Posted by: donmihaihai | April 18, 2019

Random Oxley

After reading news of Oxley for years, I was quite surprise that the aggressive property developer is telling the world that it is trying to de-leverage. I did not dive deep into Oxley and Oxley will never get pass my smell test, ie flip through the number and going into the details only if needed. I know what to look for in a property developer or owner so I actually spent lot more time pulling out number to write this article than doing my smell test.

Of course Oxley is highly leverage. Highest among the handful developers that I has seen or smelled. But the thing is, Oxley current leverage is near the lowest for whole of its listed history. 4.23X, 4.06X and 4.44X for FY2017, FY2018 & 1H2019 compare to 5X to 10X for FY2011 to FY2016. Debt to equity say the same, below 3X from FY2016 to 1HFY2019 compare to 3 to 6X for FY2011 to FY2015.

Doesn’t make sense, trying to de-leverage at the time when debts level is near the lowest? I know interest rate is going up and there is more strict regulation, and the company is taking on more projects recently. But except for interest rate, Oxley has always operates under stricter regulation since listed and while Oxley indeed is taking on more project, its equity base also increased, it is far from its hey days where it was taking on $9 to $10 dollar of assets for every dollar of equity.

If we leave interest rate out for a while, then Oxley must has made some wrong moves recently. I can guess. For a company who turn around their projects fast, taking on assets that doesn’t turn will pull down their return, especially if these assets are not as income generating or sell fast. You can’t just fuel it with debts for equity investment and over dose on debts for hotel and office. The return profiles are different from property development.

What I did not say earlier is that Oxley changed the way its account for Hotel, own use office and investment property from cost to fair value in FY2016. Fine here, nothing strange on changing accounting policies, but it has a positive impact on any leverage ratio. Now, leverage ratio also become a function of capitalization rate or direct comparison as well.

With the help of a pen, Oxley can tell other, hey our B/S improved. I have problem with co. revalue their properties sitting under PPE. Revaluation upward can easily capture gain yearly as long as the co. is pushing for cap. Rate compression and aggressive in using direct comparison. But it hurt future P&L. check Oxley hotel segment P&L, it is the worse segment within Oxley.

Another funny part on these that doesn’t make sense unless you put everything together. Hotel is depreciate within the lease period, well close to 100 yrs and own use office which is free hold, depreciate within 60 yrs. Doesn’t make sense unless it is to create a positive P&L for segmental results.

After writing so much about leverage but the most important thing to look isn’t leverage or debt to asset or debt to equity ratio. Most debts doesn’t get repay. Most get roll-over. It is the ability the service the debt, ie interest that is the most important. 3 to 5 X interest coverage is just good enough but not strong, if the company has a very stable revenue stream. Like rental. Most REITs are around 3 to 5X. Now, if one add in something like property development, there will be not much safety if the development sales is slow.

Stronger listed property has an interest coverage of 5 to 10X, these are pretty safe companies. Oxley belong to the opposite where cover is 1 to 3X.

But there are tricks here. Which interest expenses to use and which earning to use. For a company like Oxley, taking interest expenses and earning appear in P&L is useless. The P&L interest expenses reflect the loan portion for hotel, investment properties and other investment not development properties where interest cost is included in the construction cost under POC. Earning is the combination of everything. Now doing a coverage ratio blindly mean nothing.

Hey there is another trick. Taking on property development with JV or associate actually promote risk taking and present only the good stuffs. Ie. Remove debts from B/S and interest expenses from P&L. Oxley one liner income from associate and JV say superb profitability from investment in JVs and Associates. How much debts are needed to fuel these returns? What Hong Kong Land is doing should be the standard for property developers. Their calculation of interest coverage includes JV and Associate.

Hong Kong Land financial also tell a world apart on how they run their businesses through their interests in BFC and ORQ with REITs and non REIT. With REIT is way more aggressive. Something doesn’t make sense again, why do investor invest in REITs, taking a 5%++ yield and thinking that a REIT is safer than a company? The hunt for yield never stop.

Hong Kong Land financials, especially on associates and JVs is a world apart from Oxley where information is just not there. Oxley present a liner on the same thing what doesn’t tell the story. Granted, accounting doesn’t say what to disclose to be exact. How Oxley disclose is telling me what it doesn’t want to disclose. Easy.

Take one of the JV Oxley Serangoon Pte Ltd in which SLB Development has an interest as associate (one accounted as JV and another as associate??). SLB number say assets – 841M, liabilities – 837M and net assets – 4M. Haha. Don’t need to be smart to know what these numbers stand for. Oxley share of net assets is only about 2M. Oxley has close to 6B of assets and 1.5B of equity. If this development is counted as subsidiary. It will blow it B/S and how many more developments can Oxley take on? Easy answer.

So why do Oxley want to de-leverage? Oxley will never achieve the same profitability if debt-to equity ratio goes down to 1 and will never differentiate itself financially. From what I can see through the numbers, there are a few investments that is not working out at the moment.

Is Oxley trying to change from a debts fuel developer who sell project super well to something else or just go back to the good old days and make sure that its sell all units fast.

 

 

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Posted by: donmihaihai | March 22, 2019

you are locked in.

The Breakdown of latest regulated tariff rate $23.85.

Energy generation cost (Genco) – $18.09. 75.85%

Network cost (SP) – $5.31. 22.26%

MSS (SP) – $0.4. 1.68%

Market admin & POS fee (non-SP?) – $0.05. 0.21%

The only adjustment within the regulated tariff rate is energy generation cost.

From SP services AR, under segment results, electricity retailer is grouped under and I believe form bulk of the market support segment. EBITDA and NPAT for last 3 yrs are

EBITDA & EBITDA margin (2018, 2017 & 2016) – 181.3M(6.37%), 104.8M(3.93%), 103.6M(3.53%)

NPAT & NPAT margin (2018, 2017 & 2016) – 135.4M(4.75%), 73.7M(2.76%), 73.8M(2.51%)

What does the above figures say? Electricity retailer is a low margin business in Singapore. Any retailer who offer more than 10% discount to regulated tariff rate will be highly like to be loss making because SP services only earn max 4.75% out from 100% of the regulated tariff rate. Of Course, SP services might be stupid and lazy and new retailers are smart and out to disrupt our Singapore electricity, so they buy smart, hedge, etc etc.

But something doesn’t change, 24% of tariff rate $23.85 are fixed. The price of electricity sell by Genco must be really low/ out from projection for retailers to offer big discount.

In short, there are only 3 players in the whole chain who will take the price risk. Genco, retailer and consumer. If consumer is offered a big discount from regulated tariff rate, then either Genco or retailer will be taking the hit.

I suspect that the amount earned by SP services from being a retailer with regulated tariff is actually lower and the results were actually supported by other services included in this segment.

Base on discount offered by current retailers, most if not all will be loss making and unlikely to be profitable going forward. Why are they so stupid? SP services results might say something, retailer is high turnover, low margin business with low fixed cost. A low-cost retailer can generate high profitability as long as there is no suicide pricing.

The problem with Singapore retailers is, the market is open up with many retailers who can only outdo each other in price alone. What can they do if the end road they want is big market share and less competitor? Pricing.

What happened next? How many households will keep checking on offer rate and regulated rate in the future? I don’t know. I won’t do that of course. Now you are locked in by them.

 

Posted by: donmihaihai | February 3, 2019

Sad story of CapitaLand

A proposed $6 billion acquisition with $3 billion fund by issuance of new shares. With enterprise value at about $11 billion, total assets should be around the same.

Base on latest available financials, Capitaland has about $63 billion of assets and equity of almost $33 billion of which less than $19 billion belong to shareholders.

A transformation acquisition and much inks been written about it.

But the math is telling, spending about 1/3 of its equity with hardly an increase in EPS. Well the estimation is 4%. Hardly beat inflation. Spending doesn’t buy growth.

But it is so called transformation with many fancy charts and numbers being put up. New high growth sectors, leader in AUM, etc etc. Get the feet grounded. Like the storied growth sectors and fund management is certainly attractive with high ROE, bigger AUM usually mean higher ROE. But Capitaland as a group, doesn’t has high ROE, before or if this acquisition is done. Why so? Maybe few questions will answer that. Can Capitaland achieve this AUM without being Capitaland? Can fund management be decouple from the capital intensive side of the business? If the answers are no and no then the AUM is not sexy after all with single digit ROE except good story.

Also it is simple math that issue share below NBV mean decrease in NBV per share while above mean an increase in NBV per share.

Capitaland has always been written as the largest Singapore property company, innovator of Singapore REIT, blue chip REIT sponsor, Aces capital recycling model and big property fund house. But its NBV grew from $2.80 to $4.20 in 17 years (2000 to 2017) plus dividends and distribution of CCT and dividend paid by CCT and grew in CCT NBV only resulted to a NBV of almost $6.00. That is a CAGR of 4.59%. There is double counting in CCT as Capitaland own about 31% of CCT on average so that portion in dividend is retained within Capitaland but the amount is a rounding figure.

Capitaland created not even a 5% CAGR return over 17 years and among the biggest property companies listed in SGX, Capitaland growth in NBV is the slowest. Nothing sexy about capital recycling model after all. Take UOL, another largecap SGX listed co without capital recycle model and a fund house with large AUM, NBV grew from $3.28 to $11.1 during the same period. That is a CAGR of 7.43% and I am not even counting the dividends paid over the year.

Things are clearer now, nice stories which include latest acquisition and lousy numbers which include latest acquisition as well. The numbers look a little better in recent years but well it look real ugly when Capitaland is one of the biggest Asia property fund house.

But I am going to hedge my opinion. If Capitaland is able to achieve a ROE of 10% yearly without destroying shareholder value through corporate moves, then it is a decent company.

 

Posted by: donmihaihai | January 6, 2019

Market, Palm Oil, shipping and shipyard and property

The markets ended 2018 in volatility. Decent because volatile markets produce opportunities. I don’t know where the markets is heading to since I doesn’t own a crystal ball but a down and cheaper market produce higher return. This is truism. Investing in market with daily quotes mean volatility. This is truism too.

In recent times or years, I have been looking at beaten down industries and it has not yields positive results in terms of companies I wish to invest but I do notice that currently, other than a few sectors/ segments, valuation is really cheap with many selling at a discount to book value. The future of these companies doesn’t look bright but a basket of these stocks should do well in say 5 to 10 years as long as they are able to ride through the darkness. The return might be even better than those constantly in good news because you pay for brightness.

But I prefer to be invest in companies with certain advantages and I am not finding many. Talk about companies and industries interested me much more than market.

Palm oil industry.

Went through a few and stopped. Maybe I will return some days and read the rest. Commonality business. Huge uncultivated land banks, young plantation are painted by each company I read as competitive advantages!

Is that the case? In good times, every company expand their planting programs, trying so called controlling cost. In bad times, planting basically stopped when cost of planting actually reduced. Nerds behavior ensure low return and only low cost producer achieve higher profitability. Competitive advantage is their competitive disadvantage since every company is doing the same thing. Demand and supply. Low cost operator win. But the price of better operator is too high and I don’t see the reason for betting on them. Lousy operator is a better choice because the market needs their produces and they are cheaply priced. But the question is who.

I don’t need to know where palm oil price is heading next year. Investing in company in palm oil industry will be a multi years bet or perhaps decade waiting for as a group, for competitive disadvantage to turn competitive advantage again.

Vessel operator/ owner/ shipyard

About 10 years back, bulk and container market burst, offshore segment was the favorite. Fast forward 10 years, all burst. What I said back then still hold true. 1) It is a commonality business for all segment within this group. 2) Charter rate for offshore segment is not depend on oil price alone. There are at least 2 supply and demand. In fact, the supply and demand of vessels matter more than oil price. 3) In ship building, when one segment is down, shipyard will try to enter another segment, pushing down the price of the healthy segment.

When bulk and container segment were down, everyone shout offshore!

This should be a better industry than Palm oil. Low cost operator should stand out better. Not interested in the group of companies that are in need of restructuring as long as they are going to be managed by the same management that led them into trouble. For low cost operator, management is the key. So what even if their stocks are priced super cheap. Competent management that are able to ride cycles needed.

Management that are able to invest in down cycle needed too. Yes invest. Purchase vessels at rock bottom price even if you can’t find customer for these vessels. Baker Technology might be one as their purchase of CH Offshore look real interesting. Would be better if Falcon never milked CH offshore almost dry once Chuan Hup was out of the picture. Talk about corporate governance or how milky these companies are. I was not surprise when I saw those numbers in the annual report, conflict of interests, director duties, etc etc. None of the experts in the news bark at them. Good thing, I know who to avoid!

In an industry where there is nowhere to hide, I thought I don’t know much about shipyard and unlikely to invest in any. Changed my mind when I read Yangzijiang. Still don’t know much about shipyard and Yangzijiang is doing so so at the moment. How Yangzijiang did what it did in last 10 years even after many missteps? Good low cost operator. Wish the volatile market knock it price lower but it is not happening yet. I am not sure whether Yangzijaing is the best shipyard or profitability in the world but paying just below book value for its track record is something I would do.

Property

ERA is listed again under APAC Realty. Are we going to do away with property agent anytime soon? I don’t know but I like the segment they are operating in. High return and easily know who the winner is if the future look like the past.

Property developer’s valuation is cheap for good reasons. Excluding investment property, they are not doing well, with or without new measures. Actually, investment property is not doing well too. The longer the current profitability level continue, the chances of something changing is higher. Or just plaining slow dead. Physically HDB or condo as investment might continue to produce lousy return even with the usual leverage.

Investment property produce incurring income but that doesn’t mean it has superior business model. But company with good investment property at right location does has certain advantage. Developing property has no advantage by itself except for good operator and reputation.

A REIT has no real competitive advantage, yeah exclude tax exemption (To government, this is the place where you need to take away exemption, no reason to continue with REIT matured locally and increase GST rate. You are benefiting existing REIT with local investment properties not new REIT that hold overseas properties. It will hurt the market a little but anyone who invested in the market is a capital provider, ie with excess money. Mom and pop investor or not) so valuation, relatively speaking has no reason to be value higher than a company in this industry.

Unless I am investing in a small cap, any new property development or investment property matter not much, it is the track records that count. Recent years has seen companies investing overseas in term of developments to sell or buying properties. It is not hard to see why so as most are sitting on excess capital with limited opportunity locally. But this does not mean buying at 5% cap rate is a good investment. In fact, because most are able to produce return initially, it is hard to differentiate who is doing right. Look back to their records through the numbers not what the management say.

Lastly, reading their number mean a good understanding of accountings. A same property or development can be accounted differently in two company books. But long term results will show.

The market has cycle as well. Or rather nothing goes up all the time. The downturn in 2008 was too fast. A better downturn to create death of STI will be a slow dead. Give me that, maybe a 5 year bear market after a 9 year bull market.

Posted by: donmihaihai | October 21, 2018

Temasek, AAA, high yield bond.

Ok not exactly high yield bond but Temasek issued 5 year bonds at 2.7%pa. Earlier this year Issued a 10 year(or 5 year?) under indirect subsidiary Astrea at 4.35%.

The thing is these bond are opened to public, ie retail investor with min 1K to 2K. It is like throwing some bloody meats into a sea full of hungry sharks.

Invert. If Temasek is doing public services then it is fine if the coupon yield is within the range, ie cost of debt to Temasek. At the higher end or out of the range, well…

Investor has to think twice if Temasek issue some IOU at high interest where it can borrow the same amount cheaper.

I don’t know what is the borrowing cost of Temasek and neither did I read those prospectus or understand Temasek well. But because these are IOU, it must be look into from Temasek point, not investor.

 

Posted by: donmihaihai | April 25, 2018

SGD400M is not alot

The cash on the B/S of Haw Par is not a lot. Even if the Haw Par pays out every single cent plus the coming dividend payment, the return on current price is just about 13%. And it is about 12% of the net assets.

But that SGD400M cash is the sore eye. The management has failed badly. Year after year, it has prudently looking for acquisition of operating business. But it never happen, regardless of the market cycle. The longer it remain as such, the more likely management will do something stupid due to increasing weight of the cash. About time for management to think about this 12% with an estimate growing rate of 15%.

ROE of Haw Par is always low mainly because of accounting standard. Accounting standard also doesn’t fully capture the wealth generated by investees(UOB & UOL) but it captured the swing in share prices instead. Still the wealth generated is flowing to Haw Par.

Due to such situation, Haw Par usually trade below intrinsic value or its true worth. And at certain price, it is a remarkable investment and will not be easily available elsewhere. Holding on to  huge block of UOB and UOL compare to its operating businesses created such opportunity.

As share price has never gone crazy, it save me time and effort. It is for lazy investor who sit on its ass for a long time. Whatever discount the share price might be trading at for the last 20 years, it has never mask the growth in NAV per share and will not for the next 20 years as long as Haw Par, UOB & UOL being managed as per current.

Posted by: donmihaihai | April 12, 2018

The hearing has no bite

MZ hearing in US Senate has no bite. Got bored fast.

Not a fan on any of these or neither do I care much.

It was fun when Shanmugam was doing it with SM. Not just fun but effective. Just not a fan on how he did it.

The whole saga or series of sagas is easy. It is not going to change FB in term of competition or platform. In fact, it might actually strengthen FB or the existing providers competitive advantage. But there is a cost. Regulation.

For FB, it is not the question of whether there is a cost, it is a question of how much the cost will be. And what the regulators want will not be aligned with FB. Cost will not be a big concern to them.

Internet created by sort of sharing communities in early years. We don’t pay for anything unless we want to but nothing is free.

Posted by: donmihaihai | April 8, 2018

Watchlist. It is all wrong.

Spot a stock here. It is in the forum with good ongoing discussion. Nice, gonna check it out.

Spot another stock there. It is in the news with good prospects. Nice, gonna check it out.

After checking, I will either invest in them or put in my watchlist. Here it goes, two more stocks added. I am investing and searching for stock is my job.

The research is about going around figuring out which stock has the potential then maybe take a look at the financials. Well, the fact is for most, it doesn’t really matter much what the financials gonna say. Decision already made when a stock being spotted.

Not true? Well how many stocks you have not either buy it or put in watchlist after seriously looked at it?

It is about anchoring. It is about saving time.

If a watchlist is about a list of good companies then isn’t the 2nd filter more stringent than the 1st. 2nd filter should filter away most that got pass the first.

 

Posted by: donmihaihai | March 9, 2018

Hong Kong Land, 12 sites and POC.

Nailed 12 sites since beginning of 2017 in China, Singapore, Thailand, Vietnam and Indonesia. Quite some activities. Not bad for the current management who sounded really confident in previous webcast.

These investments hardly change the leverage level even after full funding. Now what more to come? Hope to see more gateway investment properties and more Singapore and China type of development properties. Perhaps it will be as CEO said, core management teams for each city/ country are in place. Team or teams in China already around for 20 years.

Countries to note : Vietnam, Indonesia, Thailand and Philippines. Perhaps Cambodia.

This make sense to me. Rather than a development project here and there or buying investment properties here and there.

Look like Hong Kong Land is starting to use percentage of completion for recognition of development property revenues for certain regions which I guess is mainly due purchase contract being used in the countries. This make Hong Kong Land In line with most of the local listed developers.

I am not against this method of revenue recognition for development properties or construction/ services project. Just one comment. Nature of lumpy project doesn’t change in real life even if accounting smoothen it.

Like it when CFO said, adoption mean advancing the recognition of development properties revenues. Simple and straight to the point.

Companies using percentage of completion can be very aggressive in their recognition. Same thing being said by WB in recent interview because of GE. I bet many investor/ analyst doesn’t fully understand how to read them in the financials. It took me years with practical experiences to understand something. Perhaps I am slow.

A goof example will be TTJ and Yongnam. Both basically operate in the same value portion in the industry. TTJ reduced the % of recognition of accrued revenues due POC over the year but Yongnam maintained. The % is huge for Yongnam. There are three possible reasons. 1st is better contract terms. 2nd is less aggressive in recognition revenues. 3rd is operational catch up in TTJ but not Yongnam.

A large number of SGX listed companies use percentage of completion for recognizing revenues. Understanding it is a must.

Next, a CEO that painted a picture that the company is worth more because the company is unable to recognize revenues of sold properties due completion method reflecting badly on them and the company. The company still has to fulfill their side of the obligation to complete the property in time and within budget.

 

Posted by: donmihaihai | February 26, 2018

Another letter, another writing

BH’s shareholder letter got shorten in 2017. Disappointed because I don’t read the K but anyway the only thing I am losing out is getting ideas on how to study businesses and industries.

There are a lot of “market talk” in the letter.

A kindergarten- like analysis produced an outsize return for what it should be fixed amount for charity. It happened because opportunity dropped right in and obvious to those who are prepared and would likely not happened if the guarantee to make up any shortfall wasn’t given. I thought he was going to do just that while reading and I smiled when he did. Investment decision is about knowing/ analysing the expecting outcome and weighting the probability of it happening.

Talked about how BH share price dropped between 37% to 59% for 4 times in 53 years. Duration of the drops last from less than a month to almost 2 years. Not as if there is no other drops in share price but these were the significant drops. Is it scary? I have experienced 90% dropped from purchased prices myself so the peak to valley dropped will be > than 90%. Not that I have lost sleeps because of it.

Sharp drop get more attentions but it is the long slow drop that is the killer. Imagine the share price drop slowly for a year and while you are holding on to a 50% lost, share price swing around 40% to 50% lost for the next maybe 3 years. It will kill most of you and I will bet on it.

Take this as a warning. I don’t know when but I am almost certain that you will experience it if you invest long enough. I have experienced both. And yes this is a kindergarten- like analysis on market.

WB always talk about return on net-tangible assets/ net worth/ shareholders’ equity in yearly letter and usually once at the beginning of the letter. Sometime he mentioned more. This year more.

The annualized increased in book value is the annualized return on shareholders’ equity of BH over 53 years since only one dividend payment and little share count dilution. ROE is the measure of how successful the company is able to generate return. How the company generate this return is the qualities side.

ROE plus price purchased and sold will be the return investor has on the stock. Assume I was there to buy BH in 53 years back at exactly 1 X shareholders’ equity and sold 1 X shareholders’ equity 53 years later. My return will be 19.1% annualized.

So there are only 3 things. ROE, purchase and sale price. In fact sale price is not as important as ROE & purchase price. Think about probability and outcome. The probability of purchasing at above valuation, getting below average ROE and selling at below valuation is really low. By probability alone, most are unlikely to lose money by investing in stock. Nah, it is not true. Math is correct but look around, most people are trying so hard to get into that small probability. It is human at work.

Investing is about being rational.

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