Saturday, May 18, 2019

Thoughts #14: Hwa Chong or Chinese High?

Are you Hwa Chong or Chinese High? This was a perplexing question for some who attended these schools in the late 1980s and early 1990s. Hwa Chong Junior College (a.k.a HCJC, a prominent high school in Singapore) was established which was a separate entity to the Chinese High School, one of the earliest boys' school in Singapore.

The story goes that Chinese High organized a 100th anniversary dinner in March 2019 and if you are a Hwa Chong student, it's technically not your dinner. So should you attend? However, HCJC was then merged with Chinese High to form Hwa Chong Institute when the through train program was introduced. In short, HCJC ceased to exist and there would be little reason to hold HCJC only dinners in the future.

But from the perspective of proud HCJC students, it's an important segregation. Partly because either they came from other reputable secondary schools (junior high schools) and would want to associate more with their alma mater of four years (since junior college was only two years) or they simply did not want to associate with Chinese High (especially ladies, since this was a boy's school).

In the end, it all boils down to time and perspective. Another 100 years from now, would anyone remember there was this segregation between Hwa Chong and Chinese High? Would anyone care? Flipping things around, would anyone of us here be around to attend the 200th anniversary dinner? If not, then should we attend this one? What would happen if we missed this dinner? It is regret or no big deal? 

Investing is also about asking the big questions. Some of the big questions that I like to ask are:

1. In 5 to 10 years, how would this bad news affect the stock? Is it a critical bankruptcy blow? What is the likelihood that the company ride through this and become stronger?

2. Does this action survive the "newspaper headline" test? (this is both an investing and life option question, when we do something questionable, think of how it would look if the media looks at it.)

3. What happens if I am wrong? What is the maximum loss? Can I sleep soundly at night holding this mistake (if it turns out to be one)? Does it mean critical financial damage? 

Another analogy worth sharing: Omaha Beach in Normandy, France was one of the bloodiest fighting spots during D-Day, 6 June 1944. Thousands of Allied soldiers sacrificed on that day to secure landing sites in order to topple Hitler. They succeeded. As Asians, we would probably shun buying any properties there in the 1950s, given the risks of haunting and what not. But, today, it's expensive beachfront properties. Who cares about D-Day. It's all time and perspective! 

Happy Vesak Day!

Friday, May 10, 2019

Lessons Learnt: Hyflux - Part 1

Eight years ago, we discussed Hyflux perpetual bonds here, putting forward the investment thesis that 6% was good dividend/interest income and how Hyflux had a so-so business model but things should be okay because the Singapore government would support Hyflux as they had done so in the past. That turned out to be a huge mistake. Not only did the government not support Hyflux, she rubbed it in, pushed the proverbial dagger into Hyflux's belly, delivering the fatal blow.

Et Tu Temasek? (Ref: Et tu Brute)

How did things come to such a dire situation? 

As described in the post eight years ago, Hyflux's business model relied on winning water projects, which meant that they had no control over the bidding price and also, in subsequent years, their own future revenue. However, as with most Singapore co.s, we are good at managing costs, which allowed us to beat many others in the global game of winning EPC (Engineering, Procurement, Construction) contracts. This was how Keppel and Sembcorp became so good in oil rigs.

But in order to grow, companies in the EPC field have to bid for bigger and bigger projects. The cost management however gets more and more complex. Once every decade also, someone would definitely screw up and one or two badly designed contract put EPC firms at risk of bankruptcy. Alas, Hyflux was not spared.

Tuaspring, Hellspring

The irony for Hyflux was that the contract turned out to be one in its home country. This was infamous Tuaspring desalination project. Tuaspring became a bomb because of its large scale and complexity. The Achilles' heel in Tuaspring is actually not desalination but power generation. For reasons unclear to me now, someone thought it's a good idea to combine the two. Maybe because desalination requires a lot of power, so hey why not generate power, then sell some power plus water to PUB as well. This definitely developed as the logical train of thought from our admin officers in the civil service and Hyflux went along.

But selling power is not the same as selling water. Cost for selling power depends on fossil fuel, the most important being crude oil, which is notoriously volatile. Meanwhile, power prices in Singapore collapsed as a result of energy deregulation. So suddenly, Hyflux found itself caught in a situation where its power generation cost exceeded its revenue. With a billion dollar debt on its balance sheet, things quickly spiralled downhill. Our admin officers don't give chance these days, just like the new Certis Cisco summon officers.

Hyflux began to run out of options as credit dries up and in an "unthinkable" scenario for investors who put in money in 2001 during its IPO to yield chasers (like me) who bidded to buy its perps in 2011 and more yield chasers who bought its perps again in 2016, Hyflux declared it might go bankrupt. A white knight from Indonesia (Salim group) appeared, willing to put money to save the firm but not the perp bondholders. Alas, that hope is now also gone as PUB decided to push the dagger some more (figuratively impaling Hyflux now), terminating Tuaspring water purchase agreement. 

As things stand, it is likely that bondholders and shareholders will get nothing in the end, barring some kind of miracle. It's neither Oliver Lum's nor PUB's fault. This is just investing. There's always risk. Perils on top of perils. Caveat Emptor.

The saving grace for those of us who invested in 2011 though was that we got a few years of 6% coupon. Not great, as the total loss of capital was still north of 60%. But almost everything is now bridge under the water. So this post serves to help us learn the lessons and move on. Well, it's mostly re-emphasizing the importance of what we already know:

1. Always limit our risk capital to any single name to an amount that we would be okay it if goes to zero. This could be an absolute amount and it could be a percentage of total net worth. What's important is that we can sleep at night. We hear stories of people who put in $200,000 or $300,000 into Hyflux perps and that's a huge chunk of their retirement nest egg or net worth. It's just so sad. So don't make this mistake.

2. Map out the scenarios and probabilities well and keep monitoring them. When we did the due diligence in 2011, we determined that the business model was flawed, one project could kill them. But we also thought that the Singapore government should come and bail them out. After all, this was Singapore's poster child. Little did we expect it would be the opposite! The project was in Singapore and the government delivered the fatal blow! Nobody could have foreseen this. But, on hindsight, we should have put in a scenario that Hyflux would go bust and ascribed a probability. In the next post, we should delve into this!

Caveat Emptor: Let the Buyer Beware!

Wednesday, May 01, 2019

Charts #21: Misery Index

While we live in sunny Singapore and watch Game of Thrones, bask in rich and affluent culture, there are parts of the world where things can be quite different and miserable. Note: Argentina is not the most miserable country, it's Venezuela which has an index reading of 1.7m, way off the chart below.

Inflation is one big cause. Singapore was once like that. During WWII and then the decades shortly after war in the 1950s and 1960s. Our forefathers pulled us through those difficult times with good economic policies, financial common sense: saving money, balancing the govt budget and lots of grit and hard work.

May Singapore continue to huat!

Happy Labour Day!