Year End Update: Purchase of Elite Commercial REIT and Ping An. Sale of 100 Shares in Sea

This is my last portfolio update for the year and might be for a few more months. This is because I am seeing less opportunites due to the run up in share prices. Only Ping An Insurance meets my crtieria but I do not want to be overly concentrated.

Purchases

With Elite Commercial REIT doing equity raising to delever and the dust settled with now a stronger balance sheet, I have purchased the REIT. My view is that the REIT is sustainable again. All in all, I expect the REIT to be a 3 GBP pence yielder and therefore buying at 28.5 cents seems fair. Its tenant base is the UK government with step up rental going at about 3% for the next full years.

Secondly, I have accumulated more Ping An Insurance because it is yielding 8% and the weak HKD against Sing Dollar is an opportunity for me to change more foreign currency to buy more foreign assets. I love our strong Sing Dollar

Sale

I have sold Sea Group because I do not view it has a strong future with the onset of Alibaba and Bytedance competing with it in South East Asia E-commerce. The rise in share prices offers a good chance to offload.

Portfolio Setup

I still have a large exposure to China. However, the composition on Alibaba has now fallen a lot because of the run up in my US holdings and that I am accumulating other China blue chips instead. The expected dividend yield for this portfolio is now 9% due to how undervalued US REITs and China blue chips are.

Interest Rate Hikes End: Will PRIME and Keppacoak REIT Regain its Highs

The dust has settled on the US Central Bank's decision. While it has not yet been cast in stone, the market expects the 5.25%-5.50% rates to be the peak of this cycle with a gradual return to the 2.5% interest rates. Next year end, it is expected rates will be at 4.5%-4.75% level; the same level as it was in March 2023.

Will US REITs PRIME and KORE return to March 2023 Levels?

The stock market is a forward looking indicator. With knowledge of further rate cuts penciled in beyond 2024 and that it is taken down to 2.5% interest, I do believe that in Dec 2024, assuming 3 rate cuts do happen, PRIME and KORE will indeed return to its share price on March 2023- 36 US cents and 44 US cents for PRIME and KORE respectively.

What Makes Me Convinced

One of the key reasons why PRIME and KORE started to tank in August 2022 was the market relisation that the Fed was on a path of dramatic rate hikes to combat inflation. US REITs borrow based on the SOFR which is pegged to the US Fed announced rates. 

In August 2022 with no end in sight but multiple rate hikes and not at 25 basis points, the borrowing cost faced by both PRIME and KORE was increasing month on month. People had grounds to be afraid that eventually the interest would outweigh the property income and in turn affect DPU.

Fortunately with rate hikes now at a pause mode, we know how much interest expenses these 2 REITs have to bear. To add to that, both REITs were lucky to have hedged their SOFR options with PRIME being lucky that most expires in July 2024. In a way, just a slight misstep and PRIME could be facing a devestating interest expense when it had to renew its debt.

Future DPU

While both REITs are paying 5 US cents per year, I do not think both will continue that amount. For PRIME, because it faces an impending revaluation exercise at a higher cap rate, it will be walking a tightrope in ensuring it does not breach the 50% leverage ratio when all its properties are expected to reported a lower property value. Likely PRIME will be announcing a 90% payout ratio instead of 100%, hence I expect a 4.5 US cents dividend announcement for years to come.

At 36 US cents, a 4.5 cents dividend is still commendable (12.5 % yield). For KORE, it may reduce or maintain its 5 US cents payout, but I think Keppel has done a commendable job in ensuring its properties remain strongly tenanted. In terms of occupancy, Keppel's KORE outranks PRIME and Manulife US REIT. Hence even at 5 US cents and expected share price of 44 US cents, KORE is still a good dividend machine.

Nevertheless, this is what I expect PRIME and KORE's price to be end 2024 - 36 US cents and 44 US cents. However with knowledge that SOFR/Fed Fund rates are going to be lower beyond 2024 and if the inflation story does not change, I will not sell PRIME and KORE at these prices. This is because with lower interest rates, their profitability will increase. 

PRIME and KORE are slated to become more than 5 US cents dividend yielders, therefore, I will keep them till the price is right; higher than what I expect for end 2024.

As for Alibaba, I am maintaining my lofty expectations that the shares will be USD$160. I was about my prediction in 2023 (in fact it went lower). But I am still maintaining this price for 2024. The company is very undervalued and I understand foreign funds are still selling it.

Dec 2023 Portfolio Update: Increasing Stake in Ping An and Alibaba While Divesting Others

Due to the constant bad news coming out of China, share prices of Alibaba and Ping An have taken a hit. What made it worse is that in the latest quarter financial results, Alibaba has struggled to grow its cloud business, while the communist owned companies of Huawei and China Telecom are gaining market share

Tencent, the previous no 2 in the cloud business is now in distant 4th place and have decided not to report its cloud business as a standalone. This highlights the possibility that the cloud business in China is now tilted to the communist owned companies of Huawei & China Telecom.

Personally I expect Alicloud will be allowed to participate in the China Cloud Business soon but no longer as the market leader. In a few years time, Alibaba should be ceding its position to Huawei. lExpectations of the growth of Alicloud has to be recalibrated. I personally feel Alicloud is no longer a US$55 billion worth company. This segment's fair value should only be about US$20 billion. While this lowers my counted Alibaba overall valuation to US$360 billion (Target Price US$140), the current market value of US$185 billion still values Alibaba conservatively. Hence I have decided to accumulate my stake in Alibaba.

Ping An too is another addition due to the news of it bailing Country Garden not yet cast in stone. Ping An is now valued at 8% dividends, hence why I have bought it. However, should Ping An start to move up, I would consider divesting a partial stake.

How the Purchases Were Financed

A portfolio rebalancing was done where 10% in my stake in Keppacoak REIT was sacrificed (25,000 shares) and Sea Group (170 shares). I see less prospects in Sea Group due to the struggles in Shopee to maintain its margins. Below is the overall portfolio composition. 

In terms of dividend yield, the current portfolio is at an expected 8.6% yield. Despite its focus not revolving around REITs, the dividends rivals any S-REIT ETF. Mainly due to the contribution from YZJ Finance, Ping An insurance and the US REITs. Sea Group and Yanlord are speculative plays with 0% expectation of dividends

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