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 2019).

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.

My Corona Portfolio (1): China Life Insurance

The coronavirus outbreak is making the headlines each and every day.  For the most part, the market, especially that of HK/China, has responded negatively to news of the Corona virus that originated from Wuhan.

Since the beginning of this viral outbreak, I’ve been thinking of accumulating a few “injured” HK/China stocks.  Some HK/China stocks have been hammered quite severely during this crisis. 

So I thought to myself, “why not start a special portfolio related to stocks affected by this health crisis?  Why not invest in some fundamentally strong stocks whose prices have been negatively impacted by the viral outbreak?  Why not buy on the dip and wait for capital gain?”  

Well, why not indeed!

The first two stocks that I was interested in for my “Corona Portfolio” were PingAn Insurance and China Life Insurance.  Of the two, I bought China Life Insurance first.  I am currently waiting for a right price to enter a position for PingAn Insurance.

Introduction

China Life Insurance is the largest insurance company headquartered in Beijing.  It hasn’t always been known as China Life Insurance.  China Life Insurance traces its beginning to People’s Insurance Company of China (PICC) when it was founded in 1949.  In 1996, life insurance division was separated from PICC and renamed as China Life Insurance Company in 1999. In 2003, approved by the State Council and China Insurance Regulatory Commission, the former China Life Insurance Company was restructured into China Life Insurance (Group) Company.  China Life Insurance is listed in New York, Hong Kong and Shanghai. 

Highlights

China Life’s market capitalization at 887.161 billion (HKD) is among one of the highest among listed life insurance companies globally. 

China Life commits itself to becoming a top international financial services and insurance group.  It has business in many fields, covering life insurance, property insurance, pension plans (enterprise annuity), banking, funds, asset management, wealth management, industrial investment, overseas business, etc.  Furthermore, it holds large shares in securities, trusts, futures, real estate, and other fields through strategic investments.

China Life dominates the China market with almost 20.5% of the total market share (compared to 17% market share of Ping An insurance).

The Chinese government holds a 68% stake in the China Life.  

This state-run insurance company enjoys a high degree of credit-worthiness and broad name recognition. 

The company touts its vast nationwide sales network comprising 1,439,000 people selling individual insurance products.  

The Chinese insurance market has been expanding rapidly on the back of the growth of a middle class and an increase in personal income, and the size of the market is expected to become even larger, reflecting the country’s graying society.

Results and Ratios

As at the end of June 2019, China Life reported the following:

1. Total assets reached RMB3,479,860 million, an increase of 6.9% from the end of 2018.

2. Total revenues was RMB448,221 million, an increase of 11.6% year-on-year.

3. Gross written premiums were RMB377,976 million, an increase of 4.9% year-on-year

4. Investment assets reached RMB3,304,129 million, an increase of 6.4% from the end of 2018.

5. Gross investment yield was 5.78%; net investment yield was 4.66%.

6. Net profit attributable to equity holders of the Company was RMB37,599 million, an increase of 128.9% year-on-year.

7. China Life has approximately 297 million long-term individual and group life insurance policies, annuity contracts, and long-term health insurance policies in force.

8. China Life’s ROE is 13% (well above 10%, which suggests China Life is covering its cost of capital and generating an ample return for shareholders).

9. China Life’s core solvency stands at 258.62% (vs 250.55% in 2018) and its comprehensive solvency stands at 269.09% (vs 250.56% in 2018).  Solvency margin refers to the surplus capital that an insurance company is required to hold at any point of time to pay any claims, dividends or other liabilities.  Under C-ROSS (China Risk Oriented Solvency System), the regulation requires that life insurers’ core solvency and comprehensive solvency ratios must be no less than 100% and 150%, respectively. As can be seen, China Life’s current solvency is strong. 

10. China Life has well-controlled credit risks, with over 95% of the its credit bonds having AAA ratings. The total amount of its non-standard fixed-income assets exceeded RMB 430 billion, with over 98% having AAA external ratings.

Why did I buy China Life?

Based on China Life’s business model, strong balance-sheet, and its ability to grow its earnings as well as its revenues, I consider the shares of China Life a worthy purchase.

China Life trades for a price-to-book (PB) ratio of 1.39.  Looking at the PB ratio, China Life is not very expensive, so I scooped up some China Life at HKD19.64. 

Given that China Life’s share is fairly volatile, this could mean the price can sink lower, giving me another chance to buy in the future. This is based on its beta (1.18 vs sector median of 0.46), which is a good indicator for share price volatility.

I’m not an exclusively dividend investor.  I like to possess some growth stocks as well.  China Life’s dividend yield is not even 1% (current yield = 0.92), so it is definitely a growth stock to me.  In other words, I hope to find capital gain when the stock price rises.  

I see many reasons why the stock price will rise because of the increase in the need for insurance:

1. It is common knowledge that the population of China is ageing.  And as the population begins to grow more advanced in age, the need for insurance increases in tandem.  About 20% of China’s population (close to 170 million people) is above the age of 65, and this proportion of elderly will only increase in the next few decades to come.

2. Given China’s one child policy, the only child in most families cannot adequately provide for his ageing parents, and meet their medical expenses and long-term care in the future.  Any doting Chinese parents will explore their insurance options now before they hit retirement so as not to burden their only child (or children, if they are lucky to have more than one) to meet their medical needs when they are eventually in retirement.  This is becoming increasingly necessary considering the increase of average life expectancy from 67 (1986) to 76 years (2016, latest data available from the World Bank).

3. China’s middle class has expanded rapidly, surging from around 29 million in 1999 (2% of the population) to approximately 541 million in 2015 (39% of the population; data taken from the World bank).  China’s middle class is amongst the fastest such growth rates in the world.  China’s middle class, with higher disposable income, will spur demand for more insurance products that secure their medical needs and meet their property expenses and wealth needs.

4. China leads the under-insured in the world.  The insurance penetration rate of China is just 4.6%, compared to the global average rate estimated at 6.1%.  Suffice it to say that China’s insurance market, though the world’s second largest (after the USA), is still in its nascent stage.  As at 2018, China’s insurance gap reached USD76.4 billion.  China’s low insurance penetration rate, coupled with a rising awareness of longevity risks, will continue to support China’s insurance market for many, many years to come.

5. The current Covid-19 situation has awakened in many Chinese citizens a need for medical insurance.  Mr Xia Changsheng, a Tianfeng Securities analyst, opined thus, “… the outbreak spurs people’s awareness for the need for insurance, such as life or health cover.”  I couldn’t agree more.  This awareness of human frailty and mortality bodes well for future insurance business.

For now, the insurance industry in China is in the doldrums in the wake of the Covid-19 crisis.  Agents cannot go out to meet potential clients to sell policies.  In fact, with the great number of people being hospitalised and an increasing number of deaths, Chinese insurance companies will have to deal with more claims (https://www.insurancebusinessmag.com/asia/news/breaking-news/coronavirus-outbreak-puts-insurers-under-the-microscope-212379.aspx).  However, with China Life’s strong balance sheets, it is definitely able to meet any massive spike in claim payouts (don’t forget China Life’s core solvency is 258.62%, which is significantly higher than the minimum requirement of 100%). 

China Life might face disruptions from e-commerce players (think Alibaba Group and Tencent Holdings).  China Life is speeding up technology application and incubation for the purpose of enhancing the digitalisation of the company.  It has no other choice but to go in that direction, and I’m glad to know, from going through its latest presentation, that it is taking the technological bull by the horns and meeting the challenge head-on.

Since my purchase (HKD19.64), China Life’s share price has gapped down to HKD18.80 (Feb 24).  It is okay for me, because the share price will take time to stablise given the Covid-19 crisis that is probably here to stay for a while (until maybe summer). 

For now, I’m happy with my position and will keep a close eye on China Life and the behaviour of Mr. Market. 

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.