Investmoolah
A Diary on Personal Finance and Investing
Sunday 26 November 2023
How DBS Takes Advantage of Naive Singapore Consumers to Earn the Largest Profits
Monday 20 November 2023
Sea Group: Prepare for Another Quarter of Large Losses in Shopee
Despite the terrible results in Shopee, Sea Group has maintained the attractivness of Shopee by continuing its incentives to consumers. As of now, the games are generating $0.15 in free cash for shopee users per day. To add to that, cashback vouchers are still attractive going at 10% cashback.
Shopee- Low Margin Segment, Discount Abound
We all know the e commerce segment is a low margin high volume model averaging at about 1-2% of GMV as profits. Hence with shopee dishing out incentive such as 10% cashback or huge amount of shopee coins which can be used for 33% discount etc, it is definite Shopee is going to post another loss making quarter for Oct- Dec 2023.
I do not doubt this will stop. Sea Group plans to ensure self sufficiency and losses at Shopee will be offset by gains at its digital finance group and Garena. In summary, Shopee is likely going be loss making and cash burning for a few more quarters. This will drag the entire group profits
Garena- Growth Slowing
Garena is now clocking profits in the US$250-US$300 million per quarter. However what worries me is that some of this revenue clocked were from its "Deferred revenue". Basically, these are pre paid game items which may have expired or been utilised by Garena users. All this means cash flow wise, Garena result is lower than expected.
Eventually Sea Group will burn through its entire pile of Deferred Revenue and we will see an increased decline of revenue and profit. Stripping the accounting tricks, Garena is likely a US$600 million per year profit machine. Barely enough to cover 2 quarters of Shopee losses.
Prediction for Q4 results
Given the performance of the 3 segments, I am predicting an overall loss of US$30 million for Sea. The group will report a small accounting profit for the full year. But the question is it's current high market cap justifiable?
Shopee is fighting tiktok shop aggressively and Bytedance has a high amount of cash to burn. As consumers, it is a definite benefit; but those who own and invest in Sea (including I), it is painful and cash burning. I feel a US$21 billion market cap (US$37) fully values Sea at the moment.
However, for it to justify a higher market cap, it has to beat Bytedance. That is going to be a very long and ardous battle. For me, I am contemplating selling off Sea should it hit US$50, my view is that the business has no more moat. The alternative is that Sea adopts the same approach as Lazada by ignoring tik tok price cutting tactics
Lazada has been quietly not giving incentives while seeing the No 1 and No 3 fight. Its a benefit to Alibaba but not to Sea
Friday 17 November 2023
What Can Alibaba Do to Improve Its Share Price
Long term Alibaba shareholders have suffered. Those who had bought it 3 years ago have seen the value shrank by 70%, while those who have held since its IPO are up 10% after holding for 9 years (a paltry 1% return). It was not fundamentals that destroyed because Alibaba's earnings have went up many folds since its IPO
So what went wrong with Alibaba? Knowing this could be the root to solving the problem.
Problem: Negative Investor Perception
Before 2020, investors were keenly aware of how much Alibaba grew its earnings and abscribed a fair value to it in the region of US$200 for about 30-40 times P/E. That was fair considering Alibaba was growing its profits at a CAGR in its teens annually.
We knew what happened next - President Xi imposed tough regulations and clip Alibaba Wings. End state today, Alibaba is now only valued at 10 times its GAAP earnings, this despite growing earnings by 5-8% annually. Investors are wary of Alibaba's prospects and value it at very cheap valuations. The answer is simple, Alibaba is earning money but investors are scared of investing because they run the risk of Alibaba being hampered by more regulations. They may not be getting their capital back
Returning Value to Shareholders
After the regulatory crackdown on Chinese Tech, many including Alibaba announced a share buyback program, which seems revolutionary because they were following the Berkshire Hathaway playbook, buy back shares at below book value and it will improve the value for all shareholders. Berkshire Hathaway successfully did it and has since gained good investor sentiments. Chinese Tech unforuntately were not. There were 2 reasons why Alibaba didnt succeed
Share Buyback Was Painfully Small
Alibaba sharebuyback was grand with plans to buy back US$1.5-US$2 billion per quarter. While the figure looks big, Alibaba was a US$300 billion company when the buybacks were announced. Relative to its market cap, this meant only planning to buy 2-3% of its share base then. In the grand scheme of things, that was paltry. Berkshire's share buyback was limitless as long as share prices went below 140% of its reported NAV, Alibaba restricted the amount of buybacks authorised.
In Singapore, blue chip companies had authorised themselves to buy back 10% of their company share base and when executing, they bought back 4-6% of their share base per year to show they were undervalued. Seen in this light, Alibaba Management is downright stingy.
Alibaba is a cash cow which generates US$26 billion in cash annually. With a growing cash pile, the investing community felt Alibaba was not treating shareholders well. If the Chinese Government was affecting sentiments, Alibaba management was not returning a fair amount of shareholder value; that could only mean a downward trajectory of Alibaba's share price to match perceptions.
It is not as if Alibaba had used its free cash generated for investments and acquistions. From end of FY20201 (March 2021) to present day, its cash hoard and short term investments grew from US$72 billion to US$85 billion; it showed an inefficient deployment of capital. Alibaba could have deployed another US$8 billion per year as returns to shareholders.
Well They Listened (partly)
Sensing they are generating too much cash, Alibaba announced a US$2.5 billion in dividends for FY23 in its most recent November results. It was a backdated dividends to reward shareholders for its good work done from April 2022 to March 2023. This looks like a good start; but frankly, i felt this is only "them listening 1/3". Based on their excess cash generated, Alibaba could have returned USD$3/share as dividends and still add cash to its growing cash hoard.
This demonstrates the investor unfriendliness of Alibaba. Yes it earns big money but is unwilling to share its riches with shareholders.
What Should Alibaba Do (the solution)?
Taking on the hat of "Investor Relations", given the situation where it has a large cash hoard, great cashflow generating ability even after accounting for CAPEX, Alibaba should announce a fixed dividend/share buyback policy.
Companies with good investor relations announce such policies and stick to them. Given how much it generates, Alibaba can announce a 50% payout ratio as dividends on top of its current share buyback policy, This is remotely fair (borderlining on unfairness). At its current earnings, this means a USD$4 dividend per share (USD$10 billion/46% of free cash generated) at current earnings. Even then, Alibaba will still grow its cash hoard annually. Should Alibaba earnings deflate, it should be fair then that dividends fall as well in line with the dividend policy.
In my view, an outright 50% payout ratio on GAAP earnings is the solution. Existing investors get the money and decide for themselves if they wish to buy more shares for income or deploy it for other uses. Secondly, with the knowledge of an annual dividend, investors are assured they will not lose 100% of their capital should the communist govenrment turns evil and strangle Alibaba; after all they had been receving annual dividends. This simple action of a dividend policy will improve investor perception of Alibaba.
In conclusion, a 50% payout ratio would boost share price because it manages and improves investor perception. It is fiscally sustainable for Alibaba to do it, but the question is will the mangement change its stingy ways. Alibaba is now a matured company and should act like it.
Portfolio Update: Adding of Alibaba to Boost my Dividend Payout.
A simple update of all my transactions since my last update this month. Alibaba threw a spanner in its spin off works and as a result, there was a 10% sell down and I added 500 HK shares to my portfolio. The decision to pick HK over US ADS is because Hk has a lower withholding tax and Alibaba has recently started to announce annual dividends. So holding in HK makes it a more ideal dividend stock. Earnings wise, there was nothing much surprising. The surprise was the shelving of Alicloud IPO which explained why a 10% selldown in share price occurred.
At current earnings per ADS of 8 times and strong cashflow, Alibaba should be able to dish out at least US$2 per ADS dividends. Management could consider raising its dividends to reward shareholders. The conglomerate is now a matured state company and returning value to shareholder should be one of its priority. Its cash rich and cash generative, hence even a 40% payout ratio (USD$3.20/share) is justified.
Due to the dramatic sell down and increase in US REIT, Alibaba has drop to less than 50% of my portfolio.
Thursday 16 November 2023
Manulife, PRIME, Keppel US: Run Up in Share Price
Webull New Account Sign up, hurry limited time left! With $1 Deposit for 30 days, Earn USD$100-$5,000
Webull has upgraded its sign up referral whichis the best so far this year! However to get the reward, you must register through this link. Reminder for a few readers who have signed up but not yet funded or fully completed the application to do so, you are missing out on this awesome reward!
You can receive 10 free fractional shares worth between US$100 to US$5,000 when (i) sign up a new account (via Singpass), (ii) make a deposit of any amount and (iii) keep the amount in webull for 30 days. It is better than many fixed deposits out there because putting in $1 or a few dollars will nett you at least US$100! That's better than any FD. The new fractional shares can be found under the "My rewards" tab
The offer is extended and now valid until 30 November 1559hrs. Again, please remember to maintain the amount that you had first deposited for 30 days, then your free shares entitlment will appear under the "rewards tab" on day 30.
Steps to Sign Up and How to Get the Free Gifts
To qualify for the promotion:
- Register through this link
- Click on the "5x your reward....", complete the sign up process
- Maintain your funds for 30 days and you will get 10 free shares worth between US$100-US$5,000. Confirmed will get at least US$100.
After your account is approved, it’s time to make a deposit. Inside Webull mobile app, select “menu" at the bottom left of the screen, then clock on the "more" word icon boxed red
Next click "Deposit", boxed red.
There are a few ways to make a deposit: eDDA, Fast or Telegraphic Transfer.
The eDDA Deposit method is the easiest, where you will authorise Webull to transfer money from your bank account into your Webull account. To use this method, you can select the “eDDA Deposit” option, as a first time deposit, login to your internet banking, and set the transfer limit.
If you'd prefer to manually transfer funds from your bank account, then you can use the FAST method. However, do note that this option is applicable only for SGD deposits, and you'll need to remember to notify Webull that the transfer has been completed. So the eDDA deposit option is the easiest
Wednesday 15 November 2023
USA Reports Lower Inflation. Higher for Longer Interest Rates remain but close to no chance of Rate Hikes
As of the time of writing, US has reported a "cooled down" inflation standing at 3.3%. If such a figure persists, the Fed will not raise prices but instead let rates remain at 5.25-5.50% while its QT effects continue in the background
What It Means To Investors (and my portfolio)
27% of my portfolio is in US REITs so I am naturally sensitive to how SOFR moves. Given the latest set of data, high chance SOFR will remain at its 5.3% level and I expect it to remain at this level until the Nov 2024 Fed meeting. "That's my higher for longer".
With this parameter and knowledge that US Office loans would be pegged to the SOFR + 1.6% range based on KORE's annual reports. I expect my investments in both PRIME and KORE to survive the current ordeal. For KORE it has no refinancing risk as well. I would dare say that at least a dividend of 2.3 US cents per half a year (4.6 US cents full year). With such a strong balance sheet, diversified blue chip tenant base, KORE should snap back to a 9% dividend yield. It's a 51 cent dividend stock to me.
For PRIME, with the renewal of a significant chunk of its loan next year, I expect its ICR to be 2.7 times. The second thing I think is that at end 2023, PRIME would survive the revaluation. The Sodexo vacancy will push the value of One Washington down by 20%. All in all, I expect a 11% downward revaluation. Near term the REIT would go above 20 cents due to much less risk
Generally I feel the US REIT space is now a much safer space to buy and with more capital I will deploy it to Keppel Pacific Oak (KORE) and UnitedHampshire REIT due to the strength of their balance sheet and with little debt maturing. Ping An insurance is now out of the running due to the improvement in the US environment. Do caveat like a certain blogger I am talking to myself and writing out my general views. More digging and fact finding is needed by readers.