I don’t think the local REITs is structured fairly. External or internal manager can both be a good manager. The answer is not external or internal but incentive. A right incentive will do alright and remove most of the wrongs. Current incentive scheme is eye rolling and has turned REIT into some kind of gold pot with all the hands in it picking up golds.

I hope that internalisation of a few REITs will act as a wakeup call to the rest.

Just look at the main part of CICT management fee

in respect of Authorised Investments which are in the form of real estate, a base component of 0.25% per annum of Deposited Property and a performance component of 4.25% per annum of net property income of the Trust for each financial year;

Base fee of 0.25% per annum of deposited property look low, but that is 3.85% and 6.91% of CICT FY2023 revenues and net profit. CICT revenue is just 6.49% of total investment properties. With investment properties being fair valued, revenues will be somehow in that range, so a base fee of close to 4% of revenue is not even close to low.

Then you have the performance component. Forget about the % per annum of net property income. Basically, the manager is taking a cut on any profit the REIT generate before interest, tax and any non property operating expenses. How performance is that? FY2023 NPI of CICT is about 4.6% of total investment properties so that is about another 0.25% per annum of investment properties.

Oh yes, these are not all, CICT still pay property management fees and marketing fees. All percentage based.

I am not following Sabana REIT internalisation of manager closely because I don’t like the actor pushing for the internalisation and I agreed with SGX regco letter that weight on how they view the manager voting right in EGM on the amendment of Trust Deed.

My view is simple, the Trust Deed, whether favour some parties to another is a contract out there. Any changes to the contract need to approval of the parties to the contract based on the contract written rules. Any one buying into Sabana REIT basically agreed to the contract. Saying that it favour one party to others and wanted to change it without all party agreeing is unfair. It is not the question of whether the Trust Deed is unfair, because you bought Sabana REIT, you agreed to the contract.

I see the actor that is trying to do so as low grade.

extract

While we are cognisant that the Manager continues to receive fee income as the interim manager of Sabana REIT, our understanding is that the Trust Deed Amendments seek to allow the Internalisation to be implemented in accordance with the resolutions passed at the 7 Aug 2023 EGM. As the Trust Deed is a constituent document governing Sabana REIT, any amendments thereto would affect all unitholders, including the Sponsor and its related parties. Accordingly, to the extent that the Trust Deed Amendments are not proposed to benefit the interest of any specific unitholder, and is to effect the Internalisation (which was voted on by all Page 2 unitholders at the 7 Aug 2023 EGM), it would similarly follow that the Trust Deed Amendments would be, as was the case at the 7 Aug 2023 EGM, voted on by all unitholders.

Was fine when the business was part of YZJSB where excess cash was parked in mainly high yield loans. As an independent company where side business became main business would be a little strange as who know what would the banking environment and regulatory in China be in the future and the opportunity for these type of loans might not be available once the market matured. Diversification sound logical. But shifting 50% of the capital into Singapore as if China investment is toxic is illogical as it is like saying China is just burning in hell.  

But then, this is what the management wanted to do. Not just shifting the money out of China but moving these money into lot of new type of investment which I regard them as not having the expertise. Hiring talents in investing world as I would like to think is hard. Any talents with proven track record would like to do it themselves, rather than earning a salary, let alone work for some unproven company. Let hope the management doesn’t screw up big time with these capital.

That was before the split and listing of YZJFH. After listing, China credit crisis worsen and YZJFH has taken a beating in P&L with higher credit losses. Diversification continue to be a work in progress, share price at about 0.3X BV and YZJFH bought back, still buying back shares from the open market.

0.3X BV make YZJFH look cheap for a flip or a liquidation. But is it cheap? If this is a flip trade, it is always possible for the share to double and trade at 0.6X BV. Nice trade when it happened and I have see people keep trying to count the B/S, finding a value between 0.3 to 1X BV so that they feel comfortable enough to invest.

But the real question is what the future look like? This is a very hard question to answer. YZJFH has scale down a lot in China and moved the cash out of China, If the high yield loans yield 10%,  YZJFH will be earning substantial less than compare to 2022 & 2023. The 50% that is outside of China, 2 things stood out. 1^st is still unknown expertise, unproven. 2^nd nothing much has happened to these capital. Nothing wrong with the 2^nd and at times, it is hard to keep capital at bay and writing a cheque is the most easy thing to do. But if things remain the same as of now, a Company will be generating ROE of 3 to 4% and is not exciting. 

Still 0.3X BV is exciting as it is like 3 times peaked and 10 times future earnings. Buying back shares at this valuation make the odds in favour of the investor.

A quick note on the Debt investment. As of yearend, the allowance for impairment is already 13% of total gross debt investment. 13% is more than gross loan interest. The most important question to the management is why keep lending? On average, YZJFH will lose money on every single loan given out. If this remain, this dark industry of China lending will be broken, unless lenders start charging higher interest. And since most of YZJFH debt investment duration are under 12 months, it will happen very soon if I take YZJFH as an industry norm. Also, when one assumes that default rate will double or triple, I would ask how would you assume the economy in general be like?  I don’t know but at that kind of default rate, I would start modelling current China to the great depression of USA where GDP tanked 25% in less than 5 years.  

Talk about bank, local banks specifically which I have a very superficial understanding.

First the math and a conclusion using DBS as an example. Before 2022, DBS was generating ROE of about depending on the period, but around just below 10% to 12% and payout about 50% of earnings which is about 5 to 6% of that ROE and retained 50% of the earnings which basically mean NBV double in about 12 years. After so many years, I would assume that retaining 5 to 6% ROE is sustainable for its growth both in Singapore and overseas.

Bank grow by consuming capital, retain more capital of says 8% ROE will not lead to faster growth. It will actually reduce ROE. So, with this assumption in placed, when DBS ROE increased to 15% a year, higher dividend payout is the natural outcome. Higher profitability doesn’t mean higher capital requirement. If the magic number is 6% ROE, generating ROE of 15% mean 9% will be paid out as dividend. Generating ROE of 20% mean 14% will be paid out.

The easy part, math is over. let talk about the harder part which is what kind of ROE can a local bank generate? Ignoring the hardest part which is what kind of competitive advantage a bank like DBS has, then a bank with like DBS with high interest income operation as compared to non interest income operation depends a lot on the spread between income and cost which is the net interest margin. Whichever way the interest rate swing, both income and cost will usually swing together in the same direction.

A good enough spread or margin enable DBS to operate its businesses in a reasonable way. Still, when it is in a low interest rate environment, like 2020 or 2021, margin will be depressed because it is harder to push the cost side of the interest lower as it was hitting rock bottom. 2020 and 2021 were some of the worst years for the local banks not just because Covid but because of the rock bottom interest rate. After cutting it out during the depressed years, local banks enjoyed a better interest rate environment which straight away resulted in higher ROE.

So, is 15% ROE the new norm for DBS? I won’t know but I don’t be surprised if this is the case and if DBS push harder in term of leverage and making their assets work harder, a 20% might be even possible. The lower end might be 13% but these are numbers I dream up with. The only thing I am sure of is a higher interest rate environment, mean higher ROE for DBS, all things equal.

Interest income operation competitive advantage come not from the ability to give high interest loan but from the ability to gather low-cost deposit. This is the competitive advantage DBS, UOB and OCBC enjoyed in Singapore with DBS way better than the other 2 and foreign banks are not going to make headway into the low cost deposit in a big way easily.

Sadly, this advantage is localized. DBS, UOB and OCBC does not enjoy the same advantage overseas, because they are the foreign banks. I am reading China Merchants bank, halfway through and as China grow, cheap deposit just poured in. How much did DBS, OCBC and UOB gathered?

For banks to expand into other countries, there is only 2 ways to do it. 1st is buy a well established local bank and one with competitive advantage will not be cheap. 2nd is to go to the ground and build it up. For that, my current understanding and base on how the bank communcate and not with hard numbers is UOB is doing just that and its avoid the crowds, China and build it way with some small acquisitions, not just current but those years back. If it does well, UOB should gain some advantage in countries like Malaysia, Thailand, Indonesia and Vietnan as years go by. These names doesn’t sound sexy but gaining competitive advantage in boring countries is way better than having a competitive disadvantage in a sexy country.

Local banks plus Jardine Group, and some GICs were the main reason why I thought STI was cheap since 2020. At current level, if the local banks are able to produce ROE of 15%, and with them making about 40% of STI, I believe it is not hard to earn a 10% annualized returned. And yes, throw those REITs with earning yield of 5 to 6% out will be even easier to achieve it.

Flip over to HSI. HSI is basically a China blue chip index. And for the component stocks, the few that I look yield double digital earning yields. Whatever the problem of China economy or CCP, these companies are, with my current understanding, having huge competitive advantage in China. So, I put my money to it. Keep doing encore in January.

And individual company, there are like 3000 listed in HKEX, and I have just started my journey of reading. In Singapore, which I have spent over 20 years searching, started from small cap. This round, I start big but still one company at a time. I want to look for companies with competitive advantage and buy them cheap, with an eye on CCP. The funny thing is companies, especially those with competitive advantage won’t be selling cheap when every day is clear blue sky, and everything is great. I am thankful.

2023 standout as an exception year with all the activity happened in the 2^nd half of the year. On individual stock, I am fully invested with only few k of cash siting around. The last time that I was this invested or more fully invested ie without idle any cash(except a maybe a month or 2 of normal expenses) was about 13 or 14 years back and this doesn’t really bother me much because I can always sell anytime with just a few clicks and I am not bother by selling at a lost or profit.

So, 2023 ended early for me. Somehow, I have gotten what I wished for a long time, a dead market. In this dead market, or since July or August, encouraged by the dropped in property stocks share prices, the idea of picking up a few cigar butts suddenly pop up. Within a short 2 to 3 months, I picked up Wing Tai, Yanlord, Sinarmas Land and Ho Bee. Buying at below BV is not some magical method to get rich. Still these cigar butts are trading at about 0.3 to 0.4X BV with more than 10% earnings yield base on previous year earning. Moving forward, their earnings will be under pressure, except for maybe Sinarmas Land. The positive is pervious year earnings were closer to bottom than peak and 0.3 to 0.4X BV is like 1 to 2X peak earning. And the negative? Peak earning is nowhere in sight.

Despite calling them cigar butts, these companies are not that lousy. Wing Tai has Uniqlo Singapore and Malaysia JVs, pretty good operations there. Yanlord grew their operation in China many folds since listed about 15, 16 years back. Sinarmas Land created an impressive BSD City out of nowhere. And Ho Bee has the track record of being the pioneer developer in Sentosa cove then turned into developer and collector of investment properties. Certainly not your typical cigar butt companies.

With the exception for Yanlord, the remaining 3 have quite decent B/S. Some might say or Yanlord is being said to be one of the safer China developers in term of B/S. But I think Yanlord is a showcase of China developers and the crisis they are going through. The latest results says Yanlord has RMB185B of total assets, RMB46B equity of which RMB36B belong to shareholders. Which mean 1 dollar of shareholder money fund 5 dollar of assets or 1 dollar of equity fund 4 dollar of assets. Too much assets, too little equity. Even traders that I came across has lower leverage, Yanlord B/S operate like a very sound bank, a very sound bank B/S is anything but sound for a property developer.

Leverage cut both ways, it can either generate lot of profit or just plain painful. The look at Assets and liabilities does not tell the full story of Yanlord because many of its developments are under JV where Yanlord either consolidate or equity accounted. Which mean Yanlord will be on the hook the moment their JV partners unable to put in their shares. The risk of stalled development is higher than putting JV partner share. Why risk it. Ho Bee is one of their JV partners.

Stop bidding for new project sound positive for Yanlord but is it really so? There is nothing positive when a developer is forced to stop bidding for raw materials. The willingness to stop getting raw materials because the cost is too high or the price of finish good is too low is another story. Checking out Yanlord B/S and try to figure out how long those cash on hand will last is also the wrong way to look at it. The most important thing is sell properties. Followed closely the 1^st will be that all developments that have started construction must be completed and has the means to complete any new construction. This mean spends those cash on B/S. A developer like Yanlord can always sell completed property and this will remove the biggest risk for home buyers. Selling completed house at below cost is not as risky as incomplete development.

I don’t have special insight on Yanlord, but I figured that Yanlord price is cheap enough and has enough investment properties and related income for a bet.

Takeover is exciting, sold off Penguin International during the 2^nd offer. My return is decent. I would say that majority of my gain is the result of the 2 offers. 1^st offer was cheap, 2^nd offer is I think cheap but closer to fair value. See, I am somehow uncertain about fair value at 2^nd offer price and this is the fun part about investing. Relatively, there are many companies trading at way cheaper price compared to 2^nd offer price without a determined management trying to take it private. Since Penguin is in play and the upside will depend on the outcome of this play. Lot of uncertainly and the gain for holding on doesn’t look great. I might be wrong but willing to be wrong and bet on the others.

From Boustead Singapore’s prospective, the current offer to privatise Boustead Project look pretty fair, though not a bargain, unlike the first offer was opportune and cheaper. All in, it is an ok use of capital and another example of in my view, Boustead having a larger reputation than it deserves.

Boustead does own a few very decent, high ROE businesses with a few in cyclical industry. One common trail within these businesses, except for owning of investment properties for rent is low capital requirement which turn almost all earnings into cash. The focus of the last 10 over years by Boustead was to take cash generated from high ROE businesses and invest in lower ROE business and this is another example. I must add, investing in those high spec properties is a better use of cash than sitting there doing nothing. The recent move, some might say, planned long ago, to create funds and partially sell out these high spec properties is a better use of capital. But at this point, the number that come out of equity accounted funds and JVs look murky, though I am not overly concerned.

So, pretty happy to buy a company with lot of cash at below BV with an earning yield of >10%.

JHM is an encore and swinged pretty heavy. It has a collection of various businesses with the exception of supermarket business, the rest are pretty ok. Another business with a little unknown going forward will be how EV affect traditional car dealership business. The rest are really decent and it is cheaper than 3 years ago. Not just JHM is cheaper, each listed subsidiary that I looked are cheaper. JMH can deploy capital this way. While Hong Kong Land is cheap, Jardine C&C is the most obvious target because Jardine C&C actually prevent a free flow of capital from JMH to Astra, Vietnam investees or any new southeast Asia bet.

Did an encore on China Unit Trust this year or pretty much looking at HSI. The sentiment on China is so differences compare to a few years back. Good. Start buying Singapore Unit Trust again, just a little. I don’t know what 2023 and beyond will bring, I hope to be fully vested, out of cash and CPF monies.

It is a long journey. Long forgot when and how I chanced upon Warren Buffett and then followed by Charlie Munger. But that must be more than 20 years ago. And I have read every single BK’s chairman letter, some letters more than once. In the early years, I would search the net for BK AGM transcripts. Nowadays, BK AGM are available live online, or available to watch anytime you want it. In fact, BK AGM from 1990s to 2023 are available online. I have spent hours listen and re-listen to when while walking my routine walk. It was always 2 voices. 1 voice will take the main stage and time while the 2^nd voice speak lesser, but each response usually cut all the chase with a short answer right to the point.

From 2024 onward, there will be only 1 voice and few years down the road, BK AGM will be very different. And I believe, I will no longer seek out new smart investors since I have not been doing it for years. I have long passed this. Investing is not some new stuffs or whatever when we need to reinvent the wheel, it is a pretty simple in term of concept. Use some common sense, buy cheap, hold on to it, let it generate return and hopefully sell dear if needed.

I am not part of the value investing cult. I know how to invest if I know how to invest. Labelling myself as a value investor will not make me a better investor. Chances are, I can do worse if I start labelling.

With the passing of Charlie Munger, while I do not miss any of his teaching or speech on investing, these are available online, and investing is not some kind of examination or must remember the concept in order to apply. I will miss his application, his thought process, how one look at the whole situation, idea, etc.

Hopefully, I have reached a point in my life where I can still improve. By myself.

Let talk about what really drive the share price. In short run, it could be anything. News flow, insider buying or selling, whatever. Whoever can get ahead of the news flow, win as you trade on it. In the long run, it is the earnings power of the company. The company might be sitting on some properties or equities, the common assets one can find on the B/S and they must be generating income and these incomes might flow directly through the P&L, or just partially through. Sometime, these assets might be sold at some point at great price and sometime, it won’t.

Some value investors will say buy at a discount to the BV, ie cheap relative to BV and one will do great. I don’t disagree but I tend to think that beside being lucky, the one that work out well are the ones that have some earning power or generate some decent return. Having a valuable asset sitting just there is not going to generate return by itself. One need to sell it or convert it into sellable product.

A good example is Bukit Sembawang Estate. The same story will keep repeating that it is sitting on some cheap land since its plantation days. I have been hearing about on the day I got to know the name of Bukit Sembawang Estate. After so many years, I bet that a big portion of those land have already been developed. But the story is always, if we look at the revalued net assets of the Bukit Sembawang Estate, the share price is worth XX more.

If I look at their share price, net assets and earnings since 2010, one will be disappointed. Share price still at $4++ range, number of shares outstanding remain unchanged. net asset about double since 2010 to $1.5B and yearly earnings on average maybe below $100M. $100M on equity of $750M is decent, but on $1.5B is just ok but I won’t pay anywhere close to 1.5X book value to get a sub 7% return on equity. After 13 years or so, investor got the dividends and a more and more depressed valuation despite the sexy story of cheap land bank. If you have the cheap land bank, it got to convert and turn into earning. Time is the enemy of return especially when one pay for it. At current valuation of about 2/3 book value, a 7% ROE change the whole calculation. The main point is still not the cheap land bank but what is the earning like in the future. If the future earnings will be like 4 to 5% ROE then I don’t think it is fun to invest in at 2/3 book value. 1/3 book value will make my blood flow faster.

The story of Bukit Sembawang Estate is not unique. It happened to so many local stocks. One start at a higher valuation and slowly roll down toward a lower valuation. I think we are at a point where investors think current valuation fit these companies. This excites me.

When talking about earning power, I can’t help it but talk about UOB and Haw Par together. Everyone know about UOB, but fewer people know that Haw Par is sitting on close to 5% of UOB on its B/S. Those who know about Haw Par will usually come out with the conclusion that, if I want to invest in UOB, I buy UOB straight, why invest in a sleepy conglomerate when there will be no so called unlock of shareholder value and might be even screwed by the Wees. Forget about how shareholder value can be unlocked in the first place, if I go back to year 2000 or 1998 with 1998 one can get to buy at the lowest point in a crisis presumably one is able to do it. Haw Par share price basically matches that of UOB. $3.62 last done in 2000 and $1.02 lowest in 1998 vs $13 last done in 2000 and $2.78 lowest in 1998 for UOB. Number of shares outstanding increased slightly for both but the reason for Haw Par increase is mainly due to bonus shares maybe 10 years back but I can ignore it.

I mean one can just look up to their share price and realised that Haw Par actually not just matches UOB return, its return actually exceeds UOB. Just a quick point out, at $13 at $2.78, UOB was at 2X and 0.5X book value. Haw Par carried UOB at cost and cost was about 1X Book value. Haw Par was trading at 1.3X BV at $3.62 and like 0.4X book value at $1.02. Do the math, It is not hard to tell at $3.62, Haw Par was trading at about 1X book value had UOB being accounted for at market price while UOB traded at 2 X book value.

Both companies’ valuation got depressed over the years. When was the last time Haw Par ever traded at Book value and UOB at 2 X book value. But despite that, share price gone up like 10X from the lowest for both companies and double or more than double at 2000 last done price. What make it so? earnings power if I ignore 1998. In UOB and Haw Par example, with a longer period, we are able to see increase in share price despite the fact that valuation being depressed. Current valuation makes both a better buy than in 2000 and the only question is what the future earnings power look like.

But there is a more important point on Haw Par and UOB. How did the boring Haw Par matches and even outperform UOB? I think valuation play a part. Never really do that math. But when I look at Haw Par, with the changes in businesses over the years, one business stood out, healthcare products. The earnings power of healthcare products made up for those businesses that Haw Par has lost over the years and become a very significant part of Haw Par and at this point, the future of these two businesses will decide the future of Haw Par. UOB is bigger with decent ROE, but ROE of 10 to 15% is in no comparison to healthcare products. The profitability of healthcare products is in another class.

Let continue with bank or DBS and Hong Leong Finance. Hong Leong finance is like Bukit Sembawang Estate. Its share price has gone no since 2010 or dropped like 10 to 20% from just above $3. As for DBS, it is like a little more than double from like $14 to $31. HLF book value was at $3.5 back then and now it is $4.55. So valuation dropped from 0.8 to 0.9X Book value to like 0.6X book value. DBS book value was at $11.25 back then to $21.17 currently. So DBS was valued at 1.3X book value then compared to 1.5X book value. Valuation expanded. Without looking at anything else, the thing that jumped out at me will be DBS increased their book value at a faster rate than HLF. Almost double.

Why so? Did HLF payout a higher portion of their earnings to shareholders? No. Basically DBS has a higher earnings power. DBS ROE used to be lower in the sub 5 to 10% range in the 2000s. But from 2010 to 2022, ROE jumped to about 10% ++. Recent days look like it will go above 15% for the coming years. What about HLF? It remains at about may sub 5% for a long time. FY2022 was a good year or so some called it for HLF and what is the ROE? 6%. Now that is what separates the both. And the story is simple, DBS generate higher ROE, paid out more dividends, retained more earnings over the years and continued to generate higher ROE.

It is no brainer that DBS should value higher than HLF with ROE of about 3X higher. The thing about bank is its need capital to grow, and it look like DBS is doing well with about 50% earnings in the previous years when its ROE is at around 10%. And when ROE improved to 15% for whatever reason, reinvestment need is still the first 5% of the 15%. free cash flow jumped from 5% to 10%. The return after 5% is way more valuable than the return before 5%. Of course, one can always invest in HLF currently at 0.6X book value. Ignoring everything else, one gets a higher return when invested at 0.6X book value with ROE of 6% compared to 1.5X book value with ROE of 15%. But that is to ignore the elephant in the room where ROE of 15% is close to 3 X that of 6%. Compound that over time is the key. Also, is HLF even been keeping up with their competitors in general after dividend out quite big portion of their earnings? Their capital, ie book value hardly grows, like 30 to 40% only, half the rate of DBS.

The most important question to ask is why HLF is ROE is so low. Yes, HLF leverage a lot less than DBS but that doesn’t explain everything. Comparatively, UOB and OCBC leverage more like DBS than HLF and earnings look like DBS as well.

Let end it by saying, while these are the pasts, it is useful to use it to see the future. The 3 local banks used to generate ROE of about 10% and now its look like if the environment remain, they should be generating at around 15%. Are you going to value them like they are in 10% or 15%?

JMH

It is all about capital allocation at JMH level. Individual company within JMH matter to the percentage of JMH ownership and relative to capital invested and income generated. FY2022 annual report has a chart on % of shareholder equity invested to those leading subsidiaries. I like that and that was exactly what I did before I make my purchase. In that morning walk or two, I was trying to value JMH in my head, flipping some numbers around without looking at any. I knew JMH is cheap but how cheap? After that walk or two, my conclusion was, precision doesn’t matter, JMH is fat.

While individual company within JMH is important, Capital allocation is even more important which is how JMH invest the  excess capital at JMH level or together with subsidiary at subsidiary level, especially Jardine C&C. The number will not jump out from JMH P&L, BS or cashflow. JMH P&L is pretty useless for any analyzing purposes. But one number stand out, that is NAV. It is around USD100 currently, an increase of about USD18 from USD81 pre covid. Pretty decent considering that covid hit JMH quite hard. About 20 years back, NAV was below USD10.

Hong Kong Land

HK Land seem to have endless problems and the future look cloudy, like a storm is coming. Might be about time for property, not just in Singapore and also China and Hong Kong to enter a prolong period of downturn. In China, excess supply will not be absorbed just like that. When it is over, those big chinese property companies balance sheet will no longer look like a relative
safe bank anymore. If you know what a bank balance sheet look like, then you will know how crazy these chinese property companies were. The trick they knew, make them big, in a very short time. The tide is out, look around, everyone is naked. Almost.

HK land has no competitive advantage. It is a well run property company that managed properties at prime locations. And continue to invest, deepen it roots in cities it is in and widen to more cities. At the same time, does not buy or sell property much and reduce share count. All these gains doesn’t really appear in the number because of margin compression, valuation losses and the
bumpiness of the earnings.

Baker Technology

Baker is simple. It is in the offshore support business. This industry will be in need for a long, long time but in a much reduced size. And industry look to be gaining back some from the bottom of the cycle and I don’t think it is wrong to say despite that, the whole industry is still hugging at the bottom.

Against this backdrop, Baker Tech, a company with no competitive advantage, and hardly being profitable for the last few years was actually look very attractive when it traded below $0.40 and even at $0.20 for over or about 2 years period. That was cheap, very, very fat back then, at current price I am not so sure. What I do know is the current management ride the last up cycle to
the top and did not crash with most of the players. Sit on lot of cash and started investing when the cycle was down. Too early might be the word for their actions in the down cycle. Despite that, Baker B/S is still strong with cash growing.

Micro Mech

The drop in profitability is not a surprise. I don’t know how deep or how  long this down turn will be but this is not the first time and won’t be the last that I am seeing it. The only differences between the current and the last is that I was able to buy because valuation was cheap then but it is not the case right now. Thing might change in the near future or if the slump is long enough. Now of course my wish is a deep and long slump.

As for current slump, it is really easy, excess supply, reduce demand plus sucking up the inventory in the supply chain. After cleaning up inventory in the supply chain, production will gear up to a more normalised level, but if demand is not gearing up more than that, the extra pop in profitability will not happen.

Just like the last major downturn, what I want to see in Micro Mech is keep investing, do not cut employees just because of some short term down turn. A great company is not built in this way. Next is cut dividend. I know Micro Mech is proud of its dividend record but it is not a record that need to be maintained at all cost. You have cut dividend before, do it again.

A downturn is a good time to build the company. Step on the gas, invest in the company, invest in the employee, test the new Deputy CEO and get out of the slump stronger as your competitors and customers get weaker.

Delfi

There are lot of interests recently. The current valuation is not excessive. Neither is it cheap. Was cheaper earlier but I did not buy a lot because of one reason. Profitability. Delfi sell confectionery, and in general, a well-run company in this industry generate high ROE. After the recent “surprise” good result, its ROE is decent but not high and It did not have a record of producing high ROE.

I invested because I saw thing was changing for the better, the company has been working to be better, refresh products, invest in production, invest in logistic, never been more focus since listed. The only thing that is pulling them back was covid and Indonesia economy. ‘

Now, what I want to see in Delfi is continue to invest not just in Indonesia but also Philippines, the long shot. Then, I want to see higher profitability, excess capital and how the company make use of that excess capital. This last part will be the excess pop, and the excess pop if it appears, it will be the most profitable part. The part that just left and unlikely to return in any time soon for Micro Mech.

Similarity

There are similarities when it comes to better companies and management. Micro Mech is proud of its dividend record, it is printed in the annual reports for many years, I don’t remember when it started to put up that chart. Delfi also started to write a paragraph on total dividends paid since listed about I think 10 years back maybe. These are good indicators that the company care about their results.

China Sunsine put up their financial records on the 10^th and 15^th years since listed. Of course, the numbers look great, but even on other years, a 10 years record will be available. I look for company who does it. But its gap in remuneration between chairman and the rest doesn’t look smart or logical. For China Sunsine, this is my first focus when I look at its numbers.

Next is competition. Sales and production equilibrium is not something new, it will only work when the company, China Sunsine is a low cost producer. The outlook doesn’t look great as increase in capacities come right after consolidation among players. When major players or many players are doing sales and production equilibrium, it is going to be painful.

I have found a few more putting up the same kind of charts, some records are not good but chart remains year after year. That is something.  

There are management who talk straight to shareholders. Penguin International is one. This year, management talks straight on margin compression and it make sense to me. PR comments/presentation bored me real fast. All I want to know is why and how we are here, what are you doing currently and what do you think the future is like. This applies especially so for bad news.

Riverstone doesn’t write a lot, or put up lot of pictures. It says little about their results, nothing much to say actually but always give bad news first. AR2022 is a feast. CEO aged like 20 years as compared to his profile picture. I was wondering when I read the earlier years annual report, is Riverstone managed by someone in his 20s?  Take it as a joke. And the quality of current and profile pictures are so low and cheap. Talk about cheap, the CEO wear some kind of cheap digital watch, I think so in latest photo. And the company ticks all my boxes in remuneration. I just hope that the management pay employees at least market rate and according to performance. It is fine when owner take low remuneration but cannot to be too cheap when retaining talented employees.

I am not qualified to write about Dasin Retail Trust not because some sort of qualification is needed, it is just that the Dasin has never been on my radar. And now it is facing refinancing problem. Problem attract my attention fast.

In the letter of demand issued by Luso Bank, 2 particular things stand out. Generally, investment property loan never get repay. Company refinance or rollover the loan unless the lease term end soon. A company or REIT holding on to properties with long term lease can easily shop for loans among banks. Why Dasin has no other option? Next is really financing 101, when borrow, borrow onshore, borrow local currency, borrow from the local bank from the same city. Why borrow offshore and in foreign currencies (USD & SGD)? I have been watching this type of movie since first heard about Indonesia during AFC and recent example will be property companies in China.

Forget about all other technical issues or unit price trading at large discount to BV. These two points along will not pass any smell test or just my smell test. But they did pass another type of smell test, the type where I usually look at rotten eggs when I have the chance and also free. It helps because I hope to recognise them in the future.

A quick look at latest results followed by quick scan at annual reports since listed pop question after questions. No choice, scan IPO prospectus. Anyway, who read them. The media just took what being put out by the companies/REITs, just look at Suntec REIT and Mapletree Logistic Trust. Especially MLT, no one ask a basic question like why a sizable drop in profit resulted in an increase in distributable profit? None.

Malls in China has short lease term. A big portion of Dasin portfolio has on average about 20 years left. Point number 1.

Next, Dasin has been lost making in the last 4 years. On cash flow basis, Dasin is profitable but that is when one ignore manager fee paid in units, without that Dasin barely generate cashflow and Dasin has been paying dividend base on that. Now, the highest Dasin paid out was close to SGD40M. Use USD40M against BV of SGD1.1B and 20 years. This investment will not make sense unless rental keep surging for the next 20 years! No wonder, words like “high upside potential due to rental reversion”, “solid growth in rental income level”, “high potential for rental reversions” are printed in the color pages of IPO prospectus. If there is no high growth, it makes zero sense to invest in Dasin.

Then you have loss allowance made for trade receivables and about half of the allowance, SGD5M related to Zhongshan Dasin Metro-Mall Merchant Investment Co. Ltd, a master lessee. Why master lessee for shopping malls and master lessee not paying.

Who is Zhongshan Dasin Metro-mall Merchant Investment Co. Ltd? A related party of Sponsor Zhongshan Dasin Real Estate. Zhongshan Dasin looks ok to be bases on their website and operate mainly in Zhongshan China. At the same time, shareholders loan Dasin SGD17M interest free loans at holding company level, ie trust level in Singapore. Such tight cashflow on Zhongshan Dasin side?

It is also interesting that in the IPO prospectus, the following is written about Zhongshan Dasin,

The Sponsor: Zhongshan Dasin Real Estate Co., Ltd. (中山市大信置業有限公司)

The Sponsor was established on 13 July 2001 in Zhongshan City, Guangdong Province, PRC, and is a large-scale private enterprise wholly-owned by the Zhang Vendors. The Sponsor Group’s principal business is focused on the development and management of real estate, including the development and operation of retail malls, hotels, educational facilities and residential properties. The Sponsor Group has mainly been involved in the construction and development of various real estate projects in Zhongshan. Over the past 15 years, the Sponsor has established itself as one of the leading developers in Zhongshan, winning a number of national-level industry awards. The Sponsor has been ranked among the “China’s Top 10 Commercial Real Estate Development Companies” for the last five consecutive years.

For the financial year ended 31 December 2015, the Sponsor recorded a net profit of approximately RMB 21.4 million and as at 31 December 2015 has a total asset value of approximately RMB 3.9 billion and cash balance of approximately RMB 113.7 million.

Consider this.

IPO proceeds about RMB586M, add loan and other, paid about RMB2B to sponsor.

As at 30 Sep 22, Dasin Retail Trust has SGD945M equity, investment property of SGD2.2B(all purchased from Zhongshan Dasin?). These are about RMB4.5B and RMB11B. I don’t know how to link these to RMB3.9B(still related somehow) but I know RMB21.4M profit of Zhongshan Dasin in FY2015 is just only about 10% of highest dividend paid by Dasin Rental Trust. Isn’t Zhongshan Dasin supposed to be much bigger or the rest of Zhongshan Dasin were lost making that year.

It doesn’t even smell right at all.

Singapore as a global REIT Hub. I take it in this way, someone somewhere will look at Singapore and say, what a wonderful place to list some REIT/Trust at a premium. Let structure something. No people read them anyway.

I saw Manulife US REIT’s announcement on the increase in gearing due to drop in valuation. I do not have great insight on REIT and Manulife US REIT but my reaction is, is this the first of many more to come.

REIT gearing is the function of property valuation and debt. Loan is fixed, unless REIT borrow more or repay. REIT borrowing seldom get repay, it is always being refinance and because REIT pay out almost all earnings, REIT borrowing tense to increase even without new property/AEI/redevelopment. Property valuation is the function of cap rate(ignore DCF and direct comparison since both are inter-linked by interest rate), rental and occupancy.

Recent history has been good for investment property, especially on cap rate or reducing cap rate. Covid created a short term stress but it is known that the stress is temporary. What happen if there is a bigger stress hitting on cap rate and cap rate start to reverse after years of downward adjustment? Places like Singapore and Hong Kong have cap rate at even lower than 3%. US on the other hand has higher capital rate of say 5 to 7%.

What will happen if Cap rate turn out to be like interest rate, ie shift upward? a 3% to 5% cap rate look reasonable when one can earn higher rate of return with the same money in fixed deposit? Isn’t everyone chasing after T-bill?

What set to limit and safeguard investor might be the trigger for massive dilutive offering during abnormal time. Maybe not because MAS foresee it. But still, if REITs as a whole are stuck at double digital yield, AUM will stop growing and will hurt sponsor or manager more. Not hard to guess what they will do when their interest is being threaten.

Click to access Response-to-Consultation-on-Proposed-Amendments-to-the-Requirements-for-REITs.pdf

Most will not take para 3.3 seriously. Only people like me who read it 2 years plus later will find them useful. This movie keep repeating from REIT to REIT. — any resultant growth in distributions from increased leverages comes with higher credit risk.

I am happy in a down market. My money buys more shares than in an up market and I love buying in down market. Some of my invested companies are buying back shares too, the right thing to do at sensible price and with excess cash. Up market serves me no good when I am a net buyer.   

STI swing around within a tight range, valuation is very reasonable with local banks, constitute about 40% of STI, trade at slight premium to book value with ROE at early teens. No panic in so far. Some might say REITs got killed. But REITs were trading at a premium earlier and now it is getting a little closer to the general market, I guess. For the rest, I think quality companies continue to trend downward, i.e. getting cheaper while those related to industrial, shipping and commodities shift upward.

This year I did an encore for Europe equities after 2020.

China or HSI is the most exciting market in 2022 for all the markets that I know. The so-called investors are not shouting China Techs this around. Many have given up, some took up another hobby, call Xi watching on top of their current hobby of reading the Fed. I got excited early this year when HSI broke below 2020 lowest level with little screaming buys. Better yet, in the last 3 months or so, HSI just keep dropping and dropping and drop passed its peak in 1997, just like what STI did in 2020. And similar to STI in the late 2020, HSI did a U-turn and jumped from 14K++ to 19K++ within a short period. Xi’s watcher, did Xi give you any insight? As usual, I stopped buying when HSI jumped. A bad habit of mine. But still not bad and quite shiok. Encore please.

US equities or tech stocks is still where I call the last bull market. It is dying but not dead yet. This is the place where the bulls are buying for the continuation of the yesteryear bull market. US market will be the place to be when these bulls throw in their towels but not any time soon, I guess. And then what. For sure the next bull market is already started at this moment at some places/markets, but I just don’t know where.

US did not fall much in 2022, those who got killed are in tech stocks and crypto. The place where excess concentrated, madness of the crowds. And I am not surprised on the wrongdoing and frauds in crypto. Temasek is not God. Come on, it or GIC invested in LTCM too. What about US banks stocks in 2008/09?

I started investing right after Enron, World Com, etc. and if history is of any guide, It will not be confined to crypto. Chances are we will be seeing more coming from the tech space and perhaps just like Enron, some of the current famous names.

A famous investor wrote “Sea Change” in a recent memo. Sort of similar to my recent thoughts on environment change and interest rate but certainly with better thinking and a lot more well written. And the thing is if the interest rate for the decades ahead will be at 4% risk free, then whether a stock trading at 6% earning yield with little growth consider fair value? What about risk free rate at 5%, 6% or higher? I don’t know the exact answer but why invest at the edge? I love a double-digit earning yield.

I like local market for individual stocks. Well, I have to like it because this is the only place where I invest in individual stocks. Haha. A lot of companies were traded at rich valuation about 10 years back. Many have fallen back to earth. And I have picked up 2 this year.  

What a strange world for Delfi, current balance sheet is the strongest since listed and have updated its production facilities after selling out cocoa crashing business. Prospect look good and likely to generate higher return going forward but valuation is around the cheapest since listed.

Then there is Riverstone. This is the first time I start doubting myself after a purchase. The normalising in demand post covid is not of concern. Profit will drop, no doubt about it, in fact current margin is actually higher than pre-covid. The excess profit from the last few years will resulted in excess production and margin compression for I don’t know, some years. These are not scary. What is scary is the competition from new players in China. If competition became intensive, past results will not be a guide for the future. What did I do? Nothing. Partly because I might be wrong, partly because I like the price and I also like the boring management.