ComfortDelgro Ltd

Since the video on Covid-19 was made in the week immediately after the Chinese New Year (CNY), signs are now beginning to surface of the near-term situations of transport companies. ComfortDelgro (CDG), which has been facing a dwindling operating taxi fleet from more than 16,000 in the beginning of 2017 to slightly more than 11,000 by end of FY 2019, is likely to be affected further as the effects of Wuhan Coronavirus start to bite.

 Operating model

Sans the onslaught of the Covid-19 epidemic, CDG’s business model has been under pressure in a few fronts. First, the operating taxi fleet has been dwindling for the past 3 years due to the competition from ride-sharing cars. Over the last three years, the operating taxi fleet has been shrinking in size from more than 16,000 in early 2017 to a little more than 11,000 in end 2019. For FY2016, the operating profit against revenue of taxis were $167.5m and $1340.8m, while for FY2019, the corresponding figures were $104.2m and $668.2m respectively.

Although the bus operations in United Kingdom (UK) and Australia remain relatively free from serious disruptions in the recent years, the exchange rate of the British Sterling and Aussie dollars have declined against Singapore dollars. In effect the reported profit from these two fairly large contributors have been affected as well. In Singapore, the Public Transport Services remains relatively shielded due to the need for yearly review on transport fares.

With the spread of Covid-19 gaining momentum by the 1st quarter of FY2020, it is highly likely that the taxi business gets deteriorate further, both in Singapore and China. Taxi operations, in China contributes about 4% of the revenue and 9% of the total profit in FY 2019. Together with the taxi operations in Singapore, they form a very significant contributor to the group’s profit and revenue. So, the 1st quarter and even the 2nd quarter, is likely to turn out to be worse that Q4 2019, especially with the rebates that CDG has to pay to retain drivers.

The drop in earnings of Q4 FY2019, in effect pushed up the historical PE to above 20. Unlike 3 years ago when CDG was in net cash position, it is now in net debt position with less leeway for growth via acquisition. The pressure on the share price is likely to continue in the months ahead based on the calculated PE. With the dividend payout at 80% even after the recent dividend cut, it may be imminent that a further cut in dividend be expected in mid-2020 for cash conservation. The share price to sub-$2 or even sub-$1.90 is all possible, hopefully temporarily and get pass quickly.

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Wuhan Coronavirus and the STI

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Digital Banks

Digital banks are banking establishments without brick-and-mortar presence. Technically, this would be unimaginable say twenty years ago. How can we be able to make what we called as bank transactions without the need of a physical bank? Thanks to the huge advancement in fintech (financial technology) developments, it has made it so convenient that one almost need not have to go to a bank to do many types of transactions, apart from the compulsory ones like opening or closing of accounts. Almost all our ‘conventional banking transactions’ can now be carried out online.

Naturally, the banking scene in Singapore has to move along with the changing times. Monetary Authority of Singapore (MAS) will be issuing two Digital Full Bank (DFB) and three Digital Wholesale Bank (DWB) licences for operating digital banks in Singapore. To date, 21 participants have submitted their applications in a bid for the 5 licences. The results will only be known by the middle of the year. Except for Sea Group, ByteDance and Art Financial who applied for the respective licence in solo, all the other applicants are newly-formed consortiums backed up by financially deep-pocket corporations. The results of the successful applicants will only be known by 20 June 2020.

But then, what is the impact on us as individual bank customers, business owners and incumbent bank shareholders amidst the dynamic business environment and the restrictions imposed by the regulators? As always, there is no fixed answer to this question. The only way to break down the issue and analyze them accordingly.

  1. Digital Full Bank (DFB) licence

The DFB licence permits the holder to take in deposits and operates like a brick-and-mortar bank. However, this can only happen when everything is in a ‘steady-state’ at least 3-5 years down the road after commencing operation. Before the DFB licence holder can reach this stage, it has to pass a series of ‘litmus tests’ to establish if the DFB can sustain itself as a full-licence digital bank.

While the paid-up capital for the first few years of operations is fairly low at $15 million, the real hurdle is the ceiling or the cap on the aggregate deposit and individual deposits. The imposed aggregate deposit of $50 million certainly pales against the incumbent banks’ deposits of between $290 billion and $380 billion based on their FY 2018 annual report. As it is, the cap on each deposit stands at $75,000, and this can only be come from the shareholders, employees and related parties. Subject to banks’ capital ratio requirements, it also means that there is a limit in which the DFB can lend out.

At the first instant, the conditions may appear to be very draconian. How can the digital banks compete with the existing goliaths? Why does the authority even bother to issue out digital bank licences only to make the DFBs unable to survive?  First and foremost, the idea of having digital banks is not to take away businesses from the existing brick-and-mortar banks. If, by doing so, means using digital banks are able to chip away businesses from existing banks, then it totally missed the whole point of having digital banks. In fact, any simple person would have envisaged that DFBs would raise the deposit rate to attract funds even at the expense of their short-term profitability. Certainly, this will cause huge disruptions to the incumbent banks as there is a huge pool of depositors looking for higher interest rates to park their money. This is not what the authority wants to achieve. Their primary objective is to enable the non-bank corporates to innovatively create products for the unmet, un-serve or the under-serve segments, in particular the SMEs. That explains why the initial deposits have to come from the DFB’s shareholders, their employees and the related parties and not any other depositors looking for higher interest rates. The relatively small aggregate deposit of $50 million also presents a challenge for the DFB to bit-size their loans to mitigate their lending risk, and to make use of their enterprising experience in non-bank businesses to make the DFB work. It is only after these restrictions are lifted, perhaps 3-5 years down the road, before the DFBs can operate as a full-fledge digital banks co-existing with the incumbent brick-and-mortar ones. Only then would the paid-up capital be increased to $1.5 billion. Perhaps, the final paid up capital requirement may not be the real issue as most of the applicants are backed up by deep-pocket corporates. However, to build up the whole eco-system to match that of the incumbent banks remain an uphill task. Thus, in the retail space, at least, the incumbent banks have a 3-5 years lead before they are subject to the real competition from the DFBs. In fact, in the last few years or so, the incumbent banks have already built sufficiently strong ecosystems well-protected by thick firewalls for the DFBs to break through. This should serve as an excellent economic moat against the DFBs for the time being.                 

  • Digital Wholesale Bank (DWB) licence

Unlike the DFB, the DWB capital requirement is lower and so is the foreign ownership restrictions.  Although head-quartered in Singapore, the motivation really is to serve the Asean region, which is generally underserved. The paid-up capital for DWBs is $100 million, which in my opinion, is not high in view that most of the applicants have deep-pocket financial backers. While the DWBs are not allowed to take in Singapore dollar deposits, they can take in current account deposits. So, if they are able to correctly provide the market with the right offers, then they are just as good as the DFBs. In fact, given that the DWBs are not subject to any deposit caps, they may even able to surpass the DFBs in terms of aggregate deposit. More so, is the fact that current account deposits attract less interest, meaning that the DWBs, in effect, have a lower cost of fund.

The battleground

For the start, the battleground for the digital banks, or digibanks in short, can be lumpy, fill with potholes and can be quite piecemeal. Given the incumbent banks’ long existence in the local scene, the juicy parts of the whole traditional banking business have already been sapped out. In the local deposit space, the incumbent brick-and-mortar banks made up of the three local banks, foreign full-licence banks and finance companies have already laid their hands in it. In fact, it was said that 98% of Singaporeans above the age of 15 years old have already have a bank account. However, that cannot be said of the region at the moment. More than two-third of the population in Myanmar, Vietnam, Indonesia and Philippines do not have a bank account. So, in the long-term when the DFBs become full-fledged digibanks, they could possibly slice out a piece of the pie of these un-served individuals, just like what the local brick-and-mortar banks have been doing in the recent years.

Then there are changes in consumer behavior and the rise in the use of apps. All these have a part to play in levelling the playing field between the digibanks and the traditional ones. Paper cheques are now push into near-obsolescence. Many, if not all, C2B payments can be made via credit cards, bank-apps, ecommerce platforms and e-wallets rendering all these transactions to become cashless, and blurring the functions between a bank or a recipient company. This is where the strengths of ecommerce companies strength are. Shopee, whose parent company SEA is one of the several ecommerce applicants for a DFB licence, has 100 million mobile users under its belt. This could easily dwarf the 10 million DBS bank customers by 10:1. In fact, all the participants vying for the digibank licences have huge data bases many times the population of Singapore. While the incumbent banks have a lead in terms of their digitization investments, the digital banks have parents, who possess a huge network of consumer data.

Finally, there is the SME segment. Whether B2B, C2B or B2C transactions, they have been made so seamless that we almost do not need, or at least, to perceive not to require a bank intermediary for these transactions. While the physical banks have entrenched deeply in this space, I think it is only a matter of time that the deep-pocket digibanks could close up the gap. In fact, I think this space could be the first cross-fire between the brick-and-mortar banks and the digibanks when they commence operations.

Effect on the brick-and-mortar banks

Certainly, it would be too naive to pretend that digibanks have no effect on the profitability of the brick-and-mortar banks in the long run. There will certainly be some impact if everything remains static. A lot depends on how the development of the digibanks is going to pan out and what the incumbent banks are doing to maintain their lead. If the incumbent banks are able to continue to successfully penetrate into the foreign markets while maintaining the stronghold position in the local scene, then the impact of the digibanks on the incumbent banks may not be so great or even negligible. That said, we should not forget that our neighbouring countries, are also planning to issue out digital bank licence pretty soon. That again could hamper the market development of both the brick-and-mortar banks and the digibanks going forward.                          

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Taking stock of stocks portfolio

Like many other years, last year had been spiced with a few surprises causing some stocks to swing significantly even though the STI index had been relatively stagnant. First and foremost, at the beginning of the year, many of us were of the view that interest rate is likely to move up given the strong US economy. The likelihood that the FED would follow through with at least 3 more interest rate increase had been on the minds of many investors after a bout of 4 hikes in 2018 to 2.5% by December 2018. It appeared that the FED’s the unwritten long-term interest rate target of 3% to 3.5% was due to materialize by 2019.

Banks

Banks in anticipation of the further interest rate hikes were seen increasing their FD rates in hope to attract more fresh funds from depositors in the first half of the year. But all these evaporated and reversed after the FED made a U-turn to reduce the interest rates three times in the following six months from July to December 2019, almost cancelling out all the interest rate hikes in 2018. The U-turn is likely to put margin compression on the local banks’ net interest between lending and deposit rates. On the whole, their share price did not change very much from the beginning of last year to the end of last year. So, if one were to hold bank stocks, it is unlikely that he could make significant capital gains. The only saving grace is that banks have been paying out good dividends.  With the current dividend yield of between 4% and 5%, it is still a good rate compared to bank’s deposit rates. And if one had bought the bank stocks say more than 5 years ago, the yearly dividend yield could be as high as 8% to 10% without any significant change in the banks’ share price. Going forward, it is unlikely that we see a significant increase in the banks stock prices at least in the short term unless there are favourable game-changing happenings like sudden ceasefire of the trade war. For the moment, let us be conservative and hang on the belief that the trade war will continue.

REITs and Properties  

Conversely, the REITs had a good run in the 3rd quarter following a series of interest rate reduction although it appeared that the stock price of most REITs had tapered off somewhat. It had been a pleasant surprise for the REIT shareholders as many had been braving through the series of interest rate hikes in 2018. REITs prices have been elevated by 10-20% since June 2019. The series of interest rate reduction also presented windows of opportunities for merger and acquisition (M&A) activities, but probably at the expense REITs shareholders who have to fork out additional funds to support the rights issues. So far, quite a number of REITs have issued rights for M&A activities. Perhaps, there could be one or two more M&A activities going into the new year as it would be deemed more difficult to justify for FED to lower the interest rate further going forward. Correspondingly, the share price of developers also moved up in response to the interest movement, but it appeared that effect is less impactful compared to the REITs.

Shipyards and Offshores

Then, came the news that Yangzijiang chairman, Mr Ren Yuan-Lin, who was reportedly missing since June 2019 implicating him to be involved in the government’s anti-corruption investigations into the former party secretary of JinJiang City, Mr Liu Jianguo. JinJiang City is where the YZJ shipyards are located. The news, that happened during our national day holiday, wiped out about 20% of YZJ share price from $1.29 to $1.04 when the market opened after the holiday. In the next few days that followed, the share price tanked further to below $0.90. Even the aggressive buying by the company did not help. It managed to elevate the share price by a few percent each time it made open market purchases, but only to see the share price dropped back when it stopped the market purchase activity. With some luck, having sold some stocks in April 2019 before the news broke, it was a good time to replenish this stock at the on-going beaten-down price at that time. More recently, Temasek injected another adrenaline shot in this sector to acquire 30.55% of Keppel Corporation from the float at $7.35 per share to become a majority shareholder of Keppel Corporation. The details have not been fully announced, but that was good enough to push up the share price of Keppel Corp from below $6.00 per share to close to $7.00. In the absence of further news, the share price appeared to have been weakened a little bit since the announcement. But still, such a news is exactly what this limping sector needs at the moment.  

Manufacturing

Despite the flagging economy in 2019 and the numerous negative reporting in the manufacturing sector during the year, some stocks in this sector were doing not too badly. On the whole, it is a mixed bag. Semiconductors and contract manufacturing appeared to be moving up ranging from 15% to more than 100% from start of 2019, but plastic parts and injection moulding segments were in the negative territories. If you have held the right stocks, it was indeed not a bad sector to be in even though the real sector, as a whole, appeared to be relatively bleak.

Plantations

The next sector that sprang a surprise was the plantation sector. Despite the EU‘s announcement of relying less on palm oil for its biofuel since Q2 and India’s restriction of palm oil in October, the share prices of plantation stocks appeared to be on uptrend closely tracking the higher Crude Palm Oil (CPO) price. Apart from Golden Agri, which appeared not to be able to take advantage of the higher CPO price, most stock prices in this sector elevated about 20%-30% in Q4, moving out of the price doldrums in Q3. The last boat to catch this uptrend was probably early to mid-October 2019.

Concluding remarks

Despite that the uninspiring movement of the STI, which is a relatively bank-heavy index, there were actually several windows of opportunities in the year 2019. Indeed, the STI did not move very much, at most 3% to 4% from 3102.8 to 3222.83, from the 2 January 2019 to 31 December 2019, but on the whole, it is still not too bad a year to be in stocks.        

Best of luck! Happy investing!       

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Posted in YZ-BANKS, YZ-COMMODITIES, YZ-MANUFACTURING, YZ-PROPERTIES, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance | Tagged , , , , , , , | Leave a comment

Keppel Corporation

What a pleasant surprise! Temasek Holdings (TH) through its wholly owned subsidiary, Kyanite Investment Holdings, is proposing a partial offer to acquire 30.55% of Keppel Corporation to increase its shareholding from its current shareholding of 20.45% to 51.0%. Based on the latest annual report, as of 5 March, the 30.55% would translate to about 555 million shares. At the offer price of $7.35 per share, the total bill would come to about $4.08 billion. Mopping up 30.55% from the other 79.55% would certainly help push up the current market price, which has been in doldrums for the past 3 years or so.     

As always, before you jump into the bandwagon, do your homework. Perhaps, the following pointers would be helpful for assessing the situation.

Why can’t TH buy from the open market quietly instead of offering a premium of 26% above the last traded price of $5.84?

Theoretically, TH can do so in the open market. But to increase its shareholding from 20.45% to 51.0%, it would either take a long, long time without causing too much disturbance to the market price or to cause a sudden upheaval in its trading price if it wanted to do so within a short time. It may even cause the trading price to overshoot way above its intended proposed price of $7.35, thus negating its intended purpose of open-market purchase. Imagine, pouring $4.08 billion on the buy side for the next one year or so, it would surely make it even more expensive and takes a longer time for TH to reach the 51% threshold. Unlike the minority shareholders who can buy 1000 or 2000 shares without causing market ripples, a major shareholder’s move would push up the share price significantly within days and even within hours. As it is, the major shareholder looks at the control side of things. Certainly, an offer of this nature, it is inaugurating a strategic move. To all intents and purposes, the action has to be swift and decisive, hopefully in one swipe. In fact, it has already been discussed extensively in the media that TH may use this acquisition to merge offshore unit of Keppel Corp and SembCorp Marine to level the playing field given the strong competition from Korea and China. After all, TH has already had almost 50% of Sembcorp Industries, which is the parent of Sembcorp Marine with a shareholding of 61%.  It certainly makes sense for the merger given that Keppel share price is at its low end of the price spectrum. Once that is done, the next step for the merger would be just a breeze. 

Why not arbitrage by buying from the market and then sell to TH at $7.35?

I believe many investors also think likewise. After all, there is a significant price difference between the trading price and the offered price. Again, theoretically, it is true. But before you do that, it may be important to look at the various scenarios. The end-results of the offer can fall into any of the three broad scenarios:

  • Case 1 – The total shares put on offer falls short of the 555 million shares. In this situation, TH is likely to buy up all the shares on offer and then bridge the shortfall by buying from the open market. In this situation, the minority shareholders will be generally happy because all their offered shares were being taken up. Perhaps, if the offer falls too short of 555 million, TH may let the offer lapse as in the pre-conditions for the partial offer. As a matter of opinion, in such a situation, it is likely TH keep the offered shares even if the offer falls through. After the moratorium period, TH can then make a fresh offer. Personally, I think TH has done sufficient homework that offering at the price of $7.35, a premium of 26% over the last trading price, should be able to attract sufficient quantity of shares for it to reach 51%.  
  • Case 2 – The total shares put on offer is exactly 555 million shares. This is a happy situation for everybody but the chance of it happening may be slim compare to the other two cases.           
  • Case 3 – The total shares put on offer exceeds 555 million. This scenario is quite likely. Given that the share price has been sinking gradually for several years and falling under $7 per share for more than a year, many shareholders would be very willing to offer their shares at $7.35 to TH. However, this situation can be quite tricky. If the quantity of offered shares is only slightly higher than 555 million shares, maybe TH might simply buy up the extra shares. If offer shares are significantly above 555 million, chances are that minority shareholders, who offer their shares, end up with some odd lots. Imagine if you decide to offer 1000 shares and the total shares on offer is 1 billion (about 55%). In such a pari-passu situation, TH will only buy 555 shares from you, leaving you 445 shares. Of course, only god knows the final quantity on offer, but given that weak share price of late, this situation remains a high possibility. If your average price that you paid for your shares is reasonably low, say below $6 per share, it may not make you distinctly unhappy. But if the trading price is already very close to the offer price, then maybe it does not make sense to arbitrage as there remains a possibility that the offer falls through.       

Will all the other 79.55% offer their shares to TH given the low share price now?

Shareholders so long as they are not subject to moratorium requirements can offer their shares. However, not all are willing to offer their shares. Perhaps, there are shareholders, for sentimental reasons, do not want to sell them. Perhaps, there are people who bought their shares way above the offered price and decided to become super long-term investors. Or, some may believe that its value is much higher than the offered price of $7.35 per share. And, maybe some may want to offer only part of their Keppel shareholdings to TH. So, it is not likely that all the 79.55% will be put on offer. The fundamental truth is that the higher the premium over the last trading price, the higher the likely quantity put on offer. Similarly, the longer the trading price stays depressed, the higher the likely quantity of shares put on offer.

Will Keppel Corporation issue new shares instead of buying shares from existing shareholders?

It won’t be the case. Issuing new shares to a corporate or another person is a private placement and do not involve existing shareholders. It has already been clearly stated in the document to SGX that TH is making a partial offer by buying off from existing shareholders. The purpose is to have a majority control likely for some strategic reasons, so why do they want Keppel Corp to issue new shares. The offered fund does not go to Keppel Corporation. It comes from TH and goes directly to the pockets of existing shareholders. Issuing of new shares would make sense only if Keppel wanted to expand, pay debts etc. Only then would the fund get into Keppel Corporation for its operation. Private placement by corporate and offers made by the majority shareholders are two distinctly different things.    

If you are already the shareholder of Keppel Corporation, the offer documents will reach you soon. As for me, just wait for the offer document and then decide the quantity to put for offer. I do not want to short-change myself by selling in the market at lower price compare to the offer price at this time. It does not matter whether TH takes my offered shares in whole or in part. The offer by TH is already on the table. It won’t run away. The only uncertainty is what is the aggregate shares put on offer. For that, I have no control. So why should I worry about it. Just sit back and wait.

Best of luck! Happy investing!       

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Posted in Keppel Corp, SembCorp Marine, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance | Tagged , , , | Leave a comment

What is the difference between investing and gambling?

This question pops out from time to time – what is the difference between gambling and investing? I bet many of us have some idea, but unable to clearly explain what really separates the two. That is why we often see people rushing to buy stocks with a gambling mindset.  For most of us, buying stocks and buying 4Ds are all in a mixed bag categorized as ‘money-making opportunities’, as both of them make use of money to make money.

In the book ‘Building Wealth Together Through Stocks’, I have dedicated 4 pages of it to explain the difference. I hope readers take time to ponder over the issues discussed. A financial book of such nature should not be read like a novel. Certainly, in its very simplistic form, it could be easily completed within a day or two. But if one were to do that, he is likely to miss out some salient points. The idea of making it simple is to enable readers associated the salient points with their own experience as a backdrop and draw up important lessons from there. This is the best way to learn financial lessons. As one goes through the book, he should be asking mind-boggling questions like – why the author is doing this and not doing that. If I were in that position at that point in time, what course of actions should I take given the future unknowns. Obviously, in our investing journey, there are always rights and wrongs that we had made when we review things in hindsight. By getting into these pertinent questions, then one can draw out the critical lessons to help frame our financial journey ahead.

Before we start to identify the differences between investing and gambling, let us point out the obvious. Whether we are investing or gambling, we need money upfront. If we do not have money as a form of ‘bet’, nothing works. That said, the huge difference lies in the outcome.

First and foremost, there is the mouth-watering payout. In any form of gambling, the payout is the most attractive part. It is a huge magnet to draw in punters. Take the case of 4D. The first price wins $2,000 on a dollar. The second goes for $1,000. The third gets $500. Even the consolation price gets $75 on a dollar. The ratio between the payout and the outlay is many times. This is the most attractive part of gambling – making ‘big money’ out of a ‘small investment’. Due to this huge difference in the payout against our ‘bet’ or investment outlay, we often see long queues in 4D outlets, especially during times when there are promotions offering strike prices going into millions of dollars for TOTO draws. In investing, however, it is a different story. It is quite difficult to gain even 50% on a dollar within a very short time to begin with, let alone hitting a multi-bagger. It can take years and even decades to do so. In fact, if one were to review his portfolio, some stocks may not even touch 2 x bagger at all.

Then comes the next few points. The best way of illustrating it is to bring out a story. There was once a big-burly 16-year-old teenager, Mike, who liked to play the same old prank on a 10-year-old boy named Jack. Mike flashed out two coin – a 10-cents dime and a 50-cents half a dollar. Every time, when the game was played, the Jack chose the 10-cents dime and he got to keep the coin. It had already been played for 11 occasions, when older boy decided that he should reveal to a common friend, Joe, how stupid Jack was. On the 12th occasion, the Joe decided to witness the game and to better know the level of financial literacy of Jack. Once again, Jack chose the 10-cents dime instead of the 50-cents half a dollar. Unable to control himself, Joe decided that it is time to let Jack knows how stupid he was. In the absence of the bigger boy, Joe spoke, “Obviously, you are not smart enough to choose the high value coin. Don’t you know that the 50-cent coin has bigger monetary value than the 10-cent coin?”. I am quite sure many of us would have the same thought as the Joe, right? Please do not go further beyond this point until you really sit back and think over this issue.

This was the answer from Jack. “I know I am very stupid to choose the 10-cent coin. But if I were to choose the 50-cents coin, he would play the game only once and it is a game over for me. I have played the game with him for 12 times and I have gotten $1.20 so far. I can play this game forever so long as he does not know what I am thinking”.

What lessons can we draw from this simple story? There are, in fact, a few overlapping take-aways:

  • In the story, there are two choices and the outcome is one of the two choices. In other words, it is a binary decision. We choose one or the other. In gambling, it is a binary outcome, either we strike or we don’t. But, unlike the above story, the probability of a strike is so low that net probability (in mathematics, we call it expectation) is always in the favour of the house. In other words, if we buy all the possible 4D numbers of $1 each, the returns that we got from all the strikes is still unable to cover the total cost of $10,000 to buy up all the possible 4D numbers. The net effect is that the house always wins. When there are more players, better still for the house. It is the summation of all the net gains from each individual. In investing, there are actually three possible outcomes. One can gain, one can lose and a less obvious one, one can draw or just break-even. In a normal circumstance (or unbiased situation), the probability of the gain and the loss are quite equal, but the probability of the breakeven is significantly less compare to the two. The gain and loss are also not significantly discrete like in gambling whereby we know the payout. While the gains and losses in investing are still discrete, they can span over a huge price range such that the win-loss probabilities can be transformed into a continuous bell curve. So, in effect, some gains and losses are significant while others are not. That explains why some people made big gains while others make small gains out of just one particular stock.
  • What attracts me to investing is certainly is not the number of outcomes per trial mentioned above. It is the number of trials that we can play per investment. In the mentioned story, Jack is not worried out about the quantum of each return he played. What he is worried about is that he could only play the game once. This is exactly the situation of gambling. In gambling, the outcome happens only once. In other words, we bank all our hopes in that one and only outcome. For example, in a 4D draw, we place a bet for a certain date, If we strike, we are happy, but if we don’t, we don’t get a second chance. In investing, we get multiple opportunities actually. If we are unhappy with the selling prices (or outcomes) for the day, we can come back another day to sell our investment. In other words, we have plenty of opportunities to buy or to sell an investment. In fact, the opportunity is infinite so long as the stock is still trading and the stock market is still there.       
  • Another advantage but often neglected point about investing is the timing of the outcomes. In gambling, we have no idea of the outcome. Up until the draw, nobody knows exactly what the outcome is like. Think of a 4D draw. Nobody is certain what is going to come out as the 1st price, or the 2nd or the 3rd. It is a total bet based on luck. It occurs once and only once. But one thing is obvious. We have to place our bet before we can enjoy (or angry about) the outcome. In other words, our action is before the outcome. In investing, due to the multiple outcomes, there are actually precedents to guide us on the trading price. If we are more or less happy with the on-going trading price, we key in our trades. If we don’t, we sit by the sideline to drink coffee and be an observer. Even if we missed out in buying or selling a stock, there is always another opportunity down the road. In other words, we can wait and sit on it. In a certain extent, the outcome comes before our action and we can choose whether to act on it.      
  • In the story, Jack definitely adopted a long-term strategy. He knew that if he took the 50-cents coin, he could only play the game once.  But if he were to take the small gains each time, he could do it over a long time. Over time, the cumulative returns, unknown to the others, surpassed the one-time significant gain. In gambling, the outcome for each trial happens only once. The outcome for the next trial is independent of the first and has to start off with a fresh bet. In others, the two trials are mutually exclusive. If there are more trials, they are also independent of the earlier trials. In other words, we are unable to set a long-term strategy. In investing, it is possible to set up long-terms strategy. If we believe a stock has a good long-term potential, we can consider to hold it long-term. Over-time, we can buy more, accumulate them, benefit from the dividend distribution while waiting for the stock price to go up. This can go on and on, so long as the stock is still trading and the stock exchange continues to operate.           

These points are sufficient pointers to help readers relate the lessons learnt with true experiences. There could be more. So, I hope readers draw in their life financial experiences while reading the chapters of this book.  

From now till 30 September, the ebook will be promoted at $16 and the physical book for a local address is priced at $18 + postage charge. (Postage charge to be borne by addressee. All purchases to be made via SingPost). Payment for the ebook can be made via www.investingnote.com. Purchase for the physical book shall be made via www.bpwlc.com.sg/contact-us, stating your name, mailing address, quantity to purchase. All payments shall be made upfront before the physical book is mailed out.             

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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OCBC is still growing

Once again, Overseas-Chinese Banking Corporation (OCBC) is dishing out to scrip dividends to existing shareholders. With the discount of 10%, this translates to a mouth-watering conversion rate of $9.57 per share. Given the steep discount, it is likely that many existing shareholders would choose scrip dividends over cash unless the bank share price tanks unexpectedly from now to 18th September. After all, we all learn about power of compounding and it makes sense to continue to invest in this bank whose history existed even before the 2nd world war.

In an effort to keep up with the growing dividends offered by other banks, the declared dividend for the 1st half of 2019 financial year is $0.25 share and is 2 cents higher than that declared for the second half of financial year 2018. Over a period of 10 years, the annualized increment in dividend rate in spite of its increasing share base translates to about 5.8%. With the latest declared dividend of 25 cents per share, it translates to a hefty distribution of more than S$1billion in dividends just for the 1st half of 2019 alone. With the huge dividend payout, and relatively low conversion rate, it is likely to push more shares in the float. It is certainly no child’s play.

But then, why does the bank want to offer scrip dividends to expand its share base? Certainly, it is going to affect the return on equity (ROE) going into the future, unless the bank can better deploy the conserved cash. Without dwelling too much into detailed calculations, the bank appeared to be purchasing its own shares from the market at between mid-$10 and mid-$11 on average, and this scrip dividend distribution at a discount of 10% would have benefited existing shareholders at the bank’s expense. After all, it had already met its CET-1 requirements and there is no necessity for the bank to conserve more cash. So, the only conclusion is expansion plans are on the card, and OCBC beefing its war-chest for such future acquisitions.

A few possibilities are:

  • Buy up the last 13% of Great Eastern shares (GE) and take it private. This is highly unlikely. OCBC had already tried 2 times (maybe more). The last was offered at $16 per share. Unfortunately, the die-hard shareholders held steadfastly to their shares that the take-over bid failed miserably at that time. Now with the share price oscillating between $25 and $30 per share, the possibility to buy up the last few percent is even more remote. It needs a huge premium to dislodge the shares from these shareholders’ hands. Given the expensive exercise, it is very likely that OCBC will leave it status quo and focus on other regional opportunities.
  • Buy up OCBC NISP. Possible, but comparatively unlikely. Again, the last 15% shareholders are likely to hold steadfastly to their shares. Furthermore, there is an authority to deal with, which can come in a surprise. Just a few years ago. DBS’s plan to buy Indonesia’s Danamon Bank (Indonesian’s 6th largest bank) was foiled by the authority placing a 40% limit by foreign institutions. Of course, there is a possibility that OCBC looks to acquire other Indonesian banks, but then it may not serve significant purposes given that it has already had a presence offering banking services there.  
  • Increasing its presence in the Greater Bay Area (GBA) in China. This appears to be more likely situation. The CEO has indicated 1-2 year ago that his target is to increase the return from the GBA over the next 5 years.  In all likelihood, more resources are likely to go into this region. To date, OCBC has a shareholding of about 12% in the Bank of Ningbo (BON). More recently, it had successfully, acquired Wing Hang Bank in Hong Kong. So, we should expect OCBC to push its growth trajectory for this region.

But then again, to shareholders, growing and acquisitions would mean taking on more risks. If we choose to take the scrip dividend in lieu of cash, we are in a way proportionally taking part in the risk-sharing process made by the bank, for good or for bad. The risk part of the equation, quite often, is conveniently forgotten or, perhaps, obscured by the attractive scrip dividend conversion rate.  

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

Posted in OCBC, YZ-E_commerce, Z-INVESTMENTS, Z-Personal Finance, Z-STOCK INDICES | Tagged , | Leave a comment

Yangzijiang

A former student messaged me on the eve of our National Day that Yangzijiang (YZJ) share price had dropped 20%. For the past 2 weeks or so, I have been very busy and have no time to look at how my stocks performed. What am I busy about? (Click here). Indeed, by the time I was able to avail myself some time, it was already national day on 9 August. The stock price had plunged 20% to $1.04 per share from the previous day close of $1.30 per share. It had already been suspended. Following the national holiday, there was a super long weekend. It was with luck that I had sold 40% of my holding in April. I would have called it an ‘insurance’ sale, taking a leaf from Jerome Powell’s insurance cut of interest rate of 25 basis point on 31 July 2019 to guard against global uncertainties. The stock price has been oscillating stubbornly high between $1.40 and $1.65 recently. Since 2011, the last high around this level was 2 years ago. Given the on-going trade war, it would be a miracle if the share price can continue to remain this high for the rest of the year. Certainly, it would be prudent to take some money off the table and do what I wanted to do, while waiting for an opportune time to buy back the stock when the time comes. With that sale in April 2019, it was a great feeling that all the remaining stocks were held at zero cost down.

Actually, in the last 6 months or so, the stock price seemed to be out of sync with the other stocks. It was especially glaring in view that all the other stocks had already fallen quite a fair bit amidst the trade war between the world’s two largest economies (see previous post – As we approach mid 2019).  However, YZJ share price seemed to be extremely resilient even though China has been a direct target of the US in this trade war. In fact, the share price has been defying gravity when it was less $1 per share less than a year ago. 

When the suspension lifted on Thursday, 15 Aug, its share price had run up from the close of $0.86 to $0.99 on Friday helped by the company’s open market purchases. With the relatively small percentage float held by shareholders of less than one million shares, it is no wonder that the share price can move ferociously in both ways. With that, it has been a great opportunity to replenish my stock holding again at almost 50% discount. However, there is a still one unclear hurdle. It is interesting that the chairman takes a leave of absence in a police investigation. Although the recent news release somewhat cleared the air, it is important that we should not let our guards down. A slight ripple can affect the share price again. We know from past incidences that when a bad news strikes, it topples the share price very fast. This is especially true for corporations whose operations are far away from our shores. That said, it is always good to know that a corporate has a succession plan in place.  

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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Happy National Day

Happy National day to friends, colleagues and students.

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Stock analyses

Analyst report – what really matters?

As stock investors, it is almost an everyday affair to come across stock analysis reports. It is not uncommon to across analyst reports comprising 5-6 pages of graphs and write-ups. Perhaps, it is meant to instill in readers that painstaking analysis is real hard work, and that not many people are capable or willing to do them. Actually, the way I see it (and perhaps many readers out there would agree) is the final conclusion of whether it is the ‘Buy’ or ‘Sell’ call that matters to everybody. The target price is probably all that matters. To make it especially appealing to readers, most brokerage houses design this most important conclusion to be at the most significant part of an A4 page, usually the upper right-hand side of an A4 page. So, within 3 seconds or so, a reader knows the conclusion of the whole report. The rest of the contents in the report is quite secondary. Most of it is to spice up or to reinforce how the conclusion was arrived at. In all likelihood, most people give the details a miss, and will not question the analyses or the assumptions behind those analyses. After all, people gave the benefit of doubt that nobody is really able to predict the future.

Relying too much on analyst reports

From an investor’s perspective, following a report and acting on it, is a wisest way of doing things. After all, many of us do not have much time to even read a report, let alone researching and feeding data into our analysis to arrive at some decent conclusions.  In very plain words, it is a lazy but a clever way of doing things by leveraging on someone else’s hard-work. After all, it is really herd mentally. If everyone believes in it, the truth actually presents itself. In fact, this is how technical analysis came about.   

Why are some stocks heavily covered while others do not?

Brokerage houses issue reports to get people interested, in particular, the big, blue heavy weights. The reason is that they are liquid and are of very high value. These stocks generate highest income for brokerage houses. The higher the frequencies of trade in these stocks, the more income they would generate for the middleman. Almost always, illiquid stocks do not get to be covered by analysts. What is the purpose of covering a stock when the daily trade is only a few hundred shares a day, right?

Differences in analyst opinion

Analyst reports may give conflicting conclusions. Remember, stock investors do not expect analysts to be just stock reporters. The general expectation is that analysts must be able to read or extrapolate into the future. In so doing, analysts have to make assumptions when making analyses. This can result in huge differences in their opinions. For example, a recent case of Capital Commercial Trusts, (CCT). Following the purchase of an office building at Main Airport Center. from its sponsor, Capitaland, in Frankfurt, Germany. I came across three analyst reports offering three different conclusions. One said ‘buy’, one said ‘sell’ and the last said ‘Hold’, perhaps taking a neutral position as a safer option. The fact is that nobody can tell the future. Therefore, it is common to make assumptions in order to make projections. These assumptions can be grossly wrong. Even if the assumptions may appear to be reasonable at the time of analysis, disruptions may happen in reality causing the actual trading price to differ significantly from the projected stock price.

(Since, I am on the subject of Capitaland. I remember for many years, Capitaland’s stock price has always be valued about $4 per share. That went on for many years as far as I can remember. To date, I noticed that it never even stayed above $3.70 per share convincingly.)  

Analysts are humans too

I am not sure of the internal checks of brokerage houses. Analysts are human beings too. They can have personal bias. Perhaps, it may be difficult for an analyst to issue a ‘sell’ call when he fell in love with a stock. Or, he may be under pressure to issue, at worst, a ‘Hold’ because the everyone is optimistic about a stock. Over the years, my observation is analysts tend to issue ‘buy’ calls more than ‘sell’ calls. Perhaps most of the stock coverage is in blue chips. Certainly, a ‘buy’ call is the natural choice because the actual stock price seldom reaches the target price as no one wants to hold the last baton. Even if a stock price is about to reach its target price, new reports are issued to reflect a higher target price. (I remember years ago even before the oil price crashed in 2016, Keppel Corp share price was projected to hit $13-$14 per share when it was trading around $10 to $11 per share at that time. In the best of my memory, it did not even hit $12 per share from then until now. To date, it is trading below $7 per share.)

Why analysts then?

Some people say just treat analyst reports as a pinch of salt. They are never accurate. If that were the case, then why do we need analysts? In my many years of observation, I notice that analyst reports may have some influence on share prices. There are a few things that analysts can help as far as the stock market is concerned.

  1. Being a full time professional, they are more focus in their job. Investors believe that they are able to provide more in-depth studies of the company and its operating environment. Furthermore, they have the benefit of conducting interviews with the company executives and visiting the company premises. Many investors do not have such opportunities, especially those on 9-5 jobs. To certain extent, company executives welcome them. Such communications serve as a conduit for company executives to provide the right message to investors. 
  2. They can help provide additional thought process. As individuals, we do have blind spots. We may have overlooked or even missed out things completely. We may have personal bias or fall in love with certain stocks, even though we may not openly admit it. We may not agree with the analyst reports totally, but they do provide different views surrounding a stock.
  3. In certain situations, such as a falling market, they can help stem a straight fall to lessen the pain of stockholders. They can help turn-around situation to provide a floor for the stock price. Perhaps, it may be a situation of self-fulfilling prophesy. But still, it works. Of course, in a similar way, they can also stifle the upside by issuing a sell call.

Getting recommendations from analyst report won’t produce the biggest upside

It is hard to say whether analyses report help or does not help in one’s buy/sell decision. But at end of the day, it is end user’s decision to make the judgement to buy or sell a stock. Stocks analysis can only do so much, at most be used as reference. To me, the best way to profiteer from stocks is really to do your homework. Remember, by the time when analyst reports land in the hands of investors, the stock price could have already gone up by 20%-30% because you are not the only one who knows about it. By then, tens of thousands out there would have already get their hands in it. So, when you spot a good stock and is out of the radar screen of the analysts, keep that to yourself. Load up the stocks and wait for the stock to come to live. It could be a few days, a few weeks, a few months or even a few years down the road. Just be patient. 

Doing it alone

But there are always the negatives if you are doing it alone. Remember, no one is beside you for you to seek solace when things go wrong. The journey can be quite lonely since no analysts are alongside with you. Apart from that, you must be daring to go for broke. Say, you have spotted an undiscovered stock with a huge upside potential. Are you prepared to put aside $10,000 and prepared to lose it all if things do not go your way? Let take OSIM for example. The lowest price during the global financial crisis in 2009 was $0.05, and the 1-to-1 right issued at that time at $0.05 was heavily undersubscribed. The amount of $10,000 would have bought 200,000 shares. Following that bad quarter, OSIM went into 23 quarters of growth and the trading price at the highest point was $2.94. That was equivalent to a whopping $558k on $10k investment. In other words, it was a 5880% upside! In hindsight, many would not mind putting $10,000 for a dream of 58.8 times upside. But really, during that time, many were more concerned about losing their $10,000 than trying to chase their dream of getting multi-bagger returns. And that was the exact reason why the share price sank to such a miserable state.

Taking stocks

At the point of writing, it has been more than 10 years since I left my full-time job. Thanks to the stock market, so far so good!

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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