Thursday 29 December 2022

Why buying US Reits like PRIME and ManuLife Could Be Dangerous

Currently, the SGX listed US REITs have been sold down terribly. In terms of dividends and price book, they are trading at very low valuations. Just look at the dividends and price to book ratio of PRIME and Manulife as of today (28 Dec 2022), these are distressed level pricing:

Prime REIT- P/B 0.47, Dividend Yield 17%

ManuLife REIT- P/B 0.43, Dividend Yield 15%

In the US exchange listed REITs, many are trading at price to book ratios of 0.9-1 times. This makes it baffling for the above 2 to be selling at such low values.... unless we retail investors are kept in the dark about some things.

Potential Red Flag of the REIT Managers

One thing that worries me is how both managements are not doing a share buyback when they are valued at a 50% discount to their property valuations. The REITs are afterall a portfoilo of properties and at such a discount, REIT managers would have deemed it attractive to be a good buy.

The lack of action by the management shows that either the REITs are short on cash or that they are anticipating a large writedown in property value of a magnitude greater than 20%. These would be terrible situations that the managers are not revealing. For context, a smilar US REIT called Digital Core is buying back its shares during this sell down at the 0.6-0.7 Price book value. Hence, it is no surprise this particular REIT has outperformed the other 2.

REITs are generally asset-heavy, financially engineered and pay out most of their earnings, leaving little cash on the balance sheet. So it is interesting to see a REIT using precious cash to start a share buyback. It demonstrates the capbility of Digital Core REIT manager unlike PRIME and ManuLife who have been silent on the scene. 

I am particularly worried about the actions of both PRIME and ManuLife. The US REIT space was recently hit by a bad egg in 'Eagle Hospitality Trust' and people are afraid to invest in the space; yet these 2 REIT managers are not doing constructive actions to improve the sentiments, despite having better reputation and experience than the demised REIT manager.

Saturday 3 December 2022

The Magic Rate to use your CPF OA for Singapore T bills even if the Rates are Falling

As many people will know, T bills interest is falling due to its attractive returns and its bidding mechanism. People will say that below 4% is not good, but in fact it is still good. As long as T bills offer 3.45% and above, it is better than CPF OA rates.

Therefore, Singaporeans should put the maximum sum of their CPF OA avalaible into T bills because of its higher interest than OA and are backed by the same entity - the Singapore Government (CPF OA is only 2.5%). Readers may point out that the first 20k of CPF OA earns 3.5% but this point is moot because the first 20k of your CPF OA cannot be used for T bills (so this point is covered). 

Cut Off Point of T bills being Attractive

The magic number is 3.45%. This is because of the mechanism where CPF does not give you interest for the month you withdraw the amount for T bill application and the month which it is deposited. Hence, I have assumed the worst case scenario where you dont earn interest for a total of 8 months. 

In short, T bills which yields 3.45% or more is more attractive than CPF OA.

Therefore for those who are putting in under the competitive allocation for T bills, 3.45% is the lowest number you should key in; any lower, CPF OA is slightly ahead. However, the good thing is that if the cut off rate for T bills is higher, you enjoy the higher interest as well. So there is nothing to lose!

As a reminder, the current tranche of T bills is open for application. To make your CPF retirement work for you, remember to bid as much T bills as possible; for those who are bidding under the competitive allotment, the magic number is 3.45%. For those bidding under the non competitive allotment, put as much of your CPF OA as possible.

Thursday 1 December 2022

December Singapore Savings Bond Interest Falls!

While we hear about an environment of increasing interest rate, the surprise is that the Singapore Savings Bond (SSB) and pherhaps, T-bills interest are falling!

Just look at this month's SSB yield offer (3.26%) vs the previous month's (3.47%):

December SSB

November SSB

The magnitude of decrease is similar to what we saw in T bills in which it has fallen from 4% to 3.9%. For those who are still cash rich and have not been successful in T bills application, my personal feel is that we can try applying for the upcoming December T bills application; if bidding under the competitive allocation, the advice is to bid at about 3.5% (my gut feel is that the cut off rate for the December tranche of T bills will be at 3.8%)

After which whatever amount it fails, the fall back plan is to apply for December's SSB.

Will SSB and T bills rate continue to fall?

My suspicion is that most of the application we are observing for T bills are from CPF OA balance. As long as CPF OA maintains at 2.5%-3.0% interest, CPF members will continue to apply T bills. Due to the abritage, I suspect T bills rate will eventually be at 0.6% above the CPF OA rate (hence if CPF OA = 2.5%, T bills will be at 3.1%)

For SSB, as they are not CPF OA eligible, their rates are dependent on the excess cash that people have. Hence I suppose we will not see a much further decline in SSB rate. The Dec SSB rate is probably the equilibrium.

Portfolio Update Dec 2022

To maintain exposure to the Chinese economy but yet diversifing across various industries, I have reduced my stakes in Wei Yuan/YZJ Finance/ICBC and spread across more companies due to a deep discount scenario during Nov arising from the communist party blunder in their management of lockdowns.

Added Xiaomi, Nanofilm, ISDN, Huya & PRIME US REIT. The first 4 had experienced a sell down due to the Communist Party Congress bearing bad market sentiments with the Poliburto promotions and China's strict lockdowns despite citizens protest.

I am banking on China to reopen and with that an uptick in its manufacturing capacity. Nanofilm and ISDN are companies I think that will benefit. Xiaomi's investment is due to anticipation that China consumers will spend more on electronics and lifestyle products once their disposable income returns. Huya is for its advertising revenue and exposure to the younger China demographic segment who have been hard hit with youth unemployment at 19.9%. The antiicpation is that a reopening will reduce youth unemployment and increase in their dispoable income.

PRIME US Reit is unique as it is the only stock with US exposure to my otherwise heavily China focused portfoilo. Prime was picked because of an anticipated dividend yield of 12%. Below is my portfoilo composition:

Wednesday 16 November 2022

SATS is Running the Risk of Overpaying for its WFS Purchase

Recently, in forums, there has been a mockery over Singapore entities (such as Temasek) overpaying for their purchases and then delivering low to negative returns (purchase of FTX, TSMC etc). Unfortunately, it seems another Singapore company, this time SATS, is likely to be overpaying for its purchase

$1.82 billion purchase of WFS

WFS is a air cargo company. Due to the e commerce boom arising from the need to stay at home during COVID,many air cargo firms experienced an increase in profit margins as the boom in e commerce was constrained by airline slots. Even Singapore Airlines (SIA) experienced a boom in air cargo business. However, in recent quarters, SIA is now reporting a decreasing air cargo volume. Given that SATS and SIA are closely linked, I am surprised that SATS still went on for the pruchase of WFS.

From WFS's financial reports, EBITDA profits is falling and this is due to margins reverting to the norm because the COVID boom has declined. I will not be surprised if SATS had waited a little longer, WFS's margin will fall from 13% to even lower in the single digits. Before COVID, its margins were at 5%, so its definite there is a reversion of the mean going on from the highs of 15%. I strongly believe, WFS's EBITDA has plateaued and EURO$200 mil EBITDA is the cap for now. Seen in this light, SATS is paying for 6.5 times EBITDA which is painfully expensive, I am not sure who is adivsing the SATS mangement but they are buying WFS at the wrong cycle.

WFS is coming down from a Peak (Boom) and SATS is recovering from a Bottom

One thing SATS has been touting is that the purchase is EPS accretive. Considering that SATS is recovering from a COVID bottom while WFS is coming down from peak earnings, it is quite stupid to pitch it as EPS accretive. When things normalise, will WFS be accretive? Based on its finanical results and SATS normalcy, I will say it is a definite no

During normalcy, SATS EPS is about 15-20 cents per shares. Assuming WFS is purchased at S$1.82 billion and net profits is approximately EURO$150 million (S$213 million) deriving from its current EBITDA figures, the expected earnings per share of WFS is only about 11.7 cents per share. It is not earnings accretive at all if we assume SATS business as usual scenario In fact, a simple metrics of 15 cents per share (this was when SATS suffered from 3 months of COVID effect in early 2020) indicates that SATS might be paying 25%. 

My gut feel is that SATS should go back to WFS and renegotiate for a lower purchase fee of SGD $1.365-1.4 billion; in terms of Euro coversion, that is about a EURO $1 billion price to acquire WFS. Anything more, it is a bad deal to SATS

From the purchase, my sensing is that the SATS investment team were only looking at recent data and were not considering the changing of trends as the world moves on from COVID. This is pretty poor decision making by the SATS board.

Sunday 13 November 2022

Reaching the point where majority of the United States Tech Sector is 'Defrauding' the World

In recent week, there is one recurring theme among the US Tech companies guidance- they are lowering revenue growth guidance. For example, Twilio/Palantir had been forecasting 25%-30% revenue growth, however due to the expected recession and crypto collapse, forward revenue guidance has been revised downwards.

This means growing their way out of losses into profits have been delayed and share prices have fallen. As these companies pay their Tech employees with a large propotion of share based compensation, the falling share prices means more shares are issued to US Tech workers and existing shareholders worldwide are being diluted faster and faster. For example, Twilio's issuance to its Tech workers for share based compensation is expected to increase to 6% of share base each year. This means for current investors, they are being diluted the worth of their shares 6% each year. 

US Practice of Generous Share Based Compensation will Make Investors Outside US Poorer

It is unlikely US will cut the pay of their tech workers by reducing the share based compensation while maintaining the amount paid in cash. US tech companies are unable to increase the cash payout as their operations are still cash burning and will be prolonged given the weaker economic conditions. Conversely, a lower wages paid to US tech workers will result in reduced consumption and in turn a localised recession to US. This is not palatable.

Therefore, global investors will subsidise the wealth effect of US society by being diluted of their investment values while US tech workers get a larger amount of shares and encash it so as to maintain their pay. Hence US will benefit while the rest of the world suffers.

It has not helped where even the retrenched workers are getting their share vestments and are getting a large amount of retrenchment benefits which are eating into the PnL of US Tech companies.

Growth Story No Longer There

It has not helped where US Tech companies revenue has slowed and they are unable to grow into profits in time. Rightfully, due to the declining share prices, US tech companies should move to paying their workers in cash. In the US property and REIT industries, the remueration of their workers has moved to almost a full cash payment so as not to dilute existing shareholders. This was evident when 2 out of the 3 SGX listed US REITs announced they would not be paid in shares but in cash so as to avoid dilution effect to existing shareholders. It happpened too in US listed REITs.

In short, the US Tech industry are still maintining their share compensation package because their promised growth story has not materialised and they prefer having their cash buffer to continue burning. Their Tech workers are highly paid individuals earning a 6 digit annual package. On average, each Twilio employee earns US$82,000 in shares per year and with part of their salary also paid in cash, it is conceivable that an average Twilio employee is earning a 6 digit USD annual salary.

In a way, the US Tech Industry is like a Ponzi scheme where the wealth/cash pumped in by investors are being dispensed out to its workers and early founders and employees by issuing more shares. These shares are then encashed by their workers and more shares are circulated (evident based on the earnings report of many US tech companies). Unfortuntately, as the world has already plonked the cash into these companies, it is impossible to stop it as Tech companies have an unfair structure where founders are given outsized voting rights relative to their stake. In the end, the world has been defrauded by the US Tech sector and a death spiral is looming with value destruction occuring. It is probably the fraud of the decade which may rival that of cryptos.

Sunday 6 November 2022

What Many Tech CEOs are not telling Shareholders- Destroying Shareholder's Value by Paying Workers Shares

As many would know, the Tech industry offers an extremely good pay to its employees. However, to conserve cash as well as they tend to be cash burning in Ops, these companies pay their workers by offering a large amount of share based compensation. This works well when share prices are high but it dosen't work well when share prices are low. 

Let's show this using Twilio as an example. This is undoublty one of the better managed company with a product that is widely used by other businesses. However, it is likely share prices will continue to crater due to their compensation package and high pay to workers.

Twilio's Share Based Compensation Package

To attract talents, Twilio gives them a large number of shares as part of their pay package. At its peak where it had 7,867 staff, Twilio was paying them $650 million in shares as part of their pay package during the last 4 quarters (highlighted in green) ; this works out to an average of US$82,000 per year per employee just on shares based compensations.

Twilio Quarterly Results

As of end March 2022, Twilio's market capitilisation was US$30 billion, hence US$650 million equated to an issuance of 2% of shares or 2% in share dilution.

Fast forward today, Twilio's market capitilisation is US$7.8 billion, a US$650 million compensation package will mean 8% in share dilution every year. Even under the assumption that Twilio has completely retrenched 11% of staff, a revised US$578 million share based compensation equates to an annual 7% dilution in value. 

Twilio (and other Tech companies) cannot sustain such sky high pay packages to its workers  because it will just erode existing shareholders excessively. Its either their tech workers have to take a pay cut or more of their compensation has to be in cash instead of shares. The latter will affect the promises of Non-GAAP EBITDA profits made by CEOs.

Tech Companies Promising Non-GAAP profitability

Due to the downturn, tech companies have promised that they will be non-GAAP profitable; a dangerous promise that has been made by Tech firms both in USA and Singapore. The truth is that fulfilling their promises may mean existing shareholders will suffer a tremendous destruction in their current investments.

As seen in the Twilio example, maintaining the same pay and amount in share based compensation will mean a massive dilution for existing shareholders. Yes, these tech companies can reduce the share based compensation and pay their workers a larger proportion in cash. However, this affects their non-GAAP profits as more cash are expensed. The CEOs will fail to deliver their non-GAAP profitability promises within the target deadlines.

Either way, it is likely Tech companies will be severly diluting shareholders due to them paying their Tech workers too well (in shares) or share prices will crater because the CEOs fail to meet their profitability promises.

CEOs of Tech Companies are making dangerous promises to the market and its shareholders. Either it has to cut the pay of its Tech workers or it has to destroy the value of its existing shareholders.

Sunday 2 October 2022

The Constant Rate Hikes in US is creating a property and insurance problem in Singapore

 That's my thought based on the following facts I have learnt during my time in the market:

(i) A rising interst rate reduces bond prices

(ii) A rising rate reduces share prices due to an increase in discounting rate

(iii) A rising rate increases interest expense

The Property Problem

To summarise, there are many local funds leveraged to the hilt during the era of low interest. A group of them are property workshops that have attracted many "wanna get rich" people. The idea is simple- (a) buy a property, (b) max the leverage pay the low interest of 1.8-2%, (c) get rental yield, pocket the difference of interest (c) and (d) while waiting for your property to appreciate, (e) repeat Step (a) to (d) by buying another property.

Here is the problem, the Fed's hike is creating (b) a higher interest expense while (c) is not rising fast enough. It will come a time where holding a property is loss making and with leverage so high, margin calls may come. A wave of property selling is due and with it a spiral down in housing prices and margin calls. This is why the government has altered the projected interest rates in TDSR projections as they want owners to be prudent.

Singapore has been remarkly resilient. Our risk free rates (SORA) have risen by only 2.0% (from 0.2% to 2.2%), while other countries like US has seen a 3% interest hike. This is not going to hold forever. Globally the risk free rate is 3.25% now and Singapore is an "interest rate taker" due to the economics principle of impossible trinity. T-bills which are more senstive to global movements are now priced at 3.2% which tells you the actual interest rates Singapore should be. Our country's interest rate is growing slower by 1% which defies the logic of being an "interest rate taker".

Eventually Singapore interest rate will catch up with the global rate increase. With US fed rates expected to be at 4.25% at year end. I expect in 2023, we will see SORA rates moving from 2.2% to 4%. With  property owners here on high leverage, a higher interest expense will mean less money in their pockets, reducing their consumptions.

The Insurance Problem

Many of us own whole life, endowment and savings insurance plans. Such policies have a non guranteed annual return which is based on the value of investments in property, bond and shares.

Referencng to the 3 facts, it follows: properties are down, bonds are down, shares are down. This means for this year and probably the next, insurance funds are drawing down on its smoothing reserves to generate returns to policyholders. This is because their investment returns are likely negative. While inflation remains high, insurance returns will be low; indicating the real returns for insurance policy holders are negative. For policy holders holding insurance products, it is a bad time to die or surrender policies during these few years.

Sunday 25 September 2022

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 shares.

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. 


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.

Sunday 18 September 2022

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. 

Friday 9 September 2022

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.

Saturday 3 September 2022

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 FactorValue
Implicit Value:0.84
Implied Asset Value$3,751,350,000
Value to Shareholders$3,469,884,000
Outstanding Shares after share buyback3,850,000,000
Value per share$0.890


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.

Sunday 14 August 2022

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.

Saturday 30 July 2022

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.

Sunday 17 July 2022

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. 

Saturday 9 July 2022

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. 

RankCEO / Key DirectorCompanyTotal Remuneration
#1Piyush GuptaDBS$13.6m
#2Dora Hoan Beng MuiBest World Intl$12.7m
#3Doreen Tan Nee MoiBest World Intl$12.7m
#4Kuok Khoon HongWilmar Intl$11.6m
#5Wee Ee CheongUOB$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.

Saturday 25 June 2022

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.

Saturday 4 June 2022

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.


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.

Friday 20 May 2022

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.