Sea Group Shares On a Run Up: Indonesia Ban Live Selling on Social Media Platform

Indonesia has banned e commerce transactions on social media platforms.

Its a good policy that prevents predatory pricing by Bytedance money burning antics which is aimed to kill off local business. Bytedance has been undercutting legitimate business models by burning its large pool of money raised from Saudi Arabia.

Beneficial to Go-To and Sea Group

Indonesia is the largest e commerce market in South East Asia, accounting for 52% of South East Asia's market. Sea Group Shopee and Go-to are neck to neck each holding 36% share in Indonesia.

With the removal of Tik Tok shop from Indonesia, Go-to and Sea Group will continue to benefit on their own from Indonesians. As of now, both groups are profitable in their e commerce segment and the continued sales on their Indonesia platform will increase revenue. The model of e commerce platforms is that their profits grow exponentially with scale. As mentioned, building an e commerce platform is like building a highway toll, at first, large amount of money is thrown in to build the highway and toll is collected for each traffic passing through it.

With each increase in traffic, there is not a need to add proportionally more cost. Hence the margin from each new e commerce order is very high. On the other hand, local businesses benefit because they have access to the "highway" to link business to consumers for sales. Tiktok was not doing this.

This solidifies the investment thesis for Go-to and Sea Group. I expect Sea Group to be immensely profitable as the largest e-commerce Indonesia has done a good policy to protect the local business and e commerce platforms. Tik tok had been doing anti monopolistic measures which would have harmed Indonesia in the future. Hopefully more South East Asia economies will do the same.

Benefits of Living in Bukit Chagar JB - Cheaper Housing, Save $250,000 and Yet Enjoy Singapore Amenities

This is an interesting thought while reading a forum.

With Singapore and Malaysia building the RTS, it may mean that, we Singaporeans, can avoid the high cost of housing by living in JB Bukit Chagar area and using the RTS to commute. With the RTS, the Bukit Chagar area is like an extra MRT stop or two after the Woodlands North MRT Station of the Thomson East Coast Line.

Apartment Cost at Bukit Chagar Area

A search in Propertyguru shows housing prices in this area to be about RM 1,000,000 (SGD$290,000) for a 1,000-1,100 square feet freehold condo unit and of 5 minutes walk from the new RTS station.

Travelling time from Bukit Chagar Area to Singapore city centre and Orchard takes 1 hour and 50 minutes respectively. This is the same travelling time from Choa Chu Kang/Bukit Gombak. And if you need to see a doctor or polyclinic, the travelling time from Bukit Chagar to Woodlands Polyclinic is a 25 minutes travelling time via public transport.

How Much can We Save?

A 4 room resale HDB flat of the same size (with remaining lease of 85 years or more) in the above 2 mentioned areas in Singapore goes for $550,000-$600,000.

Given that the travelling time from JB Bukit Chagar visa public transport will be the same as these 2 areas, they are good comparables. Living in Bukit Chagar means we can save $250,000.

This makes applying for the Mymalaysia Second Home visa valuable. Given the cheap housing cost in JB chagar area (in exchange for a lower level of security vis-a-vis if one lives in Singapore), will individuals decide to move to Bukit Chagar area? Feel free to say your views in the comment section below.

How Can Country Garden Survive and What is in Its Balance Sheet?

Mention the China Property Debt Crisis, 2 companies come to mind- China Evergrande and Country Garden. China Evergrande has fallen with its bankruptcy proceedings. Country Garden on the other hand is still in survival mode and lurching from repaying each month's interest trying to ensure no impairment or corporate action to dilute existing shareholders.

Currently Country Garden has a HKD$26.2 billion (RMB$24.5 billion) in market capitalisation)

Balance Sheet is Barely "Balanced"

Debt

Unlike the headline news which claims Country Garden has hundred billions in USD of debts, the truth is that developer has only RMB 257.9 billion (less than USD 100 billion) in debts. Below is the latest debt standing in its financial report as of end June 2023.

Cash

The developer has RMB 101.1 million in unrestricted cash (Net debt position = RMB 156.9 billion) with RMB 29 billion which wil be released if its properties and loans are repaid.

Properties Under Development

  

Country Garden has close to RMB 1 trillion in properties for development or completed. Do note China has a different housing payment system as opposed to Singapore. In China, a person has to pay 100% of the home purchase to the developer at the start. To the developer, the amount collected is classified as unearned revenue (trade payables) under the developer's liability section, While the property is classified as "Properties Under Development" under the asset section

Below is the snapshot of Country Garden's Assets and Liabilities:

What I am more interested is seeing how many unsold units there are in Country Garden's Balance Sheet (which is clearly shown). We can see that there are RMB 56.8 billion in properties ready for sale (aka unsold). 

Given the knowledge that most of Country Garden developments are in Tier 3/4 China cities, in Malaysia, the deduction is that the RMB56.8 billion is not the true value, a haircut is necessary and I believe a 50% discount warrants it (RMB 28.4 billion) to quickly sell it if there is cash crunch.

Recent Sales

Secondly, we would be aware that Country Garden recently sold off an associate company. There will be a cash infusion and realisation of RMB 0.5 billion in gaines.

Lastly, the company recently extended the maturity of 8 onshore China bonds (which amounted to about RMB 7.6 billion). Instead of maturing in 2023, it has been brought to 2026 for maturity.

Cashflow Perspective

Therefore from a cashflow perspective, Country Garden has about RMB$91 billion in funding gap it has to bridge. This has to be achieved by the sale of its unsold properties. Luckily for the company RMB$56 billion + RMB $7.6 billion of its debts mature from 2025 onwards

While in terms of bank borrowings, it has RMB $38 billion maturing from 2025 onwards.

So the real cash crunch for Country Garden starts from 2025. If it is unable to sell enough of its land bank and unsold units to bridge the RMB$91 billion funding gap, from 2025 country garden will declare insolvency and it may mean a large wipe off in value for shareholders (similar to China evergrande)

Equity

As of end June 2023, Country Garden has about RMB$254 billion in equity. However given the awareness that there are unsold completed units (RMB$28 billion deduction) + uncompleted apartments (which are hidden under the RMB$818 billion under development line item).

Using its current market cap of RMB$24.5 billion, this means the market is pricing in a further RMB$201 billion in write down from its RMB$818 billion of properties under development. To question to stock market punters is that is a 25% haircut excessive or still not enough?

 

Cainiao IPO: Alibaba's First Spin Off, Unlocking of Value

In the latest yesterday about Alibaba, it is announced that Cainiao is likely to be the first Alibaba segment to be spun off.

The listing will be done on the Hong Kong Stock Exchange, where Alibaba is also listed under the 9988 stock code.

How Will it Benefit Alibaba Shareholders

Currently Alibaba owns a 48% stake in Cainiao. Alibaba has stated its plans to spin itself its divisions out separately so that each Division has the ability to be agile (and a smaller Alibaba means less scrutiny from the communist party as it becomes small)

With the listing, it will mean Alibaba shareholders will soon get the shares of Cainiao. This is similar to how Tencent gave its stake in Meituan to shareholders so as to become smaller. For Alibaba case, this means shareholders holding either Hong Kong shares or NYSE ADR will be getting Cainiao shares in the Hong Kong Market.

Valuation of Cainiao

Based on the private market valuation, Cainiao is currently worth between US$18 to US$26 billion.

Cainiao is the leading logistics player in China and plans to expand its footprint across Asia. While a logistics company may sound as an intensive business model, Cainiao has been utilising technology in their logistics operations to the extent that the driving of logistics between intercity highways is done autonomously and tracking in real time. The smaller e commerce players rely on Cainiao's logistics network. While the growth does seems good, anything above a market valuation of US$22 billion, will see me offloading my "Cainiao-to-be" shares. This is because i do not think Cainiao can grow to be more than a US$2 billion in net income company as each country in Asia have their own logistics company unless Cainiao intends to go on an acquisition spree which will burn its cash needs.

Therefore with 48% stake and assumed US$22 billion valuation, Alibaba shareholders will get about US$10.5 billion in shares as part of dividends. Prior to the announcement, Alibaba was valued at US$84 per share (market cap of US$216 billion).

How it Affects Alibaba's Current Share Price

My view is that the market has not priced in the value of Cainiao in its US$216 billion valuation (because Alibaba has a few Decacorns in its portfolio and a US$216 billion does not justify the sum of parts), therefore a potential US$10.5 billion in value could be unlocked. This means the unlocking of an additional 4.8%. Strangely, the magnitude of Alibaba's price increase yesterday was about the same magnitude (+4.9% increase). All in all, I expect Alibaba to continue trading at this US$88 mark.

Any fall below US$88 is a definite buy for Alibaba shares. However, given that Cainiao and future divisions spin offs are likely going to be listed in the Hong Kong Stock Exchange, it is strongly recommended for investors to buy Alibaba shares in the HK exchange so as not to have the problem of owning shares across two countries. A US$88 listing on NYSE equates to about HKD$86.5 on the Hong Kong Exchange.

I will be watching Alibaba on the Hong Kong market (9988) to see if there is a buying opportunity at the HKD$86.5 level.

The eventual spinoff of Alicloud (valued at US$60 billion) and ANT (valued at US$120 billion) will see Alibaba giving out more shares. The current valuations of Alibaba is undervalued and I do see a 110% upside in prices with the completion of the entire division spin offs.

Which US Office SGX listed REIT has the ability to Weather the Storm?

According to MAS regulations, REITs are allowed to leverage to above 45% debt ratio, with conditions that (i) the REIT's interest coverage ratio (ICR) must not be less than 2.5 time and (ii) the REIT is unable to take in more debts.

Currently the 3 US Office REITs are facing declining vacancy rate amidst a backdrop of increasing their rents. Due to the hybrid working style, companies realise they need less office spaces and have moved to downsize. While rentals have increased slightly due to inflation, overall there is a negative impact on US office REIT's earnings.

With a declining earnings and higher effective interest cost due to rising rates, these REITs ICR runs the risk of breaching below MAS's 2.5x ICR rule. This is on top of an escalating leverage ratio due to the impact of the fall in valuataion of office buildings. To say the least, the US office space is in a crisis that is equals to what we saw in 2009.

Over in Singapore, there are 3 US Office REITs that are listed and below are their current situation:

Rising Interest Rates Environment and Stress Testing

The latest Federal Reserve dot plot shows that Reserve Board Members expect a 5.00-5.25% interest rate for 2024 and 3.75%-4.00% for 2025. For the above 3 REITs, the benchmark used for their loans are the Secured Overnight Financing Rate (SOFR). The SOFR rate follows closely to the lower range of the Federal Reserve Announced Rates and the loans are pegged to be at least 1.1% higher than the rates.

Using the dot plot and how these REITs have pegged their loans; it is plausible for these REITs' effective interest cost (before hedging) to be at  6.1% for 2024, and about 4.8% in 2025.

If we assume a 6% financing cost, while holding earnings growth at 0%, all 3 REITs will have ICR of below 2.5 times ICR (KORE, Keppel Pacific Oak, will be the closest at 2.2 times ICR).

Factoring the expectations of earnings growth, KORE sees an improvement and moves to 2.24 times ICR. Below is the eventual ICR taking into account earnings growth and a 6% effective interest cost:

2024 Stress Test (ignoring each REITs hedging done)

2025 Stress Test (assume no earnings growth from 2024)

Both PRIME and Manulife looks set to deviate from MAS's 2.5 times ICR limit until 2025.

While PRIME has mentioned it has hedged 63% of its debts until mid 2026, it is conceivable that the rising interest rate environment will still push its effective interest rates upwards. Hence the 2025 Stress Test figures above gives a rough guage of where the REIT may be in 2025 and how it will slightly breach MAS's requirements. For Manulife, due to a high amount of debts being fixed, I doubt its effective interest cost will see the highs of 4.80%, likely it would be at the 4.50% region. But that's bad enough to breach MAS's ICR requirements too.

Evaluation

Given the above, it seems Keppel Pacific Oak (KORE) is on the strongest footing due to its ability to grow its earnings in a weak US environment and propping itself with a high occupancy rate. Its debt profile is also good with 60% of debts maturing in 2026/2027 when interest rates are expected to be lower.

Both Manulife and PRIME runs the danger of breaching MAS's regulatory rules. If MAS does not relax any rules, it is plausible that these 2 REITs will have to find ways to deleverage.This means reducing their debts.

For PRIME, I expect they have to reduce their US$685 million debt by 3% (reduce by US$20 million); while for Manulife, they have to reduce their US$1,020 million debt by 15% (reduce by US$150 million).

For PRIME, the debt reduction should involve the sale of 1 of its smaller office building at the low trough of the office cycle. For Manulife, the sale of Phipps and 1 smaller office building are likely to happen. Manulife shareholders will have to realise some losses at the lowest points of the US office cycle, without enjoying the recovery phase of the US office cycle (should it happen).

For now, it might not be a good time to pick Manulife and PRIME unless (i) MAS decides to help by waiving its ICR rule or (ii) the 2 REITs announce the sales plan of its office buildings.

Portfolio Update: Added More PRIME, Keppel Pacific REIT & Country Garden

While the previous update on my portfolio was a short 2 weeks ago, I thought it would be good to provide another update because of many changes:

Optimistic on US Office Space

The US Office space has been beaten down badly due to negative sentiments. However, I feel the risk/reward here is skewed. In USA stock market, the US office REITs are currently valued in the region of 0.4 price book while for Singapore's it is at 0.2 time price book. There is inherently no difference in both countries REITs as they are all 100% situated in USA and there is no tax deduction for being listed in Singapore. Hence my expectations is that the Singapore US Office REITs may be in tune to double from their current share price to close the valuation gap.

Sunbelt Cities

Both PRIME and Keppel Pacific owns office buildings in US sunbelt cities (PRIME approximately 53.8% of its portfolio). These cities are seeing a high uptick of office workers returning to work (higher than national average). 

For Sunbelt cities, the rate of office workers returning to work is higher than national average and this reduces the risk of tenants downsizing of large areas of their current leased office spaces.

Rental rates of US office spaces in these cities has been increasing based on JLL market survey as of end June 2023.

The trough of the US office downturn might be now. Hence I have continued to accumulate more PRIME and Keppel Pacific REIT shares.

Addition of Country Garden

With Country Garden successfully extending its first tranche of bonds, I have doubled my position on it. This is due to my view that more tranches of its bonds will have its maturity extended. In terms of China's Real Estate market, we have seen province governments taking steps to boost housing uptakes by lowering mortgage rates. This is a positive.

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Disclaimer: The publication of my posts is solely for informational purposes and is not to be construed as a solicitation or financial advice as I am not a certified financial adviser. My analysis on companies covered are not an offer to buy or sell any stocks and I encourage readers to do your own due diligence before investing.

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August Portfolio Update: Purchase of Sea Group

Last year, I did a valuation on Sea Group and concluded "Expecting a 60% total return for owning a stake for 4 years. A worthwhile price to enter Sea Group is US$38."

Since then I have been actively updating my valuation of Sea as and when the quarterly results are released. My valuation of Sea Group has remained roughly the same at the US$45 billion point (US$56-60 share price, after factoring for employee share compensation dilution).

Sea Group indeed fell to US$38 which triggered my purchase. My latest write up, as of Aug 2023, for Sea can be found here

With that, my portfolio has changed slightly.

It is worth noting both PRIME and Keppel Pacific REIT have taken a beating in share prices. However, my evaluation of the sector remains unchanged - neutral with it being hampered by the US office space oversupply. The US vacancy rate is likely to remain high for a time period of 3-5 years.

Keppel Pacific and PRIME should be able to tide through the crisis; PRIME could possibly encounter some need of equity raising due to it being close to the regulatory leverage limits and its office occupancy rate is rather low at 85%. I am interested to see what the REIT manager is doing to backfill its vacated leases.