Sunday, April 22, 2018

Tangible Thoughts #4: Pitiful Pump Uncles

The saga of the week in Singapore was about pumping petrol. For readers not from Singapore, here's the story. A BMW driver drives his car into a Caltex petrol station and said, "Fill Ten" to the pump uncle. The pump uncle then proceeded to pump gasoline to full tank, because he heard "full tank". The driver, realizing his car now has a full tank, became enraged, scolded the pump uncle and refused to pay up. He single-handedly cogged up the whole Caltex station for half an hour. By then, his face, his car number are all up on social media with netizen blasting, "If you can afford a BMW, who the heck fills $10?" Subsequently he explained he was selling the car, hence there was no need to fill more then necessary. But the whole saga just sounded fishy, maybe he is really a crook, who knows. Meanwhile netizens came up with this form to be distributed at all gas stations in Singapore. Haha! 

Fill Ten or Full Tank?

As in investing, it takes a lot to prove accounting fraud, Midas did it for twelve or thirteen years and we only found out recently. At its peak, Midas' market cap reached SGD 1.2bn and it was generating close to SGD 50m in net profits. Well, as experienced value investors, we know too well that profits were too easy to manipulate, cashflow analysis required real kungfu. Indeed, Midas burnt through S$760m of FCF over 10 years and probably used some creative accounting to generate roughly SGD 40m of positive FCF in 2007 and 2017. In the end, the positive free cash accounted for 5% of the total money burnt. So be really careful when you see years and years of cash bleeding.

Back to petrol pumping hopefully we can tell some day whether it was the pump uncle who was hard of hearing or the BMW swindler who had been doing this "Fill Ten" trick for years only to be found out last week. Having said that, this saga pushed me to think about why would someone do such a thing? In the end, it could be a stupid case of trying to get even with Big Oil. Singapore's retail fuel market is an oligopoly, as with most things here. Hence pump prices had remained high despite crude oil prices being super volatile. The following chart (courtesy of TradingEconomics and SPC) showed how pump prices in Singapore trended. we can see that prices had been ranged bound between SGD 1.25 to SGD 1.8 since 2010. 

Singapore pump prices over the last 10 years or so.

The same chart for crude shows some correlation at first glance but from its high, oil fell 70% or more from $100 per barrel to $30. It stayed low for a good 18-24 months but Singapore pump prices never fall more than 50% and stayed low only around the few months in 2016. For some reason there was also this huge spike in 2015 despite global oil prices remaining low. I guess we can say that Singaporean car drivers are pretty much screwed by Big Oil.

Crude prices over the last 10 years

Actually, this is the same story all over. We are also screwed by Big Developers and also screwed by Big Car Dealers (a typical BMW would cost a low to mid five figures in Germany but is at least six figures in Singapore). What's worse, we then have BMW drivers screwing pump uncles. Poor Singaporeans and pitiful pump uncles. Is there a way out of all this? It's really hard as capitalism and economics drive so much of everything these days. We might have to learn from the Nordic countries and develop some form of graceful capitalism if there is such a term. 

Monday, April 16, 2018

2018 Dividend List - Part 1

The time of the year has come to review the annual dividend list, this year we are breaking up to list into more parts so that we can discuss more names. We have used the same criteria over the years which is free cashflow, EBIT margins, ROE and the dividend yield. The most important one would be the free cashflow. As this determines the companies' ability to pay dividends. Dividends should be a integral part of everyone's portfolio because this is where real money comes back to us. In my experience, 50% or more of an investor's monetary gains would actually come from dividends in a long term portfolio. It is also a good idea to first build a strong dividend portfolio that would supplement or even cover entire annual expenses. Then we are really free to choose the work we really want to do.

Dividend List Part 1 of 4

Ok let's go straight into this year's list. There are three Singaporean names here today but I really wouldn't recommend them. Telcos have indeed become dumb pipes since the internet giants took over the world. They have seen how voice revenue, SMS revenue and even data revenue dwindled as users shift their dollars away to in-app purchases and other avenues. While they still generate strong cashflows by squeezing users more and more for the remaining services they still have control (e.g. data roaming, caller ID etc), these last pockets of revenue would also disappear in time, as all of the economic value add get transferred to the internet firms.

Silverlake Axis, the other Singapore name used to be a darling as the "IBM of Singapore" (well that might be a stretch but it's quite a local big-time IT service player) had since derated after a short seller highlighted accounting irregularities with the firm. The share price had never recovered from the scandal which happened in 2015. While some short sellers had eventually be proven wrong, there is really no way for us to know, unless people from inside the firm share the truth. So rather than trying to determine the truth, the easy way is to really just look for another interesting name. There are 700 listed companies in Singapore and 70,000 globally, we don't have to look at Silverlake. Although they did manage to announce a few big deals with Malaysian banks recently, implying things might be turning. Being a Malaysian firm though, there is always that slightly higher risk of really doing some hanky panky stuff.

Silverlake Axis at 5 year Low

The interesting names that really stood out in this list would be Transdigm and Imperial Brands. Transdigm is an aircraft component manufacturer that had demostrated its ability to compound value over many years. Its FCF has grown from a mere USD 250m in 2011 to reach almost USD 1bn today. The industry also has very wide moats as aircraft manufacturers have very stringent procedures for its suppliers and require the same suppliers for spare parts and maintenance. This is such a lucrative industry that Warren Buffett bought out the other player called ITW. This name really deserve more research, but for now let's talk about a more familiar name.

Imperial Brands had appeared before and we see tobacco in a big way this year. Imperial is the 4th largest tobacco company in the world. The backlash on tobacco continues given that their existence caused the death of billions of people since the beginning of civilization. With global investors' focus now all on tech, internet, gaming and meaningful experiences. Tobacco stocks had derated over the last 12 to 18 months and three out of the four large tobacco firms appeared in this year's list, the other two being Philip Morris and British American Tobacco. Imperial Brands now trades at close to 10% FCF yield and pays out 7% as dividends. 

As mentioned before, a sustainable 10% FCF yield in stock markets is like almost guaranteed to make money because you don't actually need to firm to grow. It's like having this cash machine that gives you 10% every year until forever. The key thing to look out for is sustainability. In tobacco's case, it is likely to be sustainable because old smokers will just keep smoking and new smokers would be switching to the next generation tobacco products that are less harmful to health but as addictive and more expensive. The ethical question remains, but if perpetual 10% return is what you are looking for, then Imperial Brands is your stock.

Next generation tobacco, IQOS by Philip Morris

Here's the past lists:

2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1


Tuesday, April 10, 2018

Of Frauds and Facebook

A recent bloomberg article "How Facebook Help Shady Advertisers Pollute the Internet" discussed how fraud advertising was crazy on Facebook. These are ads selling slimming pills, money making stock tips and sure-win cryptocurrencies, miracle hair growing cream and other shady products or services via affiliates that would utilize Facebook's user data to find their victims. Most people would know that these things won't work. If they did, then they wouldn't be coming from unheard sources. Yet there are always enough gullible people to prey on. Facebook knows who they are, because everyone uploaded everything about their lives on Facebook. 

Here's how it might work, say you have been watching videos about weight loss, researching on Atkins diet and posting pictures of your 5 km runs, your meals, your weight loss last week vs this week, then when a slimming pill ad pops up on Facebook, promising results in one week, sure, why not give it a try. If someone calls you soon after you read about the fake slimming pills and markets it perfectly. Bingo! You would have spent the $100 buying some fake slimming pills.

Fraud and scam works even if 1 or 2 out of 100 tries work. By leveraging on Facebook's data, these scammers might get the success rate up to 3 out of 100 tries. That's a 100-200% increase and millions in incremental income for the fraudsters and scammers. Unfortunately, these are also people that are not too educated, usually older folks or people from with low income households. Scams prey on fear and greed and are very powerful. It is difficult for most people not to fall for these traps, but the less knowledgeable and the insecure would be especially vulnerable. 

Sex scams in Singapore

The human mind unfortunately falls prey easily to these scams time and again. It is said that internet scams are not new. The mechanics of the tricks worked in the olden days and in the pre-internet era. We had phone scams (scammers impersonating kidnapped grandkids calling grandparents to wire ransom money) and we had old school sex scams (where a sexy girl will lead  you to a room full of gangsters) before the new era Whatsapp/Alipay sex scams. It's all greed and fear, two of the most powerful emotions. Here are some common greed/fear psychological traps:

Fear
1. Fear of authority
2. Ransom
3. Near miss / loss aversion / effort for reward

Greed
1. To get rich quick
2. Greedy for sex
3. Vanity: slimming pills, hair growth

In finance and investing, we have our fair share of frauds and scams. We hear countless stories about get-rich-quick schemes or yet another guaranteed investment plan that would make money. Invest in farmlands, invest in this platinum AAA fund with 200% return, invest in bitcoins etc. I would say that 99% of all these are frauds/scams. If they were really good investments, they would have had brand names like DBS bank or AIA insurance backing them. They would be selling via unit trusts and via banks and insurance firms. Heck, even funds that got through to banks and insurance firms might be scams, let alone those that didn't pass banks and insurance firms' screening criteria.

Of all the top billionaires and millionaires that we know, how many made it there through investing? Yeah, just one, Warren Buffett. (Well, there's also George Soros and Carl Icahn but who remembers them?) Not to forget, Warren Buffett worked at it for forty donkey years before he got famous. How can we expect some promises of get-rich-quick to get us there? Investing is tough work, as with most things in life, if anyone promises quick returns, just walk away.

Having lived a few decades (signs of becoming grumpily old), I would say there aren't that many short cuts in life. We hear stories of people striking gold, had one genius insight that got them rich, made a killing in so-and-so. But, that's really a 1% or even lower probability event. 99% of the time, it's lots of hard work and strenuous effort. Edison said it himself - genius is 1% talent 99% hardwork. In my experience, doing it by the hard way yielded much better results than trying to find short cuts.

"An hour of deliberate practice or concentrated practice is worth five hours of trying to find some easy way out by cutting corners"  

- improvised Bloomberg quote

With the hard way, it's confirmed that you will get the results. To successfully lose weight, you have to change your eating habits, exercise like hell, shun all unhealthy food. Confirm plus chop will see results.  By adhering to this philosophy, we know better and hopefully never to get scammed. But just to be really safe, we need more precautions, here's three don't's to fend off fraudsters and scammers:  

1. Don't ever part with your money, especially sums more than four digits. Disregard most of what you hear when someone asks you part with more than $1,000. In fact, be careful even if it's a few hundred dollars. 

2. Don't engage. Walk away as fast as possible, this minimises the fear of loss aversion / effort for reward psychological trick. The longer we engage, the more time the scammers can work on us, trigger our loss aversion, effort for reward mindset. Don't let them have the chance. 

3. Don't keep everything to yourself, when you face a situation. Check with friends, relatives or other informed sources, even if the Police Commissioner or the President of Singapore had called and asked you not to share the information. Always double check, double confirm, look for the chop also. Need confirm plus chop first, then we talk.

Facebook's share price

Back to Facebook, so is it a buy right now? Well, as with most past valuations, my preferred metric is to use the free cashflow (FCF). Facebook generated USD 17bn of FCF last year. It is hard to say, whether this is a sustainable level given that things change too rapidly in techland. I would just triangulate that Apple generated USD 50bn and Google USD 24bn last year. The rest of the FAANGs are still not too good at FCF generation. Well Amazon has USD 9bn but Netflix still burning cash. So maybe Facebook can do USD 20bn some time in the future, given that it has Whatsapp and Instagram which it hasn't started to monetize. But, it's really a wild guess. So let's say USD 20bn. But even at USD 20bn, we are just talking about of 4% FCF yield and that's not exactly cheap. I would consider stocks trading nearer to high single digit FCF as cheap. For example, Apple is trading at 7% FCF yield with a few hundred billion dollars of cash on its balance sheet. So despite the sharp fall, Facebook is not exactly a screaming buy yet.

Saturday, March 31, 2018

Chart of the Month #10: The Great Flood


The chart above depicts very clearly the QE program by the world's major central bank since the global financial crisis of 2009. The flood of liquidity exceeds trillions of dollars. We can also see that the bulk of the liquidity was created after 2011 by the Bank of Japan and the European Central Bank.

Hence while the US is tapering, the decline in liquidity is negligible when compared to the mountains of monies created over the last nine years. This great flood of cheap money is the reason for many phenomena that we are seeing including unicorn startups and the ever-increasing dollar psf of prime properties in global cities.

Why didn't Singapore property fall back to S$1,000 psf? That's because we are thinking in nominal terms. Our minds work best in nominal terms, we like to compare psf today vs psf in 2008 vs psf in 1998 thinking it's the same. But in real terms, the $1,500 psf we see today reflected the drop in real estate pricing because asset inflation had gone through the roof. Thanks to the central banks,  money itself had gotten ridiculously cheaper after the Great Flood!

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!

Monday, January 22, 2018

Singtel: Becoming A Dumber Pipe?

I have been a long term shareholder as well as a long term mobile phone subscriber of Singtel. The experience had not been great, to say the least, especially in the past three years. Singtel's stock had done okay if we look back in time. It was $2.2 or so in 2007 and today it's $3.7. An investor who held throughout would had made 68% on capital gain and another 40% or so in dividends. But in the last three years, it did nothing. Meanwhile, DBS went from $15 to $25 and became the largest stock in Singapore (overtaking Singtel) for the first time ever!

Today, we try to decipher what happened to the #1 stock in Singapore.

Singtel's investment thesis had been pretty simple. This was a business connecting 600 million mobile subscribers over a huge part of the world. It generated tremendously strong free cash flow averaging S$3bn annually over the past 10 years with almost 2/3 coming from overseas. It is the #1 or #2 player in Thailand, Australia, Indonesia and Philippines. In Singapore, being the biggest brother, it led the way in screwing subscribers and generated huge profits year in year out. What more could investors ask for?

Big Brother - Singtel

For the longest time, it was also the proxy for Singapore. Equity investors looking to buy into countries usually look for proxy stocks. If they believe that a certain country had growth prospect and would like to play on that theme, they would buy a stock to express that view. So Singtel is the proxy for Singapore, just as Astra would be the proxy for Indonesia and Samsung for Korea or TSMC for Taiwan. However, there are also bigger themes at play. Just as Samsung and TSMC are now being associated as core stocks for the new tech wave, Singtel is facing heaps of trouble.

It is becoming a dumb pipe.

The dumb pipe argument on telcos has been around for some time. The theory was that as internet advanced, telcos would lose their relevance in the new paradigm as apps, transactions, gaming take place outside the telcos' dominance. It started with Whatsapp killing off SMS, then voice and now perhaps even data. In order to defend profits, the telcos keep setting up traps to squeeze money out of consumers.

As an example, international data roaming and international phone calls had become exorbitant. Data roaming is easily $25 per MB. If you are reading this on your mobile phone in Afghanistan without an overseas roaming plan, you might be paying $125! It has gotten so ridiculous that we hear about $1,000 phone bills and it goes on Straits Times and Singtel had to come out with some backdating-the-charges-via-a-cheaper-plan way to lower the charges. Meanwhile their call centres get flooded with waiver requests and they have the guts to claim that they are helping customers save money!

Ridiculous overseas charges

So is it just a dumb pipe or a dumber pipe?

But back to the original threat from apps and internet - this is real. SMS revenue fell drastically since Whatsapp came about. Now that voice quality had improve, people are using Whatsapp for calls too. So the only profitable arena left became data, which is why we see exorbitant data roaming charges. Now Google saw this chance and recently decided to jump in with a way to screw the telcos. It is rumored that they might offer phones with flat fees for global data usage. Now this is a gamechanger. It this really happens, it would be goodbye to all telcos, all over the world.

That's what telcos get for screwing subscribers all these years. Remember Google's company motto is "don't be evil". Not that they are living up to it, but they are certainly aiming to eat Singtel or for that matter every telco's lunch.

Singtel knows this is coming. While screwing subscribers they have also been investing in new ventures. Alas, no traditional telco had succeeded in spending money to grow new businesses. Singtel touted its small success in cybersecurity. It claims that it is the #5 player in the world in the field of cybersecurity. But if we speak to the real cybersecurity guys, they would be like, "Huh? Who is Singtel? So, it's a stretch to say they are good here. But who knows, they might make it, cybersecurity is a nascent market, things can change quickly.


Unfortunately, these investments need money and with money going into investments means less money for shareholders. The lines above shows that while dividend per share had been kept constant at 74% of earnings per share, it had shot through the roof as a % of free cash flow. At this rate, Singtel would be borrowing to pay dividends. Perhaps that is why it has been overtaken by DBS in terms of market cap. 

Having said that, Singtel is not going to crash 40% tomorrow. At S$3bn FCF per year, it is trading at a healthy 5% FCF and the market might still give it the benefit of the doubt. It can still become a smart pipe. Meanwhile, it will continue to screw subscribers and squeeze more cash out of everyone of us. Singaporeans pay one of the highest phone bills globally while suffering from poor network quality and exorbitant overseas roaming charges. Not unlike our public transport and our education system, we get the crap underneath the cleanliness and the efficiencies that our infrastructure promises. Geez, that's quite worrisome, isn't it. 

It is a dilemma to be a suffering consumer but a shareholder of Singtel. As a shareholder, some of the pain is mitigated with the dividend and the capital gain over the years. But as we now know, Singtel could become a dumber pipe. With the 4th telco coming up, it might really stir up competition and grab a piece of Singtel's pie. Especially with most subscribers suffering so long and would be more than happy to switch. If the Singapore cash cow is slaughtered, we can easily see cashflow plummeting 20-30%. This is then a serious threat to the dividend and when the dividend is cut for a dividend stock, things get really, really ugly. 

Perhaps its time to seriously think about divesting Singtel!

The author owns Singtel.

Tuesday, January 16, 2018

Tangible Thoughts #1

Welcome to yet another recurring theme type of posts! Modeled after Xi Jin Ping penning down his thoughts for the Middle Kingdom after Mao and Deng, this series will pen down bite size thoughts from the great investors as well as other thought leaders.

Here's the first inauguration thought from David Einhorn taken from an excerpt of a talk he gave recently. He was asked this interesting question from the audience and his answer was just enlightening.

Audience: Do you sort of stick to your guns, when it comes to entering contrarian positions and holding it until it works out?

David: First of all, it's not about sticking to your guns. It's about reassessing constantly. And when the positions don't work, or they go against you, the presumption is not we were right, the presumption is that we might have missed something here. And so then, you have to go back and think about it again and again and again and understand the other side, and see if anything has changed, and see if your view has changed, if it has changed, to modify the position. And you might eliminate it, or you might reduce it, or sometimes increase it, but very rarely. 

Generally speaking, my inclination is when the position is not going well it's more likely that we missed something, so the choice is generally either to reduce or eliminate or just simply keep it if we think that it's right. On the other hand if we continue to think that we are right, then I find that patience is the way to go. And then we have to wait and let the story play out however it does, while we continue to reassess it to see if, in fact, we were wrong.

Investing is not about right or wrong with one's initial stance as every new development changes the course. Rather, it is about reassessing the situation constantly, changing our positions when things change or have the patience to wait for the market to realize our correct views.

Monday, January 08, 2018

Is the Virtual Economy Taking Over the World?

Here's wishing all readers a very Happy 2018! Thanks for all your support these 12 years! Today let's talk about world domination by the internet!

We discussed this topic some time back about how internet is taking over the world and real world and real life experiences are becoming a rarity. Today let's delve a bit further. We saw how the largest companies in the world are now dominated by internet firms. So, is the virtual economy taking over the world? If so, exactly how big is it really gonna be?

I think it will be almost as big as the real economy some day i.e. the virtual economy could become 40-50 trillion dollars, which is 80% of the real economy today. But it will not take over the real economy. It might be something quite different. More like an avatar economy mirroring our real economy. The real economy does not disappear, it takes on different forms while the overall pie grows.

Based on my estimate, the virtual economy today is possibly just 15-20% of the real economy today. While it did cannibalize some demand from traditional businesses, a big part of it is just new stuff. We shall see how new everything actually becomes. Now why do we say it is 15-20% today? Reference could be drawn from two data points:

1) The tech sector market cap of the top 100 firms is USD 3.6trn vs the total market cap of USD 17.5trn, meaning that tech firms make up is c.20% of the top 100 firms (according to a report by PWC).

Technology makes up 20%

2) Internet retail penetration is 15% in the US while it is 8-18% in other developed countries (18% in China). Although globally it should be closer to the lower bound since penetration in emerging countries would be much lower.

So my thesis is that from the current 8-18%, the virtual economy consisting of mainly e-commerce, content (movies, music, software, books etc) and gaming amongst other verticals will continue to grow to become 80% of the real economy. But as alluded to before, this doesn't mean that the real economy is going to shrink. This is an additional 62-72%. In other words, in x years (maybe like x = 2035) the global GDP would be USD 110-120trn and the virtual economy would be USD 40-50trn and the real economy would be USD 70-80trn. The real economy doesn't really decline, things just get moved elsewhere.

The stock market is usually very simplistic in thinking. If Amazon is taking over retail, then all the malls and related stocks should go to zero. To some extent, retail did get decimated, but because we all live in the real world, we don't stop going out. We stopped going to department stores and traditional malls but we spend more time at Starbucks, at Costco/Big Box or Don Don Donki (the new Japanese discount store in Singapore) for differentiated shopping experiences, at outlet malls, at theme parks and going for other experiential adventures. 

Costco's share price at all time high despite Amazon's onslaught

There were other interesting revelations from the content industry, namely music and movies. The music industry was the first to fall prey to the internet technological disruption. Apple Music devastated CD sales, then streaming came along and took share from music download. Now Spotify seemed to be the undisputed leader and the recorded music sales finally saw growth in 2016 after years of decline, hitting revenue of c.USD 8bn in the US. But the truth is much bigger than that. The live concert industry boomed big time from 2000 to 2016 while CD sales plummeted. In 2016, Live Nation, the world's #1 live concert operator had sales of USD 8.4bn, the bulk coming from the US. This one firm's revenue outstripped the revenue of the entire US recorded music industry! You see, things in the real world don't disappear, the revenue just moved elsewhere.

Moving on the Hollywood, with Netflix, Amazon Prime, Youtube and streaming, the first level thinking is that everyone would stop watching movies in theatres. Yet worldwide box office revenue had positive growth from 2006 to 2016. It was c.USD 9bn in 2006 and today it's close to c.USD 11bn. So did we really watch less movies? Yep, we stop watching stuff we might catch on the planes or Netflix or elsewhere but we still cherish the experience at the cinemas. We choose the one or two films we will definitely watch at the theatres.

The Last Movie of 2017

In fact, we want to watch it in IMAX. If it's the one movie we want to watch this year, then we better watch it in top quality. We pay up to watch The Last Jedi, or Avengers, or Fantastic Beast: The Crimes of Grindelwald. So the virtual economy does not take over the real economy. It is always something deeper at play. Difficult to see, always in motion, the future is.

Let's talk about gaming which is now bigger than movies and music combined. A whole generation had grown up with Nintendo, Playstation and Xbox and are now having children. With mobile gaming becoming prevalent, we are also seeing seniors playing Candy Crush and Pokemon Go! on their phones. Gaming is simply part of everyday life today. Statistics have shown that people on average spend a few hours on gaming and social media. By examining this, we might catch a glimpse of the end game for the virtual economy.

Recently Wired did a piece on the lives of esports gamers. Esports is fast becoming an important industry as gaming grew so big. For the un-initiated, esports is going to be as big as NBA or NFL or the English Premier League where teams compete in games with other teams to win championships and millions of spectators watch these pros play online. These esports players train as hard as star basketball and soccer players. They work out, study hard, eat healthy and train 7-8 hours a day playing games like Overwatch together. Yes, they spend half of their waking hours on computers, in the virtual economy.

To some extent, we all spent a lot of time online as well, since we are on laptops or PCs when we are not in meetings. We might not have enough time for shopping, gaming and/or consuming content while working but as efficiencies improve, we would be able to do much more in the 24 hours. We will be able to shop, Facebook and Whatsapp with voice recognition, maybe watch short movies on the way to the office pantry and when cars drive themselves, we free up even more time to spend in the virtual world. We will have multiple avatars for different purposes. So, yes, the virtual economy can still grow. I believe it will be 50 trillion dollars.

Does it mean we should buy FAANG and BAT now? That's a very tough question. I think there is a better time to accumulate them, rather than buying them now for 40-100x PE. Meanwhile, opportunities are abound in the real economy with great franchises trading at teens PE. These are opportunities we wish to explore in 2018 and we shall also discuss A.I. autonomous driving and semiconductor chips in the future.

Meanwhile, again a very Happy 2018, together we huat!