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.


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.

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