Monday, March 19, 2018

Tangible Thoughts #3: Sg Condo vs US Island

In the US, one can buy an island for $8.7m while in Singapore it might not even pay for a toilet in a condominium? Something to think about yah? 

Excerpt from the news below of the most expensive condominium in Singapore.

GUOCOLAND will release later this year (2017) the super penthouse in its 99-year leasehold Wallich Residence project in Tanjong Pagar which supposedly has an auspicious-sounding price tag of S$108 million.

While the 21,108 square foot triplex is the highest residence in Singapore - the 64-storey tower in which Wallich Residence is located is 290 metres high.

But this is not to say that Singapore property is too expensive, it is another vindication that we have become the playground for the global rich and famous. Prices will stay exorbitantly high, just like the other playgrounds: Monaco, Hong Kong, London, Paris, Rome, Vienna, Bermuda amongst others.

Monday, March 12, 2018

F&N 6 Years On - Part 2

The is a continuation of the previous post.

We discussed how F&N had become a diary powerhouse in ASEAN (Association of South East Asian Nations) and the crown jewel is actually its 19% stake in Vinamilk which now accounts for 47% of its earnings. So what is Vinamilk? Well, Vinamilk is the largest diary company in Vietnam with 50% market share across the different diary products. It is also the largest listed company in Vietnam at S$17bn market cap!

F&N, at S$3.7bn market cap, implies that its stake in Vinamilk pretty much explains for its entire existence and the rest of its businesses and brands (100 Plus, Magnolia, King's ice cream) pretty much worth nothing. Albeit, the hype in Vietnam is causing every stock starting with Vina or Vin or Viet to rally hard, so it might not reflect the true intrinsic value of F&N's stake.

Nevertheless, let's take a brief look at Vinamilk. 

Vinamilk's Spokesperson

Vinamilk is helmed by helmed by Ms Mai Kieu Lien who was the spokesperson for the brand from 1995 to 2018 (pic above). She led the firm to dominance with provocative ads that flooded the internet deploring the nutrition benefits of milk to the 90 million Vietnamese. She is still single.

Just kidding.

The following is an abbreviated CV for Ms Mai (the real one), one of the most prominent businesswomen in Vietnam.

Born on 1st Sept 1953 in Paris, France
1976 to 1982: She was a Technology Engineer
1982 to 1983: She was Vice Technical Director
1983 to 1984: Studied at Leningrad Institute of Engineering and Economics
1984-1992: Deputy Chief Executive Officer in charge of sales
1992-Present: CEO of Vinamilk

She was also a member of the Central Committee of the Vietnamese Communist Party. In her 26 years as CEO, she led the firm to become the dominant market leader with 13 production plants, 10 product categories and 15,000 cows selling USD 2.2bn of diary products annually and generating USD 500m in profits and 400m in free cashflow. Most of these metrics will continue to grow at 20-30% for the next few years. Vinamilk has 40-80% market share in various products. Over the last 20 years this formidable lady trashed Dutch Lady, the UHT milk brand of South East Asia, including Singapore. Dutch Lady is now the distant #2 with a mere 20% market share in Vietnam. Here's her real pic below.

Mai Kieu Lien, not your normal Ah Lian, don't pray pray

With F&N owning almost 20% of Vinamilk with a legendary dragon lady running the show, it could be part of the reason why the stock market bidded up F&N from S$1.80 in 2015 all the way to $2.60 today. But there is another reason for the stock to go up. This has to do with the Elephant - Thai Beverage.

Recall that Thai Beverage took over the whole F&N during the saga of 2012 which included the property arm. Now, Thai Beverage had also pretty much did six years of thumb-sucking (ie not doing anything) and left a lot of stuff hanging for that period of time. Hence, it is rumoured that the whole
reorganization of Thai Beverage Group might be due. (Well to be fair, they were pretty busy with beating up Singha - the Lion in their home market.)

So here's how the organization might work. There is an ultimate parent entity called TCC which owns 59% of F&N, 59% of Fraser Centrepoint. Meanwhile Thai Beverage owns another 28% of Fraser Centrepoint. So the idea was for Thai Beverage to trade its 28% stake in Fraser Centrepoint for TCC's stake in F&N.

This would allow Thai Beverage to own around 60-70% of F&N (dependent on the transacted price) and consolidate its earnings. It would hopefully also speed up integration between Thai Beverage and F&N allowing synergies to be reaped. All in, this could mean a S$30-40m improvement in EBIT, together with additional valuation increase, we are talking about a S$500-600m increase in market cap and as Vinamilk continues to grow 15-20%, that adds another S$500-600m of market cap to F&N every year.

F&N 5 year share price chart

Not forgetting if F&N could turn the other loss-making stuff (like publishing) back into positive territory, we would get an additional S$10-20m in EBIT. So, just estimating F&N's full upside potential,  it should be at least 1.2 billion dollars from today's market cap. That's more than 30% upside. Of course, these are just numbers in the air, I haven't done the detailed work. On first cut, things definitely looks interesting. To sum up:

1. F&N has a solid ASEAN diary business generating c.$90m going to S$100m EBIT if it turn its loss-making segments positive.

2. Its stake in Vinamilk is worth almost its whole market cap, implying that the market is not ascribing value to its existing businesses mentioned above.

3. A reorganization of the Thai Beverage Group could bring about more synergies allowing for a high market cap, all in, we could see market cap increase by S$1.2bn which is a c.30% upside.

So, time to take closer look!

This author does not own F&N yet!

Monday, March 05, 2018

F&N 6 Years On - Part 1

6 years ago, we discussed Fraser & Neave (F&N)'s fate in a tongue-in-cheek Battle of the Animals post. As per our short term attention span in today's world, we left it hanging, without an update, for six long years. Well, today is the day. We shall stop our sucking thumbs! We shall follow up with the long await instalment to our own saga and analyze things clearly. 

To recap, the saga came about as the Elephant in the ASEAN (Association of Southeast Asian Nations) room charged into our tiny red dot to try to grab Tiger, F&N's baby - Asia Pacific Breweries. In the end, Star Player - Heineken, refusing to give up its control on this profitable joint venture that brewed various beer brands: Tiger Beer, Anchor and ABC stout, swallowed the whole alcohol business i.e. Asian Pacific Breweries expensively. Thai Beverage, the elephant, then took control of F&N, the parent of Asian Pacific Breweries, or rather, the portion left after the Star took out Tiger. 

Our Tiger Girl: Jessica Alba

We also speculated what would happen to Chairman Lee Hsien Yang and Tiger Girl: Jessica Alba. In the end, Hsien Yang had no choice but to relinquish the Chairman role to Charoen (Thai Beverage boss), a precursor to his subsequent fate in the Battle for Oxley Road. Unfortunately, he lost on both counts. But he still had various prominent roles including the Chairman of CAAS, President of Insead Singapore and Chairman of the Islamic Bank of Asia amongst others which he would probably be leading using Jedi force projection outside Singapore! Meanwhile, Jessica Alba, unfortunately moved on and launched her own company - The Honest Company, with milk products competing with F&N's Magnolia. Alcohol and honesty don't mix well I guess.

So what's F&N today? After Tiger Beer was taken, the portions left were non-alcoholic beverages, dairies, publishing and property. Subsequently, property was spun off into a separate entity Fraser Centrepoint while the F&N today is left with the remaining three business segments. With more clarity today, we can now see better what are the key drivers for this beloved Singapore brand. The charts below shows F&N's breakdown by revenue as well as by profit in 2017.

F&N revenue split

We can see that F&N is roughly 60% dairies by products and 60% Thailand and Malaysia by region. The beverage business and the publishing business are actually small in the big scheme of things. Despite 100 Plus being such a big brand name, it doesn't really punch its weight in terms of revenue and as we shall see later, in profits too. Also, Singapore is only a mere 25%. The more important markets are in Indochina. The earnings split below is even more telling.

F&N EBIT split

For me, this chart was kind of a surprise! F&N makes all of its earnings from diary products. The beverages, publishing and other businesses are all loss-making. What's more, when we see EBIT (earnings before interest and taxes) contribution by country, Thailand, Malaysia and Vietnam makes the money and Singapore is loss-making. Vietnam is 47% of total EBIT! F&N is a Vietnam play! 

When I first thought about this, I couldn't recall what are F&N's dairy products and what kind of businesses it had in Vietnam. Only with further digging then things came to light. F&N's diary products are Carnation and Magnolia, household products in South East Asia. Carnation is the leading condensed milk brand in Malaysia and Thailand. Building on that the firm had built a strong business selling all kinds of dairy products with local popularity. The cherry on top is F&N's ice-cream business. It has three brands: King's, Magnolia and Meadow Gold. These were my childhood ice-cream brands!

While Singapore has since moved on from F&N's ice cream brands for higher end treats like Magnum and Haagen Daaz, I believe these brands are still doing well in other parts of ASEAN and hence delivering the dough for Charoen. The diaries segment in Malaysia and Thailand earns c.S$45m and c.S$73m pretax profits last year. As for Vietnam: this is actually equity accounted profits because F&N bought its stake in Vinamilk up to 19%, making it the largest foreign shareholder in the firm. 

Dairy business in detail!

The chart above from the firm provided detailed breakdowns of the different parts in its diary segment which was super helpful. We can see that the Malaysia and Thailand have healthy 12-15% EBIT margins over the last two years. With the additional of Vinamilk, F&N becomes a powerhouse in diary in ASEAN that could dream about becoming a Danone or Meiji someday!

Alas the stock is not cheap trading at 24x forward PE  and 12-13x forward EBITDA. On the free cashflow matrix, it is earning c.S$70-140m which translates to a 2-4% free cashflow yield based on its market cap of S$3.8bn. That's not really cheap by Singapore's standard where other names are doing 5-6%. Overseas Education is doing 9% FCF yield! (albeit it's small cap.) But wait, there are other things going for F&N. The Lion shall rise again!

Next post we shall discuss Vinamilk and the reorg with Thai Beverage!

Sunday, February 18, 2018

Happy CNY!

It's the Year of the Earth Dog! But this doesn't mean markets cannot go up! According to internet predictions, this year will see resource industries doing well with oil and gas leading the way! Also, Donald Trump, born in the year of the Fire Dog in 1946, will set everything ablaze!

Dingyi Music Group

The God of Wealth is also looking to bestow on Earth his blessings in 2018. Hence Dingyi Music Group is presenting this beautiful 财神到 (God of Wealth arrives!) played with traditional Chinese orchestra insturments. With the God of Wealth's arrival, this means that property, gold and other stores of wealth like jewellery and watches would see their value appreciating! This is the year to seriously think about buying properties after years of weakness. For those who had bought, the following pic is for you!

The Dab Dog

Regardless of what Feng Shui predicts, fundamentals remain strong although we are no longer in the first innings of a bull market. At some point, the party would end. So be prepared! While there are opportunities in the markets, we should also be looking at trimming expensive names and raising cash. Meanwhile, for 2018, let's Huat Ah!

Happy Chinese New Year!

Tuesday, February 13, 2018

Book Lessons #1: The Snowball Early Chapters

As most regular readers might know. I had been amazingly slow in my reading. So, in 2018, I finally finished reading Alice Schroeder's 2008 masterpiece on Buffett's life titled The Snowball. This is the best book written on Buffett ever. It depicted his whole life from birth in 1930 all the way to events in 2007-2008. I think there are so many lessons we can learn that we should revisit these posts in the months and years ahead. But for today let's focus on a very practical today's common life issue that I gleamed from the earlier chapters in the book.

The Snowball

In describing both Buffett's childhood and his own early career when his kids were very young. I realized how their lives and ours were related. Both Howard Buffett (Warren Buffett's father) and Warren himself dealt with the markets. His father was a stockbroker before he became a senator. The big revelation reading about their lives was that they had no time to deal with domestic issues, or rather, anything else outside their work. A career in the financial industry was so mentally draining and time consuming that they had no time to deal with wives, kids and the rest of the domestic chores (as with being a senator later on for Howard Buffett). As such, both housewives find it very hard to raise many kids. Both Howard and Warren had three kids and the mums had a really hard time. In fact, Buffett's mum went into a crazy rage with her kids so much so that her eldest daughter and Warren himself resented her for the rest of their lives. It was very sad.

Ironically, modern societies are not suited to raise children. There's a saying, "it takes a village to raise a child" but with the rise of nuclear families in the 20th century, we no longer live in villages. One father and one mother have to raise multiple kids. America experienced this decades ago and now we are the first or second generation in Asia going through this. The results are not encouraging. From the book, we also realized that Buffett was a delinquent in middle and high school until he finally woke up one day to improve his studies. His kids also didn't do that well in school. This is an important reflection point for Singaporean parents today, which is made worse by our education system. We shall revisit this point later.

Back to Howard and Warren's daily lives. Their work consumed almost all the hours. They wake up early in the day to read up on market news, spend most of their time in the office on the phones, in meetings or more reading. At 6 or 7pm, they get off work and go home for dinner, which is the only family time during weekdays and then it's more reading late into the night or playing bridge. Reflecting on my own life, it has been pretty much the same routine. We spend so much time working, reading and thinking that we are mentally exhausted. There is very little energy left for anything else.

Brutal markets: STI fell 7% in 10 days

The markets are brutal. The participants are all smart. When everyone competes at the highest level, that’s where it’s always super tough. It takes Joseph Schooling to swim 8 hours every day to win an Olympic gold. It is not too different in order to become the top 10% of all investors who can beat average market returns. Warren Buffett reads two newspapers everyday, magazines, annual reports of potential investments, on top of all the other stuff he has to read. He probably spends 8 hours reading everyday. It's just crazy. On top of that, he did his fair share of travelling all over USA in his younger days. He was always in New York, not mentioning a two year stint at Graham and Newman. Then later on he needed to be everywhere: Omaha, California, New York, Sun Valley (Idaho), Washington etc. That was his life then, this is our lives today. 

When he is out on the road, his wife and also his mum during Howard Buffett's days dealt with the three kids. All by themselves. No domestic helper, no iPad, for distracting the younger kids. Not even TV for Howard's wife as it wasn't invented yet. It was unimaginable how they survived. I truly appreciate another adage, "Behind every successful man, is a very successful woman." There can be no Warren Buffett without Susie. There can be no Lee Kuan Yew without Kwa Geok Choo.

To be outstanding in our careers, our wives sacrificed. This is usually not very visible. In fact we resent why they couldn't be more. Why couldn’t they become Mrs Lee Kuan Yew. Why they couldn't understand we are working our asses off in the trenches from 8am to 6pm and when we reached home, we are not ready to juggle kids and wash dishes. We just want to switch off.

But today is 14th of February. Today is the day to put aside our complaints and give our loved ones a  big hug. Thank them for making our lives easier, for doing the chores, for taking the kids to the playground despite being totally drained.

Cupid did shoot the good arrow, right?

This cupid (Ying Tze) would be good yah?

Then, we have our education system...

I am convinced that 80% of all parents in Singapore cannot win against our education system. But that is actually ok. Our education system is a pressure cooker destined to churn out maybe 5% pristine students and maybe 35% damage products. There's 20% of okay students who would eventually find their way to success just like how Warren Buffett did and how his kids did. There will always be the average and below average students which makes up remaining 40%. A big proportion of these students get on with lives, but some would also get demotivated and become damage products. This damage is done every year and is usually irreversible. This is the sad truth. Our education system does not lift up the average, it destroys the average. But this is kept invisible. As for the bottom 20%, our system failed them, utterly.

How to win against this system? We almost need to be superheroes. Like Mr and Mrs Incredible, two superheroes married. One can take care of work, investments, annual holiday trips, on top of earning the dough. The other becoming a full-time schoolwork CEO, COO and CPO - Chief People Officer, managing all the different tutors, enrichment, as well as schoolwork. Yup, in short, become as good as one of the Avengers, save the world while looking damn cool. 

Well, the saving grace is that we don't really have to win in the system because the system is totally not preparing our kids for the future. The classroom was invented 100 years ago and had failed to improve with the times. There is not much point in learning how to write essays using bombastic words and flowery phrases or in solving three variable simultaneous equations in primary school. The former is a reflection of the outdatedness of our system, the latter the incomprehensible mentality of trying to squeeze over-abstracted concepts into young brains when they are not ready.

The most important lessons our kids have to learn would not be taught in schools. Especially Singapore schools. They are:

1. Learning to relearn everything, not rote memorizing.
2. Learning the soft skills, dealing with people, presenting, talking well.
3. Learning to use all different available tools, which is easily available today via the internet and other means, and not always relying on fixed methods or formula.

Wishing all couples a very Happy Valentine's Day! 

To my dearest wife, thank you for your love for the past 15 years! 

Tuesday, February 06, 2018

Tangible Thoughts #2: Market Turning?

Here's a long quote from a 2006 movie called "The Prestige" directed by Christopher Nolan starring Christian Bale and Hugh Jackman.

Every great magic trick consists of three parts or acts. The first part is called "The Pledge". The magician shows you something ordinary: a deck of cards, a bird or a man. He shows you this object. Perhaps he asks you to inspect it to see if it is indeed real, unaltered, normal. But of course... it probably isn't. The second act is called "The Turn". The magician takes the ordinary something and makes it do something extraordinary. Now you're looking for the secret... but you won't find it, because of course you're not really looking. You don't really want to know. You want to be fooled. But you wouldn't clap yet. Because making something disappear isn't enough; you have to bring it back. That's why every magic trick has a third act, the hardest part, the part we call "The Prestige".

Why is this relevant today? The markets corrected 3-5% overnight and looks like the carnage is continuing. But this looks like Act Two. It's just "The Turn". In every bull market, we are likely to see three acts - similar to the magic trick. 

Act One: we get a story, the markets get excited, stocks go up. The story today is actually a sequel. The first story acted out in 1999-2000 and ended in a tragedy. In 2017, the renewed internet story is about Amazon, Google, Apple, Facebook taking over the world. Then things got a bit crazy in 2018 and that's why we have "The Turn". That was yesterday. The table below shows how markets corrected. Over a 1,000 points for Dow, Bovespa, Nikkei and Hang Seng. This is unprecedented.

Markets on 5 Feb 2018

However I don't think the show has ended. We still need Act Three right? But, unlike a magic show, after Act Three, everything will come crashing down. (Well everything did come crashing down in "The Prestige", so for those who haven't watch, be sure to catch it some day!) In the last crash, we almost crippled the whole world. We were a few days close to a repeat of the Great Depression. Let's hope this show will not crash and burn like the last one!

Monday, January 29, 2018

Chart of the Month #8: Flattening Yield Curve

This argument came about in late Nov when some prominent economists noted that the US yield curve is flattening and might invert soon. Flattening or inverting yield curves are big deals bcos they were followed by recessions 7 out of 8 times since WWII. The chart below shows just that.

As you can see, we are likely to head into another one as the 10yr-3m spread goes to zero, which implies flattening or inverting yield curve. 

The economic rationale is weak though. Why does a flattening yield curve causes recession? One reasoning postulates that banks, the lubricants of a vibrant economy require steepening yield curve to make their spreads, so if spreads turn to zero, it would mean they cannot lend money and hence economic activities grind to a halt.

Another reasoning goes like this: short term rates rising to meet long term rates usually means central banks are entering into tightening mode, which again put the brakes on the economy, causing recessions.

However, it seems that this is not going to happen at least until late 2018, so meanwhile the party goes on! Huat Ah!