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I enjoyed an article on Old Chang Kee today in The Business Times.

Mr. Han Keen Juan acquired Old Chang Kee in 1986. He tried blending cultures and introduced croissants but these did not take off. 

Apparently, it was the norm to hold a curry puff and eat it on the go but people preferred to eat French pastry sitting down! It also created some customer confusion as to what Old Chang Kee represented.

To me, Old Chang Kee is the King of Asian finger food in Singapore. Their menu has expanded to include, for example, XL size fishballs which they call "footballs" and you have to trust me when I say they are delicious especially with the special chilli sauce made just for them!

Some of my other favourites are spring roll, yam cake, carrot cake and fried chicken wings (Sedap!). For sure, I cannot go without at least one of their signature curry puffs every once in a while.

The success that is Old Chang Kee today is very much about keeping to a theme that is familiar to Singaporeans. It is about sticking to a formula which has worked well for years.

Similarly, it could be a good idea for us to stick to what we know best when we are investing in the stock market. 

If we were to expand our investment portfolio, it could make sense to look at industries we are familiar with or industries which are related to what we are familiar with. 

If a strategy works well for us and is reliably replicable, why not stick to it?

Mr. Han also ventured into the dining arena by starting a small kiosk that sold authentic Hainanese dishes. It became a hit! He quickly opened another outlet without first ensuring that the kitchens could maintain the quality of the food. Diners were disappointed and the business folded within four months.

Old Chang Kee's mobile kitchen!

This holds a precious lesson for investors at large too. Don't be too hasty to take the plunge. Make sure we have a strong foundation and the necessary resources before we try growing our investments.

If our portfolio size is beyond what is the optimum (and this is probably a subjective notion), we could be increasing the probability of something nasty happening along the way. Shudder at the thought.

Related post:
Old Chang Kee: Almost 70c a share.

Luck plays a part in investing.

I would readily admit anytime that luck plays a part in investing and I would also find a businessman who admits some of his success is due to luck to be more believable.

If someone claims that his success is due to his foresight and never luck, good for him but forgive me if I say I do not believe him. 

I am sure we have come across people like this in our lives. 

They are full of confidence and think that they can do no wrong.





Some might find such confidence attractive and gravitate towards such personalities. 

It is quite natural. 

Mind you, I am not saying that it is wrong to do so. 

There must be some reasons other than luck which have contributed to the success these personalities enjoy. 

So, there must be lessons we could learn from them.





The important thing is not to surrender our cognitive abilities and be swept away by emotions. 

They are as human as all of us although some might want us to think otherwise.

The Chinese have a saying:

谋事在人成事在天






People could make plans and put them in motion but whether the plans succeed or not depends on the heavens.





Related post:
Motivations and methods in investing.

Is AK71 going to stop blogging?

In the last one week, I have not blogged about investing in stocks. In fact, I have not done any substantial blogging at all. Quite suddenly, I found my energy level to be quite low. It is almost as if I am running on empty now.

I decided to spend more time doing things for myself and that is exactly what I have been doing. I cannot say that I have been doing anything progressive but I think I have been doing things which I was doing a lot more of in the past, things which I enjoyed but have neglected since I started blogging.

In a few replies to readers, I revealed that I want to spend some time thinking about my blogging efforts and the direction which my blog should take in future. Honestly, I haven't been spending much time thinking about it. However, the time I did spend thinking about the matter did not yield any clear direction. Perhaps, I shouldn't think too much and time would tell me what to do eventually.

In a reply to a reader, I said that "I might not stop blogging but I think I will be powering down. Feeling somewhat drained." Having said that, I have conflicting feelings within me as to how I should be blogging henceforth and, indeed, whether I should continue blogging. I cannot help but question if my blogs have done more harm than good.

I have shared freely my thoughts on many things in ASSI. Through it all, I injected my personal beliefs which included pragmatism, integrity and compassion. Certain events in the recent past have shown me that perhaps what I have done is insufficient and that despite my best intentions, things went wrong. When a reader asked me what happened to me recently, I said "self-doubt" happened.

ASSI is something I have spent a lot of time on in the last (almost) 4 years. It is hard to give up. However, too much of a good thing is often bad. So, "moderation" is probably the key here.

This has been one of the hardest blogs I have ever penned as I struggled with my thoughts and feelings. Although the blog is not very long, it took me more than an hour to compose. I almost gave up but I know I must do the right thing and to keep readers guessing is not right by me.

I am not disappearing but we should not be surprised if I don't blog as much as I used to before. Indeed, do not be surprised if I do not blog the way I used to or about some of the things I used to either. Nothing is set in stone, of course. I will be keeping my options open.

Win $100 worth of shopping vouchers!

Watch "Buying a House" videos and take part in a quiz by 16 September 2013. You could win $100 worth of shopping vouchers in the process too.

Watch the videos here: Buying a House.

This blog post is part of ASSI's voluntary community service to help raise awareness on personal financial planning. Yeah!

Related post:
Buying a piece of real estate within your means.

Unscrupulous and rude person from Prudential.

My sister told me she had a cold call from Prudential.

When she heard the caller was from Prudential, she replied that she already has an agent from the company. The caller asked for the name of her agent and went on to say how some agents do not provide good service etc. When my sister told her that she is happy with her agent, the caller just slammed down the phone on her.

I have been told by quite a few people before that Prudential agents have no qualms about pouching clients belonging to fellow agents. It seems that there is some truth in this.

I told my sister that she should have asked for the person's name. Anyway, her phone has Caller ID and she has noted down the phone number of the caller. I wonder if she should report this to Prudential or would it be a waste of time?

Related post:
A bad experience in a local bank.

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.

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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'.

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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.

China Minzhong: A fully substantiated point by point rebuttal.

Now, we know why it took China Minzhong so long to respond to Glaucus Research. Call me impressionable but the response is rather breath taking. A shock and awe operation almost.

No effort has been spared as a full force encyclopaedic response has been issued:

See:
1. China Minzhong strongly refutes allegations.
2. Annex A to D.
3. Annex G.
4. Annex H to K.

Is China Minzhong's response good enough to restore confidence in Mr. Market?

Glaucus Research could have done the shareholders of China Minzhong's a favour if Mr. Market buys up with a vengeance upon lifting of the trading halt. Anyway, if Glaucus Research has indeed made a colossal boo-boo, they will be scrambling to cover their short position.

Well, I am only talking to myself and I could be bias since I have a long position here.

Related post:
China Minzhong: What could happen and what to do?

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.

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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.

AIMS AMP Capital Industrial REIT: Nibbling with GW.

It seems that AK and GW had the same idea as to when to buy more of AIMS AMP Capital Industrial REIT:

Buying at $1.36 is buying at a 10% discount to valuation and with a forward distribution yield of some 8%.

Source: here.

GW went on to buy more (107,000 units) the next day on 27 August at almost $1.40 a unit. See: here.

I ask myself when to buy more of a fundamentally sound REIT? At a nice discount to valuation and with an attractive yield seems like a good idea to me. So, if AIMS AMP Capital Industrial REIT were to see its unit price decline another 10%, what to do? What? $1.20 a unit? Easy or tough question? Maybe it is a trick question? I better think harder.

What about a rising risk free rate? Good question. See #3 in the related posts below.

Related posts:
1. REITs: When to buy?
2. Do not love unless it is worth the loving.
3. Saizen REIT: Risk free rate and unit price.

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.

Tea with Solace: Common Sense Investing.

This is a book recommendation by Solace, the same person who recommended "The Little Book That Beats The Market" a few weeks ago:



The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

Bogle's main point is that the best (most efficient) investment strategy is to buy and hold all publicly traded US businesses at a low cost. He recommends this very simple approach as a superior alternative to the incredibly complex array of specific investment options available today. He describes this as Bogle's Corollary: "Don't look for the needle in the haystack. Just buy the haystack!" - Chad Warner

Related posts:
1. The Little Book That Beats The Market.
2. Tea with Solace.
3. Blue Chip Investment Plan.

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.

First-time car buyer? Get a Mercedes Benz!

I was reading the weekend edition of The Business Times and the front page story was headlined "First-time car buyers disappearing fast".

When I read that, I thought I could guess what the article was about. It would probably go along the line of how the "cooling measures" are working because 100% LTV is a thing of the past, I thought. Well, I was right but only partially.

Although the report said that most first time car buyers are young working adults and that most of them are unable to come up with the required 40% or 50% down payment, something very interesting was also reported.

While most first-time car buyers of entry level cars (which I understand from the article are those priced at around $120,000 each) have been priced out of the market, Mercedes Benz is still doing a roaring trade with first-time car buyers!

The A-Class

"We are seeing more kids bringing their parents to the showroom to book a CLA-Class or A-Class," said a senior executive at Mercedes Benz. Their A200 is priced at $156,000. "... it also looks like more parents are buying a Mercedes for their children."

The CLA at $179,888. Ouch.

Well, I suppose the cooling measures are not targeted at the rich. Rich people can well afford the luxuries in life and cars are definitely a luxury in Singapore. 

Even so, to have a brand new Mercedes Benz as a first car for a young adult given all of today's restrictions is ... er ...

Could someone help me with an adjective here?

The cooling measures have definitely worked to prevent the less rich to be more prudent because, in the past, it was possible to borrow 100% of the car's asking price with a loan repayment period of 10 years. 

A young person could then drive out of a car showroom in a brand new car paying as little as $500. He would probably have been wearing a big smile on his face and thinking to himself, "Wah! So affordable!"

Who says money cannot buy happiness?
(But buy already still have money or not?)

Related posts:
1. They were just showing off their wealth.
2. Polish your own car and save money.
3. Tea with AK71: Bought a new car.
4. Mature and sophisticated consumers lease cars, not buy.

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.