Tuesday 8 October 2024

60% of Portfolio in China, But I Am Still Holding

 China/the Hang Seng Index has rallied. As of now, the run up has resulted in my 60% of portfolio being in China. However, I still will not sell. There are a few reasons both Macro and Micro

Hang Seng Index is Undervalued relative to Other Indexes


Forward PE wise based on bloomberg - Hang Seng is still lower than the S&P 500 and at a significant difference. If things were to be the same, we are looking at an upside for a further 90% for the Hang Seng Index and China stocks; this despite the rally

Price Earnings of My China Stocks are Low

Alibaba and Petrochina are trading at 14 times and 7 times price earnings respectively. Their peers (Amazon and Exxon) are at 40 times and 14 times price earnings. The China companies are still relatively cheap.

Dividend Yield of My China Stocks are High

Link REIT and Yangzijiang Financial are at 6.5% yield and Petrochina is at 7% yield. Their next best alternative are far apart. It will take a much higher upside for these stocks to be 4% yield before I would consider divesting- that is because that's where their peers are at. Exxon is at 3% yield.

LINK REIT is the largest REIT in Asia with the lowest leverage ratio beating any Singapore REIT. Yet local REITs are at 4% dividend yield while supposedly the best REIT with the lowest leverage ratio is at 6.5% yield. The difference in yield is too stark.

So until a further upside 60% takes place for these stocks, I am not divesting. 

Conclusion

In my view Hong Kong/China stocks are still relatively attractive for investments. Hence, it is unlikely I will divest. Sentiments has changed and China stocks are now favoured.

What makes it ironic is that even at this levels, blue chips stocks of the Hang Seng Index are at 6.5-7% yield. That is better than any Singapore or USA stocks. 

Sunday 29 September 2024

Details of China Stimulus and Why It will Prop Up China Companies' Share Prices

This week, China's Central Bank (the PBOC) has announced a slew of measures. 02 policy measures are of significant importance to investors in China listed companies.

Quoting from the central bank's website, a summary of the policy measures are:

(i) 500 billion yuan swap facility being able to be usef for stocks ETF or China listed CSI300 shares as collateral and importantly;

(ii) the central bank lending to commercial banks 300 billion yuan of loans at 1.75% interest where china banks will then lend out at 2.25% for share buybacks or founders to increase their stake. This strategy mirrors what Japan has done in the past and this should boost China companies' share prices. 

The PBOC has said it will consider injecting more money for the above 02 measures if it is doing well by doubling the amount allocated.

Significance to the Market

Part (ii) to me is good. China companies are known to be high dividend yielders at 6-9% dividend. Now any company can borrow at a low rate of 2.25% and earn the differential from its own dividend. This possibly points to a boost to many China company share prices until they are of 4-5% dividend level. We could be seeing 50-60% upside in share prices for dividend yielders such as Petrochina/Sinopec/ICBC or even companies like Haidilao.

For (i), companies can now purchase financial and insurance companies can now buy companies or even those of high dividend and in the index as collateral with the PBOC. It helps funds and insurance companies to boost their returns and entices them to buy the blue chip companies of China.

The PBOC is doing what other central banks have done - using liquidity injecting approaches to boost sentiments. As investors, this could result in multi year highs for China companies if the trajectory follows what has happened in USA and Japan stock markets, the effects of their central banks injecting liquidity.

This explains why share prices of China companies have moved up 10-20% this week. In my view, if the PBOC continued support and then supplying more cash as a second tranche, China companies will be in a bullish mode. Companies we can put in our radar are the high dividend yielders especially when founders know they can leverage on the dividend differential to make money. I see 50-60% upside from here.

Saturday 21 September 2024

SBS Transit: Good Dividend Stock, Upside with Recent Public Transport Fare Hike

Most of us in Singapore knows SBS Transit (unless of course you are too rich that you drive a car or two in Singapore).

SBS Transit operates bus services, North East MRT Line, LRT Lines and Downtown Line in Singapore. Its revenue is tied to the fares collected. So with the expected 10 cents or 6% rise in fares, SBS transit is expected to report profits increase. What is the expected profit increase?

Expected Profit Increase in Public Transport Services Segment for SBS


In December last year, Singapore saw fare hikes of about an equal magnitude as what was announced a few days ago. As a result, SBS saw a rise of about SGD$8 million in pre-tax profits. Factoring in taxes, SBS Transit could be gaining an addition $6.8 million in profits (EPS 2.16 SG cents). On a full year basis, I am expecting SBS Transit to see an increase of 4.2 SG cents for next year.

Dividend Policy
SBS has a dividend policy of giving at least 50% of earnings ("EPS"). Based on this year's earnings ("EPS"), one can expect a EPS of 21 cents; after factoring the effects on SBS needing to pay more for for advertisement spaces at bus terminals and MRT stations. Adding an expected increase of 4.2 SG cents EPS from the fare hikes, this puts EPS at 25 cents and I expect next year dividend to be 12.5 SG cents.

Cash Cow

Due to its public transport business, SBS is a cash generating business and due to its small 50% payout ratio for dividend, SBS has now amassed a cash balance of $320 million (43% of its market cap) and 4 months worth of its operating expenses. With such a large cash balance and cash generation ability, I would say the company is able to continue paying 50% in earnings as dividend. There is a small chance that a special dividend can be announced but that depends on if it needs to transfer cash to Comfortdelgro (its parent)

Are Shares Worth a Buy Now?

At $2.38 share price, I would say SBS Transit is fairly valued based on the dividend metric. A 5% dividend in current climate is acceptable where a large part of its revenue is dictated by the public transport council.

I view it on par with other strong name REITs. However, with about 12% of fare hikes still required to be adjusted; for next year, I expect another 10 cents increase in fares. So we could be seeing an end state where SBS becomes a 30 cents EPS, 15 cents dividend company at end 2026.

For investors who wishes to take a lower level of risk, SBS transit is a good buy with prospects of seeing growing profits at a faster clip than say Sheng Shiong. So between Sheng Siong (Current yield of 4.3%) vs SBS transit ( Current yield of 4.6%), I would pick SBS Transit.

Portfolio Update August 2024: Sale and Purchases, Increasing my Dividend Inflow

After some deliberation, I have sold off Li Auto because its share prices went up a bit and I do think there is cut throat pricing going on in the industry. So it is not worth being a participant in the EV market when these companies are suffering eroding margin. Partial divestment in Nanofilm was done with its run up in share price.

Purchases wise, I decided to buy back Yangzijiang Financial because there is nothing much left to buy in the market with spare cash. Going forth, I will be taking a more active role in trying to persuade the company to utilise its few hundred millions of cash for better investments instead of keeping in short term deposits with Singapore banks. 

I purchased a few shares in Petrochina because I believe the Chinese consumers strength is still strong and Petrochina is now a 8% dividend yield, that is too good for a dividend stock to pass. Petrochina is sold at such a low P/E of 6 and Dividends of 8%, that it has become a better value proposition than LINK REIT (7%) and Unitedhampshire US REIT (8%). So it was my second largest addition.

Asian Pay TV saw a few purchases because at 13% dividend and a 30% payout ratio, the trust is worth an investment. Alibaba HK was bought as well.

Dividend is now expected to hit $35,000 for next year (on a full year basis). Because this portfolio underwent additions throughout this year, I definitely will not be able to clock $35,000 dividend this year; but next year that could happen!

Thursday 19 September 2024

50 Basis Percentage Fed Cut: US REITs Benefit The Most

The US Fed has announced a rather big cut of 50 Basis Percentage points.

With that the SOFR (USA's interbank overnight rate) has decreased by 0.5% once the US Fed made the announcement

US REITs on SGX are Going Up

With the news the USA REITs listed on the SGX has gone up. This is mainly due to their debts being in USA and pegged to the SOFR. Today we have seen the 5 US REITs in the green (as of writing).

Who are the 5?

ARA Hospitality Trust, Keppel Pacific Oak, Manulife US REIT, PRIME US REIT and Unitedhampshire REIT are the well known US REITs listed on SGX. Among them most of their debts (with the exception of Manulife) interest rates are pegged to the SOFR.

A Buy Now?

This is up for debate because 4 of the 5 REITs are in distressed sectors where a large vacancy rate persists. Only UnitedHampshire US REIT is in the stripe retail mall which has a strong occupancy. It is definite as investors if we want to ride on the tailwind of the US Fed cut, Utddhampshire US REIT is the best bet because it does not have the overhang of distressed properties. In fact, from here, Utdhampshire would even benefit from lower capitlisation rates on its property which will result in increased property values and in turn lower leverage rates.

Utdhampshire US reit to me is the best bet to be on because it is well leveraged (with leverage primed to move even lower), strong occupancy rates. You can read my review of Utdhampshire US REIT here.

While Utdhampshire US REIT has risen 25% since my last post, I do feel there is more upside. It is in a much stronger property sector of USA and will be able to benefit from rate cuts directly. Hence among the 5 US REITs, Utdhampshire US REIT investors should be able to experience the full benefits of a rate cut. Dividend of 8-9% is assured too. Hence it is my top pick to benefit the rate cut. Even at 50 US Cents, it is still worth an investment and I have not sold off any of my holdings yet (my own target price is 72 US cents)

In second place, it is up for grabs, but my sense is either ARA US Hospitality Trust or PRIME US REIT.

Saturday 31 August 2024

ICBC 1H 2024 Results: 7% Dividend Yielder, Likely Further Upside

ICBC has announced its 1H2024 results. Profits has decreased to a small degree but not alarming enough to warrant a scare. The main reason for decrease is due to a fall in net interest margin which I will explain in the next section


Lower Interest Rates Means Lower Profits for Banks

Banks thrive on net interest income for their main operations--> Meaning taking in deposits and then giving loans at a much higher rate. Naturally the higher the interest of the loans disbursed, the more profits the banks make. In times of lowered interest rates, bank tend to report a lower net interest margin which lowers their profit

In China, its prime interest rate set by the China (federal) bank has been decreasing due to economic woes. As shown by the banks loan/asset profile, interest rates for Corporate Loans and China T bills have fallen.


In fact, overseas loan gave better interest because of the hike in interest rates outside of China. ICBC operates mostly in China so as seen the decrease in loan rates hurt the company very badly (3.95% decrease to 3.52%)

Investors should be aware this too is applicable to Singapore banks, with our interest rates about to fall, the net interest margin of our banks too will fall. For ICBC case, its net interest income is expected to fall further.

NPL Ratio- Up to Us To Believe


The accounting of non performing loans (i.e. loans where creditors are not servicing the debt promptly) is an art not a science. Banks can classify loans on NPL or otherwise based on their own standards. So I do not delve too much on it. For ICBC, it says NPL ratio has drop.

I won't comment much on ICBC's accounting intrepretation of its loan book portoflio but I do not believe a NPL ratio for property loan of 5.35% says the truth. No doubt ICBC's clientile are individuals who take housing loans, but given how property prices have fallen and news of China Citizens refusing to service their loans, the NPL provided by ICBC is a low estimate. Transport is another segment I seriously doubt the NPL ratio too. The high speed rail project in China has been known to be a zombie project with losses incured at large scale. It is well known that the corporates are only paying the interest with no real plans to repay the debt amount. All in all, I feel ICBC is valuing their NPL allowance too lightly. 

Of course, a reduced NPL helps ICBC to report lower allowances and it mitigates the impact of a lower net interest margin on its P&L. However, 30% of its loan book is indeed up for questioning. However, ICBC being the China national bank, questions can be answered about their balance sheet but replies by them can be mum since minority investors are not of their main concern.

Minority Investors - Think of Dividend

Ignore the noise on its financial results, loan portfolio or that of its balance sheet, I do not think ICBC will run into financial troubles. This is because it is the de facto bank for China and no matter how glossed up its results are, the government will prop it as a lender of last resort.

What investors should focus on is its dividends. ICBC maintains a 30% payout ratio for dividends. So if earnings remain flattish or slightly lower, dividends will follow suit. This happened for 1H2024. 

ICBC has now switched to a bi-annual dividend scheme. For 1H2024, dividend is HKD 0.158. For investors, given the decreasing interest rates in HK, i do think 2H2024 will give about HKD 0.155. At its current share price of HKD4.49, this means a dividend yield of 7%.

Comparatively to DBS, ICBC's yield is still high. Given the political backing and financial stability of ICBC, I do not think a 7% yield justifies. In line with DBS etc, ICBC should be a 6% dividend yielder. Hence I expect it to move to around HKD$5 for its fair value.

In terms of loan size/market cap, ICBC is many times larger than DBS. Both banks are the de facto leading bank of their country and rightly their dividend yield should follow the same. P/B ratio might not be an accurate guage given the questionable NPL allowance of ICBC's loan book portfolio.

I do not think the market's current valuation of ICBC is fair. It should be HKD$5, hence one can expect a 10-15% price upside from its current pricing.

Wednesday 21 August 2024

5 Dividend Stocks To Consider

As said a few times, the current cycle of interest rate hikes have made dividend stocks attractively priced at a high yield. This is because of the need to be valued at higher than the risk free rate of the countries they operate in. 

Hence, even REITs with strong balance sheet have to be priced at a higher dividend yield than before. 

When the time comes for interest rate cuts, it is natural for their yields to fall but share prices to increase. Below are 5 dividend companies which seems to maintain a good payout ratio, is sustainable and are of a high yield:

1) UnitedHampshire US REIT (Listed in Singapore)

A US REIT which operates Striple malls in the East Area of USA, with the low supply of stripe malls in USA, Utd Hampshire REIT will continue to have a high occupancy rate. The REIT has been experiencing increasing rental growth annually. The downside is that its cost of debt has increased due to US fed rate hikes. The reverse will happen once fed rates are lowered.

The REIT currently sports a 9.5% dividend yield (projected last year's was 10.1%). Its leverage ratio is below 40% with the recent sale of a retail mall at above book valuation. 

At NAV of 72 US cents vs share price of 43 US cents, it is attractively priced.

2) LINK REIT (Listed in Hong Kong)

The REIT manages malls in Singapore, China, Hong Kong and office spaces in China, Hong Kong. In Singapore, Jurong Point and AMK hub is owned by it and it is the sixth largest landlord in Singapore. Being listed in Hong Kong where risk free rate is 5.25%, the REIT is valued at 7.5%, the premieum shows it is a blue chip REIT similar to how capitaland is valued in Singapore (+2% premieum).

LINK REIT has a low leverage ratio of below 30%, dividend of 7.5% and is in the Hang Seng Index list cementing its place as a blue chip. Strong buy, just that us investors need to use a foreign custodian account or purchase through webull/tiger/moomoo to own this attractive REIT.

3) Pacific Century Developments (Listed in Singapore, PCRD)

A large shareholder of HK largest teleco, PCCW/HKT, part owner of FWD insurance and Viu (OTT). PCRD generates dividends from the dividends decalred by its asosciate companies. In 2024, iPCCW/HKT generated a bumper dividend and PCRD then shared the earnings as dividend to shareholders. PCRD is a holding company which just holds investments with no main business on its own, similar to Taiwan's Hotung Holding. It sports a 13-14% dividend yield for now.

How much PCRD distributes as dividend annually depends on the performance of PCCW in HK and Viu. The current strucutre of PCRD is that it is largely held by Pacific Century Group with Richard Li at the helm. PCRD is structured to be milked as a cash cow providing the cash to its parent, Pacific Century, to finance its operations.

Hence as long as the structure remains, it will definitely be a top dividend stock for shareholders.

4) ICBC Bank (Listed in Hong Kong)

The largest bank in China and world, ICBC is a household name. Surprisngly due to the negativity to China companies, it has one of the lowest price earnings ratio as compared to its overseas banking rivals. Naturally with a low earning ratio but respectable dividend payout, the result is that this Chinese bank gives investors a 7% dividend yield.

In terms of risk, it is unlikely the bank will collapse despite concerns of non performing loans in China. Similar to LINK REIT, the bank is in the Hang Seng Index (blue chip status), , just that us investors need to use a foreign custodian account or purchase through webull/tiger/moomoo to own this attractive REIT.

5) Asian Pay TV Trust (Listed in Singapore, APTT)

APTT is in the TV/Broadband business in North/Central Taiwan. Its annual dividend is 1.05 cents. 

Dividend forms only 30% of its free cashflow with the remaining used to pay down its  debts. The trust is highly geared but i believe it will not affect its dividend. I foresee a continous issuance of 1.05 cents dividend. Its TV business is declining but the remaining cashflow generated from its broadband business is able to support current dividend. 

What investors are currently worried about is the trust's ability to refinance its SGD$1.1 billion debt that is due end 2025. If debt refinancing is successful and it is to extend for another 7 years (its usual cycle), APTT will be a very attractive 13% yielder and post news of the refinacing, will see an upward revaluation.

Even among the dividend stocks, it is of a high risk high reward profile.