Turn crises into opportunities: Ping An

One little trivia to start.

Which building is the tallest in ShenZhen and the second tallest in the whole of China? 

Answer, it is the Ping An International Finance Center.

When I started out gaining knowledge on investing in early 2019, Value Invest Asia was one channel that I turned to.  I was introduced to Ping An Insurance (Group) Co. of China Ltd in their stock guide for 2019.

At that time my focus was on Singapore stocks, so I gave Ping An Insurance a miss.  Even so, I’ve always wanted to accumulate some Ping An shares.

In recent months, Ping An’s share price came under correction (and I would say undervalued) and presented an opportunity for me to snap up some for my China/HK portfolio.

Introduction

Ping An is a dominant financial services titan with an edge in tech investments. Ping An ranks 6th among global financial institutions. 

Ping An started as an insurance outfit out of ShenZhen, and it still remains one of the most successful insurance company in China and the largest insurer globally by market capitalisation.  

Ping An’s operation is anchored by its industry-leading life and health insurance business.  In addition to that, Ping An also offers other insurance, banking and fintech operations that amalgamate to form a robust financial services ecosystem.

As much as Ping An is a financial services company, it is also a technology company.  Ping An has been devoting much focused attention to areas such as blockchain, AI, and cloud computing.  Ping An’s tech programs cover areas such as urban development (Smart City Business) to healthcare (HealthKonnect, Good Doctor) to automotive (Autohome) to wealth management and finance (Lufax, OneConnect).

Highlights

Ping An pursues a 2-pronged strategy, namely the “finance + technology” and the “finance + ecosystem”, to advance its business.

Ping An provides financial products and services for 200 million retail customers and 516 million internet users. 

In 2019, Ping An acquired 36.57 million new customers, 14.90 million or 40.7% of whom were sourced from internet users within the Group’s five ecosystems (financial services, health care, auto services, real estate services, and smart city services). 

Through robust data-driven operations, Ping An anticipated trends and made timely decisions to secure first-mover advantages.  Ping An adheres to the maxim “Speed is Paramount”.

Results and Ratios (before pandemic)

In the latest annual report (2019), Ping An reported the following:

1. Total market value: About RMB1,500 billion.

2. Operating profit (Group): Grew 18.1% year on year to RMB132,955 million (Operating ROE=21.7%).  

3. Net profit (Group): Rose 39.1% year on year to RMB149,407 million. 

4. RETAIL BUSINESS: Operating profit increased by 25.7% year on year to RMB122,802 million (accounting for 92.4% of the Group’s operating profit attributable to shareholders of the parent company).  As of 31 December 2019, 73.71 million retail customers held multiple contracts with different subsidiaries, up 19.3% from the beginning of 2019, accounting for 36.8% of total customers.  In 2019, the Group acquired 36.57 million new customers, of which 40.7% were sourced from internet users within the Group’s ecosystems.  The Group’s internet users increased by 16.2% from the beginning of 2019 to 516 million.

5. LIFE & HEALTH INSURANCE BUSINESS:Operating profit went up 24.7% year on year to RMB88,950 million(Operating ROEV=25.0%).

6. PROPERTY & CASUALTY BUSINESS: Operating profit increased by 70.7% to RMB20,952 million (once again achieved a better-than-industry combined ratio of 96.4%).  Through the service of “Ping An Motor Insurance Trust Claim”, the annual average turnaround time of a single claim is shortened to 3 minutes!

7. BANKING BUSINESS: Maintained stable and healthy business growth with net profit increasing by 13.6% year on year to RMBB28,195 million.  In meeting its de-risking goals, the non-performing loan ratio dropped by 0.10 pps and the provision coverage ratio grew by 27.88 pps from the beginning of the year. 

8. TECHNOLOGY BUSINESS: Yielded good results with total revenue growing by 27.1% year on year to RMB82,109 million. Ping An has built a 1st-class technology team of nearly 110,000 technology business employees, 35,000 R&D employees, and 2,600 scientists.  As of 31 December 2019, Ping An’s technology patent applications reached 21,383 (up from 9112 from the beginning of 2019).  Globally, Ping An ranked first in fintech and second in healthtech by published patent applications. 

9. AI TECHNOLOGY: Ping An applied an internally developed AI interview robot to 100% of sales agent recruitment interviews in 2019.  AskBob, the agents’ exclusive smart personal assistant, has served agents 340 million times since its go-live. Ping An used an AI-powered image-based loss assessment and precise customer profiling technologies to provide nearly 90% of auto insurance claimants with online services, and handle almost 25% of the claims through smart loss assessment. The speech robots provided services 850 million times in 2019 in 83% of financial sales scenarios and 81% of customer services scenarios across the Group, cutting the annual cost of call centre agents by 11%. 

10. ONECONNECT: OneConnect, an associate company of Ping An, is a leading technology service platform that focuses on providing financial technology solutions for small and medium-sized banks.  OneConnect built four service platforms, namely Direct Bank Cloud, Financial Cloud for small and micro enterprises, Interbank Asset Transaction and Personal Credit Investigation based on big data, blockchain, financial Cloud, intelligent finance and other new technologies. OneConnect’s products cover all the major banks, 99% of the urban commercial banks and 52% of the insurers in China. OneConnect was granted a virtual banking license by the Hong Kong Monetary Authority.  OneConnect grew its total revenue by 64.7% year on year to RMB2,328 million. 

11. SMART HEALTH CARE SERVICES: Covers 14,000 medical institutions. AskBob, Ping An’s self-developed diagnosis and treatment assistant tool, was used 11 million times by 260,000 doctors in 2019. 

12. 15-year Average ROE: >15%

13. 15-year Basic EPS CAGR: >24%

14. 15-year Asset CAGR: >26%

15. 15-year Dividend CAGR: >25%; 40.1% over the past 5 years

16. Fair Value: Estimated to be HK$85.45 (Thus, I’m comfortable with any price below HK$85)

Ping An is really a behemoth of a company.  Its business model is extensive and is well diversified.  Ping An achieved sustained and steady overall and core business growth from year to year. 

Even so, during the pandemic period, the business operating environment for Ping An has been challenging.  Ping An highlights challenges regarding offline operations, rising credit risk, volatile equity markets and fading interest rates, all of which are unfavourable conditions being driven by the Covid-19 crisis.

Results and Ratios (during pandemic)

In the latest Q1 report (2020), Ping An reported the following:

1. Operating profit (Group): Climbed by over 5% year on year to RMB35,914 million  

2. Net profit (Group): Dropped 42.7% year on year to RMB26,063 million. 

3. RETAIL BUSINESS: As of 31 March 2020, Ping An’s total retail customers grew to 204 million. In the first quarter of 2020, the Group acquired 8.71 million new retail customers, 34.7% of whom were sourced from internet users within its five ecosystems. The Group’s internet users increased by 3.7% from the beginning of 2020 to 534 million. 

4. LIFE & HEALTH INSURANCE BUSINESS:Operating profit went up 23.7% year on year to RMB24,302 million.  Ping An’s traditional offline operations and high-value protection business were affected by the COVID-19 epidemic.  To mitigate the challenging circumstances, the Company leveraged technologies to develop innovative online operating models and accumulate customer resources for post-epidemic business growth. 

5. PROPERTY & CASUALTY BUSINESS: Recorded premium income of RMB72,589 million (up 4.9% year on year).  Amid the COVID-19 epidemic, Ping An Property & Casualty integrated online services and launched “One-click Claims Services,” thus enabling non- physical-contact claim settlement anytime and anywhere. As of March 31, 2020, registered users of the “Ping An Auto Owner” app exceeded 100 million users (growth of nearly 12% from the end of 2019).

6. BANKING BUSINESS: Revenue and net profit rose 16.8% and 14.8% year on year respectively. The provision coverage ratio of non-performing loans was further strengthened by 17.23 pps from the beginning of 2020.  Core tier 1 capital adequacy ratio of 9.2%  is comfortably above the regulatory minimum (7.5%).  Amid the COVID-19 epidemic, Ping An Bank quickly resumed business through online digital operations. Ping An Bank’s impressive performance came despite the Chinese economy posting a 6.8% GDP contraction in the first quarter as a result of intensive lockdown measures imposed by Beijing.

7. TECHNOLOGY BUSINESS: Revenue increased by 6.0% year on year to RMB19,844 million. As of March 31, 2020, Ping An’s technology patent applications increased by 2,550 from the beginning of 2020 to 23,933, more than most other international financial institutions’. 

During this time of the pandemic and growing instability in the global economy, most businesses face a great deal of challenges.  Ping An is no exception.

In a statement put out in April, 2020, Ping An elucidated, “Affected by the epidemic, in the short term, the offline business development of the insurance business will be hindered, investment income will decline significantly, credit risks will increase, and the demand for financing will decrease … However, in the medium and long term, business opportunities and challenges will coexist. The demand for insurance and financial services will rebound. Moreover, epidemic prevention and containment highlights the significance of technological empowerment, spurring technological application and spawning development opportunities for health services. Faced with growing instability of the global economy and financial markets, Ping An will turn crises into opportunities.

Turn crises into opportunities … I like that.

In the first quarter of 2020, Ping An has proven itself to be able to turn crises into opportunities.  In spite of the pandemic and over-all poor economic conditions and market sentiments, Ping An has been able to sustain growth in all 5 of its core businesses, even though the percentage of growth and profitability is substantially lower than the same quarter a year ago.

Why did I buy Ping An?

A Huge Growth Sector in China: China, as a result of its large ageing population, a growing middle class with rising personal income, economic system reform and lack of publicly funded social insurance, has considerable potential for insurance industry growth.  

China is estimated to have the largest health protection gap in the world.

What does this gap in health protection refer to?  

According to a report titled “Narrowing China’s Health Protection Gap” by Robert Burr and David Zhang, the gap is defined as “the amount of financial stress arising from unforeseen, direct out-of-pocket medical expenses and the estimated cost of non-treatment due to limited ability to afford.”*

These expenses are not covered by other payers such as insurance, social security, or government funding.  Families are thus forced to take out money from their daily living funds or savings or loans to fund such unforeseen expenses.  Lack of financial resources could lead to non-treatment and thus potentially exposing such households to greater health risks and worsening health conditions.

In view of this situation in China society, coupled with the extremely low insurance penetration (2.3% vs 5.1% in developed countries) and insurance density, Ping An is well-positioned to take advantage of this health protection funding needs for millions of people and seize the potential to gain more market share.

Over the last 15 years, Ping An’s insurance business has seen its embedded value grow at more than 25% CAGR.

What is embedded value?  

It is the present value of all future premium income less insurance expenses generated by the existing book of business. Due to the long-term nature of life insurance, future premiums and earnings are often “locked-in” when the contract is written.  Hence, the trajectory of embedded value is more demonstrative of the quality and current performance of a life insurance operation.  This speaks volume of the quality and profitability of the insurance business that Ping An’s agents are producing. 

Ping An’s insurance business, the crown Jewel of Ping An group which accounts for about two-thirds of the group’s operating profit after tax, is on a sure path of growth with many more spaces of growth in life and property+casualty markets to be explored and exploited.

It is true that Ping An’s short term performance has been negatively impacted during this pandemic period.  However, I believe the widespread nature of Covid-19 has raised awareness across the country for both protection-oriented life and health insurance, and Ping An is in a good position to meet these insurance needs. 

An Insurance Institution masquerading as a Tech Titan: One engine of growth for Ping An is what it calls “Technology-Powered Business”.  Along side with Alibaba and Tencents, Ping An is one of the first large Chinese conglomerates to harness the power of technology, especially big data, A.I., and cloud computing.  

Ping An ascribes great importance to developing core technologies and securing proprietary intellectual property rights, and constantly increasing technological R&D investments. 

Over the past decade, Ping An has developed or purchased several new tech-related businesses.  These businesses employ innovative technologies that make them not only valuable in their own right, but also help compliment and enhance Ping An’s other core business operations in insurance and banking.

Some Ping An’s Technology businesses:

1. Good Doctor: AI-aided in-house medical teams, and provides users with online-merge-offline services by integrating offline health care networks.  During the Covid-19 epidemic, Ping An Good Doctor provided 24/7 online consultation services, and attracted over 1,000 million visits to its online platform. 

2. HealthKonnect: an information software platform that provides integrated medical management solutions covering hospitals, doctors, pharmacies, and insured members. 

3. Autohome: the largest online auto-buying platform in China for dealers and used car sellers.

4. OneConnect: China’s leading technology-as-a-service cloud platform.  Its end-to-end technology applications and business services enable digital transformations by helping financial institutions increase revenues, manage risks, improve efficiency, enhance service quality and reduce costs.  OneConnect will operate a virtual bank, called OneConnect Bank, in Hong Kong.  OneConnect bank is one of eight firms that has been given a virtual bank licence by the Hong Kong Monetary Authority since March 2019. 

5. Lufax: China’s largest peer-to-peer lending and retail lending technology platform.

I like how Ping An is able to use these technologies and harness data on consumer buying patterns to improve its product offerings to meet specific consumer needs and to cross-sell customers.  

For example, it can market its insurance products to customers of Good Doctor, or offer auto insurance to Autohome customers.  

With 110,000 technology business employees, 35,000 R&D employees, and 2,600 scientists under its employment, I’m sure there are currently numerous technology businesses that are at various stages of incubation and growth.  These new businesses will eventually be marketed to improve Ping An’s traditional businesses.

Ping An is able to create advantages for itself by leveraging partnerships and alliances within its ecosystems to continuously adapt its product offerings to a changing customer base with ever-changing needs.  

Given its dominant position in China’s insurance industry and its diversified business in financial/wealth management and in technological development, I find Ping An to be a valuable growth counter in my portfolio.  That it also pays a dividend (2.9% based on my purchase price of HKD80.20) makes the investment all the more better.  Given its scale and asset size, Ping An will survive the current economic downturn … I don’t doubt it.

I have already invested in China Life Insurance.  And now I’ve also invested in Ping An Insurance.  With these two counters, I am exposing myself to the fast-growing insurance industry of China.  Only time will tell if my investment in these two insurance titans of China will pay off.

* https://www.soa.org/globalassets/assets/library/newsletters/newsdirect/2019/may/2019-newsdirect-iss78-burr-zhang.pdf 

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

Netlink Trust in the Pocket

Was there ever a stock that you’ve wanted to buy and you’ve waited for months on end to enter a position on the said stock?  

Well, Netlink NBN was such a stock to me.  

I first took notice of Netlink sometime in May last year when the price was hovering around $0.85.  I didn’t take action on Netlink then, hoping that the price would go down below $0.80.  Well, too bad for me then, the share price of Netlink kept going up from that time all the way to about $1.00 … an almost 25% increase over my desired purchase price.  

Will I ever have Netlink in my portfolio, I wondered then?

Well, I finally have Netlink in my pocket. The opportunity finally came during the market meltdown in March.  I didn’t get it at a price below $0.80.  I settled at $0.88, and I considered it a fair purchase.

Why was I so insistent on purchasing Netlink stocks?  Simply because it is a company with a wide and sustainable economic moat.

Introduction

Netlink, constituted as a business trust and listed on the SGX Main Board on 19 July 2017, delivers ultra-high speed internet access to residential homes and non-residential premises throughout mainland Singapore and its connected islands.  Netlink designs, builds, owns and operates the passive fibre network infrastructure (comprising ducts, manholes, fibre cables and central offices) of Singapore’s Next Generation Nationwide Broadband Network (NGNBN). 

Netlink’s fibre network (about 93000 km of fibre cable, 16,200 km of ducts, and 62,000 manholes) supports approximately 1.43 million residential end-user connections and roughly 47000 non-residential end-user connections, and deploys fibre to 1,679 non-building address point (“NBAP”) connections across Singapore. 

What are NBAPs?  NBAPs are basically your roadside points, bus stops, traffic lights, multi-storey car parks etc.  These NBAPs support infrastructure for telecommunications operators, cameras, sensors, signage and outdoor kiosks.  In this segment of its operations, Netlink is the lead partner in the development of Singapore’s new fibre-based initiatives (including the Singapore government’s Smart Nation programme).

Highlight

The NetLink Group is the only telco regulated by the IMDA under the Regulated Asset Base (“RAB”) regime which allows it to recover the cost of investment, operating expenditure and earn a regulated rate of return for its fibre network assets.  Netlink derives 80% of its revenue from the RAB regime.  The remaining 20% of its revenue comes from the provision of other services and rental of space.

Results and Ratios

In the latest annual report (1 Apr 2019 to 31 Mar 2020), Netlink reported the following:

1. Revenue rose 4.7% from S$353 million to S$370 million, mainly due to higher residential connections and diversion revenue.  However, installation-related and ducts and manholes services saw a reduction in revenue.

2. Profit before tax rose 3% from S$69.75 million to S$71.87 million.

3. EBITDA rose 4.3% from S$247.87 million to S$258.43 million.

4. Netlink reports a gross debt/EBITDA ratio of 2.60 (similar to financial year 2019), which is reasonable.  A ratio of 4 or 5 would be considered high.  It is interesting to note that other infrastructure and utility players with a structure similar to Netlink’s RAB model have debt/EBITA ratio above 5.  The debt/EBITDA ratio expresses Netlink’s ability to use its available cash to pay back its debts which currently is S$666 million, and does not reflect its earning ability.  Debt is not necessary a bad thing, especially if it helps to grow the business and leaves the business better off in the long-term.  What is important is that the business has a realistic and sustainable way to repay the debt, which Netlink is well capable of doing.

5. Netlink also reports an EBITDA interest cover of 13.4 (13.5 for financial year 2018).  How capable is Netlink in servicing its short-term debt obligations?  Very capable!  A ratio greater than 1 indicates that a business has more than enough interest coverage to pay off its interest expenses, and Netlink has a EBITDA interest cover ratio of 13.4!

7. Free Cash Flow

2020: Free Cash Flow of S$186.983 million (Cash from Operations S$262.518 million less CAPEX S$75535) is less than dividend payout of S$196.797 million.  FCF shortfall: -S$9.814 million.

This mirrors the same in the previous financial year.

2019: Free Cash Flow of S$158.542 million (Cash from Operations S$229.642 million less CAPEX S$71100) is less than dividend payout of S$190.172 million. FCF shortfall: -S$31.63 million.

As a result of Netlink’s CAPEX cost and high payouts (80-85%), it consequently pays out more dividends than its FCF.  Netlink has been funding its CAPEX cost from a combination of cash and debt to increase the efficiency of its balance sheet.  It is encouraging to note that due to increased revenue and a payout amount consistent with the previous year, the cash holdings of Netlink has gone up by 20%.  

It is worth mentioning that Netlink’s asset has a long life (for instance, fibre and related infrastructure has a useful life-time of 25 years) and therefore incurs CAPEX to replenish its depreciated asset base annually.  On average, Netlink incurs an annual CAPEX cost ranging from S$40 to 60 million.

8. Cash Balance: 

2020: 168.624 million

2019: 148.621 million

2018: 166.449 million

9. PB ratio was 1.08 when I made my purchase so it was a relatively fair purchase of a good stock.

Why did I buy Netlink NBN Trust?

Resilient Business & Recurring Revenue: Netlink, being the only fibre network provider with nation-wide residential coverage, is a business with a very substantial economic moat.  As of 31 March 2020, there were approximately 1.43 million residential connections supported by the network, representing  more than 90% of all residential homes in Singapore.  As such, its business is resilient and its earnings are assured.  With 90% penetration in Singapore already in the grasp of Netlink, it makes no sense for another business to enter and build another fibre network for residential homes.

In addition, much of its revenue is of a recurring nature.  For the past financial year, more than 90% of Netlink’s revenue was recurring, and came mainly from the provision of fibre broadband services to residential customers (62.5%: $13.80/connection/month), non-residential customers (8.4%: $55/connection/month), and non-building access points (2%: $73.80/connection/month).  Such prices, however, will be up for review by IMDA come end of 2022, although a provision has been made for a possible review in 2020 should IMDA or Netlink deem that necessary.

Of the 8 sources of income, only installation-related revenue and diversion revenue are non-recurring in nature.

Given the importance and indispensability of internet connectivity in present day and age (especially with current WFH measures which will continue into the near future), it is not difficult to understand just how Netlink is able to hold on to its customer base (e,g, Singtel and Starhub which lease Netlink’s spaces to provide their telecommunication services).

Netlink’s residential business will grow with the creation of new housing development projects across the island in the years ahead and in its participation in IMDA’s Home Access programme for low-income households (IMDA will bear the 2-year subsidy for these households and Netlink’s pricing will not be affected).

Netlink plans to grow its non-residential and NBAP and segment connections by customising offerings to SMEs, deepening penetration on data centres’ point-to-point connections, making NBAP easier and faster to deploy, and preparing to support 5G infrastructure.  However, ducts and manhole services (8.2% of revenue) will see a decline in revenue as fewer copper cables are installed by Singtel.  During this time of the outbreak, the installation and diversion revenue (8.6% of revenue) has been at risk given the shutdown and consequent project delays.

5G, a Substitute for Fibre Network?: Netlink operates in a technology realm.  Any changes in technology, something more efficient and more cost-effective than fibre-optic cables perhaps, might spell the eventual demise of Netlink’s fibre-optic network.  What is relevant today might be rendered obsolete in the fast-changing world of technology.  So what new technology will ascend on the horizon in the future? Is 5G a substitute for fibre connection?

5G connection is complementary and not a substitute for fibre connection.  In Singapore’s heavily built-up environment, it is expected that wireless broadband service might suffer from network congestion as well as signal degradation and speed reduction.  Consider the following concerning the essential relationship between fibre optics and 5G wireless networks:

“5G wireless small cells and their fiber wireline networks will never be mutually exclusive. To understand the relationship between wireless and wireline networks, it’s helpful to think of a city’s network in physiological terms: 5G will function splendidly as the capillaries (mobile fronthaul) of a city’s networking system — but internet traffic will travel nearly its entire journey in the veins or arteries (fiber backhaul). In fact, much like the human bloodstream, only about 11% of traffic is carried by wireless networks.  The other 90% of internet traffic is supported and carried by the wireline network.  So in a 5G world, the customer experience will be improved by better small cell wireless access points. But ultimately, the quality and reliability of the wireless network will depend on the wireline (fiber) network carrying traffic to and from the 5G small cells.”*

So, put simply, 5G’s formidable network performance is heavily dependent on the availability of a reliable fibre network.

Supporting 5G infrastructure will be a major growth engine for Netlink.  With the nationwise 5G rollout, more base stations will be added to Netlink’s NBAP connections to facilitate optimal performance, thus allowing Netlink to monetize these stations through monthly recurring charges.  

Netlink also stands to benefit from Singapore’s Smart Nation initiatives which seek to harness infocomm technologies, big data and a network of sensors and monitoring equipment all across Singapore to create and support tech-enabled solutions (autonomous vehicles, HD surveillance cameras, weather data collection, etc).

Unsustainable Future Distribution?: Will Netlink be able to sustain its dividend payouts given that its dividend payouts exceed its FCF? On this scenario, my mind immediately thinks of Starhub and Asian Pay TV which had to borrow extensively to sustain their distributions as they were unable to support their dividend payouts based on their FCF alone. 

The last thing I want to see is Netlink cutting its distribution. 

Netlink’s gearing is pretty low at 16%, as compared to Singapore Reits’s gearing at 35-40%. That means Netlink still has lots of headroom for debt.  Thus, Netlink is able to borrow to boost its cash flow and meet its distribution as well as CAPEX needs.

The difference between Netlink’s FCF and dividend payouts is quite insignificant at about -S$31.63 million in FY2019 and -S$9.814 million in FY2020.  That Netlink is able to narrow the FCF and distribution difference in FY2020 is commendable.  

Honestly, I’m not very concerned about this right now.  I’m confident Netlink will be able to sustain its distribution in the future.  That said, I will still be on the qui vive for any adverse development on this.

Netlink operates in an environment heavily regulated by IMDA.  IMDA sets the pricing terms and dictates the quality of service Netlink must meet.  NetLink is required to deliver a minimum Quality of Service (QoS) standards.  The pricing terms are subjected to review by IMDA every 5 years (end of 2022), and a mid-term review might be imposed by IMDA in 2020.  IMDA might revise the pricing terms upward or downward either this year or end 2020, and this is something that I will take note of.  Apart of changes to the pricing terms, I will be mindful to watch for any changes in regulations that might impact Netlink’s operations, financial status, and distribution ability. 

Competition from SP Telecom?: That Netlink does not have any single competitor will not remain true come this year.  Netlink might have a competitor in SP Telecom, a joint venture between ST Electronics and Temasek’s Singapore Power, which also owns, builds and powers communications and infrastructure services.  SP Telecom consults with PCCW Solutions, the IT services arm of Hong Kong telecoms giant PCCW Group.

Fortunately for Netlink, SP Telecom, thus far, is only concentrated in the non-residential area catering to a small group of customers in the CBD, one-north area, some major data centres and government sites.  SP Telecom’s aggressive entry into the fibre broadband services providing comprehensive coverage (inclusive of cybersecurity and cloud network) to the Government and businesses in the CBD area poses a potential threat only to Netlink’s non-residential revenue (8.4% of Netlink’s revenue). Netlink still has no challenger in its residential business.

However, will SP Telecom eventually challenge Netlink’s dominant position in the residential segment?  Unlikely. 

Netlink’s fibre network is still the only network with nationwide residential coverage in Singapore (more than 90%).  Netlink runs the Next Generation Nationwide Broadband Network (NGNBN), while SP Telecom runs the Software-Defined Network with Network Functions Virtualisation (SDN-NFV).  Will SP Telecom build the SDN-NFV infrastructure which is laid alongside the Singapore power grid throughout Singapore?  Quite unlikely, I would say.  But again, how things will shake up in the future is anybody’s guess.  I’ll be watching the development in SP Telecom’s business in this area.

Netlink is a resilient dividend play with a formidable moat and I should be keeping it in my Forever Portfolio for the long term.

For a small amount of perspective at this moment, imagine you were born in 1900. When you are 14, World War I starts and ends on your 18th birthday with 22 million people killed. Later in the year, a Spanish Flu epidemic hits the planet and runs until you are 20. Fifty million people die from it in those two years. Yes, 50 million. When you’re 29, the Great Depression begins. Unemployment hits 25%, global GDP drops 27%. That runs until you are 33. The country nearly collapses along with the world economy. When you turn 39, World War II starts. You aren’t even over the hill yet. When you’re 41, the United States is fully pulled into WWII. Between your 39th and 45th birthday, 75 million people perish in the war and the Holocaust kills six million. At 52, the Korean War starts and five million perish. At 64 the Vietnam War begins, and it doesn’t end for many years. Four million people die in that conflict. Approaching your 62nd birthday you have the Cuban Missile Crisis, a tipping point in the Cold War. Life on our planet, as we know it, could well have ended. Great leaders prevented that from happening. As you turn 75, the Vietnam War finally ends. Think of everyone on the planet born in 1900. How do you survive all of that? A kid in 1985 didn’t think their 85-year-old grandparents understood how hard school was. Yet those grandparents (and now great grandparents) survived through everything listed above. Perspective is an amazing art. Let’s try and keep things in perspective. Let’s be smart, help each other out, and we will get through all of this.” In the history of the world, there has never been a storm that lasted. This too shall pass.

Anonymous

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

* https://www.rcrwireless.com/20190220/opinion/readerforum/fiber-optic-5g-reader-forum

April Investing Activities and Thoughts on Current Market Frenzy

Success in investing doesn’t correlate with IQ once you’re above the level of 125.  Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. 

Warren Buffet, 1999.

Counters bought in April

Micro Mechanics @ $1.45

Netlink NBN Trust @ $0.88

Fraser Centrepoint @ $1.75

Mapletree Commercial Trust @ $1.64

I’ve never spent so much money in the stock market until March and April this year.  Thanks to the pandemic, many stocks have become very attractive in prices.  Nevertheless, it was quite unsettling even as I made my purchases … should I wait for prices to drop further … will prices go south after I’ve made my purchases?  

That’s the thing about investing, there is no way of knowing if the stock price will go up or down at any one point in time.  Thus, having a plan and sticking to it help me to weed out the uncertainties, keep perspective during this tumultuous time in the stock market, and stop me from making heat-of-the-moment decisions (e.g. the recent speculation on Biolidic).

Here are the stocks that I plan on maintaining in my FOREVER portfolio:

(Non-Yellow: Already accumulated)

With the 4 purchases made in the month of April, my Forever portfolio is now 2/3 complete.  I still plan on accumulating the following as planned:

Ascendas

Ascendas India

Keppel DC

MapleT Logistics

Valuetronics

Vicom

I’m also considering adding Fraser Logistics and iReit Global to my watchlist.  I might also switch out Vicom with SBS Transit (already accumulated).  

Thanks to the recent rebound, the overall portfolio has improved and registered a positive XIRR of 0.35%.  The question on most people’s mind is, has the market already bottomed out and is now on the ascent?

Depending on who you ask, you are going to get different answers.

Well, it does seem like the market is no longer singing the blues, but crooning strains of “hallelujahs” and “glad tidings”.  Has the new bull market already started or is this just a series of dead cat bounces?  

Tens of thousands of people are hospitalised and dying because of Covid-19, graveyards are getting filled, the world economy has been substantially paused, Singapore is practically in lock-down mode (semantically, circuit breaker mode) and yet very strangely, people are flocking to the stock market.  The great disconnect between the rallying stock market and the economy’s slump is unmissable and certainly very perplexing.  

Here’s how I try to make sense of the situation:

The worst is behind us?

I think it is fair to say that for many investors the worst of the falls has already been “priced in”.  The stock market does not dance in step with the economy.  In fact, the stock market is always many steps ahead.  At the expectation of a downturn, investors begin to dump shares.  Hence share prices go south quickly while the economy takes its time to approach a recession.  By the time the recession arrives, all the bad news have been “priced in” and dusted.  At that point, investors are already looking forward to the recovery. 

But the thing is, is recovery even close to be seen on the horizon?  Let’s not forget that the government has yet to declare a recession which economists have been saying Singapore will be entering a recession in the 2nd half of 2020.

According to the latest MAS monetary policy statement published 30th March: The COVID-19 pandemic has led to a severe contraction in economic activity both in Singapore and globally, due to the combination of supply chain disruptions, travel restrictions imposed in many countries and a sudden decline in demand. The Singapore economy will enter a recession this year, with GDP growth projected at −4 to −1%.*

How long will this recession last?  Nobody knows for sure.  

Again from MAS: The Singapore economy will contract this year. GDP growth will eventually recover following the abrupt downshift in the level of activity, but there is significant uncertainty over the depth and duration of this recession.

We have been warned by the media that there will be more job losses and wage cuts in the months ahead.

So, good times are back?  We are in a V-shaped recovery, you say?  You might be right in your optimism, but I’m not so sure.  

Irrational Exuberance

It’s not difficult to see how people are getting optimistic.  The SG government is doing a great job handling the pandemic, the earlier complacency notwithstanding.  Local transmission is coming down (although transmission in the foreign worker dormitories is a different story), and we don’t have a high fatality number.  The government has come in with guns loaded to rescue the economy.  The Resilience Budget announced on 26 March, and the earlier Unity Budget, totalled 55 billion!  In the USA, they don’t fight the Feds; in Singapore, we don’t fight the PAP.

We all have confidence in the SG government to contain this crisis.  I mean, when it comes to resolving a crisis, nobody does it better than the PAP, and no one people can come together as united, and as quickly, as Singaporeans.  The circuit breaker period will most likely not be extended past June, some lockdown measures will be relaxed, kids will go back to school, adults will go back to work (after having their hair cut), shopping malls will see a lot more footfall, etc.  So with this level of optimism and the view that the worst is already behind us, coupled with the fear of missing out, investors begin to rush into the stock market and chase perceived gains.  

Yes, Singapore will open up … but to a very different state of affairs.

On restarting the economy, Mr Lee said in his May Day speech: After we bring down the number of new Covid-19 cases, we can ease the circuit breaker measures, and progressively restart our economy.  This will not be straightforward. We need to step up Covid-19 testing and speed up contact-tracing. And we must proceed cautiously, with safeguards, so infections do not flare up again. We have kept essential services going. But the rest of the economy will have to open up step by step, and not all at once. Some industries will open up earlier than others, and recover sooner. For example, those critical to keeping our economy going domestically. And those that keep us connected to the world and to global supply chains. Other sectors will have to wait, especially those which attract crowds, or involve close contact with other people, such as entertainment outlets and large-scale sporting events … Significant structural changes to our economy are likely. Some industries will be disrupted permanently. Companies will have to change their business models to survive. Some jobs will simply disappear. Workers in these industries will have to reskill themselves, to take up jobs in new sectors. But there will also be new opportunities, and new jobs created too

Mr Lee did say in an interview with CNN on Mar 29: By the time it (Covid-19) goes around the world, and then finally runs its course, I think that is several years, unless something happens to abort that process.**

Yes, the Singapore economy will open progressively but due to the length of time this virus will run its course, we are not returning to status quo ante any time soon.

If your employer is a responsible one, you might find yourself sitting 1.5 metres away from your colleague.

Restaurants will not pack diners in.

You might find empty seats on your left and right when you next enter the movie theatre.

Businesses will be making significantly lesser money or take a longer time to return to profit.  Some will go bust.  Dividends to share holders will either be suspended or materially reduced (some Reits have already cut dividends, ranging from 20% to 70%).

Also, with wage cuts and job losses mounting across the economy, many people will be spending carefully and investing circumspectly.

So really, do all that paint a nice rosy picture of the Singapore economy from now till the end of the year?  Not really.

The health of the world economy is fast deteriorating.  Economists are even saying that the world is possibly entering a period of depression.***   Trump is also threatening to reignite the US-China trade war to punish China for the mounting economic costs of the pandemic in the USA (actually, Trump is making China the scapegoat for his own failure in handling the health crisis). 

First, the Covid-19 pandemic.  Next, the collapse of the oil price.  And coming, a renewed US-China trade conflict.  Considering all these, is it fair to expect the recent recovery momentum in financial markets to recede and fade in the near future?  Maybe.  Can’t really affirm this in absolute certainty though.  Remember, the market is irrational.

Honestly though, should we expect another wave of cold front even as we see currently tender shoots of recovery in the Singapore stock market?  Will we revisit (or not) the low of March 23?  Are some investors getting ahead of themselves and throwing caution to the wind?   I don’t know for sure although I’m leaning on the view that there is further pain to come in the next half of the year.  

During this time when the market can swing either way, I need to be calm, patient and disciplined.  I’m neither optimistic nor pessimistic.  I want to approach investing during this period logically, rationally and cautiously.  In the midst of uncertainties as a result of the disconnect between the stock market and the local economy, having a plan for investing and a price list help … a lot.  I find it easier to live with a simple story line than one that is convoluted, i.e. if A happens just do B, rather than, if A happens in the absence of B, and C and D align, then execute E.  

In a perverse way, I do wish the low of March 23 to return just so I can snap up more stocks at those attractive prices.  Better still, a new low lower than that of March 23.  Will that happen?  Don’t know.  But should that happen, I’ll be singing a glorious song and visualising pots of gold as I put in my buy orders.

* https://www.mas.gov.sg/news/monetary-policy-statements/2020/mas-monetary-policy-statement-30mar20

** https://www.straitstimes.com/politics/pm-lee-coronavirus-could-take-years-to-run-its-course-world-must-brace-itself

*** https://www.channelnewsasia.com/news/commentary/economic-depression-recession-is-ahead-roubini-12691926

Quarterly Portfolio Review (First of 2020)

The corona virus has upended lives and many a portfolio.  My portfolio has been bleeding for the past few weeks, and on the last day of March, the XIRR for the entire portfolio was -13.87%.  Details for the various portions of the portfolio as at 31 March:

XIRR (First Quarter, 2020)

SG NON-REITS: -13.67

SG REITS: -7.61

USA/CHINA: -14.53

CORONA: -84.73

It was painful to see the value of my investment sink from a 6-figure sum to a 5-figure amount.  Even so, I continued to pump my monthly salary, whatever I had left after meeting personal and family expenses, into the market.

Nobody knows when the market will turn around.  Nobody knows when the market will bottom out.  20/20, as the saying goes, only exists in hindsight.  Rain or shine, I intend to sit tight, stay invested, and ride this storm out.  In the meantime, I continue to collect dividends.

Dividends Collected (First Quarter, 2020)

SGD: $448.03

HKD: $251.50 (S$46.11)

USD: $228.08 (S$326.31)

Total: S$820.45

$820.45 is not a lot of money, just about enough to pay for my breakfast and lunch every day for 90 days.  I don’t withdraw the dividends for spending because I don’t need to.  I let the dividends grow to a sum sufficient for me to buy more lots of the stocks in my portfolio.  This will be a long-term strategy to compound my wealth.

The next 3 quarters this year will very likely see dividend earnings greatly reduced (already SPH REIT has cut dividend payout by 77% compared to the previous quarter). The world is undergoing a recession, and reduced, deferred or suspended dividend payouts are expected. 

The coronavirus has indeed put many dividends under the microscope, and companies have to cut or suspend dividends in a move to implement cost cutting, and protect their profit levels and balance sheets.  I want the companies I’ve invested in to survive through this crisis, rather than to demonstrate to investors their ability to maintain payouts.  If companies are still able to distribute dividends during this period, then all well and good.  If not, it’s fine as well.  Survival is paramount.

Under current circumstances, preserving the company’s operations and financial stability should take precedence over maintaining dividend payments.  Companies need to conserve cash now so that they have opportunities to ramp up operations and grow their businesses again once the last cell of the virus is wiped off from the face of the earth.  

To put things in perspective and by way of comparison, “… during the 2008 financial crisis and recession, 40 S&P 500 companies cut their dividends and 22 announced suspensions, according to S&P Dow Jones Indices. The following year cuts rose to 68, and there were 10 suspensions. However, 151 companies, or 30% of the S&P 500, did notch dividend increases that year as the economy emerged from recession and the stock market began its (recently ended) bull run.”*

Hopefully, when the virus crisis is over, when global economy recovers, dividend payouts will return to its pre-covid-19 levels.

The way I look at it, valuations for most companies have dropped.  The Singapore economy is not getting better, not any time soon.  Mr Lee has said in a speech that this crisis will last till the end of the year.  Mr Lawrence Wong also said the same.  Mr Heng has got the third round of covid-19 support measures in the form of the new “Solidarity Budget” under way.  The government does not utilise the reserves unless absolutely necessary. So, this virus crisis is indeed very serious and the government is dipping into the reserves to help pull Singapore through this crisis.

All these announcements and actions show that a recovery of the Singapore economy is nowhere near.  So I’m thinking, stocks will get cheaper in the months ahead as economic fundamentals worsen and investors feel more pessimistic.  I’ll keep buying during this prolonged sales period. I’m not convinced by the ‘cash is king’ mantra even for a time like this.  

The key during a crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead. To satisfy those criteria, an investor needs the following things: staunch reliance on value, little or no use of leverage, long-term capital and a strong stomach. Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns.

Howard Marks, The Most Important Thing Illuminated, p. 99

Lately, I’ve been avoiding social media that are investment related.  Basically I just want to cut out the noise.  I don’t want to go down a rabbit trail on a stock that someone had just gone rah-rah over.  I don’t want to feel bad because someone got a stock at a lower price than I did.  I don’t want to be distracted by conjectures on whether the bottom has been reached or the market is on a rebound. 

Studying past bear markets offers all of us an opportunity to learn. We can learn from what caused them as well as what worked and didn’t work in our responses to them. But it is also important to understand that no two bear markets are the same. We all tend to think that what happened in past bear markets, especially the most recent ones, will repeat itself, and that tendency can sometimes get us in trouble. So as you see all the comparisons to past bear markets you will see in the coming weeks and months, keep in mind that no two bear markets are the same, and we shouldn’t expect history to repeat itself exactly.  For long-term investors, staying the course during bear markets has consistently been a good decision, but predicting how they will play out is likely a losing game That is perhaps the most important lesson from past bear markets.

Jack Forehand, Validea Capital

I have my own plan and I’m going to stick to it: buy some when the price is right, buy more when the price dips further.

Whatever free time I’ve got, I devoted most of my time to my side gig and reading.

Yes, I have a side gig … well, had.  I’m a choral accompanist.  But alas, not anymore since social distancing measures were implemented across the island.  We were preparing for an Easter program, and I was so looking forward to presenting Faure’s Cantique de Jean Racine, Op. 11. I absolutely love this elegant choral miniature.  With some expat members leaving for their passport countries, this small group of singers was disbanded.    

What books have I read this quarter?

1. The Most Important Thing Illuminated. Howard Marks: This is a must-read after Graham’s The Intelligent Investor.

2. Think, Act, and Invest like Warren Buffett: Larry Swedroe

3. Last Man Standing: David Baldacci

4. The Christmas Train: David Baldacci

Tomorrow is the start of the Circuit Breaker. It’s going to be interesting having everyone at home. Prends soin de toi

* https://www.barrons.com/articles/dividend-cuts-are-inevitable-but-they-wont-necessarily-be-across-the-board-51584615602 

Reconstituting the Portfolio in the midst of Covid-19 Crisis

The stock market crash of 2020 began on Monday, March 9.  Now two weeks on, how is this investor doing?

Pretty much alright, I guess.  The portfolio has plunged some 20% but with a long horizon in mind, there is nothing very much to fret about for now.  The recovery might come in 6 months, or a year or even 2 years, but the portfolio will be here to take advantage of the recovery.

I took this opportunity to review my portfolio.  I think this stock market crisis period is a good time to do so, to kind of reconstitute, reconfigure everything:

1. Do I have poor-performing counters in my portfolio?

2. Are there some dead weights that I need to cut?  

3. Has the current stock market crash revealed the mistakes that I’ve made in stock selection?  

4. Are there good counters that I missed that I should add now to my portfolio given their depressed prices?

5. Is there anything that I can do to fix my current portfolio so that I can benefit tremendously when the market recovers?

Honestly, I should have done this exercise before the market started to crash.  It was a mistake that I acknowledge now to myself … take profit, remove non-performing and risky counters, rebalance, whatever, I really should have reviewed my portfolio earlier.

There again, nobody really knew then on March 9 what was going to happen and what the present is like today.  So time to suck it up, do a review, and plod on.

Anyway, here’s my humble revamped portfolio:

There are 5 parts to my portfolio:

1. The Forever Portfolio, which consists only of SG stocks

2. The USA Portfolio

3. The China/HK Portfolio

4. Corona Portfolio

5. The Demoted Portfolio

[those highlighted in yellow are counters that I do not possess now, but look forward to buying during this period; those highlighted in blue are counters that I now possess but wish to dispose of as soon as their prices recover].

Forever, USA & CHINA/HK portfolios

Why did I choose these counters for my Forever portfolio?  In general, they are:

1. Dividend plays.

2. Big/mid Cap, good moat/defensive (DBS, Vicom, Netlink NBN etc)

3. Cash rich (Fuyu, Valuetronics, etc)

4. Excellent management (Mapletree, Capitaland, etc)

To diversify, I chose one to a few from each different categories: financial services, consumer services, IT/data/telecom, engineering/industrials, healthcare, retail reits, industrial/logistics reits, and commercial reits.

Inclusive of the counters from my US and China/HK portfolio, it does look like I have a lot of reits.  Why, I like reits … for these reasons:

1. Easy to understand business model … rental income, rental period, quality and mix of tenants, gearing, interest rate, oversupply problems, etc

2. Usually possesses good return potential (5-7% dividend yield), as well as growth.

3. Offers pretty stable quarterly income as quarter-to-quarter profits of well-managed reits do not fluctuate much.

4. The hallmark of a true-blue Singaporean is a love for properties and rentals (ok, I’m being a little farcical here, LOL), and I’m as Singaporean as it comes.

I intend to have reits occupy no more than 60% of the total portfolio value. 

So, non-reit counters will be 5% each; reit counters will be 4% each (total counters 23).  As I get more confident with investing and more familiar with each of these counters, I will trim the portfolio down to 20, and then eventually 15.

Corona Portfolio

These counters were bought mainly to capture capital gain upon the Covid-19 crisis abating.  There is a good chance of me averaging down on these counters since many of their prices have fallen even more following the current market crash.   Nevertheless, I give priority to those existing and selected counters in my Forever portfolio.

Demoted Portfolio

There are altogether 9 counters that I wish to eliminate from my current portfolio.  All of them are pretty decent stocks and offer dividend yields above 5% (except China Life).  However, they are not as solid as those in my current Forever portfolio selection (for example, ParkwayLife vs First).   In addition, it will take a lot of time to monitor more than 30 stocks in a portfolio, so a reduction is necessary.  They have to go to make way for those newly selected ones.  I guess I have less love for them than those highlighted in my Forever portfolio.

The really bad one in this demoted portfolio is definitely Eagle Hospitality Trust.  That it is still in my portfolio is one big mistake of mine.  Bummer.  I did not set a stop-loss order on it.  Eagle HTrust right now has very questionable fundamentals (reducing revenue, weak balance sheet, low interest coverage, etc), and a very bad reputation.  Nobody in the right frame of mind, I think, will touch this stock, not even with a 10-foot pole.  Oh well, I still have it and the only consolation is it only occupies 0.98% of my current portfolio size.

I will continue to hold on to these demoted stocks and wait for price recovery.  In the meantime, I just collect dividends on them.

It does look like a global recession is on its way, if it is not already here.* In view of that, there will be more depressed prices of my favourite stocks to look forward to.

Stay the course! Press on!

“Stay the course. No matter what happens, stick to your program.”

John Bogle

____________________

In March, using remaining salary from last month, I bought more DBS shares at $18.17. Not quite as bottom as $17++, but no one can catch the bottom. So I’m happy with what I paid. The next target price for DBS: $15/16.

* https://edition.cnn.com/2020/03/17/economy/global-recession/index.html

A Rookie Investor, the Market Meltdown and the Plan Forward

I am a rookie investor.

My investing experience has not been more than 1.5 years, and hence I consider myself still somewhat a rookie.

As a rookie, seeing the recent market upheaval has been pretty eye-opening. Wow, this is what a market meltdown looks like! Stock markets around the world have had a turbulent week last week, with some of the worst losses recorded in over 30 years. It was absolutely horrid!

However, was I fazed when the meltdown happened? Was I tempted to sell out my positions, some of them at least if not all of them? Had I wanted to get into a 100% cash position?

No.

Well, even though I was staring at a 6.5% paper loss, I was feeling pretty nonchalant about the market crash. I was quite surprised by my own stoic disposition. Shouldn’t I have been gripped by fear and panic? Truth be told, it hasn’t really been an emotional roller coaster ride to me.

I guess what undergirded my state of mind was this Persian adage, “this too shall pass.”

Much has been written on the various incidents of market crashes and how the market eventually recovered. The turmoil in the market might last a while, might even lead to a recession, but at the end of it, there is a recovery. Market crashes do not last forever. The Asian Financial Crisis that was triggered in July 1997 lasted 2 years. The Global Financial Crisis also lasted 2 years, from 2007 to 2008. Even the worst worldwide economic depression, the Great Depression, eventually ended after having lasted 10 long years. So yes, this too shall pass.

What matters now is holding power. How long can I hold on to my investments without selling them? Long enough to survive this market crisis, I believe.

I have my emergency funds. I’m still drawing a healthy salary. I’m still able to support myself and my family every month. I still plan on taking my family on a holiday trip once the coronavirus situation dies down, and have been setting aside money for that goal. I don’t need to liquidate my investments to make ends meet. It is still business as usual for me. I am still on the merry-go-round. I have holding power.

I am good.

I plan on sitting tight and trust that my portfolio will ride out the storm. I am going to take this time to reassess my portfolio, and see if I can further deploy cash to take advantage of depressed stock prices in the market.

With the STI having dropped about 21%, many stocks are on sale. Many of them like the bank stocks are just so mouth-watering now. And I’m thankful that just last month, one of my endowment plans matured and I have this extra amount of money to add to my war chest. More money facilitates more shopping … yippee!

This is my very first encounter of a huge earthquake-sized wobble in the market, and I have made plans to take advantage of this current market turmoil to add new positions or average down my existing ones.

Market dips are when fortunes can be made, I know that. Since the start of this meltdown last week, I have made one purchase … I averaged down on my existing DBS holdings.

Then I stopped. And started thinking.

… Stock prices are depressed now, but could the prices get depressed even more?

… I have my war chest ready, but should I spend it all at once or in batches? If in batches, how many and over what length of time?

… Bank stocks (DBS, OCBE, UOB) are so far down from the peak, should I load them up now?

After much reading and deliberating, I decided to refine my plan.

I have a feeling Singapore is going into a recession and there will be better bargains further down the road:

1. During the 3rd quarter last year, Singapore’s economy avoided a technical recession after growing by only 0.6%, compared to the previous three months. This was before the coronavirus hit Singapore. Now that businesses (trade and tourism) are suffering because of Covid-19, the already weakened Singapore economy will only go down further. Will the government’s 2nd package of measures help companies with their costs and cash-flow, and keep them afloat through the storm?

2. In his remarks to the media on February 15 at Changi Airport , Mr Lee said that Singapore was bracing for a “significant” hit in the next couple of quarters because the outbreak was intense. Interesting use of the word “significant’ there. Mr Lee added further, “I can’t say whether we will have a recession or not. It’s possible, but definitely our economy will take a hit,” Mr Lee neither confirmed nor denied the possibility of a recession hitting Singapore, but in his own words, “it’s possible”.

3. In his address to the nation last Friday, Mr Lee elucidated, “[t]he situation is especially serious for some sectors – hotels, aviation, hospitality, and freelancers in the gig economy. But nobody has been spared. Everyone feels the impact, to different degrees … We will remain in this high risk state for some time to come.” Mr Lee has painted a somewhat grave picture of Singapore’s economy and has pledged help to those “who are retrenched and unemployed, as well as their families, an extra helping hand to see through this difficult period.”

4. Judging from the slide of the STI, there is definitely a lot of fear in the market, and institutions and investors are reacting to it. Hence, the drop of the STI from its peak of 3,407.02 on April 29, 2019 to 2,510.88 on March 13, 2020. A headline in the Straits times on March 12 screamed, “Asian stock markets fall into bear territory; STI in bear grip for first time since 2016.” And then there were other news on Australia, Japan, and Thailand heading towards a possible recession. A free-falling market might not always be a good predictor of a recession, but might it be different this time? A global pandemic plus the Saudi-Russian oil war can be a very lethal combination.

5. Election appears to be coming considering the announcement of new electoral boundaries last week. The PAP has a good record of performing well during times of recession. It may be early days yet but the fact that new changes are made to electoral boundaries does signal that an election might be coming. A recession provides an opportune time for the PAP to score big in an election, in my opinion. Might a recession be the big elephant in the room that nobody is pointing out?

So having given thought to the above, I hit the pause button. I may be wrong. But I remain persuaded … for now.

So this is what I intend to do, going forward:

1. Time in the market: Regardless of how the market moves, I will continue to RSP my investments in MoneyOwl and Syfe. Amidst the uncertainty, I still want to stay vested.

2. Timing the market (1): I will continue to buy the dips with my monthly income. Say OCBC shares go down to $8, or even $7, I will snap up some. Just nibble, not bite. If I am unsure, I shall just refrain from putting money into the market. If more good deals appear within the month, I will tap into 20% of my war chest to facilitate the purchases.

“If you believe markets are a screaming buy today — more than they were last week, or even more than they were last October — you are inherently market timing. Which is fine, but should at least be recognized. A call to ‘buy the dip’ is inherently a market timing call and should be recognized as such. If investors are going to make such a call, we believe it is important for them to consider where they believe the market is mis-pricing future expectations: yield, growth, or risk appetite.”

Corey Hoffstein, Newfound Research LLC

3. Timing the market (2): If the market recovers from the cessation of the virus situation, then I will use the remaining 80% of the war chest to buy on the rebound. If the turbulent market leads to a recession and the government admits to this on a national level, I will then use the remaining 80% of the war chest to buy as described below:

“For situations where share prices are low due to a weaker economic cycle it is best to invest over a six to 12 month period. The initial investment should be 50% of capital, with 10% each subsequently over the intended period for the last 50%. The timing of the initial investment of 50% is crucial. Based on my experience it is best to buy on the day following the national government’s admission that the economy is in a recession and gives a negative GDP forecast for the rest of the year. When this announcement is one that makes the front page of the national daily, then almost all the bad news has been discounted by the market.”

Chua Soon Hock, Lessons From A Super Investor – A Personal Friend Of TTI*

Suffice it to say that this plan is not set in stone. I intend to maintain the plan with some level of flexibility for changes depending on what goes on in the real world.**

We are in some really interesting times, methinks. I intend to embrace this bear, be it little or big, and turn this crisis into an opportunity.

* (https://thumbtackinvestor.wordpress.com/2017/02/02/lessons-from-a-super-investor-a-personal-friend-of-tti/)

** (https://financialhorse.com/is-a-bigger-crash-coming-or-is-this-the-market-bottom-what-to-do-next)

My Forever Portfolio. Averaging down DBS

09.03.2020

Price: S$21.75
P/B: 1.2

The talk of the town these days, as I gather from interactions on the social platform InvestingNote, seems to be very much about DBS Bank (or just DBS in everyday references).

  • What do you think is a good entry price for buying DBS?
  • I think [DBS] is getting [more] attractive and sweeter [with] each [passing] day…
  • Dbs, wait[ing] to “jiak” (eat) more …

I can understand the interest in buying DBS bank shares these recent days when bank stocks in general are snared by Covid-19, Fed’s interest rate cut, and a possible crude oil price war. I too am very interested in buying DBS bank shares because it is an excellent
company to own, the current downward pressure on its share price notwithstanding.

Taking advantage of this current sell-down of bank stocks, I decided to average down on DBS shares (current average is about S$24).

Introduction

DBS is a multinational banking and financial services corporation that has operations in Singapore, Hong Kong, the rest of Greater China, South and Southeast Asia, and internationally. It operates through consumer banking/wealth management, institutional banking, treasury markets, and other segments that offer trading and Islamic banking services.

Highlights

DBS, headquartered in Singapore, operates approximately 280 branches across 18 markets and has a market share of 59 billion.

It is the largest bank in South East Asia by assets and among the larger banks in Asia, with total assets of S$579 billion as at 31 Dec 2019.

It is at the forefront of leveraging digital technology to shape the future of banking, and has been named “World’s Best Digital Bank” by Euromoney.

It has also been recognised for its leadership in the region, having been conferred “Asia’s Best Bank” by The Banker and Euromoney, and “Asian Bank of the Year” by IFR Asia.

DBS has also been named “Safest Bank in Asia” by Global Finance for eight consecutive years from 2009 to 2016.

Results and Ratios

In the fourth quarter report (31 December 2019), DBS reported the following:

1. Income increased 10% year on year to S$14.5bn.

2. Net profit increased 14% year on year to S$6.39bn.

3. Group Net Interest Margin (NIM) improved from 1.85% (2018) to 1.89 (2019).

4. NPL rate remained unchanged at 1.5%.

5. Cost-income ratio improved one percentage point to 43%.

6. The liquidity coverage ratio was at 139% and the net stable funding ratio was at 110%. The Common Equity Tier 1 ratio was at 14.1% while the leverage ratio was at 7.0%, all comfortably above regulatory requirements.

7. ROE was at a new high of 13.2%, reflecting improved profitability and quality of franchise.

8. Dividend increased 10% to $1.32 annualised.

Why did I average down on DBS?

Simply because I believe the 3 local banks (DBS, OCBC, and UOB) are the bedrock of Singapore’s economic success. I just can’t see it any other way.

The 3 local banks make up almost 36% of the Straits Times Index, with DBS being the largest constituent of the STI (15.2%, with OCBC at number 2 at 11%). SPDR Straits Times Index ETF has a combined 40% exposure to DBS, OCBC and UOB.

You know what, should any thing unfortunate happen to DBS, I’m very sure the Government will step in to help it out. Buying DBS shares to me is a fail-safe investment. I can go to sleep every night with the assurance that when I wake up the next day, DBS is going to be there still.

DBS has a very capable CEO in Piyush Gupta. Under his leadership since 2009, DBS has been on a growth path, and registered a record net profit of $6.39 billion for the fiscal year 2019, up 14 percent year-on-year. Should this downturn eventually morph into a nightmare like the Asian financial crisis of 2017/18, I cannot think of a better CEO than Piyush Gupta to lead DBS forward.

Covid-19

The share price of DBS took a slow beating when Covid-19 spread within
Singapore and in the region. DBS has been bracing for Covid-19 impact and is doing its best to cushion the blow. Hopefully the coronavirus situation eventually goes away come summer, and should that happen, DBS expects a full year revenue impact of around 1-2%.

Right now, this negative impact on revenue basically comes from 2 main loan areas, namely, manufacturing supply chain and customer services.

Manufacturing supply chain, while facing liquidity inadequacy and reduced capacity operation in these short term of 3-4 months, is expected to make a turn for the better because demand for their goods is still intact. DBS is therefore not too concerned about these loan accounts.

Of greater concern to DBS are loan accounts from the service industry, such as tourism, hotels, retail, and aviation. Many service companies have seen demand displaced and revenue lost if not substantially reduced. DBS’s exposure here amounts to some S$20 billion. DBS reckons 90% of these loan accounts made to such large corporations
such as Genting and SIA to be relatively secure. The remaining 10% (about S$2 billion) of these accounts are under pressure and therefore at risk.

So NLPs are expected to rise as many of these virus-impacted businesses have their cashflow disrupted.

To mitigate the impact brought on by the outbreak of Covid-19, DBS has implemented “split teams” and “work from home” to ensure minimal service disruption. This was made possible because of the bank’s digital capabilities.

DBS has also started liquidity relief for its customers. It is providing a 6-month moratorium on principal repayment for customers with good credit records (SME property loans in Singapore and Hong Kong; and mortgage loans for retail customers in Singapore).

As new cases of coronavirus infection slow in China, the country is gradually getting back to work. So the million dollar question is, is the impact of Covid-19 on global supply chain over? Depending on who you ask, the answer varies.

While workers are slowly returning to work, it will still take a while, probably a very long while, for China to return to its pre-coronavirus production capacity.

China’s purchasing managers’ index, a measure of China’s manufacturing and service sector activity, plunged to 35.7 in February from January’s 50 (numbers below 50 indicate activity contracting). All eyes will be watching China’s PMI index very closely, and so will I be watching.

In the meantime, the market remains jittery, and stock prices remain volatile. Such is the new normal for now, and it’s time to look out for good stock bargains, and DBS to me is one.

The emergency Fed rate cut

Fearing the US economy would fall into a recession due to the coronavirus, the Fed pushed through an emergency rate cut of half a percentage point on 3/3/2020. This bold attempt to give the US economy a jolt is however a blow to financial stocks.

Rate cuts only mean one thing for banks: lower spreads and lower margins. When the Fed cuts rates, banks’ revenues from the interest rates they charge on loans will in turn get squeezed, thus leading to an overall hit on their NIM. With the expectation that the Fed will cut interest further to zero (even more pressure on bank margins), bank stocks began to trend down even further.

At close on 9/3/2020, DBS ended at S$21.15, slumping 8.04 per cent given its greater sensitivity to lower rates relative to its peers.

For now, DBS has a decent dividend yield 5.8%, its financial position is solid, and its management is stellar. Besides, the plunging share price now is indicative of a capital gain on a future rebound. All 3 local banks recovered spectacularly after each crisis.

How do I average down on DBS?

There are some whom I’ve interacted with on InvestingNote who are waiting for the bottom or close to the bottom before buying DBS. Apparently S$18 is the magic figure.

I see the logic in this. After all, who doesn’t want to buy something precious at the cheapest price possible? But the thing is, nobody really knows when the bottom will occur.

In my opinion, only 2 persons can “buy” at the bottom and “sell” at the top. One is God Almighty, and He possesses all power and knowledge to actually do just that, hypothetically speaking. The other is a liar who can only talk about buying at the bottom and selling at the top, but never actually doing so. Luck may have helped once in a while but never all the time.

Since I’m not divine or a spinner of yarns, I can’t possible buy at the bottom or even think or say that I can buy at the bottom.

Therefore, I decided to embark on averaging down on DBS. Presently, I don’t think it is wise to devour the entire position on DBS with just one huge bite seeing that there is the possibility of DBS’s share price trending lower.

Instead of averaging down with the same amount each time, I plan on buying a little first, and gradually increasing the lot size as the share price decreases … first a bullet, next a bazooka, then a missile, if you get my drift.

I’ve bought DBS at $21. The next price is $19, then $17, and so on and so forth.

When do I stop? I seriously don’t know … probably when the money runs out, or when DBS has rebounded from whatever bottom it is going to be.

[I have my eyes fastened on OCBC and UOB as well, and looking for a good price to enter new positions on these 2 bank stocks.]

Buy, sell or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds.

But no one can tell you this is the time to buy. Nobody knows.


Howard Marks. Latest memo from Howard Marks: Nobody Knows II; March, 9, 2020.

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

Reaching the $100,000 Milestone

15 months into investing, my total capital has officially crossed the $100,000 mark.

There are 3 parts to my investment portfolio:

1. Hand-picked stocks (Singapore, USA, and China/HongKong)

2. Moneyowl (Dimensional Funds)

3. Syfe (goal-specific saving)

I’m glad I started this journey. It has been exhilarating, with some heart-in-the-mouth moments when the portfolio went from green to red, especially lately during this virus crisis.

I have a long-term investment horizon, so I’m not too perturbed by the general fall in stock prices these couple of weeks. In fact, I expect things to get worse. I am locked in a brace position, that’s for sure.

It has not been easy doing this as a sole breadwinner in the family. At times, I wish my wife is also working so we have more money to put into the market. But no. The kids need her at home.

We don’t want our children to grow up with a foreign maid, or spend their after-school hours in a facility. It’s a decision that my wife and I made together. Money is important, but our children’s needs and well-being are even more important.

Like I said, going this alone hasn’t been exactly easy. These are some steps that I/we take:

1. Have a budget (https://mypecunia2020home.wordpress.com/2019/12/31/a-new-budget-for-2020/) and stick to it.

2. Invest monthly. I have “rsp-ed” my Moneyowl portfolio, just to make sure I’m always in the market. I pick stocks to buy (or average down) every month. I look out for high-quality dividend growth stocks. Sometimes I might go for growth-only stocks. If there is nothing that catches my fancy, I just don’t buy any.

3. Aim for no interest payment. My wife and I make sure to clear our credit card bills every month, sometimes before we even get charged, just so we are not paying interest.

4. Live frugally. Spend money on experiences, not things … especially when there are children involved. We spend time with our kids. We play and do things together. We go on trips together. Some of these activities cost money (rock-climbing, for instance), but we feel like the money is well-spent because we are building memories as a family.

I’m looking forward to being financial independent but not retire early. I don’t find myself in what some people consider “a miserable rat-race”. I value work, and I enjoy what I’m doing at work.

With this first milestone achieved, I’m looking forward to my next milestone … the $150k or $200k mark.

Well, come what may, virus or no, I’ll plod on in this investing journey.

Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.

Janet C. Lowe, Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger

My Corona Portfolio (3): SATS

Singapore’s economy wasn’t spared devastation brought on by the virus crisis, especially the travel and tourism, and hospitality sectors.  At one point in time, Singapore had the largest number of victims outside of China.  Both businesses and people have been riled by this health crisis.  I began to look at some battered stocks to see if I could fit them into my corona portfolio.

I looked at the following:

1. Hospitality REITS such as Ascott, Far East, Frasers

2. SIA

3. SATS

4. Straco

5. Transport Counters: Comfort Delgro & SBS Transit

Hospitality REITS looked very attractive.  But I’ve never really liked hospitality REITS because they are just too cyclical.  Besides, none of these SG-listed REITs has shown any consistent DPU growth over the years.  Well, I’m not ruling out buying these counters given their current valuations, but they rank low in my buy-priority.  

SIA has also not been one of my stock favourites.  SIA has no economic moat, in my opinion.  There is just too much competition within the airline industry. 

What about Straco?  As much as I’m not a big fan of hospitality REITs, I’m also not enthusiastic about tourism operators.  Aquariums and giant observation wheels sound boring to me, a 4.5% dividend yield not withstanding.

I already own Comfort Delgro and I might average down on it.

That left me with SATS and SBS Transit, both of which I like.  

SBS share has been on a decline since the beginning of the year.  I will be comfortable buying it below $3.  It still has a bit more way to go before reaching my target price.

I settled finally on SATS as the 3rd stock purchase of Feb 2020.

Introduction

SATS provides gateway services (ground and cargo handling, security etc) and food solutions (inflight and institutional catering to non-aviation sectors). SATS has operations in 60 locations in 13 countries, and employs 17,700 employees worldwide.

Highlights

SATS has inked a new 5-year commitment with SIA to strengthen Changi’s competitiveness with the renewal of a suite of aviation services contracts.  Tapping into the resources of data analytics, SATS  seeks to improve service and personalisation in F&B offerings.

SATS’s subsidiary in Japan is building a new in-flight kitchen with double the capacity in preparation for the 2020 Tokyo Olympics. 

SATS has entered into 2 new joint ventures (valued at RMB136 million) at Beijing’s brand new Daxing International Airport which opened late 2019, aimed at providing ground and cargo handling, and inflight catering.

SATS’s subsidiary in India, AISATS coolport (which occupies a 11,000 sqm facility) is the country’s first integrated on-airport perishable cargo handling centre located at Kempegowda International Airport.  This humongous facility was built to meet the extensive handling requirements of high-value perishable cargo products (such as pharmaceuticals) and end-to-end cold chain solutions.

Results and Ratios

In the latest annual report, SATS reported the following:

1. Revenue gained from Food Solutions increased from S$946.6 million (2018) to S$988.2 million (2019), registering an increase of 4.4%.  This ended a continual fall in revenue from food solutions since 2013.

2. Revenue gained from Gateway Services grew by 7.9% year-on-year from S$776.5 million (2018) to S$837.7 million (2019).  This segment has been growing year after year since 2010!

3. Revenue gained from Rental and other services grew from S$1.4 million (2018) to S$2 million (2019).  This source is a very small revenue stream for SATS.

4. Group revenue was S$1828 million (2019), up S$103.4 million or 6% from S$1724.6 million (2018) in spite of a challenging operating climate.  

5. Net profit (PATMI: Profit after tax and minority interests) fell 5% from S$261.5 million (2018) to S$248.4 million (2019).  SATS’s net profit margin has remained stagnant and even compressed for several years in spite of growth in group revenue. Expenditure (labour cost, raw materials costs, licence fees, etc) has been rising even as gross revenue grows.*

6. Productivity (value added per employee cost) suffers a 2.5% reduction year-on-year.**

7. ROE for year 2019 was 15.1 (ROE at/above 15 is good).  However SATS’s ROE is on a downward trend since 2017 (ROE:16.7).

8. Debt/equity ratio remained healthy at 0.06 times. That SATS could maintain its ROE while having little debt is really no mean feat. This means SATS has been running a superior business, and that speaks to the competency of SATS’s management team.

9. Free cash flow generated was S$208.1 million (up S$61.8 million from S$146.3 million in 2018).

10. DPU was on the 6th year of increase, up 1 cent to 19 cents (2019).  Current dividend yield is 4.7%.

11. PB ratio was 3.12 when I made my purchase.  Based on the recent share price of S$4.02, the PB ratio is 2.78.  

12. PE ratio is now 18.14 which is above its market average of 12.9 (and also above its average PE of around 16).

Why did I buy SATS?

First, SATS is set to grow its business.

If one were to take a casual look at the growth rate in SAT’s group revenue (S$1.75 billion in 2015 to S$1.83 billion in 2019), it is not difficult to notice that growth has been slow and thereby conclude that SATS may be a mature business.  

Maybe so, but is there still room to grow the business?  Apparently, there is, according to the management.

There will be growth in SATS operation in Singapore, in at least 2 areas.

In anticipation of higher visitor arrival in the future, a new passenger Terminal 5 is being developed at Changi International Airport.  T5 is said to be larger than T1, 2 and 3 put together, and is expected to open around 2030.  SATS stands to benefit big time from this development.

In addition, Singapore is also on a growth path to expand the Marina Bay cruise terminal, again in anticipation of higher visitor arrival by sea.  Singapore is the biggest cruise hub in South-east Asia, and SATS owns 60% of Marina Bay Cruise Centre that operates the cruise business.  The cruise terminal is going high-tech, leveraging technology – data science, video analytics and predictive artificial intelligence – to enhance its operations.  Again, SATS stands to benefit from this development.

There will also be growth in SATS operation in the region.

SATS has set a target of investing S$1 billion in either mergers & acquisitions or greenfield/brownfield capital expenditures to increase its Asia Pacific aviation presence in catering and air cargo market in the next three years.  SATS has already invested almost S$300 million in M&A and close to S$200 million in capital expenditures in the past five years. This S$1 billion invested is expected to generate incremental profits amounting to a quarter of its 2019 net profit of S$248 million.

SATS has the ambition to become the world’s leading central kitchen supplier for its aviation counterparts … and I like this company that is gunning for growth very much.

Second, SATS is in a defensive business.

As mentioned earlier, SATS has a dominant market presence, operating in 60 locations across 13 countries in Asia, Australasia, and the Middle East.  This massive network (comprising also of subsidiaries, joint ventures and strategic alliances) in many key airports has kept SATS’s competitors at bay.  SATS enjoys an entrenched market position.

Third, SATS is set on addressing its productivity issue (see* and ** above) in order to lower operating cost and boost net profit.

SATS intends to invest in a digital integrated supply chain across the region to reduce costs in production and limit food waste, and improve food security and sustainability.  SATS is working with Tum Create, a research platform for the improvement of Singapore’s public transportation systems, to develop what could possibly be the world’s first AI powered robotic air cargo system.  This system is named SpeedCargo will enable SATS to connect data for end-to-end optimisation of cargo operations.

This endeavour to digitise air cargo handling and transform otherwise laborious processes in the airfreight industry will see SATS benefit from improved productivity, time savings, and higher throughput and load factors.

SATS growth plans, for now, have been sidelined by the coronavirus crisis.

The reduction in regional travel as a result of the coronavirus will no doubt impact SATS’s earnings in the short term.  Wuhan is still in lockdown.  No one really dares to travel to China or Japan or South Korea.  The suspension of casino operations for 15 days in Macau has seen the usual flood of tourists reduced to a mere trickle.  For as long as the virus outbreak persists, SATS remains in a dark place operationally and financially.

Well, with regard to the virus situation, SATS has this to say,

“The COVID-19 epidemic has caused a significant reduction in air traffic in China, with a sharp decline in passenger and cargo volumes across Asia. Depending on the duration of this epidemic, there will be a consequential impact on the short-term financial performance of SATS. We are taking proactive steps to mitigate the risks and impact of the situation. Safety is our first priority at SATS, hence we have implemented plans to protect members of the public and our staff from the virus. We are working closely with the relevant authorities, suppliers and customers in each country we operate in, to support a coordinated and effective response. The company is in a strong position to weather the disruption to our business with resilience. 

Ongoing investments in supply chain processes and systems will provide greater traceability that will further strengthen our ability to respond to contingencies across our network. Recent investments in overseas kitchens in Japan and China, along with ground handling investments in India, Malaysia and Saudi Arabia have enhanced our capabilities, strengthened our market position and diversified our revenue base.” 

Until the virus situation is eradicated and regional travel outlook improves, SATS’s stock will remain impaired regardless of its fundamentals.

Based on PB, SATS is not exactly cheap. I’m looking for capital gain upon price recovery. And while I wait for that, there are dividends to collect.

I bought some SATS at S$4.49 on Feb 12 but within a matter of just 2 weeks, the share price dropped to S$4.03 (28 Feb).  A 10% drop! Well, shocking as it may be, I’m not exactly fretting over it.  Given the current situation, it was to be expected.

All that is needed now is for me to have the patience to ride this crisis out. And if I have more cash, I might average down (below S$4.00).

Incidentally, SATS’s stock code is S58.  The number 58 sounds like 唔發 in Cantonese, which means “won’t prosper/won’t huat”.  LOL.  It’s a good thing I’m not superstitious in any way.

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

My Corona Portfolio (2): Link REIT

Hong Kong has been ravaged by protests and riots for months since mid-2019.  The resentments from those tumultuous days continue to linger, right into 2020.  The economy plunged into recession as a result of the social unrest.  As if things could not get any worse, the coronavirus found its way to the Pearl of the Orient, and created further havoc in the weakened Hong Kong economy.  Talk about a double whammy! 

Hong Kong, one of the shopping paradises of the world, depends a lot on tourists. During boom times, Hong Kong’s tourist arrival numbers about 100,000 on a daily average. Today, the daily average has dropped to below 3000. That is a 97% decline in tourist arrival numbers! 

Hong Kong’s tourism and hospitality industries are being decimated. Many hotels are half-filled, with some hotels registering single digit occupancy rate. The coronavirus situation is also dealing a knock-out blow to many restaurants and travel agencies. Popular shopping areas have become quieter, and many high-end stores are reporting muted sales. Tenants are asking for rental discounts or rebates in the wake of poor business. Many landlords, such as Sun Hung Kai Properties and Wharf REIT, have begun slashing rents for their tenants as these retailers struggle in their businesses.

In doing so, these property companies and REITs are hurting their own bottomline. And as a result, share prices of these property companies and REITs began to slide south.

To build up my Corona Portfolio, I began to look into some of these property companies and REITS that pay dividends, and shortlisted some of them.

Here’s my shortlist:

1. Link REIT

2. Champion REIT

3. Sun Hung Kai Properties

4. Henderson Land Development

5. Wharf REIT

6. Swire Properties

7. Wynn Macau

Since it will take a while for me to study each of these companies, I decided to go with the one I’m most familiar with first … Link REIT.  Link REIT has been on my radar for quite a while now, and when the share price dropped to my desired range, I bought some at HKD78.00 and added Link REIT to my Corona Portfolio.

Introduction

Link REIT is the largest listed REIT in Hong Kong.  Link possesses a portfolio that comprises retail facilities, car parks and offices across Hong Kong, Beijing, Shanghai, Guangzhou, and Shenzhen, and Australia.  Its retail properties are located close to public housing estates (heartland malls). 

Highlights (HK properties)

The bulk of Link’s rental income in Hong Kong is derived from tenants selling consumer staples.  It is interesting to note that food-related sales make up 60% of trade at Link’s retail properties.

Therefore, regardless of economic cycles or status, Link’s earnings derived from businesses such as supermarkets, restaurants, and fast food, should remain resilient across economic cycles.  

Results and Ratios

In the latest interim report (2019/2020), Link REIT reported the following:

1. Revenue reached HKD5332 million, an increase of 8.8% year-on-year.  Since most of Link’s properties in Hong Kong are mostly connected to public housing estates, it benefits from having sizeable catchments and good connectivity.

2. Net asset value per unit grew 1.2% to HK$90.58 (vs HK$89.48, Mar 2020).

3. Net property income increased by 8.3% year-on-year to HK$4,071 million. 

4. Distribution per unit was HK141.47 cents, an increase of 8.3% year-on- year.

5. Link boasts an extremely low gearing ratio of 11.9% (relatively low when compared to most REITs listed in the SGX). The low gearing will provide Link with ample flexibility to continue investing in its business. 

6, Link has an interest coverage ratio of 10.65x, meaning to say that it is producing more than enough funds to cover its upcoming payments.

6.  As at 30 September 2019, occupancy rate for Link’s HK portfolio remained stable at 96.9%.

7. Link’s overall portfolio reversion rate stood at a whopping 18.1%. Average monthly unit rent improved to HK$69.6 psf as at 30 September 2019 from HK$68.0 psf as at 31 March 2019. 

8. Because of its excellent management and low gearing, Link will be able to leverage on its strong asset and capital management and asset enhancement capabilities over its diversified portfolio in Hong Kong (and Mainland China).  When it comes to capital management, Link is par excellence, as its history of active portfolio management through acquisition, divestment and development proves.  Link has been able to deliver long-term sustainable return to its unit holders, and have returned capital to unit holders in the form of unit buyback and discretionary distribution. 

9. Link’s PB Ratio was 0.85 when I made my purchase.  That was a bargain. In addition, Link has been growing its NAV at a rapid pace, increasing from HK$56.79 in FY15/16 to now HK$91.92. This makes Link even more attractive as the future PB ratio for shares purchased at the current price will be even lower.

10. Link has a distribution yield of 3.7% which is far better than its yield of around 2.7% at its peak price.  Should Link continue to grow its distribution per unit as it has done in the past, the distribution yield will continue to rise in tandem over time if shares are purchased at its current price.

Why did I buy Link REIT?

All the above provide me ample reasons to buy Link REIT.  To put it succinctly, Link REIT is an excellent stock because of its superior growth potential and first-rate track record.

Going forward, Link has plans to extend its expansion into other areas beyond the shores of Hong Kong and China.  Link intends to opportunistically add investments in Australia, Singapore, Japan and the UK. 

Link has shown its ability to unlock value through asset enhancements. In the past year, 11 AEI projects had been completed. These completed AEI projects had a return on investment of between 13.8% and 35.6%. Link will reap the benefits of these 11 completed projects in future years. In addition, Link has another 4 projects underway that could provide a further boost by this year.  

Following the recent acquisition of 100 Market Street in Sydney Australia, Link fine-tuned its Vision 2025 Goal, with Hong Kong representing 70-75% of its portfolio value, China about 20%, and the rest of the world around 10%.  Link is a company with a well-thought out growth plan, and I want to buy a company that grows its business over time.

Link’s market cap is HKD204 billion, thus making it a large-cap company. Typically, large companies are well-established and highly resourced. That means, while market volatility may impact some short-term strategic decisions, it is unlikely to matter much to such big companies in the long run. Therefore, even during a time when the general market is selling off (like these recent weeks), Link REIT, being a large-cap stock, is a safe bet to buy.

In reality, in the wake of this health crisis, both the Hong Kong and China markets have lost their momentum, and retail consumption and retail rents have been affected. As the saying goes, “this too, shall pass.” I just need the patience and mental fortitude to ride through short to mid-term volatility (and until the coronavirus crisis comes to an end) to await Link’s share price recovery. 

Now one question begs to be asked: has online shopping affected Link in any way?

Not very much.  Link (as well as other commercial REITS in Hong Kong) appears to have dodged this bullet.  Why? Hong Kong people live in tiny apartments with small fridges (I’ve lived in one such small apartment before, and the fridge was really pathetically small … I only used it to keep drinks and fruits cold).  So people tend to shop more regularly and eat outside more often.  Hence, going to the shopping malls is an everyday experience for most Hong Kong people.

Like any other business in Hong Kong, Link does face challenges. The covid-19 crisis, as well as the social unrest, will continue to put pressure on Link’s business.  In addition, any unexpected interest rate hike will also adversely affect Link’s distribution and valuation.

Link REIT is really a gem of a company, and I’m glad to have it in my pocket. 

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

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