Sembcorp Marine Board is Making a Terrible Decision to buy Keppel Offshore at Current Conditons.

Disclaimer: I do not own any Keppel or Sembcorp Marine shares. However, I do monitor the marine side. Below is my opinion which is unbiased given my declared interest.

From the latest Keppel Results, my sense is that Sembcorp Marine (SCM) shareholders are shortchanged in the current deal and I feel the Board of Directors of SCM are making a very bad corporate decision.

In Keppel's latest update on its discontinued business page 40-41, the spun off entity of Keppel O&M made about s$63 mil in profits for 6 months. Cashflow wise, it is not remarkable and is likely cashflow neutral in operations even though its report shows it is cashflow negative of 120 million. In terms of book value, Keppel declares the entity has a s$5.6 billion book value.

Valuation of Keppel O&M

If we are to extrapolate, it is likely Keppel OM will earn about 130 Million per year. Based on past earning ratios prior to the oil bust, rig builders tend to be valued at 12 -15 price earnings. Maintaining such ratio, this means Keppel OM value is now about s$1.9 Billion. Giving a premium for its high book value, let's round it up to a s$2 billion valuation

If we are optimistic in the turnaround in the oil sentiments, we can price it 0.7 times book value, similar to how I put a value to Sembcorp Marine. This prices Keppel OM at s$3.9 billion.

Scheme of Arrangement Between SCM and Keppel 

In the latest scheme of arrangement, Keppel will hold 56% of the combined entity while SCM holds 44%. At current market valuation, SCM is worth $3.4 billion. This means Keppel OM is sold off at a s$4.3 billion valuation.

To me, Sembcorp Marine is making a very bad deal to purchase Keppel OM at s$4.3 billion when it is only able to make s$100-200 million in profits

For a fair deal, it should be a ratio where Keppel holds about 37-53% of the combined entity, while SCM holds about 47-63%.

If Keppel is so confident in the value of Keppel OM, it should conduct a sale tender to global investors at $4.3 billion. However, I feel there will be few if not no takers with only Temasek the likely only bidder for pride.

Given the latest financial results produced by Keppel Corp, it shows the O&M business SCM wants to take over is definitely not worth $4.3 billion. The Board of Directors for SCM  has to review the deal, as it is not of good value to SCM. It makes me wonder if SCM's directors are doing a good job being independent directors.

In my view, a 50-50 ratio is the lowest level SCM board should agree to, anything more is a bad deal.

Why Sea Group will Survive Despite Competition from Alibaba and Tencent

In South East Asia, many of us are aware of "Sea" as it once held the title of the most valuable company in Singapore as well as its "Shopee" brand and jingles.

Competition from Alibab and Tencent

Sea is large in 2 aspects- it has a sprawling gaming, esports in Garena and e commerce brand in Shopee. Garena's games are one of the most downloaded in the world.

However in each segment it has a competitor in the form of Tencent (Gaming/Esports) and Alibaba (Lazada)

China Government's Blunder in Regulating Tech Companies will result in China Losing Out

While the giant 2 has deep financial pockets, the major obstacle is their own government that has been reducing their their profitability and cashflow generation ability. As a result, while Tencent and Alibaba has been fiercely competing with Sea in the respective segments in South East Asia, Sea has been standing its ground and retaining the market leader in both.

Truthfully, without the blundering China Government, Sea would have likely been taken out and tethering to bankruptcy due to its loss making ways. However, thanks to China, Sea's strong execution has enabled it to fight 2 giants who each have one hand tied behind their back in South East Asia market. That is quite commendable.

To Bet on South East Asia's Growth - Sea is the choice, not Alibaba or Tencent

Today, I came across a SeekingAlpha Article titled "Alibaba Is Making The Right Moves"

In it, it wrote Alibaba's international e commerce revenue is growing due to its presence in South East Asia, however, I disagree as Sea's growth in e commerce for this region is faster than Lazada's still. In short, the e commerce pie is growing but Alibaba is not capturing it as fast as Sea Group because it is distracted by its own government hindering it in Mainland China.

It is the same for Tencent as well where Huya, its e-sports subsidiary, is being obliterated by the communist government to the extent it is bleeding losses. This is why Sea Group is definitely the bet if an investor wishes to ride on the growth and not Tencent/Alibaba that I feel will flounder in their South East Asia expansion (similar to how they had failed in Europe)

Valuation of Sea Group is Rich

No doubt i have discounted Alibaba and Tencent's presence in South East Asia, however in some segments, Sea has local competitors such as Go-to and Grab. Given how Alibaba is being distracted by China, Go-To is likely going be a distant third. Grab is going to be Sea's main rival.

Sea's valuation is now close to fair value and as written in my previous article, i would prefer a higher margin of safety before investing. Long term wise, I feel Sea Group will survive because the giants in China are hindered by their blundering government. As long as China is not able to keep its house in order, Sea Group has a high probability of survival and being the market leader. 

The Second and Third Highest Paid CEOs in Singapore Comes from an Unexpected "Small" Company

Recently, I read an article from Dr Wealth about the highest paid CEOs among the listed SGX companies. The article is currently factually wrong. There are two entries he missed. 

Rank	CEO / Key Director	Company	Total Remuneration
#1	Piyush Gupta	DBS	$13.6m
#2	Dora Hoan Beng Mui	Best World Intl	$12.7m
#3	Doreen Tan Nee Moi	Best World Intl	$12.7m
#4	Kuok Khoon Hong	Wilmar Intl	$11.6m
#5	Wee Ee Cheong	UOB	$10.9m

Of course this article is not to point out the wrong facts of a fellow investment blogger, but instead point to the questionable corporate investor governance of Best World International. To me, it seems the company is cutting off the riches to minority shareholders by reducing the dividends to zero while the majority shareholder who are the above 2, earn a large amount of wealth increasing salary while dividends are eliminated from all shareholders despite a cashflow positive business which is increasingly profitable.

Relative Size of Best World to Peers

Compared to the other three listed companies mentioned, Best World's net profit or revenue is not even 10% of the other 3 listed companies. However, its two co-chairwomen earn the same region of pay, with only DBS CEO Piyush Gupta earning more than them.

Even in its peers in the same industry such as Herbalife who earns 10 times their profit or revenue. its CEO earns less than each of the co-chairwomen.

How were Their Remuneration Benchmarked?

This is a question I am intrigued. Comparable large companies in their industry (such as Herbalife) do not pay their CEOs/Chairman that high and if we were to benchmark against all the listed Singapore companies, they are the second and third highest despite the business only being 10% the size of their SGX peers.

I am curious to how the Independent Board of Directors came to this decision.

The two Best World co-chairs salary is 20% of the company's net profits, while the other CEOs in the top 5 earn less than 2% of their respective company's net profits. Herbalife pays its CEO less than 2% of their respective company's net profits as well. 

History of Remuneration

Best World International's increase in remuneration for its 2 co-chairwomen coincided when the company was suspended from trading by SGX. This is because the SGX regulators found its business model questionable. While it was suspended, the company decided to cut off its dividends to shareholders despite increasing profits; while at the same time increased the pay of the 2 co-chairs who were majority shareholders and would have received dividends if Best World International had continued to pay it.

Given the increasing profitability and continuous high pay of its key management, I am curious to how the Independent Board of Directors came to this decision of suspending the dividends.

Minority Shareholders have only One Low Price - $1.36 to Accept

Due to its suspension, minority shareholders are now only able to encash by an off market purchase exercise the company is offering at $1.36. This was the lowest share price traded in the prior 6 months, valuing the company at single digit price-earnings ratio and is about 20% lower than what could have offered according to its share buyback mandate.

Yangzijiang Financial Holdings (YZJFH): Decent entry at Current Moment

Other than the listing of Nio, SGX has added another company called Yangzijiang Financial Holdings. The company belongs to the former financial arm of Yangzijiang Shipbuilding, which is currently an STI blue chip stocks. The latter had spun off its financial arm to realize its value.

However, the market has sold down the stock continuously and in my view, the company is now in a value range to buy and accumulate. My view is that the company is worth 72 cents per share. 

Balance Sheet of YZJFH

YZJFH holds no debts, its assets are mainly made up of debt instruments in China, equity funds and cash. It is an investment company.

Based on Yangzijiang shipbuilding's circular, YZJFH has a net asset value of RMB 20 billion ( approx SGD$4.14 billion). This is the first indicator of it being undervalued. At current market value of SGD$1.7 billion, the company is only worth 0.41 times of its book value.

However assets is worth nothing if it is unable to generate profits. Fortunately for YZJFH, it generated RMB 1.75 billlion (approx SGD$363 million). This means the company's price earnings is now 5 times which is pretty low

Future Prospects and Dividends

YZJFH is now venturing into Singapore and has set up an investment arm here. Given the continuous inflow of rich Chinese nationals here, it is probable that the Singapore's arm will start to reap profits as there is an opportunity to manage such rich families assets. It plans to set up a $1 billion fund here.

YZJFH has a dividend policy of distributing 30-40% of its earnings as dividends. Given its high earnings, I am expecting a forward dividend of 2.5-3 cents per share each year.

At current share price of 43 cents, the projected yield is 6-7%.

What I am Doing

Given that its debt free and is offering 6-7% yield, I will be selling some of my holdings in SIIC in favor for YZJFH. This is because I have limited cash in buying new stocks. While, SIIC is  offering 7% yield, it is highly leveraged at 2 times debt to equity and has the same exposure to China. The perceived lower risk of YZJFH because it is debt free and has investments in multiple china industries, it is a better investment.

My fair value for YZJFH is as a 3.5% dividend yielding, valuing its fair value at 72 cents.

The management has started a share buyback program of $200 million to buy back 395,058,922 shares. This indicates, to them, any value approximately below 51 cents is undervalued and will likely be purchased by the company. This points to a short term target price of 51 cents. 

Hence at 43 cents, I do feel the company has lots of value. I will commence my accumulation of the YZJFH shares next week to make it one of my core holdings as replacement to SIIC.

Why Tencent as a Company Looks Very Expensive Now

Tencent released its 1Q results and its core business performance does not look good. What has supported its earnings are selling stakes in its past successful investments in other companies

Effects of Asset Sales

Based on 1Q results, we can see excluding the gains from selling part of its holding in Sea Holdings, Tencent's core business only made about RMB 11 billion. Similarly in Q4 of FY 2021, if the effects of its asset sales are excluded, Tencent's core business earns about RMB 10-11 billion. The 2 latest quarterly results reflects the new normal for Tencent post China's government regulations.

What is propping Tencent is its continuous monetization of past investments. Fortunately, it has made numerous good investments such as in Tesla and Sea Group, hence despite these 2 fall in share prices, Tencent's investments in them are still in the green. However, share sales is not a recurring item and eventually Tencent will run out of sales to prop up its net income.

With the tech bubble now deflated, Tencent's ability to report large sales gain is diminished.

Valuation

Tencent's core business is earning about RMB$44 billion with China's regulations slowing. However, the Chinese government has not vowed to stop regulating its tech companies. Hence it is cautious to presume that Tencent's profits wont grow despite revenue growth in China, mainly due to more regulations eating into its margins.

In this way, it is safe to presume that its core business is worth about 30 times P/E due to resiliency in the media business as a leader and the no 2 in cloud services, though Huawei may overtake it as Huawei is the CCP backed cloud provider and not Alibaba or Tencent who has been alienated by the Chinese government in procuring such services.

This puts Tencent's core business at a value of RMB $1.32 Trillion or HKD $1,560 Trillion. Its stake in major companies such as in Tesla or Sea Group are only about RMB$700 billion post the recent share decline and sales in Sea Group, meaning I will add about HKD$850 billion.

Based on a sum of parts, Tencent is worth about HKD $2.4 Trillion. Tencent's current market value in Hong Kong is HKD $3.45 Trillion. Hence, I expect a 30% decline in Tencent's share price from HKD $359 to about HKD $250.

Tencent currently is an expensive stock. Unless China stops its regulations on Tech companies which are hurting their margins, it is difficult for Tencent's core business to grow and command a good valuation. 

Given how the communist party prioritizes control, it is unfortunate that the good management of Tencent is hampered by their own government. I expect further share decline when Tencent releases its Q2 results which will be another negative profit growth with no share sales.

Sea Group: Growth Story No Longer Present

The latest results shows that the growth story has disintegrated. Profits earned from Garena is declining, losses from Shopee grew and GMV has slowed. In a sentence, Sea Group's share prices looks set to go down further.

Sea Money is unlikely to be the Winner in South East Asia Space

No doubt, South East Asia has a large population of unbanked individuals where Sea could tap on. However, it has two major competitors in Grab and Go-to.

Furthermore, it seems Grab has keeping itself toe to toe with Sea despite the latter having a larger warchest. Grab's latest financial results shows it has slowed its cash burning rate and is able to survive 10 more quarters on its current cash balance. This means shopee has to balance burning 8 billion in cash over the next 10 quarters to keep its battle with Grab.

The emergence of Go-To with a large war chest post IPO signifies that that digital payment battle is far from over and I do not think we are going to have a clear winner. This means a continuous battle in South East Asia. Hence, I am ascribing a 0% chance we will have a clear winner among the 3 which would have been a winner with a US$65 billion valuation like DBS.

Based on my previous post in determining the value of Sea Group, I have since modified it that Sea has a zero chance of domination in the digital space. A truce is more likely with Sea being the largest of the 3 in South East Asia (excluding Indonesia). Sea should be worth US$15 billion. This is much lower than my initial valuation of US$40.5 billion where I thought Sea Group had a good chance of winning.

On a sum of parts valuation, Sea Group is worth US$40 billion in market capitalization (US$72 share price).

Potential Dilution of Shares

Sea Group has about US$2 billion in convertible bonds due in 2025-2026 where bondholders can convert shares at US$90-300+ per piece or get back in cash. Given that it is unlikely Sea Group share prices will return to its hey days, existing shareholders face a medium term equity exercise raising by Sea Group to repay its debts.

In addition, the group has about 54 million in share options granted to employees and majority shareholders that have not been exercised. This means a potential dilution of 9.6% based on unvested options.

One can reasonably expect an enlarged share base of 15% from now to 2026 factoring more share based compensation to be given; maintaining a US$40 billion valuation, the future share price in 2026 is US$62. Expecting a 60% total return for owning a stake for 4 years. A worthwhile price to enter Sea Group is US$38. 

Only if Grab or Go-To declares bankruptcy, will a positive re-rating happen for Sea.

Alibaba's Value is now clearer as Regulations has Eased

Last week, the Chinese Government has again affirmed that the many rounds of regulation on the likes of Alibaba, Tencent etc. is nearing its end via a speech that the future economic growth of China will be supported with the rise of its own Internet platforms. 

While it is merely verbal affirmation with no real policy shown yet, the continuous regulations has resulted in Chinese economy slowing and China Internet companies have been firing their own locals in order to cut cost. 

What's Next for Alibaba?

Just by a single speech, Alibaba moved up 10%. However, to me what is important is that are we now able to value the worth of Alibaba as a sum of parts. To me, it might now be safe to evaluate Alibaba's value as the waves of regulations has cleared.

Base Case Scenario

Based on Alibaba's latest quarter (page 8), its e commerce business margins have dropped, international e commerce's competition has intensified and local consumer services has not been doing well. At the end state, it is likely the first 3 sectors will be making RMB$40 billion per quarter, while the Cloud division and Cainiao will only break even, earning RMB$1 billion each. Personally, it is difficult for Alibaba Cloud to be a successful as Amazon's Web Services which generates as much profit as its e commerce. This is because Alibaba Cloud's main market is China and the Chinese Government is still wary of Alibaba Cloud and has been asking government entities to shift to Huawei Cloud which is technologically inferior to both Tencent's and Alibaba's cloud offering. 

Excluding the RMB $28 billion impairment which is one time, I expect Alibaba, as a group, to be reporting profits of RMB $37 billion per quarter (USD$5.6 billion per quarter). Extrapolating to a full year, Alibaba might be a US$22 billion profit generating machine. Applying a 20 times P/E (which is 50% of Amazon's valuation), we are looking at a US$440 billion market cap, implying a 58% upside.

Bull Case Scenario

To me, the bull case is that its cloud services becomes as profitable as its e commerce division as China allows it to prosper- something that Amazon Web Services has achieved for Amazon. This means the doubling of profits and will put Alibaba at US$880 billion market cap at 20 times P/E. This is a 215% upside.

My evaluation

To me, the bull case is a little hard to believe because i don't forsee China ever allowing Alibaba and Tencent Cloud to rule over China's Internet and Payment Services like what Amazon, Microsoft, Alphabet have done to the Western World. 

The offerings and Technological innovation by these 2 China Tech giant are definitely as good as the latter 3 US companies. But because the Chinese Communist Government is wary of them in growing to be larger than the communist party itself. I personally don't think either of the 2 will become trillion market cap giants.

Hence my view is that Alibaba can grow to be a US$420-US$500 billion market cap. Alibaba's business offering is more diverse than Amazon's (on an apple to apple comparison) because it has a 'Google Maps" division, a payment service, a digital banking arm and a youtube equivalent in China. This means Alibaba is in fact an Amazon + part of Alphabet. However to even grow to even Amazon's value of US$1.2 trillion is never going to happen.

My estimate is at a price of US$186 (share price) or US$500 billion market cap, it is the upper limit of Alibaba's fair value.