Sea Group has a further downside to $30+ unless....

For the past 2 weeks, Sea Group has made headlines by retrenching and closing down operations. The press release/letters by the CEO is the goal of "self sufficiency".

Weirdly, based on information, it seems Sea is not cutting or downsizing at the right places to be self sufficient. In fact, without doing this, it is likely shareholders will face a further 50% losses.

The Main Problem to Self Sufficiency

Shopee Brazil is the problem. Without it, Sea Group will be self sufficient. This is derived from CIMB's report

                                                                 Shopee Results

To clarify the terminology of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), EBITDA is one of the closest guage of cashflow generation. A positive EBITDA means a company is generating cash and self sufficient. An important point is that a positive EBITDA may mean the company is reporting accounting losses. So a positive EBITDA is a bare minimum to being self suffiicient and what Sea Group CEO, Forrest Li, is alluding to.

For year 2021 and 2022, the biggest cash burner (excluding HQ) is Shopee Brazil at about US$1 billion per year. Without Shopee Brazil, it is definite Sea Group on a whole can be self suffiicent by 2023, generating positive cash. 

The 2025 Time Bomb

Sea Group has US$7.8 billion in cash and short term investments currently. By 2025, it has about US$2-3 billion in maturing covnertible bonds, without a share price of US$90, it is definite bond holders will ask for cash instead of cash.

With about a cash needs of US$1-2 billion to sustain its main 3 segments, the continous burning of cash by Shopee Brazil from there to now of US$3 billion is putting Sea Group on a whole in danger of having to raise cash in 2025 to save itself. 

Conclusion

Without closing Shopee Brazil, Sea Group is going to find it difficult to achieve self sufficiency by 2025 and investors will be in a world of pain. I expect a collapse of share price until $30+ as long as Shopee Brazil remains in operations.

The closure of Shopee Brazil will save at least $1 billion in cash each year and enable Sea Group's survivial from 2023 onwards.

Putting Deposits with Singapore Banks will Make You Relatively Poorer

Recently, there were 2 hour long queues to place fixed deposits with Singapore banks. To me, it is not financially wise as there are two Singapore Financial Products available to all Singaporeans and are providing higher rates - (i) Singapore Savings Bonds (SSB) and (ii) 6-month Treasury T bills issued by Singapore.

Both are yielding more than 2.6%. In short, if you are placing Fixed Deposits (FD) with banks, you are becoming relatively poorer to others who put in SSB and T bills.

Higher Rate better Credit Rating than Singapore Banks

Below are the current rates for SSB and T-bills.

SSB- 2.6% for first year and eventually rises to 2.99%. Can be applied at any ATM as long as you have a CDP. 

T-bills: Shorter duration than SSB or FDs (about 6 months). Current rate is about 3.3% per annum, which is the highest. Only downside is that you will need to hold to maturity about 6 months to a year. Individuals can approach a bank manager to enquire on how to apply. My advice will be to select the non competitive tranche to get allocation. T-bills are subject to institutional investors bidding and given the high interest rate environment, they are bidding around 3% for Singapore T-bills.

What's even better is that SSB and T-bills are issued and backed by the Singapore government that has higher credit rating than our banks. A higher interest rate, better credit rating, short duration or no locking you up- what better way there is than to invest in our government's SSB and T-bills

Do not be Tricked by Bank Staff

Unfortunately in Singapore, most bank staff are sales driven and will peddle you products that are not in your best interest. Forget about their talks of saving investment products. While they are higher rates (in the T-bills interest range), they lock you up for a longer duration than T-bills and early redemption results in penalties. SSB has no penalty for early redemption and T-bills while they lock you up, are at most a 1-year duration.

If you want higher rates, go for Singapore T-bills they are as good as investment products and lock you up for less than 1 year. The products being marketed by banks lock you up for a longer period and have financial penalties for early redemption.

Right now as interest rates rises likely to 4-5% level, you do not want to to be locked at such low rates. SSB and T bills offered by the Singapore government is currently one of the best ways to grow your wealth at close to risk free, as opposed to the Singapore banks.

This article is not a sponsored post from the Government of Singapore, but to remind individuals that investing in Singapore banks are making you relatively poorer. The author believes in writing neutral articles with no financial motives. 

Portfolio Update Sep 2022

As mentioned in my older posts, I have planned to sell my SOE & other investments and shift the proceeds to Yangzijiang Financial Holdings (YZJFH). I have completed this.

This is because with the clarity of its debt investments provided by YZJFH, it indicates a deep discount which will make the investment worthwhile. The company has followed up on their thoughts that the market is undervaluing their business by doing large share buybacks. You can read my thoughts of YZJFH fair value here.

I have also bought a few Alibaba shares due to the recent sell down. 

The current portfolio composition is as follows:

I don't foresee any more significant portfolio changes unless such a deep discount situation re-occur.

Yangzijiang Financial: High Returns and Clarity on its Investments

Yangzijiang Financial (YZJFH) had released an announcement clarifying its assets and its composition. Below are the key points:

1. Investment Portfolio: 57% in Debt Investments, 14% in PRC equity, 11% in Singapore as Cash, approx. 12% in China in cash after receiving proceeds from short-term investments (see Question 25), approx. 6% in microfinancing

2. Clarity on its Debt Investments: YZJFH lends it to companies via a close loop system and it is secured against the joint venture's assets and land which are about twice the amount of the loan it gives out (see Question 3) and PowerPoint on its collateral held. 

Valuation of YZJFH

Using a Sum of Parts valuation, we will ascribe a discounting factor for each portion of YZJFH portfolio.

For cash, we can set it as 100% because this is cash held in bank. For debts, given that YZJFH has clarified they are collateralized with a high amount of security such that a default by its loanees will not result in large impairments, a 90% factoring is sound.

For equity, to be safe, it will be set at 50% of its value. This is similar to the book value of Hotung Investments and TIH which are listed on SGX.

This means a fair value of YZJFH is $0.890.

		Reported Assets	$4,450,000,000
		Discount Factor	Value
Debt	0.57	0.9	0.51
Cash	0.23	1	0.23
Equity	0.14	0.5	0.07
Microfinance	0.06	0.5	0.03
		Implicit Value:	0.84
		Implied Asset Value	$3,751,350,000
		Liabilities	$281,466,000.00
		Value to Shareholders	$3,469,884,000
		Outstanding Shares after share buyback	3,850,000,000
		Value per share	$0.890

Summary

Given the company has clarified on the components of its investments, been aggressively doing share buybacks for two weeks and clarified on its 40% dividend policy, YZJFH is undervalued and has a potential to provide a 130% return at the current price of 0.38. The company is a 6% dividend yielder.

To me, this is a strong buy and I will start re allocating my China Investments in Tencent Music and various SOEs to YZJFH. This is because I want to cap my allocation to China. It is good to know YZJFH provides the same dividend rates as my current China stock holdings but with added knowledge that I am investing in a company with a Singapore presence.

Palantir- Falling Margin and Slowing Revenue Growth

 In my previous article, I had indicated Palantir was a stock worth $18 at a valuation of (i) 30% revenue growth, 27% margin and 10% risk free rate.

However, based on the past two quarters of financial results, Palantir's growth story is not true and margin is decreasing in a bad way. This is due to the company paying its employees a large salary which is faster than growth. Palantir has to control its margin because it is destroying the valuation of the company.

No Longer: 30% growth, 27% margin, 0.48 EPS in 2025

Palantir has guided for 27% revenue growth and operating at 23% margin. This kills off future profitability. I am now guiding for a more pessimistic 20% revenue growth with a 17% margin.  This means expected EPS is now 0.24 in 2025.

Maintaining long term growth, a 50 times P/E is still applied with 10% risk free discount rate and this points to a $9.12 fair present value 

Moat is There but Company's Cost Management is Terrible

I still believe in Palantir's moat for it has created a good product. This is thanks to its CEO's innovation. However, in terms of cost management, the CEO is doing a terrible job. The value destruction has been that its margins have fallen off a cliff 

Yangzijiang Financial Holding Review- a 6% Dividend Company in Singapore

Yangzijiang Financial Holding (YZJFH) results are relatively muted- interest income was slightly lower due to the shifting of cash from China to Singapore rendering it not invested. Earning per share wise- the first half saw 3.45 cents earnings. I foresee the full year earnings to be 7 cents.

Based on its dividend policy, this means at the end of the year, an investor should expect a 2.5-2.8 cents dividends. At current share price of 39 cents, this means a 6.7% dividend yield

Risk- High exposure to China Real Estate Sector 

From its PowerPoint briefing (pages 24-27), YZJFH has about 43% of its $2.5 billion PRC debts in China's real estate and construction sectors. This works out to $1.07 billion exposure to China's property sector.

As a proportion to its s$4.5 billion asset, YZJFH has a 23.7% exposure to this sector. This is quite a large exposure to the declining property sector that China is trying to rescue.

However, one positive is that most of the debts mature in a year time. I hope YZJFH is prudent and not renew such debts to China's property sector. Given that YZJFH has a high collateral to the sector where the companies pledge two time the loan amount; if the China's companies are unable to pay up, I hope YZJFH will force sell these companies' assets. There is just too much exposure 

Explains the High Dividends

Given the high exposure to China's property sector, I think this explains why its dividend yield is at 6.7%. China's national bank, ICBC, has about 31% in loan exposure to China's property sector and yields 7.4% in dividends. 

Company Share Buyback

Despite the approval by shareholders for YZJFH to have a s$200 million share buyback this FY. The company has been very slow in executing it. In fact, YZJFH has only utilized $9 million in share buyback.

On 12 Aug, the company has hastened its share buyback and bought $1.5 million worth of shares. From now to the end of April 2023, YZJFH has the capabilities to make $1.3 million in share repurchases each trading day under its mandate. CEO Mr Toe has been highlighting in presentations how the market has been undervaluing YZJFH. 

As an investor, I will be judging him based on his management team's execution in their share buyback. Shareholders have approved the mandate for him to do a large amount of buybacks; however the management has been extremely slow to deploy. As seen in the slides, YZJFH has s$480 million in cash in Singapore, it is definitely able to execute a buyback of s$200 million anytime as its fund management business requires only s$250 million this year.

The share buyback execution from now to the end of this FY will be key to show if Mr Toe does mean his words. As the trading volume is 4-5 times its buy back volume, there is no reason for YZJFH not to do buybacks if their CEO does feel the company is undervalued.

My Action

I have started switching some of my funds from Sinopec and Tencent Music to YZJFH. This is to maintain my exposure to China at a limited proportion. To me as a financial company, I do feel YZJFH is undervalued as well. Basing on comparable to ICBC and CCB, YZJFH smaller exposure to the China property sector and that its results are audited in Singapore should lend credibility to the company's assets. 

I am valuing it to be a 5% dividend company and have an internal price target 60 cents at a future dividend of 3 cents. Hence explaining my reallocation.

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.