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.

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!

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.