Saturday, February 22, 2020

Thoughts #20: More on Coronavirus

Coronavirus has been around and when kids get viruses, 1/3 are thought to be from the coronavirus family. Hence kids tend to develop some immunity to coronavirus and are less susceptible to this new type from Wuhan. Thankfully.

Coronavirus death rate may not be as high as 2%. As it goes round more humans, it should tend towards normal influenza rate of 0.1% to 0.2%. It is high now partly because it is concentrated in 1-2 Chinese cities whereby the healthcare system is tremendously strained. 

Masks are less effective than handwashing and maintain 1m from others (since the virus is not airborne, only aerosol). According to the WHO website, proper handwashing, avoiding contact of our own hands (unclean) to our eyes. nose and mouth would be more important.

On investment implications, the virus is likely to bring down economic growth with impact on global tourism and supply chain disruption. The US stock market has not fully factored in this risk. But looking at past experiences (SARS, ERS), the virus is very likely to die down in summer and we can move on with our lives.

So, very short term wise, there could be buy opportunities as stocks correct on negativism and fear. Things are likely to get better from here. But we must bear in mind that we are in a decade long bull market and valuations, especially in the US, are stretched.

Friday, February 14, 2020

Chart #29: No more jams

Chinese road conditions after coronavirus last week. Courtesy of FT and Capital Economics.

Supply chain disruption ahead, stay safe everyone!

Happy Valentine's Day!

Saturday, February 08, 2020

Coronavirus and Malicious Intent

The coronavirus from Wuhan has the world on its feet. We now have close to 35,000 infections and over 700 deaths and the numbers are rising. This is the worst pandemic since SARS 17 years ago and looks like it will get worse. In Singapore, panic ensued. For reasons unclear, we believe our city state will fall under siege. Not from any military invasion nor terrorist attacks but from our own fears. Singaporeans last night raided supermarkets for essential supplies. Shelves at NTUC, Sheng Siong and other large retail outlets supplying instant noodles, rice, biscuits, masks and toilet paper went empty. Of all the essential supplies, why toilet paper? 

NTUC raided

This is human psychology. We are programmed with this herd mentality. We don't want to lose out and we shun things when we see others shunning it. This is the reason behind bubbles and crashes. At the height of the Tulip Bubble in 1673, one tulip was sold for 5 hectares of land in Holland. Then when it crashed, nobody wanted to touch any tulips. We then saw the same bubbles over and over again. The British stock bubble in 1720 that caused Sir Isaac Newton to lose a lot of money. He then quoted the following:

I could calculate the motion of heavenly bodies but not the madness of people.

Then we had the US stock market boom in 1928 which was followed by the Great Depression (1929 to 1938). In recent times, we saw the Japan property bubble (1989), the dotcom bubble (2000), the bitcoin bubble (2017) amongst others. Alas, to be able to make good return at investing requires us to do the opposite. We cannot buy when share prices are sky high and we need to find gems when others shy away from certain sectors or industries. This is not easy. When we see everyone buying masks and the stock is running out, we panic and go on Amazon and pay up $50 just to secure some supplies. 

To become better investors though, we need to think out of the box and find better solutions to win the game. This is also what Howard Marks coined as Second Level Thinking. The stock market has followed the pandemic with China related and affected stocks crashing while masks makers and healthcare names are rallying. The following charts of SIA Engineering and Raffles Medical tell the two tales well.

SIA Engineering, falling in tandem with our beloved national carrier Singapore Airlines, hits a recent low in the last two weeks. 

Meanwhile Raffles Medical, with its Chinese hospitals, see a slight pop before succumbing to heavy selling. Then in the last two days, global stock markets rallied in the midst of the coronavirus pandemic because China decided to push forward the lifting of the trade war tariffs. However, this is a very myopic view. As the crisis unfold, the global supply chain will be affected. We are seeing impact in the electronics and auto industries. It could be more widespread. China is still the world's factory, right in the middle of the global supply chain. Some other stuff might be affected. This could be a small reason why some smart aleck want to secure supplies of toilet paper in Singapore. Just kidding. 

Maybe, they are trying to use toilet paper to make masks? Ok, lame... As mentioned, prices of masks has skyrocketed. People with malicious intent buy to stock up supplies and mark up to sell to others. This is very unfortunate. It is worth spending a few paragraphs discussing this as investors as well. As responsible investors, we should also not harbour malicious intent. It is a subtle but yet important point.

The coronavirus does not have malicious intent. All viruses are programmed to propagate. They make their hosts sick but they do hope to spread, find more hosts and multiply. They do not intent to kill their hosts. Death is a side effect. From the virus' perspective, what's the point of destroying your world? However, as mother nature goes, some viruses get very good at killing hosts, like Ebola or SARS. Once in millennium, humans do suffer big deal. The Black Plague kill 100 million people. But it is important to note, viruses, animals, mosquitoes cannot have malicious intent.

Don't hoard masks!

The hoarders of masks hoping to sell for profits had malicious intent. The Wuhan authorities trying to cover up during the initial days might have malicious intent. The US media going out of their way to blame China has malicious intent. Humans, unlike all living things, are the only species that can harbour malicious intent. The thing is, malicious intent, however small, is detectable. There is no quarantine possible. 

As investors, we must also be mindful. We may not have malicious intent 99% of the time. We just want to make money right? But when we buy tobacco stocks, what does it mean? If we short Singapore Airlines now, can we say we have no malicious intent? This goes for startup investors and entrepreneurs as well. If we are building a startup just to sell bitcoins and trying to make fortune for ourselves, knowing the business is crap, does it mean we have no malicious intent? Who did we trick into buying our bad business? Remember, malicious intent can only cause harm and is easily detectable. 

So, in the new era of sustainable investing, we need to be responsible investors and not make investment decisions that could imply malicious intent. To the mask hoarders, the world is already a horrible place, do more good please. We must strive to have no malicious intent, all the time. The wuhan virus will test many of us. We have already seen heroes and malices. Alas, this blogger also has no new good investment ideas for now. Maybe we can buy 3M, maybe buy SIA Engineering if it falls further. Meanwhile, stay safe, wash and sanitize, use more alcohol wipes!

Wuhan Jia You!

Saturday, February 01, 2020

MMM Analysis - Part 1

3M (ticker MMM) is a stock that I have looked at ten years ago right after the financial crisis but never gotten to buy. This is one of the biggest opportunities missed. The share price at that time hovered around $80 to $90 but collapsed below $60 after Lehman Brothers went down. It was trading at 10x PER and looked really interesting. However, with the state of the global financial system at its brink and this blogger could not muster the courage to buy the stock.

Since then 3M went on to quadruple its share price hitting $240 at its peak back in 2017. It has since fallen to $170 on the back of the trade war in 2019. At the start of the year, Trump and Xi secured an initial deal to reverse the trade war which helped global markets but little did we expect the Wuhan virus outbreak to hit us. The stock fell further to $158 last week. When the dust settles, it might be a good opportunity to finally own a piece of this spectacular company. The chart below tells its history nicely.

3M was founded in 1902 as Minnesota Mining and Manufacturing company but has since evolved into a diversified industrial conglomerate with unique businesses. The chart above showed how it started as a maker of infrastructure supplies and subsequently branched into industrial, manufacturing and safety products. Some of these early businesses are still supporting its earnings today. It has built strong branding in specific industries, allowing the firm to charge higher pricing vs its competitors.

Today, the firm is focusing on retail and healthcare where its innovative prowess has helped created differentiated products from Post-It Notes to 3M N95 masks to waterproof band-aids for intensive wound care. 3M takes pride in its culture of creativity and has created one of the most conducive corporate environment to nurture innovation. Numerous case studies had been done to figure out how 3M continued to be an innovative company for 100 years.

3M's secret to unleash people's creativity was deceptively simple. It was to empower its employees and giving them freedom to create products as they wished. 3M was also a master at organizing people. Human organizations eventually get too complexed over time and 3M consciously keep its working groups small, making sure that politics and people issues are kept minimal. It is said that humans cannot have deep relationships with more than 150 people in their lifetimes and 3M had adhered to this logic. Without politics and empowering people to do what they want, creativity flourishes. In my view, this is 3M's secret sauce.

Today 3M is investing in new priorities and growth platforms as shown above. Some of these are really top global concerns: air quality, food safety, grid modernization. Business opportunities are abundant and 3M is ideally positioned to capture them. Together with its anchors in its core businesses today, 3M's foray into these areas would bring about the next phase of growth.

3M's ability to harness innovation is further strengthened because of its financial savviness. The company intrinsically understands the importance of growth, free cash flow, return on invested capital and margins. 3M's focus on ROIC and FCF are the tenets of good companies. This is evidenced by its consistently high ROIC (above 20%) and strong FCF (c.USD 5bn per year) over the last five years.

3M organizes itself into four segments: Health Care, Safety & Industrial, Transportation & Electronics and Consumer. All four segments boasts margins above 20% with Health Care leading the pack at 28% for 2018. These high margins are very sustainable on the back of its strong branding, innovation and economies of scale in some of the niches that the firm competes in. In the next post, we shall delve into some of its strengths here and discuss both valuations and risks.

Stay safe, wear masks and sanitize!

Thursday, January 30, 2020

Chart #28: The Wuhan Virus

This comes from the courtesy of the now famous website, simply named - thewuhanvirus.

We are not even halfway through the crisis. The saving grace is that it is not as deadly as SARS but still many more people are likely to die. Please wear masks, sanitize and stay safe.

Buy the mask makers: 3M and Unicharm

Tuesday, January 14, 2020

Thoughts #19: Carlos Ghosn Escaped! Jho Low At Large...

Over the New Year celebration, we received news that Carlos Ghosn managed to escape Japan using a fake passport to board a private jet. He was willing to forfeit c.USD 15m of bail money and probably used a lot more to get himself to Lebanon in ways and means not available to mere mortals. 

Similarly, Jho Low, the mastermind behind usurping billions from Malaysians is still at large, using the billions at his disposal to find countries willing to give him a safe harbour. Money does makes the world go round the way you want it to.

Could this be another side effect of negative interest rates? With so much liquidity around the world, billions fall into the undeserved hands that much easier and these hands use such financial firepower to get what they want. It might take a lot more to truly dispence justice going forward.

Friday, January 03, 2020

2020 Happy New Year Post: Investing in Niseko, Good or Bad?

Skiing has always been a status sports given the cost (easily costing a few thousand dollars per person), the exoticness and the instagrammable pics of the family in ski-wear and gear with snow-capped mountains in the background. In the last 10 years, we have seen a huge explosion in tourist numbers to high end ski destinations globally: Whistler in Canada, Aspen in US and Zermatt in Switzerland, just to name a few. In Asia, the number one destination is Niseko, Hokkaido, Japan.

Some of these destinations had always been premium locations since modern leisure skiing started. The most important features being the quality of the snow and the geography. Skiers want snow that is powdery and slopes that can hold these snow and also provide good variety for novices and experts alike. Niseko started to attract attention around 7-8 years ago and early investors from Australia put in money to turn Niseko into one of the top destinations for global skiiers.

Niseko in December

Today, Niseko has become the undisputed #1 Asia ski destination attracting more than 200,000 foreigners during its ski season from December to late April. In 2018, mainland Chinese, Hong Kongers and Taiwanese accounted for c.50% of foreign tourists while Australia ranked #2 with 12% and the Koreans are not far behind. Interestingly, Singaporeans have been visiting Niseko by troves. 11,000 to 14,000 Singaporeans visited Niseko consistently over the last five years and the numbers look like it can only go up. Our own homegrown property developer SC Global is launching a 190 freehold apartment project in 2020 alongside world class hotels like Hyatt and Hilton.

Part of the allure is that Niseko offers more than just powder snow. Starting with Australians, global investors, including Singaporeans have been investing in retail, food and other amenities since a few years ago. Tourists can find good food, shopping as well as the whole slew of tourist services including spa and massage, physiotherapy, car rental as well as peripheral activities such as snow hiking and even baby-sitting. Night life in Niseko is also never boring, with drinking places and bars at every other block.

Niseko's Nightlife

This has led to a strong global eco-system pushing up local wages which led to higher prices for food and services which fed back to even higher wages. With high prices, the back-of-envelope calculation of an apartment investment in Niseko makes the math works. Believe it or not, a two bedroom apartment in Niseko cost c.SGD 1,000,000 today. But the same apartment could be rented out for c.SGD 1,000 a day and even with just 4 months of rental income, the revenue comes up to be SGD 120,000 implying a gross yield of 12%. Subtracting the overheads, investors are still earning 6% net rental yield.

This is very attractive to Singaporean investors used to 2% residential yield and 4% net yield for most other types of properties. As the global rich continue to flock to Niseko, hotel pricing will continue to go up, apartments can continue to charge higher prices. More luxurious apartments can easily charge SGD 2,000 for a family of four a day which is still cheaper than staying at Hyatt or Hilton at Niseko during the ski season.

So, is it a no-brainer investing in an apartment in Niseko?

It is if we assume we can sell the apartment. But Niseko is not Tokyo and land is abundant. We cannot assume there would be ready buyers after ten years. A new investor can always buy a new property developed by SC Global, or Hong Kong Land or some Japanese developer in 2030. Why would they buy an existing ten-year-old property rather than a brand new one?

The other big question is the relative pricing of properties in Japan. Given that a similar property in Tokyo is selling for almost the same price as an apartment for Niseko, does it make sense that Niseko's apartment can go higher than Tokyo even if it has a better rental yield? Mathematically, it could. This is because one can argue that Niseko's 6% yield that could become 10% is more attractive Tokyo's 3-4% yield that is not going anywhere.

Intuitively though, it is very hard to stomach why should someone cough up a million dollar on a property in Niseko when he or she could buy a good apartment in Tokyo or for that matter, a slightly smaller shoebox in Singapore. There will be a lot more demand for a second-hand shoebox condominium in Singapore as our beloved city state has become a playground for the global rich and famous. But Niseko? 

Queuing for ski lifts

Niseko is not a global city. There is limit to its growth. Queuing for the ski lifts is exhaustingly long as it is. Tourists has caused prices of food, lodging and services to skyrocket in the vicinity. This has drove up the cost of living and most locals have moved away, preferring to live in Sapporo or Chitose. Without the local population to anchor life, it is hard to see how Niseko can continue to flourish. Global tourists can love Niseko today, but they can also move elsewhere in a flash. Not forgetting that Japan is a country of natural disasters. An earthquake in Japan would cause property prices to collapse across the country, from Niseko to Tokyo to Fukuoka.

Having said that, Aspen and Whistler have gone on the same paths. Niseko could follow their success story. Property prices of similar sizes in Whistler ranged from CAD 100k to 1.5m. Expensive stuff goes for more. In Aspen, properties across the board in ranged from USD 1m to 10m. So Niseko's properties might still increase in value. The global rich is getting richer, driven by cheap liquidity, their search of yield and valuable assets will continue indefinitely. At the back of all this asset inflation is ultimately global negative interest rates. This is the same big tailwind for many types of investments, be it stocks, industrial properties in Singapore or private equity stakes in disruptive startups.

Niseko, or exotic winter holiday homes in general, could become an asset class like collectible fine wine, art pieces, luxury watches and the likes. It has the added characteristics of good rental income and a respectable rental yield at face value. So it does look attractive. But as astute investors, we must remember it's not the same as rental income from a Tokyo or Singapore property.

I would buy a property in Ho Chi Minh, Vietnam any time over an accommodation in Niseko. But that's just me.

Happy New Year 2020! Huat Ah!