Intrinsic Valuation from Financial Modelling is Dead in the Current Market

If one follows the Singapore Scene on investing in Alibaba, there are a few who espouse the value propostion of investing in Alibaba. Yesterday, one of them, Tay Chi Keng used the textbook valuation models of EBITDA and P/FCF to show Alibaba's intrinsic valuation as US$240 per share.

Textbook is Textbook, Real Life is Different

Like the above "financial influencer" who is young and still in his last year at a prestigious business school in Singapore, my comment is that if valuation models are the law; many of us, including yours truly, would be millionaires applying the valuation models I learnt at my university. 

From what I have experienced in my investment journey, other factors never taught in our academic textbooks are more important.

Sentiments to a Company

They say the stock market in the short run is a voting machine while in the long run, it is a weighing machine. To be honest, I don't know what the caveat is "in the long run", it could be holding it till I am dead and the intrinsic value will not be realised until 10 lifetimes later. Hey thats still called "long run"!

To me, the most important determinant of a share price is sentiments. It contributes to definitely more than half of the company's value. The China stock market bubble and Tech Bubble in 2020/2021 are evidence. For China companies, their forthy valuation were curtailed when China clamped hardly on them and now companies are trading at less than half of the multiples they were commanding in 2020.

Ditto to US tech companies who have risen and fell. Nvidia is another example where it rode the tech wave, then moved down, then with the AI wave now and good guidance, Nvidia's share prices is moving back to its 2021 highs. However, valuations and growth trajectory has remained unchanged through these years. It is just people expecting their business will "huat" with each mentioned of a new wave.

Structure of the Company- Kingboard Copper Foil

This is another component I learnt where whatever fancy valuation model is thrown at it, due to this, the company will never reach the target price.

9 years ago, I chanced upon this SGX company called Kingboard Copper foil which was trading below its net net value with a good cashflow generating ability. Even before i chanced upon it, its 5 years financial results stretching to FY2010 was reporting a high net profit with good cashflow.

However, the controlling shareholder, who was the parent company, never gave out good dividends to reward shareholders. Cash was just accumulating in the balance sheet. Privatisaion eventually followed and those who held on made insignificant gains.

There are a few companies such as Sing Holdings which had a low price to book ratio and strong earnings; however due to its structure where the controlling family had little chance to be voted out from their management positions, offered low dividends to minority shareholders and paid themselves a high management salary. The price today and price when I sold off (at a loss) has not changed since 8 years ago. I was forecasting a doubling of price based on "valuation models", this has never been reached for 8 years. So what is "long run"?

While still a value investor type, I will like to say sorry to the Accounting and Finance professors who had taught me at University. Those models and what nots are not useful in real life. I scored an 'A' for my finance valuation projects but truthfully its not even worth a D grade in the real world of investing.

Investing is like how many of our Asian Chefs and Hawkers cook- in two words, its called "agar agar". To non malay readers, agar agar is a terminology where people estimate the amount of ingredient to add into a dish as and when they cook it, there is no definite amount that is added. Investing is the same, it is based on estimate and not some complex number crunching excel modelling.

Property Crash- HDB reaffirms the launching and building of 100,000 flats from 2021-2025

In the latest news on HDB launch, HDB has continued its pledge to deliver 100,000 flats for launch in 2021 to 2025. This means from early 2025, 100,000 flats will flood the Singapore market until 2029.

146,000 new housing units in 5 years time

As what I have written in my previous housing post, without a dramatic increase in population, housing prices will tank with the addition of 146,000 confirmed new housing units. This is because the growth in foreigner population has been relatively slow; in turning leading to a large rental supply  in the market with rental demand from foreigners not catching up.This will force rental prices down.

I will not be surprised to see rental rates falling, unless Singapore decides to increase the foreigner population tap to save property investors.

Current OCR condo yields are at the low 4-4.2% and a reduction in rental rates will force yields to be far below the interest rates of property loans that are currently pegged to SORA. 

Do not forget among the housing types, HDB flats are eligible for the lower interest CPF loan provides at 2.6%, this means HDB owners who are renting out their flat can undercut private condo unit's investors. This may force OCR condo to fall to the 3% yield level based on current prices.

Effect of 3% Yield for Condo Units

If loan interest rates are 4.1% (current rate), while the rental yield is lower than that; the leverage effect will mean private unit investors will earn pittance even if they are renting out. And if they are unable to rent out, they are in a deeper cashflow negative state.

Magnitude of the Crash in the Private Market

With HDB housing loan able to sustain a compression in yields thanks to the 2.6% loan interest rate, I will be genuinely unsurprised that the private market can fall to a 3% yield because the premium of a swimming pool + gates will not be enough to justify a large differential from HDB flats.

Without a drastic increase in the foreigner population (e.g. +500,000 foreigners until 2027), I really forsee a compression in yields especially in the private condo market. My prediction is that yield rates will fall to a 3.2-3.5% level, this translates to a 20% drop in housing prices.

Current private property investors will suffer a loss or otherwise be continuously funding a loss making venture in their property market. This is the likely scenario. 

The saving grace will come from the government should it decide to increase the foreigner population dramatically or increase the annual citizen naturalisation rate drastically from its annual 21,000 rate; otherwise I believe a crash is imminent.

Who Benefits?

The fall in prices will definitely benefit the youths of Singaporeans who will enjoy the effects of an affordable house. Otherwise, current youths will continue to suffer from the effect of skyhigh housing prices especially in the HDB resale market that is directly correlated to the housing privates of the private condo market.

There is a side story if the government wants to help the future of the country or bail out the leveraged property investors who bought a house not to build a home but to profit from it.

Why Singapore's Interest Rate Remain Low and a Way to Earn More Interest?

I have seen a few articles covering Singapore's low interest/T bills rate. There are a few reasons why these rates have remained low and will likely remain at such levels for the next few years (venture a guess it could be for the next 3-5 years)

High Leveraged Society on Real Estate

Look no further beyond Singapore's property market. The market is in a buying overspree mode, with people leveraging heavily to buy multiple properties in hopes of profitting from it. 

The overbuying of properties help spurs Singapore's GDP as the construction industry overbuilds ahead of population growth. While the government is aware of the overleverage, it has sought to minimise interest rates hikes that kills property investors. This is because a higher interest means it is more difficult to service debt obligations, foreclosure happens and this will trigger a downturn of prices which causes margin call among property investors. This will freeze Singapore's banking sector via a domino effect. Hence it is important currently to keep SORA (the SIngapore's offical benchmark) rates low to prevent it.

The pace of SIngapore's interest hikes (SORA) is only 60% the pace compared to the US mortgage industry.

With the ever appreciating SGD, investors have parked their cash here with no complains of the low interest rate. This is because the appreciation of SGD against their foreign counterparts helps to earn a few percentage in "extra interest". Take for example the Japanese Yen and Korean Won, SGD has appreciated by 6-10% in a year. Japan and Korean investors would have profitted from such movements. It is the appreciation of the SGD where foreign investors are earning and not from the SGD deposit rates.

Outside of US Interest Rates are Still Low

Singapore's 3 month SORA is at 3.6%

The 3 month Euribor (Europe Interbank) is at 3.7%.

China's Prime 3 month rate is at 3.65%. 

Hong Kong 3 month Interbank is 4.63%. 

Japan's 3 month TIBOR is 0.08%

Only the US is at the 5-5.25% range.

Singapore might be slightly lower but it is not totally far off from the rest.

What Can We Do Living in Singapore?

Given the low (but not so low) interest rates, strong Sing Dollar, I have been considering to exchage some Sing Dollar into foreign currency deposits.

Among UOB and other local banks, USD foreign deposits are at highs of 4.9% 

There is an opportunity to aribitage where if one is able to change SGD into USD/HKD at money changers at Raffles Place Arcade Exchange, deposit in our local banks in the stated foreign currency, the returns is higher vis a vis a Sing dollar deposit. 

The current spread at Arcade from the offical FX rates are about 0.2%, so a 2 way conversion means you lose 0.4% in spread. This still netts a positive 0.7%. Do note you are subjected to foreign exchange risk if the Sing Dollar keeps appreciating non stop, like as present.

I am not sure if the method of changing foreign currency at Raffles Place Arcade and then depositing the currency as FD at a bank branch in Raffles Place is allowed. 

For readers, if you are aware it is allowed, please dispense your advice on how it works. I am sure many will be grateful for this advice to earn more interest in the low interest rate Singapore environment.

With Just $1 Deposit for 30 days, Get US$50-500 + $20 cash via paynow for New Webull Sign Ups

Until 30 May 2023, this is the final chance to Register here and individuals can receive 5 free fractional shares worth between US$50 to US$500 + a $20 cash gift when they (i) sign up a new account (via Singpass), (ii) make a deposit of any amount and (iii) keep the amount in webull for 30 days. It is better than many fixed deposits out there because putting in $1 or a few dollars will nett you at least US$50! The new fractional shares can be found under the "My rewards" tab

The offer is valid until 30th May 2359hrs. please remember to maintian the amount that you had first deposited for 30 days, then your last 2 free shares entitlment will appear under the "rewards tab" on day 30. Otherwise, without putting the money in for 30 days, you will only get 3 fractional shares.

Steps to Sign Up and How to Get the Free Gifts

To qualify for the promotion:

1. Register for a webull account here
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Each free share is a fractional share worth between US$10 to US$100 each. It is a roulette with each spin giving you a certain amount, if you are lucky, you will be able to get US$500 with 5 spins. Most of the time, it is US$10 worth of Tesla shares per spin. 

How to Deposit Funds into your new Webull Account:

After your account is approved, it’s time to make a deposit. Inside Webull mobile app, select “menu" at the bottom left of the screen, then clock on the "more" word icon boxed red

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The eDDA Deposit method is the easiest, where you will authorise Webull to transfer money from your bank account into your Webull account. To use this method, you can select the “eDDA Deposit” option, as a first time deposit, login to your internet banking, and set the transfer limit. 

If you'd prefer to manually transfer funds from your bank account, then you can use the FAST method. However, do note that this option is applicable only for SGD deposits, and you'll need to remember to notify Webull that the transfer has been completed. So the eDDA deposit option is the easiest

How to Redeem Your Free Shares

On the homepage, click "My Rewards" which is boxed green and then claim your free shares there

Every fractional share sale will incur a $0.02 Commission

Do note for every different company fractional share sold, a $0.02 commission is present due to the charges incurred by the US Stock Exchange. Example if you get Tesla, Amazon and Alphabet fractional shares and you sell all the total is $0.06 comission ( 3 multipled by $0.02 commission for each company). Feel free to sell and encash them upon the end of the 30 days you have deposited your first fund into webull.

Disclaimer: I may receive an affiliate/referral fee when you sign up for services/products on this site. I only recommend services/products I am personally using to readers, however I do not provide any warranty or guarantee for the quality of these services/products

Alibaba Break Up: How much is the Broken Entity Worth?

 As the first steps of breaking up the empire, Alibaba has announced the spin off of (i) Alicloud, (ii) Hema (Freshippo), (iii) Cainiao (which it holds a 67% stake)

In this post, I will try to evaluate the worth of these 3 entities so as to guage the fair value of what they are. This will help to decide the fair value of them when they list

Alicloud

This is the second largest segment of Alibaba and touted the fastest growth. While the company is growing faster, it is now cutting prices to keep up with the compeition. Due to its relapse into loss making, a P/E value is not effective, instead a price/sales (P/S) ratio is a good measure. 

At about US$11 billion in revenue, a 5 times P/S will be where it stands; I know there are loss making cloud companies that are valued in the region of 10 times, but given that Alicloud can only compete in China, a 5 times P/S is valid.

A US$55 billion valuation

Cainiao (48% stake)

The close listed comparable is Coupang (which is valued at about 140 times P/E and 1.4 times P/S) and Kerry Logistics (5 times P/E and 0.3 times P/S)

Cainiao is still loss making so using P/S as the guage and with continued growth, it may mean Cainiao is worth about 2 times its current P/S, Cainiao reported RMB55 billion in revenue (US$7.8 billion). Hence alibaba's stake is worth US$7.5 billion

Hema

Hema is a supermarket chain which uses technology to efficiense itself and provide consumer insights.

In July 2022, it was reported that Freshhippo was raising funds valuing it at US$6 billion. So let's take it.

Overall value of the three spun out entity

The three entities value to existing shareholders is about US$66.3 billion

Alibaba holds 33% in ANT's stake (the whole of ANT is valued at US$100 billion) and $36 billion worth of shares in other companies.  Netting everything out, this means its China Commerce (the largest revenue generator) is valued only at US$96 billion.

Alibaba's china commerce segment generated RMB$172 billion in profits (US$24 billion) in its latest financial year. At its estimated valuation of US$96 billion, it is priced at 4 times P/E, which i find is relatively undervalued

Potential Upside

Personally, a 10 times P/E for its china commerce segment is fair and this place it at US$240 billion. 

My views is the fair value for Alibaba on a whole is about US$390 billion. At current valuation, a doubling of market value can be easily achieved but I feel modelling and assumptions are no longer valid in the stock market environment we live in

ManuLife US REIT Secured its Safety (For Now)

In the latest update, Manulife REIT has announced the impending sale of its Phipps Property. Forming about 10.5% of the REIT's valuation, the sale is likely to protect the REIT from breaching the 50% regulatory limit and lower its interest expense tremendously

Approximate Leverage Ratio (Post Disposal)

With the sponsor announcing the waiver of disposal fees, it is likely most of the proceeds from the sale will be used for debt repayment. I expect ManuLife's REIT leverage to fall to 45% post sale. This prevents it from running into the danger of breaching MAS's regulatory limit.

MIRAE Severe Dilution Off the Table

With the Phipps sale, the need for equity injection by Mirae is less urgent. If Manulife is capable of taking on more of the REIT's property disposal, the need of Mirae is not there. This could spell the closure of a turbulent chapert in Manulife's history.

Dividends could be secured as well, however, I expect the payout ratio to be reduced to 90% permanently.

While Manulife continues to be my least favourite among the 3 commercial REITs, the fact that the parent is able to come in to buy disposals (albeit at a low valuation), there are signs that its net asset value can be realised at some discount. This should spell confidence to the whole sector. Hopefully, Keppel and Prime could do the same if the need arises

[One Last Call for Webull Sign ups] - $1 Deposit for 30 days, Get US$50-500 + $20 cash via paynow for New Sign Ups

I am doing a similar post to Stockscafe who posted today too. Webull is likely ending their current generous sign up promotion where with a $1 deposit for 30 days, you get US$50-500.

This is the last week to get the sign up gifts - do sign up through this link: https://www.webull.com.sg/i/investmoolah

What's more, you will get a $20 paynow gift upon successfully funding the account that readers have obtained after signing up with my link. To read more, please refer to the post i wrote yesterday here

Its the end of another good promotion.