tag:blogger.com,1999:blog-280868562024-03-17T21:50:07.236+08:00Eight percent per annum: Value investing in Singapore stocks8% or eight percent per annum refers to the average return on investments (including stocks, bonds, real estate and other alternative investments) over the long run. Value Investhink is a play on the words "Value Investing" to incorporate Critical Thinking.Jayhttp://www.blogger.com/profile/03292158817395898619noreply@blogger.comBlogger550125tag:blogger.com,1999:blog-28086856.post-75468545168736689602024-03-15T14:51:00.000+08:002024-03-15T14:51:00.207+08:00Diageo - the luxury spirits compounder<p style="text-align: justify;">When we first started out a year ago, we discussed the goal to write one investment idea per month and ultimately getting to 30 ideas. Well time files and we are now at the 15th idea. This is a good one as can be seen in the numbers below (company has FY ending in Jun):</p><p style="text-align: justify;"><b>Simple Financials (Jun 2024 estimate, USD)</b></p><ul style="text-align: left;"><li style="text-align: justify;">Sales: 21.0bn </li><li style="text-align: justify;">EBITDA: 7.2bn </li><li style="text-align: justify;">Net income: 4.5bn </li><li style="text-align: justify;">FCF: 3.2bn </li><li style="text-align: justify;">Debt: 19bn, Mkt Cap 84bn</li></ul><div><p style="text-align: justify;"><b>Financial Ratios</b></p><ul style="text-align: left;"><li style="text-align: justify;">ROIC: 13% and ROE: 40%! </li><li style="text-align: justify;">EV/EBITDA 13.4x </li><li style="text-align: justify;">PER 16.8x </li><li style="text-align: justify;">Past margins: OPM 27-31% </li><li style="text-align: justify;">FCF yield: 2.4-3.7%</li></ul></div><div><p style="text-align: justify;">This is another one of the highest quality companies amongst those we have discussed and therefore do not come cheap with average FCF yield in low single digits. It has not traded above 5% FCF yield in the last 10 years and the reason is in the world map below. The company has enjoyed good growth in most geographies (with the exception of North America and Russia), partially supercharged by the pandemic. It also operates in a consumer market segment that has a lot of pricing power as a result of strong brand marketing, the perceived glamour and luxury that comes with the consumption of its products and just strong global demand as the world normalizes from COVID-19.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSfXPR6fEb8KP_9QJyvPxxJqXv06yxvMoowdyEFXX4fQQpOYAosQ8W6gc3ows1YnqfUNhAu0SZHR6Sk3oHEUZubOW0xbaglMCJOX2T-SqZV67PonLiITkrgAWy2Q7qeiqG5aOs6rtAX01BMincHuqQ_2jCRCrHdidVZI2iau1PnXn4_D65Hp6r/s1698/Screenshot%202023-10-13%20at%2022.58.48.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="966" data-original-width="1698" height="228" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSfXPR6fEb8KP_9QJyvPxxJqXv06yxvMoowdyEFXX4fQQpOYAosQ8W6gc3ows1YnqfUNhAu0SZHR6Sk3oHEUZubOW0xbaglMCJOX2T-SqZV67PonLiITkrgAWy2Q7qeiqG5aOs6rtAX01BMincHuqQ_2jCRCrHdidVZI2iau1PnXn4_D65Hp6r/w400-h228/Screenshot%202023-10-13%20at%2022.58.48.png" width="400" /></a></div><p style="text-align: justify;">The company we are discussing today is Diageo (DGE on the London Stock Exchange), the world’s largest spirits maker alongside China’s Kweichow Moutai by revenue but trading at less than half Moutai’s market cap. Diageo owns a few of the most recognizable alcoholic brands such as Johnnie Walker, Guinness, Smirnoff, Tanqueray, Bailey and Casamigos. Share price has compounded nicely over the last 20 years, up more than 4x from GBP6.9 to GBP30.6 today.</p><p style="text-align: justify;">In the last few years, Diageo has enjoyed some strange and ironic growth. When the pandemic hit, it was thought that Diageo will be impacted negatively as on-premise drinking died down but revenue grew because people drank more at home! With nothing better to do during covid, they emptied their bottles of whiskies and tequilas and bought some more. Diageo’s revenue skyrocketed. </p><p style="text-align: justify;">As air travel resumed, people started moving again and when they roamed the duty free shops at airports with spare foreign currencies they have to spend, they bought more spirits and so Diageo grew some more! Although we are seeing the backlash now and share price has corrected in the recent months.</p><p style="text-align: justify;"><b>1. Fundamentals</b></p><p style="text-align: justify;">We have written about Diageo on the original infosite and the investment thesis has not changed much:</p><p style="text-align: justify;"><i>Diageo is a global leading spirits company with 200 brands and footprint in 180 countries that has compounded growth steadily since its inception in 1997. Its strong brands, coupled with good marketing, high market share and strong global distribution has enabled the firm to generate consistent, steady free cashflow (FCF) and high ROIC on the back of both pricing and volume growth. The stock has compounded well in the past and shareholders have benefited from both capital appreciation and dividend growth, an important aspect that management has focused on. Investors can expect Diageo to continue to compound at 5-7% going forward.</i></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyh5S2ZYsdnJFCkXOrW__ZYc7OtAuH7pNeRdAL1snX8k8jJ3OplvhAs39OdWfK2D5UlcxPg2Pen75TtgIu4xjYe43RvAGUWwmcd8Yvl8hyphenhyphen5mr7EsN6aY2FZB5isDGgL9_Pq5bqPWjbIXIockY4lz6VdJxlG1gIlXkBDHR9pNuvmXTQ0nrq10MX/s2130/Screenshot%202023-10-14%20at%209.31.47.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="844" data-original-width="2130" height="159" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyh5S2ZYsdnJFCkXOrW__ZYc7OtAuH7pNeRdAL1snX8k8jJ3OplvhAs39OdWfK2D5UlcxPg2Pen75TtgIu4xjYe43RvAGUWwmcd8Yvl8hyphenhyphen5mr7EsN6aY2FZB5isDGgL9_Pq5bqPWjbIXIockY4lz6VdJxlG1gIlXkBDHR9pNuvmXTQ0nrq10MX/w400-h159/Screenshot%202023-10-14%20at%209.31.47.png" width="400" /></a></div><br /><p style="text-align: justify;">In the past, Diageo was synonymous with Johnnie Walker, its largest brand with the most amazing story and heritage. Scotch was c.25% of revenue but closer to 35-40% in terms of profit contribution. There is an old 6 min plus Youtube video taken in one shot casting Robert Carlyle who narrated the Johnnie Walker story brilliantly. Every Diageo current and future investor should watch the video. It is just fascinating! Since then, as depicted in the pic above, Diageo has successfully diversified its portfolio from Scotch over the last few years into other spirits.</p><p style="text-align: justify;">Today, Diageo’s revenue breakdown is relatively simple to understand. The following pie chart from its latest annual report provides the breakdown which roughly works out to be 22% Scotch / Johnnie Walker, 18% Beer / Guinness, 16% Vodka / Smirnoff while Tequila, Rum and Gin makes up high single digits. Together, its spirits portfolio is the largest in the world and accounts for 70% of market share based on Diageo’s own measure of market segments it competes in. Of course, if we sliced it differently, the market share might be lower, but still, we cannot deny Diageo is dominant in spirits.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUzW55JqxkmsX2GGjBc_Updpcxmw2oBLBrRuNfMqmySEhEOdmbSCFqqqu7jUcczAWPf_g50E5Sx2s7GffivlTjYR8qcR7RXJxsAeMBwEx8ViwJhh_6-TQGy68Rx-PSIOTgZc-jiV5kjj45j6cQg7FKnxnnQVLqeqQYcF4cgEfoY-imd_Kuk8Ak/s664/Screenshot%202023-10-14%20at%2017.31.16.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="504" data-original-width="664" height="304" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUzW55JqxkmsX2GGjBc_Updpcxmw2oBLBrRuNfMqmySEhEOdmbSCFqqqu7jUcczAWPf_g50E5Sx2s7GffivlTjYR8qcR7RXJxsAeMBwEx8ViwJhh_6-TQGy68Rx-PSIOTgZc-jiV5kjj45j6cQg7FKnxnnQVLqeqQYcF4cgEfoY-imd_Kuk8Ak/w400-h304/Screenshot%202023-10-14%20at%2017.31.16.png" width="400" /></a></div><div style="text-align: justify;"><br /></div><p style="text-align: justify;">In terms of margins, Scotch enjoys one of the highest margins in the portfolio at 35-40% operating margin alongside Tequila and Vodka while Beer and Ready to drink are lower at 15-20%. Well, alcohol is just good business. As per the usual, let’s discuss the few positives on top of the fundamental thesis:</p><p style="text-align: justify;"><i><u>Positives</u></i></p><p style="text-align: justify;"><b>Growth in TAM via volume and premiumization</b>: According to Diageo, the growth in the spirits addressable market is phenomenal and while Diageo has not grown in its North America region this year, the US market is resilient and I believe it also reflects the global growth opportunity for Diageo as 600m consumers come of age and look to drink better and are willing to pay up for that. </p><p style="text-align: justify;">The chart below shows how spirits have grown 6% CAGR by taking share from beer and wine in the US and more importantly how the market has premiumised with the ultra premium and super premium categories growing rapidly. This phenomenon is likely global because as middle class consumers increase their income and spending, they seek out the best offering and will not hesitate to pay up to get. In the world of luxury handbags, our better halves only want the best and the most popular: Hermes and LV. Similarly in watches, it’s Patek and Rolex. In the Singapore food scene, it’s either Michelin star restaurant, or the longest queue in the hawker centre’s bak chor mee (minced pork dry noodle) store or Hainanese chicken rice store.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhdFta02YZgqyjFjBhEo44Apmhe3dMLFJx7SHDUIQeGuxVZGze8fnfQq0D4rXjKEMIckyf7g5TbGQFb4c5Af2b2-zbClaJcA2bdQcKAnJRm1Zk6MO9AvMUyKboEIPgXWu7JAM-_ta6qMd5Gk5ZeQ-hClXO_PTuTaeQ31EvffjawPHwrYfEm6Kr/s2464/Screenshot%202023-10-14%20at%2017.34.48.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1218" data-original-width="2464" height="198" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhdFta02YZgqyjFjBhEo44Apmhe3dMLFJx7SHDUIQeGuxVZGze8fnfQq0D4rXjKEMIckyf7g5TbGQFb4c5Af2b2-zbClaJcA2bdQcKAnJRm1Zk6MO9AvMUyKboEIPgXWu7JAM-_ta6qMd5Gk5ZeQ-hClXO_PTuTaeQ31EvffjawPHwrYfEm6Kr/w400-h198/Screenshot%202023-10-14%20at%2017.34.48.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><b><div style="text-align: justify;"><b>As such, Diageo, with the most recognizable whisky brand globally and a growing portfolio of desirable spirits and beer brands, has benefitted from having both the best and the most popular choices in the spirits space and will continue to do so. This is perhaps the key reason behind management’s confidence and promise to keep growing 5-7% annually.</b></div></b><p></p><p style="text-align: justify;">Distribution prowess: With its long term track record in distribution prowess starting with ship captains more than 150 years ago to the current footprint in 180 countries, Diageo has insurmountable clout in putting its products across the globe in every imaginable shelf. We see Diageo’s spirits prominently in airports, supermarkets, convenient stores, bars, restaurants and online. Diageo tracks inventory at its distributors religiously and make sure its whole supply chain chugs along and delivers.</p><p style="text-align: justify;"><b>Strong Financial Metrics: </b>The third positive for Diageo is reflected in the numbers. We have discussed the high OPMs in the various spirits segments. With scale, Diageo has been able to do businesses with less capex (c.5% capex to sales), generating high ROIC and extraordinarily high ROE. Diageo used to generate GBP1bn in FCF a decade ago but that has bumped up to GBP2-3bn.</p><p style="text-align: justify;">Its return metrics are best in class with ROICs averaging teens while ROEs are in the 20-40% range with just modest use of leverage. Capex to sales has creeped up in the last two years to high single digit percentage. On average, this should be a mid single digit capex to sales business. The following shows its FCF generation capabilities and ROICs over the last 5 years.</p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLkorVpTlTMQyBY9WHms29LdOTMkCyzpXa5cJzG9xb9gm5mMUF4gdfUsLRKeLFxhHlbkuP6DoIaBSm7FTQzHfafRy_OQFywadvxAk2wPk79pqHQCwA7_MJA2QWNlyEw1rQff2i3V2F4zgeXoBPr4CvG_-QV1lCmwyAZFtubtgtcwr_aK3Q0VRN/s970/Screenshot%202023-10-14%20at%2017.33.11.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="380" data-original-width="970" height="156" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLkorVpTlTMQyBY9WHms29LdOTMkCyzpXa5cJzG9xb9gm5mMUF4gdfUsLRKeLFxhHlbkuP6DoIaBSm7FTQzHfafRy_OQFywadvxAk2wPk79pqHQCwA7_MJA2QWNlyEw1rQff2i3V2F4zgeXoBPr4CvG_-QV1lCmwyAZFtubtgtcwr_aK3Q0VRN/w400-h156/Screenshot%202023-10-14%20at%2017.33.11.png" width="400" /></a></div><br /><p style="text-align: justify;">Similar to Thai Beverage, the other alcoholic company we analyzed, the strengths of companies show through in numbers and Diageo’s margins, free cashflow generation, ROEs and ROICs speak for itself. This is a world class business and a classic compounder.</p><p style="text-align: justify;"><i><u>Management</u></i></p><p style="text-align: justify;">Diageo was helmed by Ivan Menezes who built the company over the decade to 2023 but he unfortunately passed away this year. His legacy is passed to Debra Crew who was appointed Chief Executive this June and she seemed well-supported by a diversified team with varied experience to lead Diageo to greater heights. </p><p style="text-align: justify;">Diageo exemplifies the future where corporates balance profitability and growth against environmental and social concerns. While selling alcohol, the company also advocates responsible drinking and is focusing on being a responsible employer for its 28,000 global staff.</p><p style="text-align: justify;"><i><u>Risks</u></i></p><p style="text-align: justify;">Most investments have risks. That is how the game works. The only risk free investment is the first idea introduced - invest in Treasury bills which now gives 3.8%. This is risk free, as per textbooks’ definition. But it is predicated on the continuing existence of Singapore and our government. As such, nothing is without risk. For Diageo, two risks are tepid growth into 2024 and its geographical exposures.</p><p style="text-align: justify;"><b>Tepid growth</b>: As discussed earlier, Diageo has enjoyed strong growth going into the pandemic and then going out of the pandemic as air travel resumed. Good times will always end and 2024 is now looking weak. We are seeing inventory piling up at its distributors and adjustment may well run a few quarters. <b>Investors are ultimately short term minded and without growth, Diageo’s high valuation is not sustainable and hence we are seeing its share price correcting from its high at c.GBP40 to current GBP30.6 and looks like we may break that psychological barrier of GBP30.</b></p><p style="text-align: justify;"><b>Geographies:</b> While Diageo is a global company, US ultimately drives revenue and earnings. The chart below shows how North America accounts for majority of sales and Operating Profit (OP) and needless to say, recession in the US will negatively impact Diageo. However, as market goes, hiccups in China, Africa and Latam will also affect share price when short-term investors look at large companies with exposures to these geographies and short them on sentiments.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw0m_yDNaBHBkfNrcb5ZtvAzH1PBCDM7VZJQQ_mLJHqAFm32zMAT3pviRgW7KW6hZByNoegZiBClEVnt3IMbP_XgQhmOkulZA4415BXEqsJBupgkCTAdBmloEY86YFCgJlnjAdJsTZTTbxuubCNomrzY-7Fh-nghMS1_5Nn95G_cvmB9IKVcJw/s1148/Screenshot%202023-10-15%20at%2017.47.59.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="262" data-original-width="1148" height="91" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw0m_yDNaBHBkfNrcb5ZtvAzH1PBCDM7VZJQQ_mLJHqAFm32zMAT3pviRgW7KW6hZByNoegZiBClEVnt3IMbP_XgQhmOkulZA4415BXEqsJBupgkCTAdBmloEY86YFCgJlnjAdJsTZTTbxuubCNomrzY-7Fh-nghMS1_5Nn95G_cvmB9IKVcJw/w400-h91/Screenshot%202023-10-15%20at%2017.47.59.png" width="400" /></a></div><br /><p><b>2. Technicals</b></p><p>Diageo share price chart shows the nice compounding curve that we are familiar with and it recently hit its all-time high at GBP40 before correcting to the recent GBP30 level. At the pandemic low, it was at GBP25 which is, as previous ideas, a strong technical support.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdzxbyhNFQVxbw6hcvxKReACeG9Ew-zCJNum6xBzI3fsFmfO4bvIhyphenhyphenLwy2wp8yRN7jaKtWdKpcex0QVY78-MnoUqr6MUa-wsug0DY4hMFsF_E4VMFqtHmqf74I8UX3t_ryPetoDQznAVA0aKEvUBfBRnzbR0TFC12hVmBzaKCgQ_rxtmpntIP8/s679/Screen%20Shot%202023-12-03%20at%2013.20.53.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="501" data-original-width="679" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdzxbyhNFQVxbw6hcvxKReACeG9Ew-zCJNum6xBzI3fsFmfO4bvIhyphenhyphenLwy2wp8yRN7jaKtWdKpcex0QVY78-MnoUqr6MUa-wsug0DY4hMFsF_E4VMFqtHmqf74I8UX3t_ryPetoDQznAVA0aKEvUBfBRnzbR0TFC12hVmBzaKCgQ_rxtmpntIP8/w400-h295/Screen%20Shot%202023-12-03%20at%2013.20.53.png" width="400" /></a></div><p style="text-align: justify;">The risk reward profile for Diageo as dictated by technicals is therefore 25/30 vs 40/30 which translates to c.20% downside vs c.30% upside. This means there is almost no skew either way which is usually the case for strong consumer names. It is worth noting though Diageo has had larger drawdowns at 25-30%. So it is not inconceivable that it drops closer to GBP18-20, which is the next strong technical support below GBP25. But let’s look at fundamental valuations for a better picture.</p><p style="text-align: justify;"><b>3. Valuations</b></p><p style="text-align: justify;">Diageo trades at a slight discount to peers on PE but is right smack in peers’ average on EV/EBITDA and trades at a slight premium on FCF yield. Its OPM (blended at mid 20s) and ROIC (teens according to the company above) are inline with peers while ROE is exceptionally high. Overall, peer valuation comparison does not suggest Diageo is undervalued. </p><p style="text-align: justify;">Next we look at Diageo’s valuations based on the usual three metrics: Free cashflow (FCF), EV/EBITDA and Price Earnings Ratio (PER). The Earnings row is simply FCF (GBP 3bn), EBITDA (GBP 6bn) and Net Income (GBP4bn) respectively and if we apply the appropriate multiples, we get to Intrinsic Values (IV) between GBP33.3 to 35.6 which suggest that Diageo has some upside to its IV but not by a whole lot. There is no big margin of safety buying today.</p><p style="text-align: justify;">This corroborates with both peer valuation comparison and technicals and hence it may be prudent to wait for a better opportunity to buy, perhaps closer to GBP25. However, this high quality name rarely gives a big open window for investors to buy a lot at the price we want. If we can establish that GBP25 is a screaming buy, so do other investors and hence it won’t get there. One other angle to look at is dividends. Diageo is considered a UK Dividend Aristocrat, a small group of stocks listed on LSE with increasing or stable dividend for the last 10 years. The following bullet points provide more details:</p><p style="text-align: justify;"><i><u>Diageo's dividends </u></i></p><p></p><ul style="text-align: left;"><li style="text-align: justify;">Track record of increasing dividend since 2001 and in the last few years, consistent dividend growth between GBp1.5-3.8 annually </li><li style="text-align: justify;">Enhanced shareholder return with further share buybacks </li><li style="text-align: justify;">Paid out c.GBP5 in dividends over the last 7 years which accounts 16% of today’s share price </li><li style="text-align: justify;">Current dividend yield of GBP 0.8/30.6 = 2.6%</li></ul><p></p><p style="text-align: justify;"><b>With that in mind, I would ascribe the higher IV of GBP36 for Diageo which implies high teens upside but would look to buy more closer at GBP25. </b></p><p><i>Huat Ah!</i></p><p><i>This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.</i></p><p><br /></p></div><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-14600141262931998202024-03-08T10:55:00.001+08:002024-03-08T10:55:00.195+08:00The Property Strategy<p></p><div style="text-align: justify;">There are two topics that dominate social conversations in Singapore. Children’s Education and Real Estate. Nothing else seemed to loom as large.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In one of the earlier post on this substack, we discussed the important pieces of an investment portfolio. But we did not talk about property. Given that this would be a huge monetary outlay for most families, we believe property deserves a separate discussion. This post is an attempt to address this big topic in our lives.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have to caveat that I have not gotten it very right with Singapore property. All the posts in the original infosite detailed my read about Singapore’s favorite investment topic and how wrong I have been by being somewhat bearish. That said, I have nonetheless benefited through luck, timing and some simple strategies which I do hope to share in the post.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This discussion is not about predicting where Singapore property will go from here or how the cycle will transpire. Like trying to time the stock market or forecast macro trends, it is just too difficult. Nobody thought property can rally the way it did during and after the pandemic. Just when we think the property sector was too hot and bound to cool, things heated up further in Singapore’s previous swamp site (see below).</div><p></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglvCyt9I5MA9R_apLsQrv5lga92jTCthFeqzNw6g-JsselK3cmwmP_AaxJ4xErbDVABM-cUCQRew2PGb7w_oghiPGhzKer69Y9D6RWXBx7Rb3n_Ce_X47mE-y808NxZgITn3mQ7rlHpbxim_3_CXRSusl531QGdL2-zu4WnZnwHCBVjZTy25Bt/s1480/Screenshot%202023-12-25%20at%2011.03.00.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1094" data-original-width="1480" height="296" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglvCyt9I5MA9R_apLsQrv5lga92jTCthFeqzNw6g-JsselK3cmwmP_AaxJ4xErbDVABM-cUCQRew2PGb7w_oghiPGhzKer69Y9D6RWXBx7Rb3n_Ce_X47mE-y808NxZgITn3mQ7rlHpbxim_3_CXRSusl531QGdL2-zu4WnZnwHCBVjZTy25Bt/w400-h296/Screenshot%202023-12-25%20at%2011.03.00.png" width="400" /></a><span style="text-align: left;"> </span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">A few months ago, we have a crazily popular project launched in Jurong, which was a swamp in the 1950s. People queue hours to ballot for units. When their no.s were called, it was as if they struck lottery. Winners celebrated when they have to write a million dollar check to buy a 99-year lease of a Mickey Mouse condo unit in a former swamp site. Only time will tell if they would actually make money.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I had a chance to look at proprietary data of many property transactions in the past thanks to a good agent friend. Properties that we know today that we thought should had done so well, e.g. The Sail (see below), people have lost their family fortunes. These sad datapoints with a lot of money lost can be seen across almost all condos in Singapore.</div><div style="text-align: justify;"><br /></div><div><div><div style="text-align: justify;">--------------- </div><div style="text-align: justify;"><br /></div><i><div style="text-align: justify;"><i>The Sail @ Marina Bay had 30 unprofitable transactions and 27 profitable transactions. At the time of writing, the leasehold condominium has 28 unprofitable and 28 profitable transactions over a 12-month period.</i></div></i><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Source:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><a href="https://www.edgeprop.sg/property-news/profitable-neighbours-unprofitable-condominiums"></a><a href="https://www.edgeprop.sg/property-news/profitable-neighbours-unprofitable-condominiums">https://www.edgeprop.sg/property-news/profitable-neighbours-unprofitable-condominiums</a></div></div><div style="text-align: justify;"><br /></div><div><div style="text-align: justify;">---------------</div><br /><div style="text-align: justify;">So, please remember, it is very difficult to predict anything. Nobody can consistently and successfully predict the markets, nor macro trends (recall that everyone said 2023 will see a recession, but it didn’t happen) nor elections and certainly not property cycles. It is important to invest in ways such that you will never risk the house. I cannot emphasize more on this point. We must be very careful with large % of net worth, with leverage and margins, with savings we cannot afford to lose and needless to say, with property investment due to its size.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is so important, I feel I must repeat, be very careful with:</div><ul style="text-align: left;"><li style="text-align: justify;">
large percentage of net worth</li><li style="text-align: justify;">
leverage and margin trading / financing</li><li style="text-align: justify;">
savings we cannot afford to lose</li><li style="text-align: justify;">
property investment </li></ul></div><div><div style="text-align: justify;">To me, property discussion should also be in different basket because of the sheer size of the investment and how it functions as a life utility rather than financial instrument especially when we are talking about the first property. If we view property more as an investment and lump it in with our other investments, rather than part of our lives, things can get really complicated as we shall discuss.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I have dissected the discussion into the following sub-topics which we will delve into for the rest of the post:</div><ol style="text-align: left;"><li style="text-align: justify;">
Thoughts on the first property </li><li style="text-align: justify;"> Rent and mortgage </li><li style="text-align: justify;"> Second property in Singapore </li><li style="text-align: justify;"> Overseas properties</li></ol><div><b>1. First property
</b><br /><br /><div style="text-align: justify;">The first property is not an investment and it is best not to lump this property together with the rest of the investment portfolio. It is difficult because the capital outlay is huge and if we ignore this capital outlay and simply look at what’s left of the investment portfolio plus savings, sometimes it doesn’t make sense intuitively because what is left is too small to matter.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">However, it is an important segregation because when we see property as an investment vehicle and less as a shelter over our heads, we might be enticed to make the wrong decisions. The trick could be to buy a property we can afford (i.e. HDB in Singapore). Once we have secured the shelters over our heads, we can think more clearly about investments.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Recently, there was a video where Charlie Munger (RIP Charlie..) spoke about his view on his first property. I think it is very apt to share it here. I have paraphrased it though.</div></div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguYBtd7qdRQQ7y0sEgJK4nVR4J2t3Ash-Lr7l9wRzq2pt-7xe3-0hSVsA2C0crG_x12kTC3N02k5GA_43lU-fIgJEH7mNPkqTaTvVidULaa8OWMbDp5tZkzpTOoMErf3uT6wda5TSLlI4lODuO5svKCXIe8LW7Kf49IwnD76fEEtj_pRviXK5N/s1492/Screenshot%202023-12-25%20at%2011.11.32.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="576" data-original-width="1492" height="155" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguYBtd7qdRQQ7y0sEgJK4nVR4J2t3Ash-Lr7l9wRzq2pt-7xe3-0hSVsA2C0crG_x12kTC3N02k5GA_43lU-fIgJEH7mNPkqTaTvVidULaa8OWMbDp5tZkzpTOoMErf3uT6wda5TSLlI4lODuO5svKCXIe8LW7Kf49IwnD76fEEtj_pRviXK5N/w400-h155/Screenshot%202023-12-25%20at%2011.11.32.png" width="400" /></a><span style="text-align: left;"> </span></div><br /><div style="text-align: justify;">The property you live in also dictates how your family will live and behave. It is not simply an investment or a shelter. So if you see your property as such then the following logic should naturally hold - buy your first property and do not trade it. If you want to upgrade, do so in accordance to the way you want to live your life and always try to upgrade when dollar psf are at lower points (not easy) so that you can buy the bigger house at a relatively lower valuation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">On the flipside, when we do not have a property, we are essentially shorting the property market. As seasoned investors would be reminded, shorting something has unlimited downside. We may end up in a situation where we have to pay rent for years and the market rises and rises. The cost can be unbearably painful.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is a good segue to talk about rent and mortgage.</div><b><br />
2. Rent and Mortgage
</b><br /><br /><div style="text-align: justify;">I hate paying rent. You pay a significant amount of your salary to someone else and help him pay his mortgage. Shouldn’t we then buy the property and pay the mortgage ourselves? Then at the end of the day, we will own the property vs paying rent which we get nothing ultimately. When we first start out in our careers, it is difficult because the capital outlay is just too big. Yes, it is not an easy discussion. There are times when you cannot help it and you have to pay rent. For example:</div><ul style="text-align: left;"><li style="text-align: justify;">
Working in a foreign city for just a few years</li><li style="text-align: justify;">
Rent is subsidized or has other benefits (e.g. tax)</li><li style="text-align: justify;">
The rent is way lower than mortgage and we can arbitrage rent (i.e. renting out our purchased property and staying somewhere else paying a lower rent)</li></ul><div style="text-align: justify;">Otherwise, if things checked out well, we should always strive to buy our first property well and pay mortgage.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">We can have a whole debate about mortgage. But going by our logic that we should always treat our first property as a utility, then we should strive to pay down mortgage asap. We can take our time when interest rate is low. But as 2022-23 showed, interest rates can spike rapidly and we might get caught paying 4-5% on mortgage which is ridiculous. So always buy an affordable first home and strive to have a manageable mortgage.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Remember, when you are paying mortgage, the bank owns the house, not you. People talk about using mortgage and financially engineer profits with property’s leverage. I would suggest doing that with a lot of prudence with the first property.</div><b><br />
3. Second property in Singapore
</b><br /><br /><div style="text-align: justify;">When we have the shelter over our head well covered, then we are eligible to think about second properties and how they factor into the investment portfolio. Here we can think about asset allocation and compare returns but property differs largely due to leverage. Based on just equity returns, without leverage, property usually generate mid to high single digits over time. This is not too different from stocks and just a tad higher than T-bills. Therefore, money should be deployed into real estate only if our analysis shows that the equity return on some particular property investment is better than the alternatives. The chart below is enlightening.</div></div></div><div><p></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGPFsGZZjTItmfklZYhrJR8AmH7rx4ATiiE2LI17qr_M8LC1SNtBEvqzpkP8pm57JygIxSTjbUWzSFfsISIweq4haPMdfvcXV_1JSxjGuH3TNp6XRW4sNTQ7EHOE8jDrTnftlA2Y46DmF_6I0qEUK_sGE1wP8W0jARfOPzKOm51o6h0_SjLvY_/s1466/Screenshot%202023-12-25%20at%2011.01.10.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="882" data-original-width="1466" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGPFsGZZjTItmfklZYhrJR8AmH7rx4ATiiE2LI17qr_M8LC1SNtBEvqzpkP8pm57JygIxSTjbUWzSFfsISIweq4haPMdfvcXV_1JSxjGuH3TNp6XRW4sNTQ7EHOE8jDrTnftlA2Y46DmF_6I0qEUK_sGE1wP8W0jARfOPzKOm51o6h0_SjLvY_/w400-h241/Screenshot%202023-12-25%20at%2011.01.10.png" width="400" /></a></div><br /><div style="text-align: justify;">In the earlier post, we established that we could 2-4x our money if we can compound the portfolio at a high single digit return over 10-20 years. Property can achieve that because of leverage. However we do require many other elements to work as well. We are talking about good agents (cannot emphasize their importance more here), bank lending, support from family (parents, significant other etc) and legal and tax advice!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In Singapore today (early 2024), we need to do a lot of legal gymnastics because individuals are not allowed to own multiple properties without paying significant amount of taxes. For married couples, we need to “de-couple” legally so that husband and wife can own one property each. For foreigners, unless you have money to burn, it really doesn’t make sense because you need to pay 60% tax on buying the first Singapore property!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As such, investing in second properties in Singapore is not something we can just execute by clicking the buy button on the Interactive Broker platform. It requires a lot more effort.</div><div style="text-align: justify;"><br /></div><b><div style="text-align: justify;"><b>4. Overseas properties</b></div></b><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Overseas properties can be even trickier since we need to handle everything remotely. The biggest barrier is to find the right person / agent on the ground whose interest is aligned. If you have dealt with enough property agents you know that good agents who really have your interest at heart are like unicorns, very rare.</div><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgf4b87qsYTU8PFlk8WnxDFNalC1BIjUCDMKH61eDqv8Usrf8a19v8lICvfhs4X_O4T9uwl-AqHuFhkJf0GaMus_1e0U8cFWHU7eB9d9vN0G3rdHFi1r7YRsKFAMAonlhuGVoflqjXY_RSM8SHtYxQjkGEIlUNRblLKh436ZyARaoLLd99dyH-m/s1072/Screenshot%202023-12-25%20at%2010.59.16.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1072" data-original-width="772" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgf4b87qsYTU8PFlk8WnxDFNalC1BIjUCDMKH61eDqv8Usrf8a19v8lICvfhs4X_O4T9uwl-AqHuFhkJf0GaMus_1e0U8cFWHU7eB9d9vN0G3rdHFi1r7YRsKFAMAonlhuGVoflqjXY_RSM8SHtYxQjkGEIlUNRblLKh436ZyARaoLLd99dyH-m/w288-h400/Screenshot%202023-12-25%20at%2010.59.16.png" width="288" /></a></div><p style="text-align: justify;">
To sum things up: </p><p></p><ul style="text-align: left;"><li style="text-align: justify;"> Don’t trade your first and only property </li><li style="text-align: justify;"> Use mortgage wisely and try to pay down as much and as soon as possible </li><li style="text-align: justify;"> Weigh second properties against the investment portfolio well and </li><li style="text-align: justify;"> Don’t buy overseas properties</li></ul><p></p><p style="text-align: justify;">These are my views inherited from very smart people who had successfully navigated life in Singapore with some based on my own experience. </p><p style="text-align: justify;">They are definitely not gospel truths and I would welcome further discussion.</p><p style="text-align: justify;"><i>
Huat Ah!
</i></p><p><br /></p></div></div><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-42892648337905710732024-03-01T00:30:00.010+08:002024-03-01T00:30:00.135+08:00Thoughts #33: Negotiating Power<p style="text-align: justify;">Events in 2023 have prompted some initial thoughts about negotiation and how it affects the situations, our lives and the world. Life is indeed a game of chess, and we need good strategies and there is also timing, environment and our fellow community to help. Or in Chinese, 天时,地力,人和.</p><p style="text-align: justify;">The Russia-Ukraine war comes to mind. It was reckless to start the war and reasons back then are no longer relevant today. This is very much like life. The person we were just a few years ago, is actually not us today. Events that has happened just last year may no longer be relevant today. The Russia-Ukraine situation has evolved so much that everything can be now at stake. The following factors provide worrisome boost to a bleak future which may further escalate:</p><p></p><ul style="text-align: left;"><li style="text-align: justify;">If Trump becomes President, US may stop its aid to Ukraine and Russia can win. This was unthinkable just a year ago.</li><li style="text-align: justify;">The second war in Israel is putting further pressure on US and its allies on resources and political will to fight internal battles.</li><li style="text-align: justify;">China, its allies and North Korea are run by dictators and can move much faster than the US can.</li></ul><div style="text-align: justify;">To not escalate this further, US and Ukraine may need to go to the negotiating table faster and from a position of weakness. Without this, there is a real risk things unravel for the worse and pave the way for WWIII. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In a similar life situations, one must always understand the dynamics so as to move advantageously.</div><p></p><p style="text-align: justify;"><i><u>Position of strengths</u></i></p><ul style="text-align: left;"><li style="text-align: justify;">The situation does not warrant any third party negotiator</li><li style="text-align: justify;">Options to move in different directions in position of strength (strong offensive power, strong internal defense, strong bargaining chip or chips)</li></ul><div style="text-align: justify;"><i><u>Position of weakness</u></i></div><div><ul style="text-align: left;"><li style="text-align: justify;">The situation requires a strong third party negotiator especially at a critical juncture</li><li style="text-align: justify;">Optionality is restricted, there are no catalysts on the horizon (e.g. Biden continues to be President)</li><li style="text-align: justify;">Nuclear options (literally pressing nuclear button, or more soft approaches like media influence or use of international laws against the enemy)</li></ul></div><div style="text-align: justify;">Shareholders have some negotiating power. Especially in recent years, activists have turned the tables against companies and their management. With just a few percent stake, they can:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Demand changes in the board of directors, which can decide the fate of the company's C-suite</li><li style="text-align: justify;">Use media to drum up support for their cause, rally other shareholders to vote with them</li><li style="text-align: justify;">Use lawsuits against companies who may do things can give activists the leeway to sue</li><li style="text-align: justify;">Make public strategic campaigns and propose that management execute them to generate higher returns for shareholders</li></ul></div><div style="text-align: justify;">These are strong tactics that have good track record of successes. Sadly, as a minority retail shareholder, <b>we are always in a position of weakness</b>. We have nothing to fight against management. We can go AGM and make noise but it will not change anything. As such we must always remember, there is only one option which is to sell when things are not looking good. Yet, we tend to hold on to losses for too long.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Therefore it is very important to always look for good businesses and good compounders. Check on the quality of management and simply avoid situations that stack the odds even more against us.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>Huat Ah!</i></div><p></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-31596677794778603652024-02-16T00:30:00.001+08:002024-02-16T00:30:00.142+08:00Podcast - Inflation and Interest Rates<p>Welcome to our podcast, as mentioned, we shall discuss further about the impact of inflation.</p><p>Inflation is real and happening today. Everything in sunny Singapore has become a lot more expensive.</p><p>Food court meals was $5 and now we have to pay $10. </p><p>The cheapest car cost almost $200,000 which is enough to buy a house in most countries.</p><p>The cheapest condo... I wouldn't even want to go there. </p><p>You get the idea, inflation has taken us by storm.</p><p>The hardest hit people are people in the lower income households and those with debt.</p><p>Interest cost is rising and if one is not careful, one might get caught with over-indebtedness.</p><p>It is very scary, it may cause bankruptcy and then all we worked for is gone.</p><p>So please be very careful with debt. </p><p>Lower income households did not ask for this but yet they will suffer. It is imperative for society and the more well-off to help.</p><p>Inflation benefits savers a lot. Because the interest earned can more than offset the rise in cost of living.</p><p>Let us discuss a simple example:</p><p>The cheapest meal in Singapore can still be $3. Not in the cities but in neighbourhood stalls. Yes, it will not taste as good but it is cheap. </p><p>It will fill the stomach and one can survive with $270 for a month. That is about $3,240 per year.</p><p>Now that we can get 3% from banks, it is possible to have some savings and the interest pays for all these meals. </p><p>The math is roughly $90,000. If you have $90,000, your interest can pay for an entire year of meals.</p><p>Although the same $90,000 cannot even buy half a car.</p><p>This is the strange world we live in now.</p><p>But to low income households, everything has changed, they don't have $90,000 in the bank and they wonder why people are driving fast cars.</p><p>It is very warped and there are no easy solutions.</p><p>Some say the solution could be war.</p><p>It is not inconceivable.</p><p>So back to the tenet of this podcast, while we earn 3-4% interest, if we can help, we should help the lower income households, in whatever way we can.</p><p>Hope you have enjoyed listening. See ya!</p><p><br /></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-69177500899777053852024-02-02T22:05:00.000+08:002024-02-02T22:05:00.136+08:00Thai Beverage - Singapore's compounder<p></p><div style="text-align: justify;">This third Singapore name has been a strong compounder since its IPO c.17 years ago, almost quadrupling its share price back then. With STI barely up over the same time period, this is an idea that has worked out and I think the share price is not expensive today. As usual, the simple financial numbers below:</div><div style="text-align: justify;"><br /></div><b><div style="text-align: justify;"><b>Simple financials (Sep 2024 estimate, SGD)</b></div></b><ul style="text-align: left;"><li style="text-align: justify;">
Sales: 11.7bn</li><li style="text-align: justify;">
EBITDA: 1.9bn</li><li style="text-align: justify;">
Net income: 1.2bn</li><li style="text-align: justify;">
FCF: 1.5bn</li><li style="text-align: justify;">
Debt: 4.7bn, Mkt Cap 25.1bn</li></ul><b><div style="text-align: justify;"><b>Financial Ratios</b></div></b><ul style="text-align: left;"><li style="text-align: justify;">
ROIC: 10% and ROE: 16%</li><li style="text-align: justify;">
EV/EBITDA 11.4x (Sep 24)</li><li style="text-align: justify;">
PER 11.5x (Sep 24)</li><li style="text-align: justify;">
Past margins: OPM 12-14%</li><li style="text-align: justify;">
FCF yield: high single digit for last few years</li></ul><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzhGgGpVKG35cv5YY-BA2Ti56vpunxD-c_fJtlpyB-3nV-jGsF248O53nDXSblXx0t5OaCqD__ouTRrlZ9RbLmgFb1YFzCvDa6JN_KF_K6qHrsIBQ-lS1Xqz9XW0A0tGtnPiJhr7x6E1AkdT8HQglbEo0N28skZlZR7UBgvxFp1d2vRjmRrY1X/s1372/Screenshot%202023-12-25%20at%2011.32.35.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1012" data-original-width="1372" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzhGgGpVKG35cv5YY-BA2Ti56vpunxD-c_fJtlpyB-3nV-jGsF248O53nDXSblXx0t5OaCqD__ouTRrlZ9RbLmgFb1YFzCvDa6JN_KF_K6qHrsIBQ-lS1Xqz9XW0A0tGtnPiJhr7x6E1AkdT8HQglbEo0N28skZlZR7UBgvxFp1d2vRjmRrY1X/w400-h295/Screenshot%202023-12-25%20at%2011.32.35.png" width="400" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Interestingly, share price has stagnated since 2020 and we are not far from the Mar 2020 low today. Recall that this was at the height of COVID-19 when the markets capitulated. Compare now to 2020, things has improved so much, yet the stock is trading as if we are still in the worrisome heydays of the pandemic. This warrants a closer look!</div><p></p><p></p><div style="text-align: justify;">The company in question is Thai Beverage (ticker: THBEV), the spirits, alcohol and beverage conglomerate controlled by the Charoen Sirivadhanabhakdi’s family listed on SGX. It is the largest spirits producer in Thailand and the second largest beer producer and has expanded its empire into Vietnam, Myanmar and Singapore as well as into other business segments.</div><div style="text-align: justify;"><br /></div><b><div style="text-align: justify;"><b>1. Fundamentals</b></div></b><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Thai Beverage’s investment thesis is predicated on the alcohol being an <b>inherently high ROE and sticky business as people enjoy drinking and the markets in which THBEV operates in continue to see strong growth. </b>Thailand is still seeing mid single digit growth in the spirits market while beer is also seeing strong growth with Vietnam's volume surpassing pre-COVID era. Margins have also been stable with EBIT* margins for spirits at 20+% and beer at close to 10% (while it was closer to 5% in 2017). <i>As the dominant player in various markets, THBEV will continue to generate above market growth and investors stand to benefit from this compounding.</i></div><div style="text-align: justify;"><br /></div><b><div style="text-align: justify;"><b><span style="font-size: x-small;">*EBIT = Earnings Before Interest and Tax</span></b></div></b><p></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjolbgIqSySDUpS5vkWNIvYLoB_fFKjPSR6OqLc3rG4XFjgzZaPXefbTJbGxSSWDQ4H4XHp0RpMg7MuyWjM1ZKfpMVMVXqlY2ibL501W2aIxBeRIaS7V4nNwjgIECTgQh80kGpQllwYmDIAmBBKrD-qcQbw0ySdMZmgrG2ilLcWwkrG4UppTPXC/s1474/Screenshot%202023-12-25%20at%2011.34.22.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="972" data-original-width="1474" height="264" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjolbgIqSySDUpS5vkWNIvYLoB_fFKjPSR6OqLc3rG4XFjgzZaPXefbTJbGxSSWDQ4H4XHp0RpMg7MuyWjM1ZKfpMVMVXqlY2ibL501W2aIxBeRIaS7V4nNwjgIECTgQh80kGpQllwYmDIAmBBKrD-qcQbw0ySdMZmgrG2ilLcWwkrG4UppTPXC/w400-h264/Screenshot%202023-12-25%20at%2011.34.22.png" width="400" /></a></div><br /><div style="text-align: justify;">Thai Beverage has been acquisitive and currently owns c.80% of Oishi, green tea business acquired in 2008, c.65% of soft drink maker Sermsuk (2011) and c.28% of F&N and Fraser Property (2012) and c.53% of Sabeco, the largest Vietnam beer company (2021). It generated c.SGD1.5bn in FCF last year (FY ending Sep 2022) and is on track to sustain FCF at SGD1.5bn, which implies that we can buy it now at the magical 10% sustainable FCF yield today!</div><div style="text-align: justify;"><br /></div><b><div style="text-align: justify;"><b>10% sustainable FCF yield is magical because technically, you never need to sell. If an investment gives 10% yield you get back your capital in 10 years or less. If you sell it then at cost, you just made 100%. But chances are, you can sell for higher, so this investment will probably give you 3x. If the FCF compounds, then the sky is the limit, it could be a ten bagger. Or a moonshot, or a fat pitch. You get the idea. That is why 10% FCF yield is magical.</b></div></b><div style="text-align: justify;"><br /></div><div style="text-align: justify;">THBEV is also one of the larger companies listed on the SGX at c.SGD14bn market cap today. It has compounded value since its listing and management continues to look for ways to increase value. The company intended to spin off 20% its beer business in 2020 as a separate listing but unfortunately that did not work out. Recently, the company talked about privatizing its food business which would make it a pure beverage manufacturer (both alcohol and non-alcoholic drinks) and eliminate the conglomerate discount on its valuation. More on this later.</div><br /><div style="text-align: justify;">For now, let’s discuss the few positives layering on top of the fundamental thesis:</div><div style="text-align: justify;"><br /></div><i><div style="text-align: justify;"><i><u>Positives</u></i></div></i><div style="text-align: justify;"><br /></div><div style="text-align: justify;">High and growing market share: THBEV has very high market share in Thai's spirits market (c.80% share) and has maintained that edge over the last decade driven with strong local brands. With high market share, THBEV enjoys economies of scale and lower cost per unit which has contributed to its good margins at c.20+% EBIT margins vs c.10% for its beer business.</div><div style="text-align: justify;"><span style="font-weight: 700;"><br /></span></div><span style="font-weight: bold;"><div style="text-align: justify;">EBITDA and EBIT margin snapshots:</div></span><ul style="text-align: left;"><li style="text-align: justify;">
Spirits: EBITDA margin 24-25%, EBIT margin 20-22%</li><li style="text-align: justify;">
Beer: EBITDA margin 13-16%, EBIT margin 10-12%</li><li style="text-align: justify;">
Non-alcoholic beverages: EBITDA margin 13-14% EBIT margin 10-11%</li><li style="text-align: justify;">
Food: EBITDA margin 10-13% EBIT margin 7-10%</li></ul><div style="text-align: justify;">Its beer market share in Thailand and Vietnam has remained stable at c.30-35% for both markets. In Thailand, it has impressively grown its market share from 27.4% in 2012 to 33.4% in 2021 and targets to displace the #1 leader Singha going forward. The following chart from its investor presentation deck shows the contribution from the various business segments:</div><div style="text-align: justify;"><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitLuwyS8CU8B3wIrifU3tv1qL8YYi8WruIuNumOI0qah-18HegF0_VDKZCo4VP0vGEO9pmkaRFvUyxUIJtRn049D9-AOo-AVgEyNG9QlBhSLPtkiDGJEe3PVut7JX6b_H7a6FJauVV5SiUIXeoR0fFsn1aO9cVQQA7zsyJ77rjGtqC4-VJ13Uh/s1462/Screenshot%202023-12-25%20at%2011.37.06.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="838" data-original-width="1462" height="229" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitLuwyS8CU8B3wIrifU3tv1qL8YYi8WruIuNumOI0qah-18HegF0_VDKZCo4VP0vGEO9pmkaRFvUyxUIJtRn049D9-AOo-AVgEyNG9QlBhSLPtkiDGJEe3PVut7JX6b_H7a6FJauVV5SiUIXeoR0fFsn1aO9cVQQA7zsyJ77rjGtqC4-VJ13Uh/w400-h229/Screenshot%202023-12-25%20at%2011.37.06.png" width="400" /></a></div><br /><div style="text-align: justify;"><b>In Vietnam, while Heineken has grown rapidly in Vietnam with its strong Tiger Beer brand capturing the bulk of the demand growth, we believe THBEV's market share should stabilize going forward. </b>Sabeco’s iconic Vietnamese brands such as Saigon beer and 333 beer should see further recovery as the pandemic subside and tourists visit the country again and going forward, the Vietnamese demand comes back as the population embrace local brands.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b style="font-weight: bold;">Transformation:</b> Thai Beverage intends to continue to transform into an ASEAN multi-national empire with potential to further focus on its core, divesting the legacy property business from F&N. While not executed, its 2022 move to spin off BeerCo and current intent to privatize its food business are testimonies of how the group is constantly thinking about value creation. We believe the company can continue to improve margins and ROICs for lower performing business as it has done with its beer business.</div><div style="text-align: justify;"><br /></div><b><div style="text-align: justify;"><b>The strengths of companies show through in margins, ROE and ROA and we see THBEV doing well with overall teens EBIT margins and teens ROEs. It has also maintained high ROA at 6+% despite the pandemic.</b></div></b><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b style="font-weight: bold;">Recovery: </b>The third and final positive is simply recovery back to pre-pandemic demand. Consumption has not fully resumed to levels seen in 2018-19 but historical volume growth points towards mid single digit growth going forward. Interestingly, only 20% of consumption is off-premise in Thailand which means that on-premise demand rebound will greatly benefit THBEV.</div></div><div><br /></div><div><i><u>Management</u></i></div><div><br /></div><div><div style="text-align: justify;">Management has a strong and proven track record in building strong businesses. The founder family tsar Charoen Sirivadhanabhakdi (79) and his son continues to run the company efficiently and has created a strong culture which is reflected in the numbers such as strong margins and ROICs discussed above. His business empire spreads across retail, food and other asset classes with property being prominent as well. His daughter runs the property business arm. THBEV’s M&A track record has also been stellar, buying Singapore's F&N and Vietnam's Sabeco well and has created value after the acquisitions. His wealth is estimated to be USD12.7bn.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Charoen’s third son Thapana Sirivadhanabhakdi (48) is the CEO of Thai Beverage today, a role he stepped in since 2008. While having more a decade of management under his belt and holding directorships in a variety of businesses, he undoubtedly has less of a free rein in running THBEV’s business with his father still in the Chairman role and probably calling the key shots. But he is definitely smart and more than capable to run an oligopolistic alcoholic beverage business.</div></div><div><br /></div><div><i><u>Risks</u></i></div><div><br /><div style="text-align: justify;"><b>Key man risk: </b>While the company culture seemed strong, key man risks will be inevitable. The question about what happens when the father is no longer around will always linger. The son must build his own team and appoint key lieutenants before that. As of today, the management team seemed capable having staffed with high calibre people and we should expect the ship to continue to sail forward.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b style="font-weight: bold;">Minority shareholder risk:</b> Alongside the key man risk is how they treat minority shareholders. Unfortunately, Asian businessmen had a weak track record of being fair to minority shareholders and one has to be always mindful that we will receive the shorter end of the bargain if the owners can get away with it. The family still owns c.62% of Thai Beverage. So far, they have not been unscrupulous and the share price reflects that as well.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b style="font-weight: bold;">Regulatory risk: </b>Thailand, as a Buddhist country, with restriction on alcohol consumption has been a risk to the investment thesis since the IPO of the company. Part of the share price weakness today reflects the recent concern that the new Thai government may implement stricter rulings such as no alcohol consumption in public premises outside 11am-2pm and 5pm-midnight. In my experience, when share price corrects on such news, it is often good times to buy because people just want to drink and regulations do not deter them drinking less. They will just drink more when it is permissible to drink.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd4sHzbNgdej8KZzW7rzmi7I9aF84yOcvs6WrdZJErNFhMJjwHvk6ydGgvt3bBVmAGjo6aLk7nAWGggIT0ZV4vuk6zhs2dusnT9GoXJvLuOtWoRXnBSkCs-GIBtIR_w3SFwO9m5lzgtESc_0iKnRh42ESAuDlyD9h4WZaefk3nyTSRaCOKD9cs/s1088/Screenshot%202023-12-25%20at%2011.42.51.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="612" data-original-width="1088" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd4sHzbNgdej8KZzW7rzmi7I9aF84yOcvs6WrdZJErNFhMJjwHvk6ydGgvt3bBVmAGjo6aLk7nAWGggIT0ZV4vuk6zhs2dusnT9GoXJvLuOtWoRXnBSkCs-GIBtIR_w3SFwO9m5lzgtESc_0iKnRh42ESAuDlyD9h4WZaefk3nyTSRaCOKD9cs/w400-h225/Screenshot%202023-12-25%20at%2011.42.51.png" width="400" /></a></div><br /><div><b>2. Technicals</b></div><div><br /></div><div style="text-align: justify;">THBEV became a public company in 2006 and the following chart shows the share price movement over this past 17 years. While it is a FMCG company, drawdowns are frequent and not easy to stomach. Its largest drawdowns are 30-35% usually over the course of 6-12 months and the most recent one is c.20% which brought it close to its pandemic low.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyFrEc-eudiC8926CmJJFhcWNvvFMPuBQl5frnJz3DnFdXlS3FmUun9mr_g4Djhi6GgkAVtn48hRgmfMslQ_CKaFIyuzZKVKwIDC0wFZNqnXctnkrnCUKkyIrb-dXnBEHKFeI9BAkr2M0XLgVmT8jIKC6aAaehk411Ac6Bk7l2Qalt1medetgq/s1372/Screenshot%202023-12-25%20at%2011.32.35.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1012" data-original-width="1372" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyFrEc-eudiC8926CmJJFhcWNvvFMPuBQl5frnJz3DnFdXlS3FmUun9mr_g4Djhi6GgkAVtn48hRgmfMslQ_CKaFIyuzZKVKwIDC0wFZNqnXctnkrnCUKkyIrb-dXnBEHKFeI9BAkr2M0XLgVmT8jIKC6aAaehk411Ac6Bk7l2Qalt1medetgq/w400-h295/Screenshot%202023-12-25%20at%2011.32.35.png" width="400" /></a></div><div><div><br /></div><div style="text-align: justify;">The pandemic low was SGD0.45 which means that we have c.15% downside if it ever revisits that level. On the upside, the stock hit its all-time high of SGD0.84 in 2019 which implies c.50% upside. So by just looking at technicals, we already have favorable risk rewards. But that’s not enough. Let’s look at valuation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>3. Valuations</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Thai Beverage trades at a significant discount when compared against its global peers although that’s partially due to its lower margins as a conglomerate with food and non-alcoholic beverage businesses and lower ROEs and ROICs as we can see below.</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYXPmBaKtRYYSg48iLfEfs5ruDf5xlUYtBG-KPdM-4u6kyO4l-g2XLtNSS8VLVHurLvwUSgYBQWvcVgFHfJqbeq00VF_ZQMVAhvVTD9mk0daUz2jGwBEfk-z6-dEm6wVRenzFyZ3RHitKpGxsE0WXhBNiTYRR31hRuCHUuRziSw-MUNeKfYTXE/s1472/Screenshot%202023-12-25%20at%2011.47.42.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="506" data-original-width="1472" height="138" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYXPmBaKtRYYSg48iLfEfs5ruDf5xlUYtBG-KPdM-4u6kyO4l-g2XLtNSS8VLVHurLvwUSgYBQWvcVgFHfJqbeq00VF_ZQMVAhvVTD9mk0daUz2jGwBEfk-z6-dEm6wVRenzFyZ3RHitKpGxsE0WXhBNiTYRR31hRuCHUuRziSw-MUNeKfYTXE/w400-h138/Screenshot%202023-12-25%20at%2011.47.42.png" width="400" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">That being said, the valuation gap is too big to be ignored. If we apply slight discount to the average valuation on the various metrics (except for FCF where we are applying a crazy discount at 20x vs 40x), we will still get significant upside as shown below:</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWaBNgtlHJrYX6fp1xvi3nWLqUHcEk9KJoyZuJBXRUcWBgOQZFuD3rNwZ-DZR8JDvX7pFMdXguuSWLbWDO7oTWt9PJkXEP4V5ex_WcYQgLPMH4F0aRula-WrfHXFr0tS13Ey3SJ9h2IsmL_82UWDLiyiWNhZuiru62NpORRBSqrXHcMq1iqpoC/s946/Screenshot%202023-12-25%20at%2011.47.55.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="550" data-original-width="946" height="233" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWaBNgtlHJrYX6fp1xvi3nWLqUHcEk9KJoyZuJBXRUcWBgOQZFuD3rNwZ-DZR8JDvX7pFMdXguuSWLbWDO7oTWt9PJkXEP4V5ex_WcYQgLPMH4F0aRula-WrfHXFr0tS13Ey3SJ9h2IsmL_82UWDLiyiWNhZuiru62NpORRBSqrXHcMq1iqpoC/w400-h233/Screenshot%202023-12-25%20at%2011.47.55.png" width="400" /></a></div><div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Recall that the stock hit its all-time high at only SGD0.84, the lowest value amongst the three intrinsic value (ie SGD0.90 with 57% upside) might be a better estimate while keeping in mind that this has been a compounder and it would not be surprising that the stock hit SGD1.11 (almost doubling for today’s price) on the back of its strong free cashflow someday.</div><div style="text-align: justify;"><br /></div><i><div style="text-align: justify;"><i>Huat Ah!</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.</i></div></i><p></p></div></div><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-60938799950738389952024-01-18T23:30:00.002+08:002024-01-21T20:58:01.096+08:002024 Dividend List - SGX<div style="text-align: justify;">The start of the year brings fresh aspiration, perspectives and ideas. This year, we start early with the dividend list using Poems' screener. It is quite basic but allows us to screen using ROE, ROA, Dividend along with the usual market cap and valuation cut-offs. So we tried the following:</div><div><ul style="text-align: left;"><li style="text-align: justify;">Market cap > SGD 500m</li><li style="text-align: justify;">ROE > 10%</li><li style="text-align: justify;">ROA > 4%</li><li style="text-align: justify;">Dividend Yield > 3% </li><li style="text-align: justify;">PE < 25x</li></ul><div style="text-align: justify;">As we know, the Singapore Government 6 month Treasury Bills currently gives us 3.7%. So to be buying for dividends, we would actually require a much higher yield (perhaps 5% or more), otherwise we should just buy T-bills right? However, with high yielding stocks, if they are not generating high enough returns (which is why ROE is important), they are basically paying out their equity base. One of the stocks we discussed actually exhibited this:</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSsXwKts9-wELSQRf9EWuZF_DSlAe3ik-UkESYAu1ulG__-1DYjkHiMLdVR_PEieg5Y3bZyg19w41diDVQgpMePg5WBDI878xKUX2cGisygR_KXQ8aJufBuO797kL-uP-eVCQwdP_w-y9jIKNphWbqqUD9sBVrYawbBTIG-DJ6yY0ObD-dfrhs/s680/Screen%20Shot%202024-01-08%20at%2011.27.55.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="501" data-original-width="680" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSsXwKts9-wELSQRf9EWuZF_DSlAe3ik-UkESYAu1ulG__-1DYjkHiMLdVR_PEieg5Y3bZyg19w41diDVQgpMePg5WBDI878xKUX2cGisygR_KXQ8aJufBuO797kL-uP-eVCQwdP_w-y9jIKNphWbqqUD9sBVrYawbBTIG-DJ6yY0ObD-dfrhs/w400-h295/Screen%20Shot%202024-01-08%20at%2011.27.55.png" width="400" /></a></div><div><br /></div><div><br /></div><div style="text-align: justify;"><a href="https://8percentpa.blogspot.com/search/label/OEL">Overseas Education</a> pays a 7-9% dividend over the past years, but as there was no growth (revenue did not grow and ROE was only 3-4%), the stock price simply falls by that amount annually as exemplified by the share price chart above. But anyways, that's enough digression. Let's look at the list (sorted by market cap) today:</div><div style="text-align: justify;"><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUXnlaY0cphFiEY3wIAyfE5xuB_mLPk4-RxSE1SW54gDFx5_X7Zy1fz8LRks0RWlW_0EgFGsF03zNbSZ_JI3DzBhmlBlKVjPPvopzBD1MK2DkfAQiDh5XareZBOMND9wjonJ7C-Tk7fWsXz3FfEi980c_CfilFof2Ty-HKD0gztNp3B0kC6pCM/s1116/Screen%20Shot%202024-01-08%20at%2011.35.41.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="328" data-original-width="1116" height="118" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUXnlaY0cphFiEY3wIAyfE5xuB_mLPk4-RxSE1SW54gDFx5_X7Zy1fz8LRks0RWlW_0EgFGsF03zNbSZ_JI3DzBhmlBlKVjPPvopzBD1MK2DkfAQiDh5XareZBOMND9wjonJ7C-Tk7fWsXz3FfEi980c_CfilFof2Ty-HKD0gztNp3B0kC6pCM/w400-h118/Screen%20Shot%202024-01-08%20at%2011.35.41.png" width="400" /></a></div><br /><div><br /></div><div style="text-align: justify;">The first section of the list shows the blue chip names and we have <a href="https://8percentpa.substack.com/p/investment-idea-12">Thai Beverage</a> and <a href="https://8percentpa.blogspot.com/search/label/SGX">SGX</a> discussed in depth on our platforms. It is also interesting to note that most names are trading at teens PE which alludes to the cheapness we see in the Singapore market today. As for other noteworthy names, Raffles Medical is definitely on the cards.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwCUfdHu7Rc6BhnaJIH1hAcFS-sBdkGSHLr-NDgMAmgdNFatco7uCzLsCH3u-k2DuXUZGwMHDwp_ggf6dtd2k1YMp3TYHDN-PRP0FCk-sy4ZbjKs7CXQ3m9af_4roIU6CiROpDrHw5r6c6yZJfrOWADgGO_3wFRDtaveJJYEKDnJmVGA5RxCDW/s1111/Screen%20Shot%202024-01-08%20at%2011.36.34.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="446" data-original-width="1111" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwCUfdHu7Rc6BhnaJIH1hAcFS-sBdkGSHLr-NDgMAmgdNFatco7uCzLsCH3u-k2DuXUZGwMHDwp_ggf6dtd2k1YMp3TYHDN-PRP0FCk-sy4ZbjKs7CXQ3m9af_4roIU6CiROpDrHw5r6c6yZJfrOWADgGO_3wFRDtaveJJYEKDnJmVGA5RxCDW/w400-h160/Screen%20Shot%202024-01-08%20at%2011.36.34.png" width="400" /></a></div><div><br /></div><div><br /></div><div style="text-align: justify;">The second portion of the list shows names going down the market cap ranking quickly. Since we cut it off at SGD500m, the last name appears to be <a href="https://8percentpa.blogspot.com/search/label/Vicom">Vicom</a>, which is also discussed on this platform. If we remove that filter, we can another 57 names with the last name at just SGD6m market cap. Well, these are not primarily our concern. The interesting names that popped up are the watch distributors Hour Glass and Cortina, with double digit ROAs and trading at single digits PE and give close to 5% dividend, they are worth studying!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><p>As usual, here's the past lists:</p><div><a href="https://8percentpa.blogspot.com/2023/05/2023-dividend-list.html">2023 Dividend List</a></div><div><a href="https://8percentpa.blogspot.com/2022/09/2022-australia-dividend-post-first-ever.html">2022 Dividend List - Australia!</a></div><div><a href="http://8percentpa.blogspot.com/2022/07/2022-sg-dividend-list.html">2022 Dividend List</a></div><div><a href="http://8percentpa.blogspot.com/2021/09/2021-hk-dividend-list-bonus.html">2021 Dividend List - HK!</a></div><div><a href="http://8percentpa.blogspot.com/2021/08/2021-singapore-dividend-list-using.html">2021 Dividend List</a></div><a href="http://8percentpa.blogspot.com/2020/08/2020-dividend-list.html" style="text-align: left;">2020 Dividend List</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.com/2019/06/2019-dividend-list-10-years-on.html" style="text-align: left;">2019 Dividend List</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.com/2018/06/2018-dividend-list-part-4.html" style="text-align: left;">2018 Dividend List - Part 4</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.sg/2018/05/2018-dividend-list-part-3.html" style="text-align: left;">2018 Dividend List - Part 3</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.sg/2018/04/2018-dividend-list-part-2.html" style="text-align: left;">2018 Dividend List - Part 2</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.sg/2018/04/2018-dividend-list-part-1.html" style="text-align: left;">2018 Dividend List - Part 1</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.sg/2017/11/2017-oct-high-dividend-list-part-2.html" style="text-align: left;">2017 Oct Dividend List - Part 2</a><br style="text-align: left;" /><a href="http://8percentpa.blogspot.sg/2017/10/2017-oct-high-dividend-list-part-1.html" style="text-align: left;">2017 Oct Dividend List - Part 1</a><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2017/03/2017-high-dividend-list-1h-version.html">2017 Mar Dividend List</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2016/08/2016-high-dividend-list-singapore-us.html">2016 Dividend List - Part 2</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2016/08/2016-high-dividend-list-singapore.html">2016 Dividend List - Part 1</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2015/05/2015-high-dividend-stocks-in-singapore.html">2015 Dividend List - Part 2</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2015/04/2015-high-dividend-stocks-in-singapore.html">2015 Dividend List - Part 1</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2014/05/2014-high-dividend-stocks-in-singapore.html">2014 Dividend List</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2013/06/2013-high-dividend-stocks-in-singapore.html">2013 Dividend List - Part 2</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2013/04/2013-high-dividend-stocks-in-singapore.html">2013 Dividend List - Part 1</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2012/01/2012-high-dividend-stocks-in-singapore.html">2012 Dividend List</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2011/12/high-dividend-stocks-2011.html">2011 Dividend List</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2010/09/high-dividend-stocks.html">2010 Dividend List</a></div><div style="text-align: start;"><a href="http://8percentpa.blogspot.sg/2009/01/free-cash-flow-and-dividend-stocks.html">2009 Dividend List</a></div><p style="text-align: left;"><i>Huat Ah!</i></p></div><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-13042160995917955212024-01-12T13:03:00.001+08:002024-01-12T13:03:00.249+08:00[Globe Newswire] Fraser Institute News Release: Hong Kong plummets to 46th spot in latest Human Freedom ranking<p><i>
This is a collaboration post with <a href="https://www.globenewswire.com/">Globe Newswire</a> which provides earnings update and salient financial news globally. Please click on the links after the introductory excerpts for their full articles.</i><br /><br />
TORONTO, Dec. 19, 2023 (GLOBE NEWSWIRE) -- As a result of increasing restrictions on liberties in Hong Kong—once among the freest places on earth—it now ranks 46th in the latest Human Freedom Index report, released today by Canada’s Fraser Institute and the U.S.-based Cato Institute.<br /><br />
As recently as 2010, Hong Kong was the 3rd freest jurisdiction on earth. Mainland China has always been less free than the territory and this year, China ranks 149th out of 165 jurisdictions.
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“Freedom has suffered a precipitous decline in Hong Kong, but its tragic descent into oppression provides important lessons about the value of freedom,” said Fred McMahon, resident fellow at the Fraser Institute and co-author of this year’s report.
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The index measures personal freedom—the rule of law, safety and security, identity and relationships (i.e. the freedom to choose your relationship partner), freedom of movement, speech, assembly and religion—alongside economic freedom, the ability of individuals to make their own economic decisions.
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This year’s report ranks 165 jurisdictions around the world. It finds that from 2019 to 2021 (the latest year of available data), 89.8 per cent of the world’s population experienced a decline in freedom.
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Full article:
<br /><br /><a href="https://www.globenewswire.com/news-release/2023/12/19/2798336/0/en/Fraser-Institute-News-Release-Hong-Kong-plummets-to-46th-spot-in-latest-Human-Freedom-ranking-as-China-continues-to-violate-one-country-two-systems-pact.html">
https://www.globenewswire.com/news-release/2023/12/19/2798336/0/en/Fraser-Institute-News-Release-Hong-Kong-plummets-to-46th-spot-in-latest-Human-Freedom-ranking-as-China-continues-to-violate-one-country-two-systems-pact.html
</a></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-34729631467071636832024-01-05T00:00:00.000+08:002024-01-05T00:00:00.135+08:00Happy New Year! Live Nation!<p><span style="text-align: justify;"><i>This post first appeared on <a href="http://8percentpa.substack.com">http://8percentpa.substack.com</a></i></span></p><p><span style="text-align: justify;">Happy New Year! We shall start 2024 with a deep dive into this company!</span></p><p><span style="text-align: justify;">This company is not our typical strong financials, high ROE and high margin company. Its net income is barely positive and this makes the Price Earnings Ratio (PER) and Return on Equity (ROE) numbers look erratic. But FCF generation is strong and growing which makes the stock worth looking at. Again, let’s start with the financials. </span></p><p><b>Simple financials (Dec 2023, USD)</b><br /></p><ul style="text-align: left;"><li>Sales: 19.1bn</li><li>EBITDA: 1.7bn</li><li>Net income: 0.2bn</li><li>FCF: 1.0bn</li><li>Debt: 4.9bn, Mkt Cap 20.4bn</li></ul><p></p><p><b>Ratios</b></p><p></p><ul style="text-align: left;"><li>ROIC 8.0%</li><li>EV/EBITDA 11.7x (Dec 24)</li><li>PER 78.5x (Dec 24)</li><li>Past margins: OPM 5%</li><li>FCF yield: mid to high single digit for the last few years </li></ul><p></p><p style="text-align: justify;">Before 2009, the company was generating negative FCF as it just started building its moat and it only started generating three digit million FCF from around 2012. But when the pandemic hit in 2020, FCF turned hugely negative to -USD1.3bn but has since recovered strongly. Analysts expect FCF to be USD1-2bn in the next 3 years. </p><p style="text-align: justify;">The company is Live Nation and it goes by the ticker LYV and is listed on the NYSE. Live Nation is the world’s largest concert promoter organizing 40,000 events for almost 100m fans globally. Its ticketing platform, Ticketmaster sold over 485m tickets to music, sporting and other events. It also provide artists management services to c.500 artists.</p><p style="text-align: justify;"><b>1. Fundamentals</b></p><p style="text-align: justify;">Live Nation is the leading live entertainment ticketing sales and marketing company and has one of the world’s largest music advertising networks for corporate brands. The company is a platform connecting fans, venues, tickets, artists and advertisers and operates a growth flywheel based on the above which we shall describe later.</p><p style="text-align: justify;">Live entertainment is a huge megatrend because so much of our lives are now with screens, in-screens or for screens, like taking pics of our food before every meal for Instagram. So very ironically, we treasure every sliver of live interaction and will pay an arm and a leg to see our favourite artists “live” with friends and family.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg200mFNs4OwlOff8QjqbJM1bIwM6A_ln6CWmiZi0Mzvm7HYynvbE3DMAWcIXSkesnmV5VJwF0EyAcD4Xtz-28nRWKUAy_gVo6gFTQULIJjJu5VrkT6qajJyUf_h4Rity1DiaRjBkFBYgLciLawV0vNcoaWBOLi_pPfVDaBdvPDvX2rDOWETi5V/s758/Screenshot%202023-12-14%20at%2019.41.42.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="254" data-original-width="758" height="107" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg200mFNs4OwlOff8QjqbJM1bIwM6A_ln6CWmiZi0Mzvm7HYynvbE3DMAWcIXSkesnmV5VJwF0EyAcD4Xtz-28nRWKUAy_gVo6gFTQULIJjJu5VrkT6qajJyUf_h4Rity1DiaRjBkFBYgLciLawV0vNcoaWBOLi_pPfVDaBdvPDvX2rDOWETi5V/s320/Screenshot%202023-12-14%20at%2019.41.42.png" width="320" /></a></div><p style="text-align: justify;">The last three paragraphs pretty much summarized the investment thesis. Next, I would point you to the following link to better understand LYV’s flywheel since the blogger has done a much better job than I could ever do: </p><p style="text-align: justify;"><a href="https://punchcardblog.wordpress.com/2015/03/05/live-nation-entertainment-an-unregulated-monopoly/">https://punchcardblog.wordpress.com/2015/03/05/live-nation-entertainment-an-unregulated-monopoly/</a></p><p style="text-align: justify;">I would simply add what has since transpired has further strengthened the LYV flywheel starting with </p><p style="text-align: center;"><b><i>Fans → Tickets → Venue → Artists → Advertisers → Platform </i></b></p><p style="text-align: justify;">churning out Cash and Compounding even more Growth as we speak. Let’s go through them. </p><p style="text-align: justify;"><b>Fans and tickets:</b> With no live concerts for the last couple of years no thanks to the pandemic, LYV has accumulated a lot more fans in 2022 due to the pent up demand. It was 60m in 2015 and it is 100m now. Similarly, LYV has sold much more tickets, from 150m in 2015 to over 450m today! People just cannot get enough of live concerts. </p><p style="text-align: justify;"><b>Venues:</b> LYV has been building this moat for years. All counted (below), it has over 300 venues in operations, both owned and leased. It has full ownership of 30 venues including 10 amphitheaters which are most conducive for music concerts. It also has 100 international venues. This makes LYV one of the largest venue operators in globally alongside ASM Global (unlisted), its main rival and partner.
</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhejqAFjCrC5NtAfEZN5R79oa5gAjwKTaaQ-9ZbQXYAPw4DhIzb8dXAtM_Li5V_6i4m8erE5OzLt4IWGGA7rLp16T6wzRi0h6Gy2Vtf-6o4YwphelP4vl4HVcy4_65Cna30fw0hsMqDLcjpASPMK5Gso7ozw8O1fLxPOr4lKs-nkl7d2zN0bO6T/s1436/Screenshot%202023-12-14%20at%2019.44.47.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="776" data-original-width="1436" height="216" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhejqAFjCrC5NtAfEZN5R79oa5gAjwKTaaQ-9ZbQXYAPw4DhIzb8dXAtM_Li5V_6i4m8erE5OzLt4IWGGA7rLp16T6wzRi0h6Gy2Vtf-6o4YwphelP4vl4HVcy4_65Cna30fw0hsMqDLcjpASPMK5Gso7ozw8O1fLxPOr4lKs-nkl7d2zN0bO6T/w400-h216/Screenshot%202023-12-14%20at%2019.44.47.png" width="400" /></a></div><p style="text-align: justify;"><b>Artist and Advertisers:</b> Similarly, LYV has continued to grow its clout with artists and advertisers further enhancing its platform to grow revenue from its successful flywheel model. Its key artists include: Aerosmith, Beyonce, P!nk and Twice, the Korean girl band, amongst many others:</p><p style="text-align: justify;">https://www.livenation.com/artist-sitemap</p><p style="text-align: justify;"><i><u>Management</u></i></p><p style="text-align: justify;">Oftentimes the people make the business and for LYV, this is an important element to discuss. In this sense, LYV is not our consumer staples or razor blade model where the business economics triumph management. Fortunately, LYV is helmed by strong managers, starting with John C. Malone, who built a media empire with various companies, most notably Liberty Global and is the largest private landowner in the US. </p><p style="text-align: justify;">Live Nation, being part of the the Liberty media group of companies, enjoys advantages such as not being penalized for having too much debt and prioritizing free cashflow over net income. Liberty companies are known for the above and LYV’s CEO Michael Rapino, John Malone’s trusted lieutenant and LYV’s CFO Joe Berchtold have mastered the art of managing for cashflows. </p><p style="text-align: justify;">Both have served more than 10 years. Michael was appointed as CEO since Aug 2005 and has led the company through two crises: GFC and COVID-19. Looking through the 10K pages on managers, there is a mix of young and experienced managers, not necessarily in the right pecking order, which perhaps says something about Michael Rapino. But tough managers run great businesses, fortunately or unfortunately. That’s life.</p><p style="text-align: justify;"><i><u>Risks</u></i></p><p style="text-align: justify;">Interestingly LYV lists personalities and relationships as its #1 risk. The ability to secure popular artists for concerts and the ability to sign new artists onto LYV’s platform relies the soft skills of agents, promoters and special relationship managers that represent artists. So while LYV has built the network, flywheel and all, it can be a brother, uncle or friend of the artists who decides that the star should work with somebody else and not Live Nation. As such, LYV believes relationships are its key risk, which may be true.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTO1Yez-PFanin4KbgWHRoljl_l7Lm1rJ8tCZTyS8k9ht17T973FNs_N-xCrqBlPV39KXVrmTVX1oGR8imrt_pPDYtxU-AZAelQmIGOX75HeRt33QhAGnfzVwDyom6OS15Uisb23U-R0jxG3DBPQgv-qNweoKKu-Zvjz8zrEf6pe-en8NKzUvp/s1174/Screenshot%202023-12-14%20at%2019.49.32.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="930" data-original-width="1174" height="316" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTO1Yez-PFanin4KbgWHRoljl_l7Lm1rJ8tCZTyS8k9ht17T973FNs_N-xCrqBlPV39KXVrmTVX1oGR8imrt_pPDYtxU-AZAelQmIGOX75HeRt33QhAGnfzVwDyom6OS15Uisb23U-R0jxG3DBPQgv-qNweoKKu-Zvjz8zrEf6pe-en8NKzUvp/w400-h316/Screenshot%202023-12-14%20at%2019.49.32.png" width="400" /></a></div><p style="text-align: justify;">The mitigating factor is that as LYV grows, it will have more clout, it can provide better economics and it has the best venues which means that musicians have limited choice but to work with LYV. Sometimes, Live Nation could provide the best option and pay the highest dollar and money talks. So, the stubborn brother, uncle or friend will get overruled by economics. As such, over time, this risk should diminish.</p><p style="text-align: justify;">The second biggest risk in my opinion could be the firm’s balance sheet. LYV has c.USD6bn of net debt and cost of servicing this debt is 4.7% which works out to be USD128m. This is c.15% of its operating income and FCF which is not small. Should earnings dropped significantly like what happened during the pandemic, LYV could run out of equity and need financing. </p><p style="text-align: justify;">As a matter of fact, it has very little equity. As of Dec 22, its total equity was USD93m. The mitigating factor is that as a Liberty / John Malone company, banks, analysts, suppliers know that someone will back things up if LYV really gets into trouble. That said, it is not ideal and the hope is that its strong FCF generation at c.USD1bn (which can be used to pay down debt) will make this problem go away in a few years.</p><p style="text-align: justify;">Other risks would include Pandemic Part II, injuries at events, cybersecurity and legal risk related to Ticketmaster which we have little visibility. It happens when it happens and we assess then whether it’s actually a good chance to add more. The Ticketmaster legal risk is worth monitoring as the DOJ recently fined the firm USD10m, which is inconsequential but not insignificant as it sets the precedent.
As the incumbent monopoly, it will always be targeted and we need to be vigilant in monitoring the legal / regulatory risk. Next, we talk about technicals.</p><p style="text-align: justify;"><b>2. Technicals</b></p><p style="text-align: justify;">LYV became a public company in 2006 and the following chart shows the share price movement over this past 17 years. In the early years, as it was still small, share price was quite volatile and drawdown could be treacherously big. From the peak in 2007 to the trough in 2009, it collapsed 80%. More recently, it crashed 45-50% in 2020 and 2022, partly due to the high debt problem we highlighted.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2g-eLlOACOcdkkTWKBxb9iIe9rGCDTh7ErdtRx3zsDSP1P-_jjb6CTp7XSAg3aagRZWe4EoyqyEQr6UmUPpqYilUsXzWAF8bmA6g-GzY4T_OXjpu2rjVsaYF_0x3-aWKbsAFf5EjbdknQSuBW9bMKPmfDEAaiCnZV5xLCJUx0SIAxtoOtrCHq/s1342/Screenshot%202023-12-14%20at%2019.53.44.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1020" data-original-width="1342" height="304" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2g-eLlOACOcdkkTWKBxb9iIe9rGCDTh7ErdtRx3zsDSP1P-_jjb6CTp7XSAg3aagRZWe4EoyqyEQr6UmUPpqYilUsXzWAF8bmA6g-GzY4T_OXjpu2rjVsaYF_0x3-aWKbsAFf5EjbdknQSuBW9bMKPmfDEAaiCnZV5xLCJUx0SIAxtoOtrCHq/w400-h304/Screenshot%202023-12-14%20at%2019.53.44.png" width="400" /></a></div><p style="text-align: justify;">So this is not a stock for the weak stomach. We cannot rule out a huge drawdown but we can try to establish a bottom and better triangulate that using valuation in the next section. At the height of the pandemic, it hit $40 and the recent low in 2023 was $66.23 as shown on the chart above. Let’s see which number works better using robust valuation methodologies.</p><p style="text-align: justify;"><b>3. Valuations</b></p><p style="text-align: justify;">LYV’s valuation has always been tricky. It is not an easy company to value given the complexity around little net income, highly leverage balance sheet and inexplicably, negative equity before minority interest. I have used the same methodologies from past analyses below to triangulate its intrinsic value and the results are mixed.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgECcOHBSkLIq6k5hmicIC6Js3A5wCu0w6Dy-8BQV76QlKIu7h1wDSqo0m4sH3EkKNXackCw9GkcaV0NcuzI5JqHMLZHmAME99H40p0Hvwti_SYQD9_-dARE5nTGGw1bNVZMYpyRVGEsYyMRmSU7UYnFGjyKMNK3LKZq3bS8lsBo2ClltNvf9w/s946/Screenshot%202023-12-14%20at%2019.56.08.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="422" data-original-width="946" height="179" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgECcOHBSkLIq6k5hmicIC6Js3A5wCu0w6Dy-8BQV76QlKIu7h1wDSqo0m4sH3EkKNXackCw9GkcaV0NcuzI5JqHMLZHmAME99H40p0Hvwti_SYQD9_-dARE5nTGGw1bNVZMYpyRVGEsYyMRmSU7UYnFGjyKMNK3LKZq3bS8lsBo2ClltNvf9w/w400-h179/Screenshot%202023-12-14%20at%2019.56.08.png" width="400" /></a></div><p style="text-align: justify;">As expected, for PER, there is no upside even if we used a generous net income assumption of USD800m, a level I hope it can achieve at a sustainable state in the future. This year’s net income, as mentioned, was below USD200m and analysts are looking at USD400m in Dec 2024. so USD800m is a lot higher. </p><p style="text-align: justify;">We do have some upside using FCF of USD1bn and EBITDA of USD1.8bn and ascribing the respective multiples. But there is no margin of safety with intrinsic value at just 20-23% above today’s share price. We need 30-40%. Co-incindentally, LYV’s share price hit all time high at $120 (just 31% above today’s share price), during the meme stock mania in the middle of the pandemic, which is not far from our first cut intrinsic values of $110-112.</p><p style="text-align: justify;">Next let's look at the bear case:</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRjOQ1OkQfuj5dMumepx8zqseLhsjUmGndnZo4zwb1W0H7wUoR8LhGt5U3HzoIySuRB-RHyh6gxV5vdaR_FDTq0lCRQC9pTVdw_lLTTrWhmezrvPCf5Al6SUgNI8BOAGVLuyMUNiLUqTER7qY1ztwN3lDO1RaXAQkIW-Ik9kUAyH5Frv_Q1C6r/s932/Screenshot%202023-12-14%20at%2019.58.30.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="354" data-original-width="932" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRjOQ1OkQfuj5dMumepx8zqseLhsjUmGndnZo4zwb1W0H7wUoR8LhGt5U3HzoIySuRB-RHyh6gxV5vdaR_FDTq0lCRQC9pTVdw_lLTTrWhmezrvPCf5Al6SUgNI8BOAGVLuyMUNiLUqTER7qY1ztwN3lDO1RaXAQkIW-Ik9kUAyH5Frv_Q1C6r/w400-h153/Screenshot%202023-12-14%20at%2019.58.30.png" width="400" /></a></div><p style="text-align: justify;">If we cut earnings by half while maintaining the same multiples (FCF at 25x, EV at 15x and PER at 25x), we see downside of 40-52% which was similar to the drawdowns in the past two years. </p><p style="text-align: justify;">Putting the two scenarios together, we have the risk at -50% but the reward at only 20%. The risk reward is therefore skewed towards the downside and it may not be a great idea to buy at current price.</p><p style="text-align: justify;"><b>4. Intrinsic value</b></p><p style="text-align: justify;">The most important ratio in any stock analysis is the ROIC or ROE but it is difficult to establish that number for LYV since its net income has been negative for the majority of the years it was listed. Last year’s ROIC miraculously hit 8% but it could be just one off. </p><p style="text-align: justify;">I have used FCF divided by invested capital (net debt plus equity) instead to try to determine a sustainable ROIC and narrowed that to a range of 8-10% which seemed reasonable. A simple illustration is that LYV’s average FCF for the last decade was USD400m while its average invested capital (average net debt plus equity) was USD4.6bn. Dividing the former by the latter gives us c.9% ROIC. </p><p style="text-align: justify;">Simplistically, this means that LYV can compound its capital at 9% per annum and if we are willing to look out two years, LYV’s intrinsic value is then $112 x (1.09)^2 = $133. At today’s price of $91, the risk reward is still not great but if we get in at $70, the risk reward becomes $40/$70 vs $70/$133 which is -43% vs 90%. And that’s ideal. </p><p style="text-align: justify;">So do monitor this name closely at $70! My portfolio will be adding at $70. In fact, the team held it since 2016 when it was $20.
The hope is that this could be a ten bagger some day.
</p><p style="text-align: justify;"><i>Huat Ah!</i></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-29668622010130810152023-12-25T00:00:00.044+08:002023-12-28T11:51:31.752+08:00Merry Christmas!<p style="text-align: justify;">2023 is coming to an end. It has been a tumultuous year with two major conflicts, blowups in the China property market and crypto going all rollercoaster. Depending on your starting point, you could have made or lost a lot. That's just investing, it's just so tough. But at the same time, regular mom and pops are having the best year in a long while just by putting money in fixed deposits and T-bills. As of this writing, we can still get 3.8% return on the SGD!</p><p style="text-align: justify;">Pls do not understand 3.8%. Over time, it will still return multiple folds. Based on the table below, very roughly speaking, 3.8% return will 3x in 30 years. This is how someone used CPF to save a million dollars and more. His name is Mr Loo Cheng Chuan and he started the <a href="https://www.youtube.com/@1m65">1M65 movement</a> in Singapore.</p><p style="text-align: justify;">Read his blog, this is wrong one bro :)</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif3dWbwAuTfbWvYHDl6OrpqSNJYBxXZRMsA3xYHDonoTSVZSAN_h7EuWKZsDexontlX1AiTPlAnjDrgwAit013l-xvOcycsAHd0P1z-jDXFVt1syZfu8AmCP1yOyXQqhvJEFJ2snKGrmPAUHY3IZbSynMoZJutCb6TpduzwSMy2Y-OuNJPr8bH/s1462/Screenshot%202023-12-14%20at%2017.31.00.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="874" data-original-width="1462" height="239" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif3dWbwAuTfbWvYHDl6OrpqSNJYBxXZRMsA3xYHDonoTSVZSAN_h7EuWKZsDexontlX1AiTPlAnjDrgwAit013l-xvOcycsAHd0P1z-jDXFVt1syZfu8AmCP1yOyXQqhvJEFJ2snKGrmPAUHY3IZbSynMoZJutCb6TpduzwSMy2Y-OuNJPr8bH/w400-h239/Screenshot%202023-12-14%20at%2017.31.00.png" width="400" /></a></div><p style="text-align: justify;">This post also serves to update the new format we hope to drive in 2024. As our team worked on the Substack platform over the past year, we found it to be more superior and both writer and reader <i>friendlier</i>. As such, we hope to prioritze substack while porting what we have written over here over time.</p><p style="text-align: justify;">Our Substack platform is on:</p><p style="text-align: justify;"><a href="http://8percentpa.substack.com">http://8percentpa.substack.com</a></p><p style="text-align: justify;">As such, posts will first appear on Substack on every first and third Friday of the month (the team's target, but sometimes can be OTOT* also). We will periodically add bonus posts on other Fridays or if an event calls for it, a totally ad-hoc post to mark certain days of significance like today, it's Christmas!</p><p style="text-align: justify;"><i><span>*OTOT stands for Own Time Own Target. A terminology used in the Singapore Army during live firing at in shooting ranges. When all soldiers are in position to fire their weapons, the officer-in-charge will shout "own time own target, carry on" meaning soldiers can start to aim and fire at their targets at will. In daily life, the term has evolved to mean do whatever you want, whatever time you like and carry on with life, which is the intent and purpose used here ;)</span></i></p><p style="text-align: justify;">Some of these posts on Substack are paid posts for those who are paid subscribers (USD5 per month) on Substack. Some posts will become public over time and hence shared here. The following shows the process:</p><p></p><ul style="text-align: left;"><li style="text-align: justify;">Substack paid posts and not unlockable -> only available for paid subscribers</li><li style="text-align: justify;">Substack paid posts and unlockable -> port over here over time, say 2-3 months</li><li style="text-align: justify;">Substack free posts -> port over sooner than the above</li><li style="text-align: justify;">Substack related materials like podcasts, notes etc -> port over on adhoc basis</li></ul><div style="text-align: justify;">This would really help to streamline workflow and hopefully benefit even more investors by cross-pollinating readers on both sides. Thank you for all your support all these years and see y'all in 2024!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>Wishing everyone Merry Christmas and a Happy 2024 ahead!</i></div><div style="text-align: justify;"><i><br /></i></div><div style="text-align: justify;"><i>Huat Ah!</i></div><div style="text-align: justify;"><br /></div><p></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-86459431526921320102023-12-15T22:30:00.014+08:002023-12-15T22:30:00.133+08:00Portfolio Strategies to Build Wealth<p style="text-align: justify;"><i>This article was first posted on <a href="http://8percentpa.substack.com">8percentpa.substack.com</a>.</i></p><p style="text-align: justify;">There is an interesting book published in 2020 called the <i>Psychology of Money</i> written by Morgan Housel who was a financial analyst and fund manager. He wrote about simple strategies and how wealth is best compounded over time. There is no need to complicate things and most importantly, we need to just save up and invest simply - like buying the S&P500. Then time will take care of everything else.</p><p style="text-align: justify;"><i>"Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he's been a phenomenal investor for <b>three quarters of a century</b>. $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday. His skill is investing, <b>but his secret is time</b>." </i></p><p style="text-align: justify;">- from the <i>Psychology of Money</i> by Morgan Housel</p><p style="text-align: justify;">Successful investing may not be about stock picking, or following market news and trends, or all the complicated stuff the investment world likes to do. It is time and discipline, it is not making investment mistakes over that long period of time. </p><p style="text-align: justify;">The following is a good quick review for the Psychology of Money:</p><p style="text-align: justify;"><a href="https://sakshikumari204.medium.com/book-summary-7-the-psychology-of-money-by-morgan-housel-bb39a96558c3">https://sakshikumari204.medium.com/book-summary-7-the-psychology-of-money-by-morgan-housel-bb39a96558c3</a></p><p style="text-align: justify;">While we already know all this, reading the book made me think very hard about how what we have been doing so far can be even more useful. We have analyzed more than 10 ideas, mostly stocks of companies, some mid caps, covered by analysts. Some Singapore names with little coverage, which could useful to investors in our Little Red Dot. Some really large cap, like Google / Alphabet. A lot of people have written about Google. This infosite won’t be the last to analyze Google. So, how do we make the impact most useful to our defined audience. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxAoPp74dOjkV8s6Byup3GDdUrLI1wsh4bCeNaZb_F6Gsqw-ofdVmN3AA1Qm9AHDEkHGgc2k7B2WKy5UjHNVXFbRGw3eIItBRzMBg1m6zbMFJeJxSMkWdN3bl0XpN2F4acWsFhQAsRPROXDR4_99Ng5IWwDNuoFRSJFaGwG5iJ1vUsHNHsgzzN/s390/Screen%20Shot%202023-11-28%20at%2010.51.36.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="390" data-original-width="381" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxAoPp74dOjkV8s6Byup3GDdUrLI1wsh4bCeNaZb_F6Gsqw-ofdVmN3AA1Qm9AHDEkHGgc2k7B2WKy5UjHNVXFbRGw3eIItBRzMBg1m6zbMFJeJxSMkWdN3bl0XpN2F4acWsFhQAsRPROXDR4_99Ng5IWwDNuoFRSJFaGwG5iJ1vUsHNHsgzzN/s320/Screen%20Shot%202023-11-28%20at%2010.51.36.png" width="313" /></a></div><p style="text-align: justify;">For some of us, like Taylor Swift, things can grow so big and the audience becomes everyone. For this infosite though, the target audience could be young to middle age adults looking to build wealth. Analyzing stocks would play only a small part. As such, we need to better redefine how to help young adult build wealth effectively.</p><p style="text-align: justify;">We need simple and yet effective investment strategies.</p><p style="text-align: justify;">The market is efficient. 80% of professional fund managers cannot beat indices like the S&P500 or the MSCI indices i.e. the generate less returns than market returns. Warren Buffett once said that the CEO of Vanguard, John Bogle who popularized index funds and then ETFs did more than he could ever do for investors. So investing in ETFs should be an integral part of every investor’s portfolio, especially young families’ investment portfolios.</p><p style="text-align: justify;">The traditional investment portfolio starts with 60% into stocks and 40% into fixed income instruments. This utilizes diversification and has generated stable long term returns for institutional investors such as endowment funds, insurers and mutual funds. As individuals, we could also benefit from this simple strategy.</p><p style="text-align: justify;">Fixed income returns are very attractive today (think short term US Treasury Bills generating 5% and Singapore 6 month Treasury Bills generating 3.8% risk free), therefore, for me, the right starting mix could be: </p><p></p><ul style="text-align: left;"><li style="text-align: justify;">40% fixed income with Singapore 6-month Treasury Bill as the base and then building up from here </li><li style="text-align: justify;">40% stocks with S&P500 ETF as the base and build from here</li><li style="text-align: justify;">20% risk taking activities including single stocks (such as those we discussed on this infosite) and other investments</li></ul><p></p><p style="text-align: justify;">We can tweak each category to suit our own needs. If you are more conservative, you can do 50% fixed income. For some, risk taking could be 30%. To each his or her own. Let’s dive into each of these categories.</p><p><b>1. Fixed Income</b></p><p style="text-align: justify;">We have spoken so much about T bills. This is just the simplest no-brainer investment today that everyone should do. In Singapore, this instrument is yielding 3.8% risk free. Simple desktop research on Google shows that the famed 60/40 investment portfolio returned c.9-10% annually over the last 25-50 years. However, it is predicted that future returns could be much lower at c.4% based on the article below. </p><p style="text-align: justify;"><a href="https://caia.org/blog/2023/06/24/spectacular-past-and-concerning-future-60-40-portfolio">https://caia.org/blog/2023/06/24/spectacular-past-and-concerning-future-60-40-portfolio</a></p><p style="text-align: justify;">If so, at 3.8% per annum, Singapore T-bills can generate the bulk of the c.4% return! While I personally really like T bills (because it is risk free), there is a whole fixed income universe out there. DBS, Singapore’s largest bank, recently issued bonds at >5% and we have a slew of USD-denominated corporate bonds. But my experience with bonds had been terrible, so for now, I would simply advocated putting most, if not all, of the 40% in Singapore T bills.</p><p><b>2. Stock ETFs</b></p><p style="text-align: justify;">It has been shown time and again that it is very difficult to beat the stock market. The S&P500 has returned 10%pa for more than a century. The rise of index funds and subsequently ETFs came precisely because active management wasn’t able to even just match the returns of the indices Since the first ETFs launched in the 1990s, we now have thousands of ETFs listed on various exchanges. </p><p style="text-align: justify;">The largest ETFs have AUMs in the hundreds of billions of dollars and can cater for any investment need one can think of. The following shows the list of the largest and most popular ETFs and as mentioned, we have many, many more to choose from.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKNzgf3B7nP6rLwSyYO5WnswBM7gaqADyfAiNgOlCDb00VMy-NlzDyF1LSMBrNnPyFBhvgYYooSki9lVkOOIive7vXLOMw0eFr49ksVm6szj65YDg0z8IG8cL8Dn_Lj3rqgG-_VpkfPppaHQinbHmcRBZh3X7QtCZvGAnzqDLiO4Rz-T5ELWCl/s688/Screen%20Shot%202023-12-03%20at%2012.45.00.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="688" data-original-width="626" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKNzgf3B7nP6rLwSyYO5WnswBM7gaqADyfAiNgOlCDb00VMy-NlzDyF1LSMBrNnPyFBhvgYYooSki9lVkOOIive7vXLOMw0eFr49ksVm6szj65YDg0z8IG8cL8Dn_Lj3rqgG-_VpkfPppaHQinbHmcRBZh3X7QtCZvGAnzqDLiO4Rz-T5ELWCl/w364-h400/Screen%20Shot%202023-12-03%20at%2012.45.00.png" width="364" /></a></div><p style="text-align: justify;">The following would be a list of ETFs that our team had followed and is worth doing more work on: </p><ul style="text-align: left;"><li style="text-align: justify;">NOBL - Dividend Aristocrat </li><li style="text-align: justify;">EMQQ - Emerging Market Tech </li><li style="text-align: justify;">HACK - Cybersecurity </li><li style="text-align: justify;">SOXX - Semiconductor </li><li style="text-align: justify;">GLUX - Luxury goods
</li></ul><p></p><p style="text-align: justify;">Interestingly there is little in-depth analysis on ETFs online perhaps because it entails too much effort. But this author believes more could be done. It is tedious work though. We need to run through numbers for each and every company in the ETF to come up with the valuation, free cashflow, growth profile etc. As such, our proprietary database will be available only to paid subscribers.</p><p style="text-align: justify;"><b>3. Risk Taking Activities</b></p><p style="text-align: justify;">Hitherto our newsletter has focused on this final 20% of the portfolio. Deep analysis is at the foundation of what we do and we shall continue to publish our work on interesting companies and ideas. We hope our skills can also be put into good use by providing value added services on valuation of private companies and businesses. We will also put all the ideas into a portfolio and see how we compare against the S&P500 over time. Similarly, proprietary analysis and portfolio returns will be available for paid subscribers.</p><p style="text-align: justify;"><b>4. To sum it up</b></p><p style="text-align: justify;">Time is of essence (albeit in a different way) and if we invest correctly based on the above, we would be compounding wealth at c.8%. Based on the table below, we can expect to slightly double our money in 10 years, more than quadruple it in 20 years and grow it 10x in 30 years. That’s unrefutable math on paper.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqNO82Uapp-tx-AyBCmK87Q01xwTdP9Ex8EWQUt8ydlBtmuvN-jECF32M7TLULplJrLYmgydYCH1lUwaF34s8yLbLpBX4mcxK6HGDWwhg-uvTOGnbJcEB76mGthOiih4IVJN0NBMZDxKNQWteR8dN3_KH9i8l_5tL5IJbEOMgZSZ0qa8RhZN1Q/s971/Screen%20Shot%202023-11-30%20at%2010.41.52.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="518" data-original-width="971" height="214" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqNO82Uapp-tx-AyBCmK87Q01xwTdP9Ex8EWQUt8ydlBtmuvN-jECF32M7TLULplJrLYmgydYCH1lUwaF34s8yLbLpBX4mcxK6HGDWwhg-uvTOGnbJcEB76mGthOiih4IVJN0NBMZDxKNQWteR8dN3_KH9i8l_5tL5IJbEOMgZSZ0qa8RhZN1Q/w400-h214/Screen%20Shot%202023-11-30%20at%2010.41.52.png" width="400" /></a></div><p style="text-align: justify;">In reality it’s a journey. We must remember to smell the roses, spend some of it (there is no point compounding money for afterlife ;) and importantly never risk losing so much that it can bring down the house. And this is a good segue to give sneak preview on the next discussion: property. </p><p style="text-align: justify;"><i>Huat Ah!</i></p><p style="text-align: justify;"><i>This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.</i></p><p><br /></p><p><br /></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-6635517357390174122023-12-05T14:25:00.001+08:002023-12-05T14:25:00.134+08:00Goodbye Charlie Munger<p style="text-align: justify;">Charlie Munger, #2 at Berkshire Hathaway passed away last week at the ripe old age of 99. The value investing community exploded online with outpour of grief, past interview videos depicting Charlie's wisdom (Mungerism) and praises for this extraordinary man.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirk2XhxvYcryR6PPFh7VO3h3u6eOiT4rarbsYUqgvkr09K-fCwiCeNPPTaqbcnIC2wrpP9himCHVCqe4fmXqkEzobxcjqcW5FcEhRmYBCaBqOCo_xs8lRBa5L1FZt9Duc845fTap-CV1xhAhkXxHjF5j-dWwuNlARfaQskOshxXi-HVAsDcuuc/s564/Screen%20Shot%202023-12-02%20at%2015.34.03.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="336" data-original-width="564" height="191" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirk2XhxvYcryR6PPFh7VO3h3u6eOiT4rarbsYUqgvkr09K-fCwiCeNPPTaqbcnIC2wrpP9himCHVCqe4fmXqkEzobxcjqcW5FcEhRmYBCaBqOCo_xs8lRBa5L1FZt9Duc845fTap-CV1xhAhkXxHjF5j-dWwuNlARfaQskOshxXi-HVAsDcuuc/s320/Screen%20Shot%202023-12-02%20at%2015.34.03.png" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><p style="text-align: justify;">His wiki page is also well updated, which I would recommend a quick read:</p><p style="text-align: justify;"><a href="https://en.wikipedia.org/wiki/Charlie_Munger">https://en.wikipedia.org/wiki/Charlie_Munger</a></p><p style="text-align: justify;">I don't think I have anything unique to praise about Munger. He is basically the best example of how we should live our lives, <b>soldier on come what may</b>. He lost one of his children to leukemia, was divorced, lost his eyesight in one eye, almost became blind and yet lived a full life with fighting spirit, never calling it quits.</p><p style="text-align: justify;">He loved Singapore and Lee Kuan Yew, giving us praises which we may or may not deserve in many interviews over the years. Thank you Charlie. <span style="text-align: left;">May you rest in peace!</span></p><p><br /></p><p><br /></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-62002412693867275762023-12-01T00:00:00.091+08:002023-12-02T14:25:01.211+08:00BHP - Australia's Commodity Juggernaut<p style="text-align: justify;">I have found that simple financials and ratios to be most useful as the first snapshot when looking at a company. This is like the first date. You are just going to see a glimpse of this person with all the excitement and risks. Is she pretty, is he handsome? What are his or her likes and dislikes? Any major dealbreaker like smoking (if you are non-smoker), drugs, violence etc. That’s simple financials. Today, we have this interesting set of numbers:</p><p><b>
Simple financials (Jun 2023 estimate, USD)</b><br /><br />
Sales: 55.7bn<br />
EBITDA: 30.0bn<br />
Net income: 14.9bn<br />
FCF: 12.4bn
<br />
Debt: 5.1bn, Mkt Cap 144.9bn</p><p><b>
Ratios</b></p><p>
ROE 33.4%, ROIC 30.3%<br />
EV/EBITDA 5.2x (Jun 24)<br />
PER 10.4x (Jun 24)<br />
Past margins: OPM 25-45%<br />
FCF yield 8.6% (consistently at mid to high single digit, with last two years double digits) </p><p style="text-align: justify;">This set of numbers could be the strongest we have seen so far, beating Roche’s! Alas, it is in an industry even more cyclical than Roche’s! In the lean years, it goes into losses and ROE turns negative. It is also highly capex intensive (10-35% of sales) and the firm suffered a couple of years of negative FCF over the last 30 years but only once in the past 20 years. Over the last 10 years, it has compounded nicely with share price doubling for GBP12 to GBP24 today.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBVgSJ46vzx2GVxcODbukY0tncbFQ8XGJHJmoUyZehgto5i88yjx1_obkhzVCMP9XbD64n-5rGi_JrsrkH0ehLYSbmgXm2nZV4pR4a27TeUnlQjftMEJrl3HGSgSx2hrHdLtvU4ADa-9E2bi0FJLMUYuwqw_ScEA9g0RE5hup1KTLxAZj71swr/s930/Screenshot%202023-10-22%20at%2012.44.15.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="726" data-original-width="930" height="313" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBVgSJ46vzx2GVxcODbukY0tncbFQ8XGJHJmoUyZehgto5i88yjx1_obkhzVCMP9XbD64n-5rGi_JrsrkH0ehLYSbmgXm2nZV4pR4a27TeUnlQjftMEJrl3HGSgSx2hrHdLtvU4ADa-9E2bi0FJLMUYuwqw_ScEA9g0RE5hup1KTLxAZj71swr/w400-h313/Screenshot%202023-10-22%20at%2012.44.15.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><i style="text-align: left;">Company has these great pics in its results presentation to kick off earnings discussion</i></div><p style="text-align: justify;">Investors, skeptical of the boom bust cycles in the recent past, has ascribed inexpensive valuation across the whole sector with PER at very low double digits and EV/EBITDA at 4-6x. Meanwhile FCF of the whole industry has been exceptionally strong over the last few years.</p><p style="text-align: justify;">
This company is none other than BHP (used to be called BHP Billiton and before that Broken Hill Proprietary), an Australian commodity giant turned multi-national resource powerhouse. While it is dual listed in UK and Australia today, BHP provides reported no.s in USD and has been one of the strongest compounders driven by the firm’s unique competitive advantage and world class operational execution and capital management.</p><p style="text-align: justify;">
The investment thesis is as follows:</p><p style="text-align: justify;"><i>
BHP owns some of the best commodity assets on Earth which allows for low cost production and has been able to generate ridiculously high Return on Capital Employed (slide below) and EBITDA margins of 30-60% over the last 15 years. Its management has also been able to drive further value with operational execution and capital management that has resulted in quadrupling of its book value per share from USD2 in 2003 to USD8.8 today (GBP1.2 in 2003 to GBP7.3 today).</i></p><p></p><div style="text-align: justify;">Strong return on capital across key businesses and at the same time building new pillars for the future</div><div style="text-align: justify;">The predecessors of today’s BHP have had long illustrious histories dating back to the 1800s which is worth more scrutiny for people who like to go back in time and study things. For today, let’s focus on the birth of BHP Billiton in 2001. Since then, it went through many mergers and demergers which simplified its business portfolio to focus on a few major commodities: copper, iron ore, coal, nickel and potash today.</div><div style="text-align: justify;">Notably, it divested its steel business in the very early years and more recently it completely got out of energy, selling its US shale oil and gas business in 2017 and then engineering the full exit by merging the energy business with Woodside, Australia’s largest independent gas producer.</div><p></p><p style="text-align: justify;">
Today, BHP’s segments are clearly defined and the following chart from its 1H results briefing in Feb 2023 provides a good snapshot of the company:</p><p><i><u>
Management<br /></u></i>
<br /></p><div style="text-align: justify;">BHP is currently helmed by Mike Henry. He was appointed CEO in 2020 and has over 30 years of experience in resource and mining. He is supported by CFO David Lamont who was also CFO previously at CSL, Oz Mineral and other large cap Australian names. As the leading company in Australia, BHP attracts the best talent from the country to join like how Roche did as the leading Swiss pharmaceutical company.</div><p></p><p style="text-align: justify;">
With the best talent, strong culture of meritocracy and less politicking and bullshit, BHP continues to exhibit the positive traits of well-run companies with the right incentives and values even as it evolved into the multi-national resource powerhouse it has become today. This is exemplified by the impeccable capital allocation decisions described above.</p><p><b>
1. Positives<br /></b>
<br /></p><div style="text-align: justify;">Australia is blessed by the iron and mineral gods. Starting as an Australian company, the geographical advantage formed billions of years ago naturally found themselves in BHP’s portfolio, becoming part of the company’s moat. Some assets are simply legacies of the company’s history and other important assets were added by design, thanks to generations of strong, savvy management.</div><p></p><p style="text-align: justify;">
There are some places on Earth that provide easy access to minerals and fossil fuels. For example, Middle East is blessed with oil and gas. Africa has diamonds and gold. US has shale gas, which was made possible to extract by technological advancement. Australia has a bit of everything, iron ore, coal, minerals in abundance and they are easy to extract, benefiting BHP in the early years.</p><p style="text-align: justify;">
BHP’s two key assets in Australia for iron ore and coal built the foundation which it has leveraged on with efficient extraction and transportation. Then by management design, successful M&As has allowed the company to build a formidable suite of assets that enjoy high return on capital. The following lists the key assets today: </p><p></p><div style="text-align: justify;"><ul><li>Western Australia Iron Ore (WAIO)</li><li>BHP Mitsubishi Alliance (BMA) producing metallurgical coal</li><li>New South Wales Energy Coal (NSWEC)</li><li>Escondida, Chile (Copper)</li><li>Nickel West, Australia</li><li>Jansen, Canada (Potash)</li></ul></div><div style="text-align: justify;">In short, the first positive which is also a strong business moat is that BHP enjoys a huge competitive advantage as the lowest cost producer in its key assets as a result of Australia’s geography, which allowed BHP to own low cost mines with long lives such as WAIO and BMA. Building on this, it has gone out and acquire similar good mines and maintained and strengthened its competitive advantage across key minerals.</div><p></p><p style="text-align: justify;">
This solid portfolio of assets has generated supernormal free cashflow over the last 10-20 years. Cumulatively, BHP made USD168.6bn of FCF from 2003 to 2023, which is more than its market cap today. Looking back for just 10 years, it has also returned more than half of this humongous FCF amount as dividends. For an investor who bought the stock in Australia in 2013 when the share price was c.A$15 (post stock splits), the dividends distributed has more than exceeded this amount.</p><p style="text-align: justify;">
So here’s the second positive - BHP is simply a cash generative machine much like Pepsico was, but trading at a much cheaper valuation with slightly more volatility.</p><p style="text-align: justify;">
The third and last positive is BHP’s potential in Potash and Nickel. While both businesses generate negligible EBITDA today, BHP’s assets in both businesses will allow it to become a dominant player in the future as long as it continues to execute. Potash is a key mineral in fertilizers and nickel is widely used in batteries which is needed to power the millions of electric vehicles in our sustainable future.</p><p style="text-align: justify;">
By positioning itself with key assets that can extract these elements at low costs, BHP stands to become a dominant player in both fields when the mines come online. Both potash and nickel have also seen shortages as a result of the Russian-Ukraine war, which further improves BHP’s position. Markets like to hope and dream and given the right circumstances, share price can skyrocket into trillions of market cap if the picture of a dominant clean potash and nickel producer solving global environmental and geo-political issues can emerge. This is the upside for BHP.</p><p><b>
2. Risks</b><br />
<br /></p><div style="text-align: justify;">Investing in BHP comes with three major risks: regulations, accidents and disasters and deep cyclicality. We shall discuss them below.</div><p></p><p></p><div style="text-align: justify;"><i><u>Regulations</u></i></div>
<div style="text-align: justify;"><br /></div><div style="text-align: justify;">In 2018, BHP settled a longstanding dispute with the Australian Taxation Office (ATO) by paying A$529m (c.USD350m) in additional taxes for the income years 2003 to 2018. The crux of the issue was related transfer pricing in its Singapore marketing arm which ATO claimed that BHP made use of to evade tax. As such, in this author’s opinion, regulations ranked as the highest risk factor. The following are the regulatory disputes from chatGPT (edited and verified to be true):</div><p></p><p></p><ul style="text-align: left;"><li style="text-align: justify;">
Western Australia Iron Ore Royalty Dispute: BHP was involved in a legal dispute with the Western Australian government regarding iron ore royalty payments. This was similar to the above ATO dispute and was settled for A$250m.</li><li style="text-align: justify;">
BHP admitted that it underpaid over 170,0000 days of work across the company’s current and former employees after miscalculating public holiday leave for more than a decade. The cost of remediating the issue will be c.US$280m.
</li><li style="text-align: justify;">
Anti-bribery Fines: In 2015, SEC fined BHP for US$25m for violating US anti-bribery law by failing to properly monitor a program under which it paid for dozens of foreign government officials to attend the 2008 Summer Olympics in Beijing.</li></ul><p></p><p style="text-align: justify;">Samarco Dam Disaster: BHP’s joint venture with Vale S.A., suffered a catastrophic dam failure at the mine resulted in a massive release of toxic mining waste, causing significant environmental damage and loss of lives. BHP faced legal actions and regulatory investigations from Brazilian authorities, leading to significant penalties and ongoing legal proceedings. More on this later.</p><p style="text-align: justify;">As we can see, regulatory risk is BHP’s biggest risk. BHP’s regulatory issues are complex, recurring and has significant negative impact on earnings at times. Investors have to be mindful. Once in a while, a tsunami level issue hits and the company could be crippled for years. The mitigating factor is that BHP has managed to navigate these so far and still generate strong FCF and shareholder returns.</p><p><i><u>Accidents and Disasters</u></i></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEYMSRfRUmfrYncmZZln5bZj5Pm2rHbgI4J46tTu_iL6A65J8E-zvHG8rRMrrWQOGwuGlcc17OtfA5eeubpuRb5XkiQJesnhKGGJhVCZoFO4Zrm7bdlnsVDq1xc3Ugqqux2KladrL7xzYQinCGReG1GFvhS6hFgOS4DU68SG2OcDbJA11L9Le_/s1090/Screenshot%202023-10-22%20at%2012.48.07.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="782" data-original-width="1090" height="288" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEYMSRfRUmfrYncmZZln5bZj5Pm2rHbgI4J46tTu_iL6A65J8E-zvHG8rRMrrWQOGwuGlcc17OtfA5eeubpuRb5XkiQJesnhKGGJhVCZoFO4Zrm7bdlnsVDq1xc3Ugqqux2KladrL7xzYQinCGReG1GFvhS6hFgOS4DU68SG2OcDbJA11L9Le_/w400-h288/Screenshot%202023-10-22%20at%2012.48.07.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><span style="text-align: left;"><i>Samarco dam disaster in 2015</i></span></div><p style="text-align: justify;">
The second risk which is related to the above is the accident and disaster risk. In 2015, one of BHP’s asset in Brazil, the Samarco Mining Complex caused one of largest environmental damage and human tragedy when its dam broke, causing toxic mudflow to hit villages and houses, resulting in 19 deaths. BHP and its partner Vale were fined USD4.8bn. But this does not cover civil damages and the cost of recovery.</p><p style="text-align: justify;"> Lawsuits are ongoing and some news articles have floated that further cost escalation to USD55-65bn for the duo is possible. Such disaster can post significant risk to commodity companies. Recall that BP’s Deepwater Horizon disaster, which was made into a Hollywood movie, still haunts the company today.</p><p style="text-align: justify;">
The mitigating factor is that BHP understands that safety is paramount. On the first slide of its every presentation, BHP talks about safety. BHP latest results highlighted death of one of their colleague due to accident and the CEO makes a personal message to emphasize the importance of safety. It is unclear at this juncture how big Samarco might become, but its strong share price is saying perhaps this is not going to be as crippling as it was for BP.</p><p></p><div style="text-align: justify;"><i><u>Deep Cyclicality</u></i></div>
<div style="text-align: justify;"><br /></div><div style="text-align: justify;">Commodity stocks are destined to be cyclical and BHP is no different. Over the last 20 years, share price have seen >50% drawdowns multiple times as we can see from the chart below. Despite its low valuations, investors will still sell commodity stocks to receive cash during market crashes in order to preserve capital. However, we also know that strong players like BHP bounce right back up and the best times to buy is when the share price has corrected significantly. Over the long run, it has also compounded value nicely and we stand to collect massive dividends along the way.</div><p></p><p></p><div style="text-align: justify;">BHP has suffered a couple of huge drawdowns over the last 20 odd years: 2009, 2017, 2020 and 2022.</div>
<br /><b>
3. Valuations</b><br />
<br /><div style="text-align: justify;">BHP trades only at a slight valuation premium in terms of PE amongst it peers. But this can be easily justified as it is the best and the largest player. On FCF, it trades at a very palatable 9.7% FCF yield, which is ironically at a discount to industry average. Looking at its history, this seemed to be sustainable level of FCF which means that, in theory, someone should take the whole company private and reap this 9.7% dividend indefinitely.</div><p></p><p style="text-align: justify;">
Using our usual valuation methodologies to triangulate the fair value for BHP, we have projected FCF and Net Income at USD14bn and EBITDA at USD29bn. Applying the respective multiples give us 22-42% upside (based on the table below) which again provides enough margin of safety. I would argue that these no.s also err on the conservative side. </p><p></p><div style="text-align: justify;">Lastly to ascertain the risk reward profile, we first look at the share price movement of the last 10 years. While a 50% drawdown has happened before, this brings its FCF yield to c.20%. Although it is possible, I would put it as unlikely, and if it happens, management or some deep pocket buyer would simply take the company private. As such, a bear scenario with 30% drawdown seemed more reasonable. The upside scenario, as alluded in the valuation above is 42%. So with that in mind, the risk reward for BHP seemed balance at -30% to +42% but with the potential go up much higher given its history of strong FCF generation, dividends and simply compounding returns.</div><br /><p></p><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-76754549361649927172023-11-17T21:27:00.028+08:002023-11-17T21:27:00.135+08:00Podcast - Nov 2023<p><i>This podcast was first recorded for 8percentpa.substack.com during the end of November. </i></p><p><br /></p><p>We discussed the impact of global inflation and its impact to our portfolio and also our lives. he link is as follows:</p><p><a href="https://8percentpa.substack.com/podcast">https://8percentpa.substack.com/podcast</a></p><p>Please see the transcript below:</p><p>***</p><p>Welcome to the second podcast on 8 Percent Substack. Thank you for listening and we hope to provide you with insights to help you manage your personal finances. </p><p>In this podcast, we will discuss the impact of global inflation to our portfolios and our lives. Most of us would not remember inflation because it did not happened in a big way since the 1990s until 2021-2022 which is about 2 years ago.</p><p>Prices of products and services have been kept low as China was making everything cheaply and exporting them. Toys, clothes, everything!</p><p>Some corporate services such as IT management and call centres were also being exported out of India. </p><p>And lastly migrant workers have also kept service costs low. They worked hard as waitresses, hairdressers, security guards. Thank you!</p><p>In sunny Singapore, we did have inflation but it was by and large manageable.</p><p>But, things changed dramatically during the pandemic and is now further exacerbated by wars, rent and salary inflation.</p><p>The pandemic disrupted global supply chain and caused prices to increase in a big way. The Russia-Ukraine war then caused energy prices to spike and now with another war in Gaza, we will see further disruption.</p><p>In sunny Singapore, <b>rent and wages are spiralling up</b>. When rent goes up and wages go up, businesses need to charge consumer more, this means things will get even more expensive.</p><p>The saving grace is that cash can also earn interest today as the US Fed has been raising interest rates to tame inflation.</p><p>Since Singapore largely follows the US, we are seeing our fixed deposit rates and Treasury Bill rates going up.</p><p><b>$100 invested in Singapore Treasury Bills earns almost 4% interest today.</b></p><p><b>People who have saved money can benefit tremendously from this.</b> We were taught to save up in school. </p><p>Remember the adage: Save Up For Rainy Days. </p><p>This is now really helping, albeit in a different way!</p><p>At the same time, people with a lot of debt and lower income households are experiencing hard times. It is not easy for them.</p><p>Another old adage comes to mind, always be prudent because sometimes it doesn't just rain, it pours.</p><p>In the next podcast, we shall discuss more on this!</p><p>Thank you for listening. See ya!</p><p>***</p><p><br /></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-66041699766777358832023-11-03T00:30:00.002+08:002023-11-03T00:30:00.143+08:00Roche - Europe's Pharma Gem<p><i>This post first appeared on <a href="http://8percentpa.substack.com">8percentpa.substack.com</a></i></p><p style="text-align: justify;">Healthcare has always been a strong return generating sector and has consistently beaten the broader stock market. According to data from the S&P 500 Health Care Index and the S&P 500 Index, the healthcare sector has outperformed from May 2001 to May 2021. with an annualized total return of 12.1%, which was higher than S&P 500's annualized total return of 7.4% during the twenty year period. </p><p style="text-align: justify;">I have monitored Roche for a couple of years and admired its strong cashflow compounding and drug innovation prowess. In the last twelve months though, the share price underperformed on the back of the dismal outlook of European stocks and Roche’s lack of growth as it faced declining revenue from the fallout of COVID-19 related sales. As such, share price corrected from CHF400 to CHF240 today, a c40% drawdown. This presents an interesting opportunity to buy the stock today. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEvk-yCYuNvmX9ejhgMwzeyFuPIodZAzY33F-5hb26ingk1hGlNMOVHcS-5BsE8aRzM_XCWXQlh-0Pxlv5sgOxWF-jbn1AgGuOWK9c-NZgsZnHg_hDMPC3abwsc_6iy-Tm8tGUfb9wp8OhzPGhOQWeegDPMeX852qf9n9oNCYHaKhFVqs-6j8Q/s1508/Screenshot%202023-10-21%20at%2011.57.12.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1192" data-original-width="1508" height="316" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEvk-yCYuNvmX9ejhgMwzeyFuPIodZAzY33F-5hb26ingk1hGlNMOVHcS-5BsE8aRzM_XCWXQlh-0Pxlv5sgOxWF-jbn1AgGuOWK9c-NZgsZnHg_hDMPC3abwsc_6iy-Tm8tGUfb9wp8OhzPGhOQWeegDPMeX852qf9n9oNCYHaKhFVqs-6j8Q/w400-h316/Screenshot%202023-10-21%20at%2011.57.12.png" width="400" /></a></div><p style="text-align: justify;">At USD320bn, Roche was the largest European pharmaceutical company by market cap when Visual Capitalist charted the above. Today, it is #2 behind Novo Nordisk (market cap >USD400bn) with its market cap USD220bn as of Oct 2023. That said, Roche is consistently ranked top 5 globally in the pharmaceutical space either by revenue or earnings. As per previous ideas, we shall discuss its investment thesis, moats, risks and valuation in detail today.</p><p><b>1. Investment Thesis</b></p><div style="text-align: justify;">Founded in 1896, Roche is one of the oldest pharmaceutical company around with strong innovative roots and was the pioneer in tranquilizers, antiviral drugs and cancer treatment or in today’s terminology - oncology. Fast forward to the 2000s, it made a series of good acquisitions and has now grown into a Swiss multi-national healthcare giant with two core divisions: Pharmaceutical and Diagnostics. </div><div style="text-align: justify;"><br /></div><div>Roche’s investment thesis is predicated on the following: </div><div> </div><div><i>1. Diversified portfolio of strong innovative drugs: Roche has built a robust portfolio of innovative drugs in oncology, immunology, and neuroscience. On top of that, the company also has strong research and development (R&D) capabilities which has regularly churned out blockbuster drugs such as Avastin and Tamiflu. </i></div><div><i><br /></i></div><div><i>2. Leading position in diagnostics: Roche is a market leader in the diagnostics industry with a wide range of products that are used in laboratories worldwide. This business consistently generate c.20% of overall EBIT over the last decade. </i></div><div><i><br /></i></div><div><i>3. Roche is a free cashflow generating machine: In 2000, Roche generated c.CHF1.5bn in FCF. It has steadily compounded that and today’s FCF is 10x of that. Its dividend shows the same story. </i></div><div><br /></div><div>As usual, we also have Roche's simple financials and ratios below:</div><div><br /></div><div><b>Simple financials (Dec 2023, USD) </b></div><div><p></p><ul style="text-align: left;"><li> Sales: 66.9bn
EBITDA: 25.6bn </li><li> Net income: 15.0bn </li><li> FCF: 16.5bn </li><li> Debt: 18.2bn, </li><li>Mkt Cap 218.5bn </li></ul><p></p><p><b>Ratios </b></p><p></p><ul style="text-align: left;"><li> ROE 47.3%, ROIC 24.4% </li><li> FCF yield 6.2% (consistently at mid to high single digit) </li><li> EV/EBITDA 8.9x (Dec 24) </li><li> PER 11.7x (Dec 24), PBR 4.6x (current) </li><li> Past margins: OPM 25-35% </li></ul><p></p><p style="text-align: justify;">Roche’s numbers could be the strongest we have seen so far in the past few ideas. This corroborates with what we discussed earlier: the healthcare sector has consistently outperformed the broader market and this is because it enjoys stronger margins and return profiles due to the nature of its business. With ROE and ROIC above 20%, but PER at just teens, it simply shouts cheap!<br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7FCCee5wdv-Y7LOQidetrTK_Qj9roQCTTjpcAX34eddArM6byMEH6BVsjfvizTcfsKvxh6vj5btk2hyHWPtHUrabWb8Q_9UzoHz-35bpWGFUE39CUsz0Ju-X0mIKUAzpx7lCZoEG6TOBRUvQlM0ZjkT0KDZvlWjJwkHL0sDYKZWJ3gIk1UiGc/s1494/Screenshot%202023-10-21%20at%2014.24.04.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1494" data-original-width="1368" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7FCCee5wdv-Y7LOQidetrTK_Qj9roQCTTjpcAX34eddArM6byMEH6BVsjfvizTcfsKvxh6vj5btk2hyHWPtHUrabWb8Q_9UzoHz-35bpWGFUE39CUsz0Ju-X0mIKUAzpx7lCZoEG6TOBRUvQlM0ZjkT0KDZvlWjJwkHL0sDYKZWJ3gIk1UiGc/w366-h400/Screenshot%202023-10-21%20at%2014.24.04.png" width="366" /></a></div><div style="text-align: justify;">The numbers in the simple financials are translated into USD for easy reference. But Roche actual disclosure in Swiss Franc (CHF) is actually super transparent and it breaks down its businesses in detail for whoever is interested to dig. The slides above give the high level picture while its latest annual presentation materials contained 200 more pages in the link below:</div></div><div><br /></div><div> https://assets.cwp.roche.com/f/126832/x/5738a7538b/irp230202.pdf
</div><div><br /></div><div><i><u>M&A</u></i></div><div><br /></div><div style="text-align: justify;">Roche has had a long history of M&A that accelerated in the 2000-2010s and made the company what it is today. In the earlier years, one of the more important acquisition was that of Biomedical Reference Laboratories in 1982. This acquisition helped built the foundation of Roche’s diagnostics business in the US. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"> In 2002, Roche bought a stake in Japanese pharma company Chugai and raised its stake to c.60% in 2008. The overall amount that Roche paid was c.USD2bn but its stake today is worth c.USD30bn, making Chugai one of its is most successful purchases. </div><div><br /></div><div>Thereafter, Roche made a series of important M&As: </div><div><ol style="text-align: left;"><li>Ventana Medical Systems for USD3.4bn in 2008, which further strengthened its diagostics business.</li><li>Genentech for USD46.8bn in 2009, Roche’s largest acquisition ever. Genentech is considered to be the first biotech company. </li><li>InterMune for USD8.3bn and Seragon Pharmaceutical for USD1.7bn in 2014, both biotech companies focusing on orphan diseases and cancer treatments respectively. </li><li>Spark Therapeutics for USD4.8bn in 2019, a US based gene therapy company. </li></ol></div><div style="text-align: justify;">These successful bolt-on acquisitions strengthen the company, allowing them to gain market share and receive new technologies, talent and knowhow. The company is also very smart in the way they do it. For both Chugai and Genentech, Roche started with a small stake to know the partner better before acquiring more, thereby ensuring that the integration will be smoother. Roche’s prowess in M&A became its weapon to both beat the competition and absorb smaller competitors for its own benefit. </div><div><br /></div><div><b>2. Business Moats </b></div><div><br /></div><div style="text-align: justify;">As a pharmaceutical company, Roche enjoys a few moats not available to normal companies. The most important of which is patent protection. Pharma companies are in the business of discovering new drugs and when they do, they file patents and enjoy good economics for 15-20 years to sell these drugs profitably. In fact some companies exploited this and charged an arm and a leg for orphan drugs which led to other issues. But the bottomline is that patent protected drugs make money and Roche has 15-20 of these blockbuster drugs across oncology (cancer), immunology, infectious diseases and other segments at any one time. </div><div><br /></div><div>That’s Roche’s first moat - patent protection. </div><div><br /></div><div style="text-align: justify;"> The second moat is its R&D engine combined with scale and results. As mentioned, Roche has consistently churned out blockbuster drugs and looks like it will continue to do so. R&D alone is pretty worthless but with scale, it becomes a huge barrier to entry. Roche spends more USD10bn on R&D every year and there are only a handful of companies that match that. The following list comes from chatGPT: </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"> Based on cutoff in September 2021, the following are some of the top pharmaceutical companies known for their significant research and development (R&D) budgets, based on their reported spending in USD. Please note that rankings and budgets may have changed since then: </div><div><ol style="text-align: left;"><li> Johnson & Johnson: R&D budget of approximately $12.2 billion (2019). </li><li> Pfizer Inc.: R&D budget of approximately $8.1 billion (2020). </li><li> Roche Holdings: R&D budget of approximately $11.4 billion (2020).</li><li> Novartis International AG: R&D budget of approximately $10.5 billion (2020). </li><li> Merck & Co., Inc.: R&D budget of approximately $11.3 billion (2020). </li><li> Sanofi SA: R&D budget of approximately $7.9 billion (2020). </li><li> AstraZeneca PLC: R&D budget of approximately $6.6 billion (2020). </li><li> GlaxoSmithKline PLC: R&D budget of approximately $5.1 billion (2020). </li><li> Eli Lilly and Company: R&D budget of approximately $6.0 billion (2020). </li><li> Bristol-Myers Squibb: R&D budget of approximately $5.9 billion (2020). </li></ol></div><div><i>ChatGPT is awesome! </i></div><div><br /></div><div style="text-align: justify;">R&D dollars are table stakes in the world of pharmaceuticals. If you cannot cough up a few billion dollars to do research in finding new drugs, there is no business to talk about. Naturally, the bigger the budget means more research being done, more money to hire better talent and higher chances of finding blockbuster drugs. With the second highest spending and more than twice as big as #8 (GSK) and below, Roche is playing in the big boys league. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Besides being big, Roche’s labs were also efficient and were able to continue to churn out new drugs and allowed the firm to manage patent expirations very well. This proved that its R&D dollars were well spent, there are always results to show for and that attracts the best scientists to work for Roche and ensure that their labs continue to be successful. They even have the best R&D labs (pic below)!</div><div><br /></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi61MzKNXe5WELSrpWgF_4lW1yfetk_Gl-kijGNxfY7_FsUdPBT_MmZj71LbCA_XiX16VOPPXMuQhyd7ubHGOBiHrtTZh_llcDl8g3U5h4Turkrd5Y9CIfywWBTdeAt50hNmuRwAZbcuTbTjDc5UuPSnY60sjyhs09DahMygsHMToOdNpfyiQFW/s1540/Screenshot%202023-10-21%20at%2014.31.02.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1540" data-original-width="1508" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi61MzKNXe5WELSrpWgF_4lW1yfetk_Gl-kijGNxfY7_FsUdPBT_MmZj71LbCA_XiX16VOPPXMuQhyd7ubHGOBiHrtTZh_llcDl8g3U5h4Turkrd5Y9CIfywWBTdeAt50hNmuRwAZbcuTbTjDc5UuPSnY60sjyhs09DahMygsHMToOdNpfyiQFW/w391-h400/Screenshot%202023-10-21%20at%2014.31.02.png" width="391" /></a></div><div><br /><div style="text-align: justify;"><br /></div><div style="text-align: justify;">With good R&D and clout in the Pharmaworld, Roche has also built an eco-system of doctors, drug specialists and medical reps who helped it distribute its drugs efficiently across the globe. This is an intricate system that takes years to build and nurture. When a key drug goes off patent, generics can come in but Roche is able to combine its off-patent drug with another drug and keep selling the combination to doctors who would recommend it to patients, thereby delaying generics from gaining market share quickly. </div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is the same moat as the distribution network that large FMCG companies like Pepsi has. It is not easy to replicate. With such moats, it is no wonder that Roche enjoys double digits margins and ROICs. But what are the risks? Every investment comes with risk and no matter how good things look, there is always an Achilles’ heel somewhere. Just like how every superhero has his or her nemesis and Superman has to deal with Kryptonite. </div><div><br /></div><div><b> 3. Risks </b></div><div><i><br /></i></div><div><i><u>Stagnation </u></i></div><div><br /></div><div style="text-align: justify;">At Roche’s current juggernaut USD220bn in market cap, it gets harder and harder to grow and the company’s recent no.s are showing that. There is no meaningful growth over the last few years despite the supposed boost from the pandemic. Roche provided those ART test kits we used and a slew of diagnostics related to COVID-19 but that was offset by patent expirations and at the corporate level, we are just seeing the modest growth as shown below. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhW-fsXwCBaNfjhM8dipfKGLMfSV-1TswpD65QbZx5W9YshTWEFS-41sdhoLTyw1EppYrADyuthMhHx-RLcE0cgmMpSC5ign0SLMV5Xslc7m_efzaNpi03aGVSaEt89umt3YW65diW0o3OEsjvE3ckT1-5T3VluoVn_wuGL2NfLBYT3iQfn3LP3/s1472/Screenshot%202023-10-21%20at%2014.32.55.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="834" data-original-width="1472" height="226" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhW-fsXwCBaNfjhM8dipfKGLMfSV-1TswpD65QbZx5W9YshTWEFS-41sdhoLTyw1EppYrADyuthMhHx-RLcE0cgmMpSC5ign0SLMV5Xslc7m_efzaNpi03aGVSaEt89umt3YW65diW0o3OEsjvE3ckT1-5T3VluoVn_wuGL2NfLBYT3iQfn3LP3/w400-h226/Screenshot%202023-10-21%20at%2014.32.55.png" width="400" /></a></div><br /><div><br /></div><div><i><u>Lawsuits and regulatory risks </u></i></div><div><br /></div><div style="text-align: justify;">Pharmaceutical companies are prone to being sued and Roche had its fair share of lawsuits over the years with its key drugs like Avastin, Tamiflu and vitamin pills alongside other pharmaceutical companies. In a landmark lawsuit, Roche paid a record USD500m criminal fine for leading a worldwide conspiracy to raise and fix prices and allocate market shares for certain vitamins sold in the United States and other parts of the world. The conspiracy lasted from January 1990 into February 1999 and affected the vitamins most commonly used as nutritional supplements or to enrich human food and animal feed. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The full press release below: </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"> https://www.justice.gov/archive/atr/public/press_releases/1999/2450.htm </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"> As such, regulators are constantly watching Big Pharmas. Regulations can always screw pharma companies. Besides fines, it could be cease and desist orders on their production facilities, or it could be price caps on drugs that are too profitable. After all, if the umpire is not doing his job, then game hell breaks loose. For Pharmaworld, Purdue Pharma and Oxycontin comes to mind. That said, Roche has definitely managed these risks better than some peers and there has not been multi-billion fines or lawsuits against the company as far as I can tell. </div><div><br /></div><div><i><u>Breakup </u></i></div><div><br /></div><div style="text-align: justify;">One idiosyncratic risk with Roche is the dissolution of its current structure housing diagnostics and drugs under one entity. Roche is the only pharma company having such a unique structure and it is not inconceivable that some activists ask for a breakup or some other kind of financial engineering to “create value”. While monetary gains could be made ultimately, it is straining on management resources and with Swiss pride and ego involved and one can imagine how volatile Roche share price can gyrate. We could see more 30% drawdowns, which is not what investors want. The mitigating factor is that at current share price, Roche is already cheap and I don’t think the downside would be big even if there is some negative newsflow on this issue. </div><div><br /></div><div><b>4. Valuation </b></div><div><br /></div><div style="text-align: justify;">As with the previous analysis, I have used excel to triangulate valuation using Free Cashflow, Enterprise Value and Price Earnings. The Earnings column refers to free cashflow, EBITDA and Net Income respectively and we slap the multiple on for each metric. In analysis done earlier this year in the original substack post was pretty off. Jsut to give you a flavor, the following shows the downside case we had, today, Roche's share price had completely crashed through this and now trades at CHF240.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCxDpeyjVK04GuW8uhX_eZDT01GrFNYtgPWVjU3f6ccw4RTLVHvlHaGyCwrVwJ2Duik1Y-MgKiv1M4fE5PZFiPube0UZDp2sa4G2BtfHLGF27dfd_UbOFfj9gqmv3o4w34g4D4ZonrVvDRDhDH-DVx7ozMkClrMbqCHvZz7dDw_aftpjZtwlrw/s846/Screenshot%202023-10-21%20at%2015.27.48.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="450" data-original-width="846" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCxDpeyjVK04GuW8uhX_eZDT01GrFNYtgPWVjU3f6ccw4RTLVHvlHaGyCwrVwJ2Duik1Y-MgKiv1M4fE5PZFiPube0UZDp2sa4G2BtfHLGF27dfd_UbOFfj9gqmv3o4w34g4D4ZonrVvDRDhDH-DVx7ozMkClrMbqCHvZz7dDw_aftpjZtwlrw/w400-h213/Screenshot%202023-10-21%20at%2015.27.48.png" width="400" /></a></div><br /><div style="text-align: justify;">This is a good segue to discuss that a lot of our investment decisions will be wrong. The best investors are right 57% of the time. Not alike how the best baseball players only have batting average of 0.3 and batting average of 0.4 is considered unachievable. That means the best baseball players cannot hit 4 out of 10 balls thrown to them. In similar fashion, the best investors get 43% of their trades wrong. So, we were wrong, earlier in the year and the new valuation of Roche perhaps looks like the following:</div><div><div><br /></div></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6YYvwNZUAAtD2CpS45-mqKpqMK-YQfpPtb5W4B_s58Dg-Fxytm_js8WM1SR9rhTVbu1tbH8nrXpaxV8hOvC45ZWQ-YCg9LgXGe4-4d6ob1vhZsFEgaXjNE0Hb4c9Oi3YmoQ9GfphyS3s1Jzra-kqiRiqlejevxxfmQkKxUEMWogFjLJj2UT8x/s1088/Screenshot%202023-10-21%20at%2015.24.23.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="602" data-original-width="1088" height="221" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6YYvwNZUAAtD2CpS45-mqKpqMK-YQfpPtb5W4B_s58Dg-Fxytm_js8WM1SR9rhTVbu1tbH8nrXpaxV8hOvC45ZWQ-YCg9LgXGe4-4d6ob1vhZsFEgaXjNE0Hb4c9Oi3YmoQ9GfphyS3s1Jzra-kqiRiqlejevxxfmQkKxUEMWogFjLJj2UT8x/w400-h221/Screenshot%202023-10-21%20at%2015.24.23.png" width="400" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Over the last 20 years, Roche has suffered 40% drawdown during the GFC while most other drawdowns ranged from 20-30%. Perhaps this higher volatility explains the valuation difference with Pepsico but it also represents the opportunity today. The above shows the implied valuations are taken down by a few turns to reflect peer valuation, which was the mistake we made earlier. For comparison, European pharma names trade at one year forward PER between 14-28x. Novartis is at 14x, AstraZeneca at 18x, Merck at 15x and Novo Nordisk at a whopping 30x. Pfizer trades cheap at 10x though. If we take a simple average, we are looking at 17x. So putting Roche at 15x probably makes more sense.</div><div><div><br /></div><div><b> Intrinsic Value (IV) </b></div><div><br /></div><div style="text-align: justify;">To calculate Roche’s intrinsic value, we would simplistically use PER today. Using 15x above, Roche’s IV will be c.CHF320 and this represents c.33% upside from today’s price. I would think that this provides good margin of safety at current prices. The stock is cheap. To reiterate, Roche's IV was off in the original post. We had Roche IV at CHF380. It could get there if things changes. But for now, CHF320 looks more right.</div></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYKKrKH5_hK8i85VWdrPivf2JvHpfTuq0gHVkg5sYEiLUppuwvABN-dE2EYye0ayrDskwTn5TCg9DGclNqxbWzCIC2JiU2AE2TXI4h46kDNII_ib_e146GoJ4hBh9-HbF9E5Y4xrMJDbAhg768cBSkmPQnsY2eFK1A7BEAWLxqj2xoc2pJUamR/s1422/Screenshot%202023-10-21%20at%2015.28.42.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="714" data-original-width="1422" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYKKrKH5_hK8i85VWdrPivf2JvHpfTuq0gHVkg5sYEiLUppuwvABN-dE2EYye0ayrDskwTn5TCg9DGclNqxbWzCIC2JiU2AE2TXI4h46kDNII_ib_e146GoJ4hBh9-HbF9E5Y4xrMJDbAhg768cBSkmPQnsY2eFK1A7BEAWLxqj2xoc2pJUamR/w400-h201/Screenshot%202023-10-21%20at%2015.28.42.png" width="400" /></a></div><div><br /></div><div style="text-align: justify;">Lastly on dividends, the chart above shows how Roche has increased dividend for 36 years consecutively. We also get to earn CHF9.5 in dividend representing a c.4% dividend yield which should continue to grow given the track record. Therefore, Roche as one of the best healthcare bet that plays on the global growth in demand for better drugs in oncology, immunology and neuroscience and better diagnostics with a demonstrated track record in compounding earnings over decades, will be an attractive European compounder to own in the portfolio. </div><div><br /></div><div><i>Huat Ah!</i></div><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-86889706384455694482023-10-20T00:30:00.002+08:002023-10-22T12:40:56.162+08:00Charts #50: More on Property - Offices<p>The pandemic upended offices with vacancy rates hitting all time high in some cities as the chart below shows. This has impacted property valuations and changed the landscape for entire vicinities.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrjNA5F938e6pXj52AWqAHbSFCkt5NOjCbDoiyXNOxBpl2pcOMs7yFe7L4lwf-g4_0lX0HJLlPkqwXFpy_nWnprubhl8yddfQ0hvKYYz0hheRyg_O4lkYcFN4IAMM09NISSUQn_OlKz0lghQpyxPmmIqbV2D-nIrh0PC24nSFNyy7fINX5krQc/s1538/Screenshot%202023-10-13%20at%2018.46.20.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1134" data-original-width="1538" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrjNA5F938e6pXj52AWqAHbSFCkt5NOjCbDoiyXNOxBpl2pcOMs7yFe7L4lwf-g4_0lX0HJLlPkqwXFpy_nWnprubhl8yddfQ0hvKYYz0hheRyg_O4lkYcFN4IAMM09NISSUQn_OlKz0lghQpyxPmmIqbV2D-nIrh0PC24nSFNyy7fINX5krQc/s320/Screenshot%202023-10-13%20at%2018.46.20.png" width="320" /></a></div><p>Interestingly, it also reflects work culture in different parts of the world and different industries. Asian workers tend to head back to office while tech startups are resisting. </p><p>But if we can stretch on the horizon, we should revert to norms over time and therefore it might be a good time to start buying office reits now!</p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-16922524595289123742023-10-06T17:01:00.003+08:002023-10-06T17:01:00.141+08:00Pepsico - FCF Generation Machine<div><i><span style="text-align: justify;">This post first appeared on </span><a href="http://8percentpa.substack.com" style="text-align: justify;">Substack</a><span style="text-align: justify;"> a few months ago</span><span style="text-align: justify;">.</span></i></div><div><br /></div><div style="text-align: justify;">The human brain is weak. We are wired to succumb to temptations easily and we slide down slippery slopes and are unable to get back on our feet without tremendous effort. That is why it is so hard to lose weight, or stop swiping those TikTok videos or quit drinking or smoking. The common denominator for the above question is addiction. We just cannot stop ourselves when our brains from crazy over those dopamine hits. No pun intended but we are, in essence, not too different from zombies always going crazy for brains. They also cannot help it.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Businesses that leverage on this weakness become cash generating machines as consumers cannot stop consuming their products. Think sugary drinks, addictive games, new seasons of Game of Thrones and salty snacks. It gets so bad that governments have to clamp things down. Cocaine is illegal in most countries as with most drugs. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Many countries has imposed sugar tax and China restricted kids from playing games after 10pm. But that does nothing to stop these companies from churning cash because people simply cannot stop themselves from wanting more. They will still consume even if you raise prices, reduce the volume per pack or even reduce the quality of the product.</div><div style="text-align: justify;"><br /></div><div><div style="text-align: justify;">Our idea today is one such consumer company with market cap of over USD250bn, which is roughly the size of New Zealand’s GDP and almost twice the size of Ukraine’s GDP and amazingly, a tad smaller than our Little Red Dot’s GDP. We shall discuss its investment thesis, moats, risks and valuation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The investment idea today is a compounder and a household name which I have followed for a decade as an analyst but its brands are brands I have known all my life, as I am sure most of us do. We will be discussing Pepsico (Ticker: PEP), listed on the NYSE. The stock has compounded tremendous growth for the past 40 years.</div></div><div style="text-align: justify;"><b><br /></b></div><div><b>1. Investment Thesis</b></div><div><br /></div><div style="text-align: justify;">Pepsico is the world’s largest potato chips manufacturer and the world’s second largest bottled soda drink maker behind Coca Cola. The company has a diversified portfolio of iconic brands such as Pepsi, Frito-Lay, Gatorade, Quaker Oats, and Tropicana, among others that creates great products which are well-liked because they are savory and addictive. It has also built a strong global procurement and distribution network in 200 countries on the back of its sheer size as one of the leaders in these two consumer sectors which provides Pepsico huge competitive advantages against smaller competitors.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Today, Pepsico ranks amongst the top 5 global FMCG (fast moving consumer goods) companies and has compounded growth at minimally high single digit pace for decades. In the recent 5 years, share price has also more than doubled from c.USD80 in 2018 to c.USD180 today. The following is Pepsico's simple financials and ratios:</div><div><br /></div><div><u>Simple Financials</u></div><ul style="text-align: left;"><li>Sales: 89.9bn </li><li>EBITDA: 16.3bn </li><li>Net income: 9.7bn </li><li>FCF: 8.3bn (current FCF in 2022 is 5.6bn) </li><li>Debt: 36.1bn, Mkt Cap 253.9bn</li></ul><div><div><u>Ratios</u></div><ul style="text-align: left;"><li>ROE 53.7%, ROIC 16.2% </li><li>EV/EBITDA 16.5x (Dec 24)</li><li>PER 23.4x (Dec 24)</li><li>PBR 14.5x</li><li>Past margins: OPM 14-18%</li></ul></div><div><div><i><u>Management</u></i></div><div><i><br /></i></div><div style="text-align: justify;">While Warren Buffett did famously say (below) it is not about management but more about the business, it is worth mentioning Pepsico’s previous and current CEOs. Pepsico’s success over the last two decades can be largely attributed to Indra Nooyi, who served 12 years from 2006 to 2018. Her Spanish successor, Ramon Lagurta took over well and has continued to drive growth. What Indra and her team did was both strategic and effective.</div><div><br /></div><i><div style="text-align: center;"><i>“ When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. ”</i></div></i></div><div style="text-align: justify;"><i><br /></i></div><div style="text-align: justify;">In the years prior to becoming CEO, Indra was CFO and SVP for corporate strategy and she famously spun out Yum! Brands which was Pizza Hut, KFC and Taco Bell. These restaurant businesses did not fit well with Pepsico’s core products even though conceptually they were supposed to fit back in those days. Since you sell carbonated drinks, why not own businesses that sell those drinks day in day out? Today we know that it doesn’t work. Indra sold those businesses and bought Tropicana and Gatorade which further strengthened Pepsico’s distribution network and its business moat.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Next, Pepsico reclassified its products into three categories: "fun for you" (potato chips and regular soda), "better for you" (diet or low-fat versions of snacks and sodas), and "good for you" (oatmeal). It was easy to understand and put Pepsico in a good light as the world moved to emphasize on ESG. Her legacy continues today as her successor continue to grow profits and dividends.</div><div><br /></div><div><b>2. Business Moats</b></div><div><br /></div><div style="text-align: justify;">Buffett also said the most important thing about businesses is how they defend their market share. He coined “Business Moats” as the term to illustrate characteristics of strong companies that would help fend off competition. For the fun of it, I asked chatGPT, “What is Pepsico’s business moat?” and the following is what it churned out:</div><div style="text-align: justify;"><br /></div><div><i>Pepsico's business moat is primarily built on its strong brand recognition and extensive distribution network. As a leading global food and beverage company, PepsiCo has a portfolio of well-known brands such as Pepsi, Lay's, Gatorade, Quaker, Tropicana, and Doritos, among others, that have become household names.</i></div><div><i><br /></i></div><div><i>Additionally, PepsiCo has a diversified product portfolio spanning snacks, beverages, and other food products, which helps it to maintain a stable revenue stream in different market conditions. The company also invests heavily in research and development to create innovative and sustainable products to meet changing consumer preferences.</i></div><div><i><br /></i></div><div><i>Moreover, PepsiCo's extensive distribution network, which includes partnerships with bottlers and retailers, allows the company to reach customers across various geographies and demographics. This distribution network provides the company with a competitive advantage over smaller players who may not have the same level of reach.</i></div><div><i><br /></i></div><div><i>Pepsico is committed to operating in a socially and environmentally responsible manner and has demonstrated ESG leadership. The company has set ambitious targets to reduce its environmental footprint, improve the lives of farmers and communities in its supply chain, and promote diversity and inclusion in its workforce. These initiatives not only benefit society but also position PepsiCo as a responsible corporate citizen and a leader in the ESG space.</i></div><div><i><br /></i></div><div><i>Overall, PepsiCo is a well-established company with a strong brand portfolio, diversified revenue streams, and a commitment to ESG leadership. These factors, combined with its consistent financial performance, make PepsiCo a compelling investment opportunity for long-term investors looking for exposure to the food and beverage industry.</i></div><div><br /></div><div style="text-align: justify;">I must say this is really not bad! It picked up Indra Nooyi’s ESG leadership point as well! But alas for serious value investors’ deep dive, chatGPT is still not good enough. Maybe we can give it a few weeks and open access to Substack, after some more learning it’s game over for writers like us :)
</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Okay, before that happens, let’s get back Pepsi’s moats. ChatGPT got the two most important moats: brand and distribution. Brand is easy to understand, humans like familiarity and if businesses can deliver consistency, consumers will just keep coming back. Starbucks, Johnson and Johnson, L’Oreal, LVMH, Macdonald’s, Toyota, Singapore Airlines and Yakun Kaya Toast all built their businesses on consistency and reliability.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmyaiabDGWmVUUuTtAfko3U2TiXB7wYiMSCLo7zP1bt_assgnjD19XqVzWxeS8RdZpIBjaycRJNVlqhBClEAZS2VC7fxuPwPIEcqvyExgRCWFutp_jnx0eF_kSwF2AHil3sP7chkohZB-Bss9blbuwqUc-1sMk3i0mi6RNjVjHWZy0evCTHJrZ/s1452/Screenshot%202023-09-09%20at%2017.13.27.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="882" data-original-width="1452" height="243" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmyaiabDGWmVUUuTtAfko3U2TiXB7wYiMSCLo7zP1bt_assgnjD19XqVzWxeS8RdZpIBjaycRJNVlqhBClEAZS2VC7fxuPwPIEcqvyExgRCWFutp_jnx0eF_kSwF2AHil3sP7chkohZB-Bss9blbuwqUc-1sMk3i0mi6RNjVjHWZy0evCTHJrZ/w400-h243/Screenshot%202023-09-09%20at%2017.13.27.png" width="400" /></a></div><div><br /></div><div style="text-align: justify;">Distribution is key and towards the consumer, it is about securing shelf space in retailers, being able to restock products as soon as they run out, putting the right products in front of consumers in the right season. Drinks in summer, chips before big games. It is also vital in procurement. Get suppliers globally, procure at low costs but ensure consistent supply. Frito Lay became the largest potato chips maker because it can secure potatoes from growers all over the world. As it grows in size, it becomes harder and harder for others to secure potatoes and even if they do, competitors cannot buy at the same low price.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is economies of scale at work. Frito Lay can procure potatoes cheaply because it has volume. This is the same for all other raw materials: packaging, PET bottles, syrup, oats etc. It can also secure shelf spaces cheaply, it then has more marketing dollars to spend, ensuring mind share with consumers.</div><div><br /></div><div><b>Economies of scale → lowest cost producer → higher gross margins → more marketing spend → bigger market share</b></div><div><br /></div><div style="text-align: justify;">There is also a strong positive cashflow angle. Pepsico can always have better payment terms. It pays farmers some small upfront cost to grow potatoes. It pays distributors deposits to put its chips and drinks on shelves. These are cents per packet or per bottle. But when the consumer buys a packet of Ruffles at $5, the money goes to Pepsico fairly quickly because its systems are linked with retailers like Walmart and Costco. If we buy on e-commerce, then it gets money instantaneously. So Pepsico’s working capital cycle is very short. In fact, in 2022, it was negative. It was -USD6bn against revenue of USD90bn. Pepsico’s upstream supplier and downstream counterparties funds its day-to-day business operations.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As the company keeps improving its margins and cashflows, Pepsico realized it doesn’t really need a lot of equity on its balance sheet. So it kept buying back its own shares. ROE hit more than 50% since 2016. I believe there is room to further improve ROIC (c.16%) as well. It used to be just 27%! This is the beauty of FMCG businesses or in general, businesses with good economics.</div><div><br /></div><div><b>3. Risks</b></div><div><br /></div><div style="text-align: justify;">Every investment comes with risk and we need to understand them well and see if there are any mitigating factors. Most of the time, risks can be mitigated if we buy cheap enough. For a name like Pepsico, the ability to compound also helps. It is akin to the current environment when risk free rate is 4%. If you lost 10% on some investment, cut loss and put in T-bills, you get it back and a bit more in 3 years. But with Pepsico, you just have to wait for compounding to do its work.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Anyways, let’s go through some of its key risks:</div><div><i><br /></i></div><div><i><u>Market correction / valuation compression</u></i></div><div><br /></div><div><div style="text-align: justify;">As valuations are not cheap (25x PER and 18x EV/EBITDA), Pepsico and similar companies are vulnerable to any kind of market correction. Hedge funds, institutional investors will sell large, liquid and expensive names which in the past has caused 25-30% drawdown for Pepsico. This, in my opinion, is the biggest risk because it will take 4-5 years of compounding to clawback negative 25-30%. But if it falls that much, also means it will be a good opportunity to accumulate if the other risks listed below are non-issues.</div><div><br /></div><div><i><u>Competition</u></i></div><div><br /></div><div style="text-align: justify;">This is another good point picked up by ChatGPT although its explanation was not good enough. Pepsico is constantly bombarded by competition. Arch-rival Coca Cola will not stop hammering at Pepsi’s drink business and in this new economy, there are endless shelves on Amazon and so part of its moat of having good distribution to supermarkets and good bargaining power for shelf space has become mooted. There are also new niche brands coming out every other day. Singapore’s own Dangerously Addictive Irwin’s Fish Skin and Potato Chips made such a big splash in the local scene in a few short years. You can imagine globally how many niche brands are chipping away Pepsico’s shares in both snacks and drinks.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoZEWfElNkESEb_TvYHuXn5uITZgg_iI7DpujHYDffAiAB89A5bheZqKHR93EhwdW6m4eCW2bwWzdlVtQvVkJw3lXpNdbXCed4IHaSkITtbSmMhoQPE_cGbV4wi0KCjeF3vqe8N2ivbsmI1OrerIGd6GmKJXKR_hp8I2eyoiA8Ns9GK0-54tH6/s760/Screenshot%202023-09-09%20at%2017.20.11.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="760" data-original-width="728" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoZEWfElNkESEb_TvYHuXn5uITZgg_iI7DpujHYDffAiAB89A5bheZqKHR93EhwdW6m4eCW2bwWzdlVtQvVkJw3lXpNdbXCed4IHaSkITtbSmMhoQPE_cGbV4wi0KCjeF3vqe8N2ivbsmI1OrerIGd6GmKJXKR_hp8I2eyoiA8Ns9GK0-54tH6/w384-h400/Screenshot%202023-09-09%20at%2017.20.11.png" width="384" /></a></div><div><br /></div><div style="text-align: justify;">Of course the mitigating factors are also spelt out above. Pepsico will enjoy lower costs, cheaper marketing dollars and a lot more resources to crush anyone because of its scale. Pepsico can just buy Irwin for USD250m tomorrow, which doesn’t move the needle at its USD250bn market cap and *poof* this competition is gone.</div><div><br /></div><div><i><u>Regulations</u></i></div><div><br /></div><div style="text-align: justify;">Large companies are always vulnerable to regulatory risks and Pepsico, with its addictive sugary drink and salty snack portfolio is always in the cross-hairs of regulators’ firing squad. In the ten years from 2012 to 2022, a slew of countries passed sugar or soda tax laws to reduce consumption of sugary drinks because it became medically proven and established that sugar causes diabetes. Similar to tobacco taxes, this was argued to be good for humanity. Pepsico’s share price reacted negatively whenever announcement of countries passing the such tax bills hit the newswire. But compounding has since done its magic and it is not longer talked about today.
</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">
However, regulatory concerns will continue and in today’s context, extensive use of plastic and PET bottles could be targeted. Or anti-competitive moves could be picked up by the authorities. Lawsuits can also hit share prices. Johnson & Johnson was recently hit by Talc baby powder lawsuits (which we all used!) but a quick search will show it had been hit so many times in so many different products over decades.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">
While most companies survive such sagas, once in a while, we see companies falter and unable to recover. Recent examples not in the FMCG industries such as Bayer and BP come to mind. We just have to be mindful that this is part and parcel of investing in large prominent companies.</div><div><br /></div><div><i><u>Poor execution</u></i></div><div><br /></div><div style="text-align: justify;">Highly cash generative companies can be more prone to execution risks because they are constantly being asked to distribute the cash back to shareholders if they have nothing better else to do with it. As such, management find it irresistible to buy things. Doing M&A is fun, you meet other companies senior executives, wine and dine with investment bankers’ money, get to travel and just in general being viewed internally as doing something transformative. But we also know that c.60% of all M&A fails and companies get saddled with debt.
</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Gladly, Pepsico does not have this problem for now. It has done very good M&As and it has also returned a ton of money to shareholders. We have a chart further below showing that the company executed 51 years of consecutive dividend hikes. Gosh, that’s more years than yours truly has spent on Earth.</div><div style="text-align: justify;"><br /></div><div><b>4. Valuation</b></div><div><br /></div><div style="text-align: justify;">Today we will use four valuation methodologies (FCF, EV, PER and Dividend) to triangulate (or quadriangulate) the range of intrinsic value for Pepsico. I have complied the table below for easier digestion. The earnings line is essentially FCF, EBITDA, Net Income and Dividend multiplied by 8% growth (one year forward) for the four methodologies respectively.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwDLVzk-hYrkJwLxbbYgfjDMLs0DTDNHjpFwU3h0h76Ip-t4hvhwqDj4hOAGNAdeK-oxeOtbC-9uOUM_g_XLzdr1DxNNnLlNA1UzSJUS_S_78c72xxITUjSORDgkr7fa8_P_WX1Sue7d-fBi1Lng2bIEYFAdhdyYDTMKruOSolHn4hByEtJ6uz/s1142/Screenshot%202023-09-09%20at%2017.27.06.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="434" data-original-width="1142" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwDLVzk-hYrkJwLxbbYgfjDMLs0DTDNHjpFwU3h0h76Ip-t4hvhwqDj4hOAGNAdeK-oxeOtbC-9uOUM_g_XLzdr1DxNNnLlNA1UzSJUS_S_78c72xxITUjSORDgkr7fa8_P_WX1Sue7d-fBi1Lng2bIEYFAdhdyYDTMKruOSolHn4hByEtJ6uz/w400-h153/Screenshot%202023-09-09%20at%2017.27.06.png" width="400" /></a></div><div><br /></div><div><br /></div><div style="text-align: justify;">Multiples are always the hardest and I have not done a lot work to justify the numbers above. I just looked at the recent numbers used them. As we can tell, the upside is limited and this would not past Buffett’s margin of safety test. Adjustments are done for EV to add back debt and for Dividend to add this year’s announced dividends. Intrinsic value is in per share terms and upside is calculated using the share price today is $185.</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSvnPabXmYTaWCtobgdWQqUyW3hSJ66pvlbhpOV6rSqxw0K4XDbDwuXMjmT0b8TKPBJoTd5OcWPDv7L2ib8mVOiWQ-_HJTEkEpCLI9mppwfraAGr2rVrjrCTkFPH836L8P1QpCOJyP8BFa1KcFaXwNUhafNku-XexfilwDJdF3430MNMJJuD9p/s1108/Screenshot%202023-09-09%20at%2017.27.53.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="410" data-original-width="1108" height="148" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSvnPabXmYTaWCtobgdWQqUyW3hSJ66pvlbhpOV6rSqxw0K4XDbDwuXMjmT0b8TKPBJoTd5OcWPDv7L2ib8mVOiWQ-_HJTEkEpCLI9mppwfraAGr2rVrjrCTkFPH836L8P1QpCOJyP8BFa1KcFaXwNUhafNku-XexfilwDJdF3430MNMJJuD9p/w400-h148/Screenshot%202023-09-09%20at%2017.27.53.png" width="400" /></a></div><br /><div><br /></div><div><br /></div><div style="text-align: justify;">With the power of Excel, I also did a quick sensitivity test above and I brought down all the multiples above by 5 points and we have the new intrinsic values showing between 9-18% downside.
.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Recall that Pepsico has suffered maximally 30% drawdown in the past, which we should not expect in most normal circumstances. So at 9-18% downside, I would say these no.s represents good downside cases. As such the risk reward is essentially minus 9-18% vs compounding at 8-10% annually which is had done i.e. 80-100% upside over my investment horizon of 5-7 years. This is good risk reward in my opinion, but I would want that margin of safety. Let’s see how we get there</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>Intrinsic Value</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Just using simple math, I would take the average of the four IVs above which brings Pepsico’s IV to c.$210 and this represents c.14% upside from today’s price. In order to get 30% margin of safety, I would think that the right entry price today should be c.$150-160. For full disclosure, my average price is closer to c.$80 many years ago. But at $160, I will be buying more.
.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To sum it all up, Pepsico is one of the world’s best compounder with strong core businesses in addictive products such as sugary drinks and savory snacks. The following chart says it best. According to Google, Pepsico’s share price was $2.08 this month in 1983, some 40 years ago. So if we bought then, the dividend we get this year is more than double our capital and our capital gain is 170x</div><div><br /></div><div><i>Huat Ah!</i></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGhKdolHioOdjo47KRqsBM3hrV_hleChKFYt-GmZ1zHvONUFiIk1Qak8mfNq4R_Cy5_IvdiexVBg5eJFn7T9skfYqHBbb997glXvS9HFkewiAneZyfCRcJj3v7wwal8Q8pLbYiiTKO7xRxOw5Tb-f_aAYRV1Fm5JqbF-HBZulHh7JTJ9eKtMlI/s1434/Screenshot%202023-09-09%20at%2017.28.55.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="810" data-original-width="1434" height="226" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGhKdolHioOdjo47KRqsBM3hrV_hleChKFYt-GmZ1zHvONUFiIk1Qak8mfNq4R_Cy5_IvdiexVBg5eJFn7T9skfYqHBbb997glXvS9HFkewiAneZyfCRcJj3v7wwal8Q8pLbYiiTKO7xRxOw5Tb-f_aAYRV1Fm5JqbF-HBZulHh7JTJ9eKtMlI/w400-h226/Screenshot%202023-09-09%20at%2017.28.55.png" width="400" /></a></div><br /><div><br /></div><div><i style="text-align: justify;">This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.</i></div><div><br /></div><div><br /></div><div><br /></div></div><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-85613240783117590322023-09-29T14:20:00.002+08:002023-09-29T19:29:35.636+08:00Partnership with Globe Newswire<p style="text-align: justify;">Globe Newswire provides salient financial news update and we have dedicated a page for readers to check out the news provided. Globe Newswire is part of the Notified platform. According to its website, Notified is the world’s only communications platform for public relations, investor relations, and event experiences to drive meaningful insights and outcomes. </p><p style="text-align: justify;">Notified works with more than 10,000+ global customers, from growing businesses and new IPOs to some of the world’s most recognizable brands. With a suite of world-class, award-winning communications solutions, Notified provides its clients the relevant tools to effectively reach and engage customers, investors, employees, and the media. With the partnership our infosite can also now leverage on this platform to share news and updates!</p><p style="text-align: justify;"><i>Huat Ah!</i></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-13298176996704534912023-09-15T16:06:00.001+08:002023-09-15T16:06:00.223+08:00SGX<p style="text-align: justify;"><i>This post first appeared on <a href="https://8percentpa.substack.com/p/investment-idea-5">https://8percentpa.substack.com/p/investment-idea-5</a></i></p><p style="text-align: justify;">Exchanges are the core hubs of financial activity when it comes to stocks, shares, some traded bonds and in today’s context, ETFs, derivatives and a suite of financial instruments As such, today’s idea is another Singapore company that has built its business as the electronic trading marketplace for stocks, bonds, derivatives and other financial instruments. </p><p style="text-align: justify;">The Singapore Stock Exchange or SGX is Asia’s most international multi-asset exchange and is one of the most profitable companies in the Straits Times Index with operating margins at c.50% and ROE at c.30%. It has been a phenomenal compounder since IPO. It started trading at 30c back in 2001 and the share price today is $9 and its market cap is slightly shy of SGD10bn while its revenue topped SGD1bn for the first time in 2021.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBKEGMIwjAYnMOAKU8yVomcPgYKuIJmrQqIM6J5eSO1axTqt2Bqy8xHLLKX5vc-aB24ARenbWh3zT8aNEF5uU--RUHaQpYkM8jidDYJJ1a9GR_w4d1GN6n_iBlHPiE3PFPe3rWHMODcTEBVjWIIT-oUtWmbN3F_LHiNhXpbL9Ld-rS4vDDmWmj/s1552/Screenshot%202023-09-03%20at%2012.55.39.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1552" data-original-width="1168" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBKEGMIwjAYnMOAKU8yVomcPgYKuIJmrQqIM6J5eSO1axTqt2Bqy8xHLLKX5vc-aB24ARenbWh3zT8aNEF5uU--RUHaQpYkM8jidDYJJ1a9GR_w4d1GN6n_iBlHPiE3PFPe3rWHMODcTEBVjWIIT-oUtWmbN3F_LHiNhXpbL9Ld-rS4vDDmWmj/w301-h400/Screenshot%202023-09-03%20at%2012.55.39.png" width="301" /></a></div><br /><p><br /></p><p><b>1. Fundamentals</b></p><p style="text-align: justify;">SGX, like many other global exchanges which are highly profitable, trades like a start up with its market cap at c.10x of its revenue (i.e. c.10x Price-to-Sales) but it is justifiable because profits are ridiculously high. The key difference: startups at 10x Price-to-Sales are usually still in red. They are selling a concept, a dream. Exchanges have made those dreams reality, churning out crazy profits. Importantly, valuations based on earnings, as we shall see later, make sense. We will also compare across different exchanges, they are all drowning in profits. </p><p style="text-align: justify;">Why are exchanges so profitable? </p><p style="text-align: justify;">First, the business has no cost of goods sold. The platform provides the venue for buyers and sellers to transact. There is some cost but it is negligible compared to a manufacturer requiring raw materials or airlines requiring heavy investments to buy airplanes. <b>Furthermore, when the platform establishes itself as the venue of choice, naturally it attracts more buyers and sellers. Like grocery stores and marketplaces, exchanges are about connectedness. The more you connect market participants, the more others will want to join.
In financial markets, this translates to liquidity, the ease to buy and sell shares, bonds and other financial instruments. </b>If you wanted to buy shares of Singapore Airlines, well, the Singapore Stock Exchange is most liquid exchange to buy from and for some retail investors, it is also the only place to get those shares because they do not have global brokerage accounts or are simply not comfortable to buy the depository shares or receipts on other exchanges. </p><p style="text-align: justify;">This brings us to the second point. Exchanges are also monopolies. At the height of the FAANG boom, if you wanted to trade the FAANG* stocks, the natural venue is NASDAQ. Before that, if you wanted to trade the cool China internet names or industrial names during China’s boom in 2003-07, you got to go to the Hong Kong Stock Exchange and in the 1980s, if you wanted Japan exposure, there is only the Tokyo Stock Exchange. Singapore stocks do not have the same drawing power but the SGX team has more made up for this shortcoming by targeting very niche instruments and becoming the marketplace for trading such instruments. </p><p style="text-align: justify;">To list a few examples, SGX today has positioned itself to be the exchange for commodities like iron ore, rubber, some petrochemicals and certain types of forex and futures derivatives. In the past, SGX was also a pioneer in launching REITs and ETF products in Asia and continues the lead today with a large number of listed REITs and it recently established itself as one of Asia’s largest international trading venue for Chinese fixed income ETFs.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBNhcLqtLt08QF4OUzJJQWtHLW35dsQMBpykyxbFm8o6g1r0lBFEHd2C3OEQq9-UMIr-ZVeGWbGdB0roQCLzxXU2pPdYIx1xjR9CcdjtmXrxh50JBwCnAHuNI9J7myvlBT09LcgCuTOsNWNprhNzwUKnzZ-3IOHuUvMvj9m3pftz0FFMefl-Fn/s1484/Screenshot%202023-09-03%20at%2012.57.45.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1484" data-original-width="1304" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBNhcLqtLt08QF4OUzJJQWtHLW35dsQMBpykyxbFm8o6g1r0lBFEHd2C3OEQq9-UMIr-ZVeGWbGdB0roQCLzxXU2pPdYIx1xjR9CcdjtmXrxh50JBwCnAHuNI9J7myvlBT09LcgCuTOsNWNprhNzwUKnzZ-3IOHuUvMvj9m3pftz0FFMefl-Fn/w351-h400/Screenshot%202023-09-03%20at%2012.57.45.png" width="351" /></a></div><p style="text-align: justify;">Building on core bases such as fixed income and cash equity trading and clearing, securities settlement and depository management, SGX has also branched into the indices and connectivity (co-location) businesses, which provides market data and collects licensing and subscription fees, which forms the base of its recurring revenue. This helps to reduce the volatility of earnings as these businesses are less impacted by market volume. By my estimate, recurring earnings from such operations contributes c.25% of overall profits and will continue to grow (see segment information above). </p><p style="text-align: justify;">The crux of the exchange business is also its scalability on the same platform with very little additional overheads required when growing revenue. This can drive supernormal profits thanks to the proliferation of electronic trading. Trading systems are not as expensive as banking systems and capex intensity is very manageable at c.3-4% of revenue (c.SGD30-45m). Additional trades simply create revenue that drops straight to profits. For banks, their systems need to handle ATM withdrawals, cross-border money transfer, fraud detection which incurs a lot more costs.</p><p style="text-align: justify;">Besides systems, SGX has labor cost as the other big cost component, as with most other exchanges. It employs c.1,200 people and pays out c.SGD240m in salaries. There is also processing costs and royalties but those are smaller compared to IT systems and salaries. The end result is this high margin (OPM at c.50%) cash generating machine churning out almost half a billion in net profits which is almost fully paid out as dividends annually.</p><p>This story is the same as we look across global exchanges:</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtLuwn58UXY_JYzRshvwrHcTApxUei-yEvuqRlixVQpg4S6odi6qVMiptVWrt-z-uL8aBMhP1shtGJRqYF0BNZJqxXC1PUjPmwdSTHjJAI4PRCyjzrluj3lBW6rWH_F25-G8Ra0135dcsiHIAf3e00TFzKZAs7lhp44IgWq_hy-9B5JoRKI-Hc/s1284/Screenshot%202023-09-03%20at%2012.59.29.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="600" data-original-width="1284" height="188" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtLuwn58UXY_JYzRshvwrHcTApxUei-yEvuqRlixVQpg4S6odi6qVMiptVWrt-z-uL8aBMhP1shtGJRqYF0BNZJqxXC1PUjPmwdSTHjJAI4PRCyjzrluj3lBW6rWH_F25-G8Ra0135dcsiHIAf3e00TFzKZAs7lhp44IgWq_hy-9B5JoRKI-Hc/w400-h188/Screenshot%202023-09-03%20at%2012.59.29.png" width="400" /></a></div><p style="text-align: justify;">SGX is also highly free cashflow (FCF) generative. It only had a single year of negative FCF in 2001 when the dotcom bubble burst. Since then, the company made c.SGD300-600m of FCF annually over the last 10 years which it is mostly paid out as dividends to shareholders. The largest beneficiary of which is Temasek, which owns 23% of SGX and therefore receives SGD60-120m annually which has more than covered the original investment cost after collecting this amount for the last many donkey years and yet the stake is still worth c.SGD2.3bn today. </p><p style="text-align: justify;"><i>*FAANG was the acronym for the hottest internet stocks from 2015-2022: Facebook, Apple, Amazon, Netflix and Google, before Facebook and Google changed their corporate names to Meta and Alphabet respectively.</i></p><p><b>Risks</b></p><p style="text-align: justify;">Is it too good to be too profitable? The affirmative answer to this question is one of the key risk for SGX. When the company has money coming out from its ears, management simply cannot resist the urge to spend. Over the last few years, SGX spent more than half a billion dollars buying companies and goodwill on its balance sheet is now SGD708m which is c.45% of its equity. If this is impaired, the share price would collapse. </p><p style="text-align: justify;">The second risk is competition and how can SGX stay relevant. As alluded above, Singapore is not Hong Kong or NASDAQ and we do not have sexy stocks or sectors that can drive investors to come to trade. The SGX model is built diligently on niche markets which could simply migrate elsewhere tomorrow. SGX’s management knew this and desperately wanted to create stronger business moats. In 2011, SGX tried to make a joint bid for the London Metal Exchange (LME) after failing to acquire ASX, the Australian Exchange. LME was ultimately sold to SGX’s arch rival HKSE for c.USD2.2bn.</p><p style="text-align: justify;">It is difficult to say if SGX have strong moats around its niche instruments. The mitigating factor is that SGX has managed to grow its revenue steadily from c.SGD200m in 2013 to more than SGD1bn today. In some ways, the SGX growth story draws parallel with Singapore’s own story. We have nothing yet we built a modern city state that thrives on efficiency and effectiveness. Things just work and foreigners loved it! Now Singapore is well-known as a global financial hub and that has contributed to SGX’s moat directly.</p><p><b>2. Technicals</b></p><p style="text-align: justify;">Despite the strong business model, SGX’s share price has gone through a roller coaster ride during the pandemic. It rode to a $11 high and then dropped almost 1/3 to $8 and is now closer to $9 today. The main reason could be the dividend, which wasn’t increased when everyone expected them to do so for FY ending Jun 2023. The other could the risk that we discussed above, the company is squandering away the money into bad M&As. </p><p></p><div style="text-align: justify;">For the above reasons, share price is not too far from the pandemic low of $8. Recall that this is a level at the height of global pandemonium during covid and market participants capitulated. The most bearish sellers sold out and the stage is cleared with all selling pressure abated. As such, prices then (around Mar 2020) marked a strong support level and we are at a mere 10% above that. This makes things interesting.</div><div style="text-align: justify;">$8 has been a very strong support for the stock over the last 5 years and if we go further back in time it was hovering at $6 for a long long time. But it is very hard to imagine SGX would trade to that level because that would mean that dividend can be c.6% and PER is at 13-14x which would make it the cheapest exchange (based on the peer list above) by 7-8 turns and provide us the opportunity to buy a high 15-20% sustainable ROIC at c.8% FCF yield. </div><p></p><p style="text-align: justify;">So I would draw the downside at $8 and not $6. Conversely, the upside is dictated by the recent $11 but also the valuations of its peers which can be as high as 30x PER, 19x EV/EBITDA and as low as 3% FCF yield. Assuming SGX can generate 50c in EPS in the near future and applying 25x to that, we are talking about the stock going to $12.5. This does not account for the net cash it has on its balance sheet. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisfGp_snFHu1h8vMqs2uKWXPFbfxfJV6GXRHx6fQricKXE8QV9kSjhn2-UXLKTBp-_oGmEu5cRaeQ3Foz-Dx2BJ_NPah6ibJfGLSS_5wb9Y13mSUROlGAdBqEO4VJZdfUByQi3-ga5JJ5htOTASYbhtJvl8vYgJ_aAAZtFPbfbZtYNV8dHwZK-/s1374/Screenshot%202023-09-03%20at%2013.02.45.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1016" data-original-width="1374" height="296" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisfGp_snFHu1h8vMqs2uKWXPFbfxfJV6GXRHx6fQricKXE8QV9kSjhn2-UXLKTBp-_oGmEu5cRaeQ3Foz-Dx2BJ_NPah6ibJfGLSS_5wb9Y13mSUROlGAdBqEO4VJZdfUByQi3-ga5JJ5htOTASYbhtJvl8vYgJ_aAAZtFPbfbZtYNV8dHwZK-/w400-h296/Screenshot%202023-09-03%20at%2013.02.45.png" width="400" /></a></div><p style="text-align: justify;">So in terms of risk reward, we have the risk of falling to $8, which is 20% downside from here, but the upside could be $11-12 which is 15-25% upside. Even if we assume the stock falls to $6 which is a scary 47% downside, we have strong compounding as the tailwind which means the stock should double over next 6-7 years. The strategy would be to buy on dips if the stock for some reason collapses to $6, then we will buy more and enjoy much more compounding in the years ahead.</p><p><b>3. Valuations</b></p><p style="text-align: justify;">As with the previous ideas, let’s use the usual three valuation methodologies (FCF, EV and PE) to triangulate to a more concrete intrinsic value. On FCF, we have it at c.SGD500m and using the same 3.5% FCF yield that we used for Vicom given its strong fundamentals, we get to SGD14.3bn and adding back its SGD200m cash, we get to SGD14.5bn of market cap. </p><p style="text-align: justify;">With Enterprise Value or EV, SGX will likely achieve an EBITDA of c.SGD700m in Jun 24. Using 15x which is near the industry average, we get to EV of SGD10.5bn and again adding back cash of SGD200m, we get to market cap of SGD10.7bn. </p><p style="text-align: justify;">Lastly, using Price Earnings Ratio or PER, SGX should be able to achieve Net Income of SGD500m in Jun 24 and using PER 23x which is again the industry average we get to SGD11.5bn and adding back its SGD200m cash, we get to market cap of SGD11.7bn. </p><p><i>Intrinsic Value </i></p><p style="text-align: justify;"><b>Taking the average of the three market caps, we arrive at SGD12.3bn and translating this into share price, we get to c.$11.5 in terms of intrinsic value per share (c.20% upside). </b>Co-incidentally, this is very close to the all time high reached during the height of the pandemic in mid 2021. Meanwhile we also get to collect c.3.6% dividends annually. </p><p style="text-align: justify;">To sum up, SGX is an interesting bet on the highly profitable stock exchange business model and the continual success of Singapore to be a bigger financial hub and SGX grows it business moats in the various niche it has created in REITs, commodities, futures and derivatives. This is a good Singapore compounder to own and to keep buying on dips as long as management does not squander away the money. </p><p>Huat Ah! </p><p>Main blog:
<br /><a href="http://8percentpa.blogspot.com/">
http://8percentpa.blogspot.com/</a></p><p><i>This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.</i></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com1tag:blogger.com,1999:blog-28086856.post-45229436045876685392023-09-02T00:50:00.004+08:002023-09-02T00:50:59.034+08:00Thoughts #32: Tharman wins!<p style="text-align: justify;">Singapore has its first Presidential Election in 12 years and the ruling party's chosen candidate Tharman Shanmugaratnam has won with an overwhelming 70.4% share of the vote. Our First Lady would be Jane Yumiko Ittogi, a lawyer of mixed descent whose father was Japanese but she grew up speaking Teochew in Singapore. Tharman would be Singapore's first elected non-Chinese President by the people. </p><p style="text-align: justify;">As the saying goes, the stock market is a voting machine in the short run but a weighing machine in the long run. We do not vote rationally and most market participants do not buy stocks rationally. Hence we see bubbles and crashes all the time and stocks can trade at 50x PER and people buy them knowing they are getting 2% earnings yield ignoring the fact that they can buy T bills and earn 3+% <i>risk free</i>.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzhivs_da41eO_ehjKsV1mVJc1yMrdlL3q7gTDNQ4t-fSLEMoUIGMjZcnjmW-rDUZ0TkzUSlMi6n41k3sHW9cds-RrBJ4r3gcSSUU8uY3BjlfocUrSLBia11TJ1BA6us0m5PX2wdr2jn6qakcA-mukx9UDJteixrPiD5dvcpuINhFRYKUOenYW/s746/Screenshot%202023-09-02%20at%200.50.13.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="608" data-original-width="746" height="261" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzhivs_da41eO_ehjKsV1mVJc1yMrdlL3q7gTDNQ4t-fSLEMoUIGMjZcnjmW-rDUZ0TkzUSlMi6n41k3sHW9cds-RrBJ4r3gcSSUU8uY3BjlfocUrSLBia11TJ1BA6us0m5PX2wdr2jn6qakcA-mukx9UDJteixrPiD5dvcpuINhFRYKUOenYW/s320/Screenshot%202023-09-02%20at%200.50.13.png" width="320" /></a></div><p style="text-align: justify;">However, in the long run, the dues will always come. The stock market is a weighing machine and weighing machine never lies. Mr Tharman's track record as a formidable politician provided him the win today but will be judged again during his term as President. Hopefully he can propel Singapore to ascend further in the global arena and more of our stocks can trade at higher valuations, validating what he said about Singaporeans enjoying the Singapore premium.</p><p style="text-align: justify;"><i>Huat Ah!</i></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-12076658554870341802023-08-18T10:45:00.152+08:002023-09-02T00:51:49.791+08:00China's Lehman Moment<p><span style="text-align: justify;">When the GFC broke out, we discussed that the repercussions will be felt worldwide across many years. In 2015, it hit Europe hard with the Grexit crisis and it was said that Asia and China needs to see its own Lehman moment. </span></p><p style="text-align: justify;">I think we just witnessed that - Country Garden's default and the collapse of Evergrande.</p><p style="text-align: justify;">The buildup of woes at Evergrande was well known but no one thought that the biggest developer Country Garden could face issues. Now, all is laid bare and we know how deep the issues are. Property is a huge part of China's economy and when this piece of the chain breaks, it threatens the entire financial system. China's GDP growth may fall below 5% and there are concerns about China going into deflation, following Japan's experience in the 1990s.</p><p style="text-align: justify;">Chinese authorities recently launched a stimulus bid by allowing major banks to reduce mortgage and deposit rates to boost sentiments. The stock market reacted positively for two days but the bullishness has since faltered as investors confidence remained low. The draconian measures to curb the Chinese private sector, notably private education and internet / gaming sectors remained fresh on people's minds and many market participants are still licking their ghastly wounds.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFMuTr1gUP_hXYKJUST63lbnh5FOnChYi7h_p2eY0c5D1FjQpEYyJJ-Wn0MB7cWP6yLtQ3W9bPq-jjt4UPOFsOuAYQEqDD-6i4C9odS02VyGqbm_xYssh9gt8expysZDRFlIlW6eJ4d-dU_NSzLDaPxkf-TgTKowUkyFs3nzV7NaBI--AoDcL5/s1358/Screenshot%202023-09-01%20at%2020.32.57.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="996" data-original-width="1358" height="294" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFMuTr1gUP_hXYKJUST63lbnh5FOnChYi7h_p2eY0c5D1FjQpEYyJJ-Wn0MB7cWP6yLtQ3W9bPq-jjt4UPOFsOuAYQEqDD-6i4C9odS02VyGqbm_xYssh9gt8expysZDRFlIlW6eJ4d-dU_NSzLDaPxkf-TgTKowUkyFs3nzV7NaBI--AoDcL5/w400-h294/Screenshot%202023-09-01%20at%2020.32.57.png" width="400" /></a></div><p style="text-align: justify;">The representative stock would be Tencent (chart above). Once the darling of Chinese stock market, along with Alibaba, it is now trading not far from its pandemic low and the drawdown from 2021 to the bottom this year was a whopping 70%. The broader market is similarly trading near all time lows. See 2828 HK below.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5ffehxJYJQpmjJ_S268lom2sdk7u2LsmQ7Bjh86juhjh-IEwoMkO0U_iQt_zEaNhuhTegHPcqVwKFNUNLhbGf2RZKduz60uekDsacoolIBperEXU-chemHA1M2QMhdqdU1FLdl5_jDgblqnSYL_C3ZbsGU0ksd-Af0wWPauo45HqJap7no7ZI/s1356/Screenshot%202023-09-01%20at%2020.42.04.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1012" data-original-width="1356" height="299" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5ffehxJYJQpmjJ_S268lom2sdk7u2LsmQ7Bjh86juhjh-IEwoMkO0U_iQt_zEaNhuhTegHPcqVwKFNUNLhbGf2RZKduz60uekDsacoolIBperEXU-chemHA1M2QMhdqdU1FLdl5_jDgblqnSYL_C3ZbsGU0ksd-Af0wWPauo45HqJap7no7ZI/w400-h299/Screenshot%202023-09-01%20at%2020.42.04.png" width="400" /></a></div><p style="text-align: justify;">China has been the world's growth engine for the past two decades and with this engine gone and with US equity valuation still high, it is unclear to me how markets can continue to rally. With risk free rate at 3-4%, the big question is why would anyone buy anything at 40-50x PER? We might be due for a big correction but as ex-Citi CEO Chuck Prince famously said in 2007:</p><p style="text-align: justify;"><i>"As long as the music is playing, you gotta keep dancing"</i></p><p style="text-align: justify;">So, we continue to buy 50x PER names and not worried about just getting 2% earnings yield even though it doesn't make sense any more because risk free rate (or yield) is now 3-4% in the US. Interestingly, we can buy Chinese banks at 5x PER and receive 6% dividend yield but no, investors will still prefer 50x PER concept stock in the US rather than invest in China.</p><p style="text-align: justify;">Many global investors believe that China could be an un-investable market as long as Xi continues to rule with an iron fist with the wrong advice and motivation from his top echelons advisors and inner circle. While he is not Putin, he needs to be more pragmatic and focus on the economy rather than his ego and China needs to return to the pre-pandemic days of embracing innovation, restore diplomacy and providing entrepreneurs freedom to grow their business domestically and then expanding globally to challenge western rivals.</p><p style="text-align: justify;">Let's hope that can happen.</p><p style="text-align: justify;"><i>Huat Ah!</i></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-50169834797770105152023-08-03T23:01:00.000+08:002023-08-03T23:01:00.162+08:00Vicom<p style="text-align: justify;">I have written about this name in 2017 and not much has changed since then. The stock did well and the thesis played out and it seemed that it should continue to perform. The company entered a rough patch during COVID and I think this presents an opportunity for us to buy / add today. </p><p style="text-align: justify;">The following is what I wrote on <a href="http://8percentpa.substack.com">Substack</a> a few months ago and am reproducing here.</p><p style="text-align: justify;">Vicom is Singapore's leading testing and inspection company with two core businesses. The first is the vehicle inspection business which it has 70% market share across 7 inspection locations in Singapore. The second business housed under the brand SETSCO does industrial testing and calibration. It also provides certification services to various industries. The important ones are construction, oil and gas, aviation amongst food, sanitation and other test-heavy industries.</p><p><b>1. Fundamentals</b></p><p style="text-align: justify;">I believe little has changed since my last analysis a few years ago. Vicom enjoys very strong fundamentals with stable demand that comes from regulatory requirement for vehicle testing. It conducts tests for 500,000-700,000 vehicles annually across its 7 test centres in Singapore. There is room to increase pricing as with everything else in Singapore.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM5geg3_Kl6OyGL_4FDiEK5hzsP1Daohux5jL_V_iLeGXUryzEq7Zx9zf8guQ0ySGJrPlSjLp6tWHMbJ0S0SA_wH0l6WxKEnFCbhcTT0Z9it9KZC7fLWWyeeKswsUlqHYGVb64da22djWrKKGgJC2c5XRE3kDnVBLtXQhOS0nx7oUe0eBWw6vu/s535/Screen%20Shot%202023-06-22%20at%2011.21.01.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="409" data-original-width="535" height="306" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM5geg3_Kl6OyGL_4FDiEK5hzsP1Daohux5jL_V_iLeGXUryzEq7Zx9zf8guQ0ySGJrPlSjLp6tWHMbJ0S0SA_wH0l6WxKEnFCbhcTT0Z9it9KZC7fLWWyeeKswsUlqHYGVb64da22djWrKKGgJC2c5XRE3kDnVBLtXQhOS0nx7oUe0eBWw6vu/w400-h306/Screen%20Shot%202023-06-22%20at%2011.21.01.png" width="400" /></a></div><p style="text-align: justify;">SETSCO which makes up its second business in industrial testing, benefits from the global ESG* global trend. There will be more requirements and demands for tests and certifications in various industries. Singapore, the South East Asia’s hub for many industries, can also attract companies to do tests from other countries and SETSCO stands to benefit from this.</p><p style="text-align: justify;">The company stopped disclosing the business splits years ago. We can only speculate that revenue is split roughly half in each and margins also more or less similar at 20+ percent. Putting the two businesses together, Vicom comes out as a solid compounder. Its revenue has grown from c.SGD50m in 2003 to c.SGD100m today. Similarly, its operating profit expanded from c.SGD11m to SGD30m with margins maintaining at 20-30% throughout the last 20 years</p><p style="text-align: justify;">The ompany has never had a single year of negative free cashflow (FCF). It averages c.SGD20m over the last 20 years and is poised to generate a higher average over the next 10 years. In some good years, it has achieved over SGD30m and as you can imagine, cash has piled up nicely, reaching SGD100m back in 2017 but is at SGD65m today after returning some to shareholders. Its ROE is a healthy 18-20%, mostly on the back on strong margin and high asset turnover</p><p style="text-align: justify;"><b><i>Risks</i></b></p><p style="text-align: justify;">That said, Vicom is not without risks. Every investment idea will have downside and it is vital to get these out in the open. Nothing is worse than being blindsided by obvious risks that we should have considered. Even when we have identified the risks, we have to keep monitoring and make sure things are under control. It will take willpower and courage to cut loss when things go wrong. Case-in-point is Hyflux, Singapore’s poster child in water purification that went bankrupt. I lost 100% of my capital even though I identified the key risk!</p><p style="text-align: justify;">For Vicom, the key risk pertains to its passenger vehicle business. While this business does not account for the majority of revenue (only c.30% or less of overall revenue by my estimate), it is very visible and top of mind. Analysts and market participants immediately think about the drop in the number of passenger vehicles in Singapore when stratospheric COE prices and vehicle quotas are announced. These announcements come regularly!</p><p style="text-align: justify;">It may be true that the number of passenger vehicles in Singapore will not increase much. But the majority of inspections are actually made on commercial vehicles (trucks, lorries, buses and also taxis) and importantly, there is room to raise prices to offset any volume decline. As such, the bigger risk, in circumspect, is the cyclicality that comes into Singapore’s economy for both vehicle inspection and industry testing and certification businesses</p><p style="text-align: justify;">Vicom's end customers are subjected to the whims and fancies of business cycles. This is more pronounced in Singapore because we are a small open economy in the global ocean with big fishes generating bigger waves. In 2016, Vicom suffered a small revenue decline in more than a decade as the global economy plunged into crisis with China slowing down and Europe imploding on Grexit and Brexit. Although the share price did not react much, it did stagnate until 2019 and only crossed $1.5 for the first time around June in the same year.</p><p style="text-align: justify;">Then in Mar 2020, at the height of the pandemic, share price suffered a 20% drawdown and fell through $1.5 again. On hindsight, that was also a good opportunity to add to this rare Singapore compounder</p><p style="text-align: justify;"><b>2. Technicals</b></p><p style="text-align: justify;">This is a good segue to talk about technicals. As mentioned, all stocks have risks and the even best compounders suffer from drawdowns. With Vicom, we face a similar situation as the share price dropped from $2.1 to $1.9, c.10% decline in the last few months of 2022. This was likely due to:</p><p></p><ul style="text-align: left;"><li style="text-align: justify;">a slight decrease in dividend and special cash over the calendar year when comparing 2022 against 2021 (8.5c vs 9.2c). Singapore shareholders hate dividend cuts. So, they voted with their feet (or sell orders in this case).</li><li style="text-align: justify;">the relentless increase in COE prices bringing the initial cost of owning a car to SGD150,000-200,000 which was enough to buy a small 3-room HDB flat just a decade ago. Market is postulating that the Singapore car population will decline, therefore the number of inspections will decline and hence the share price weakness</li></ul><div style="text-align: justify;">This presents the opportunity for buying as the risk reward is now favorable. We shall further illustrate below:</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCC37jyp14wxZ79O7PiMgWG9rTeAKf5_7Td-7GGMsbQdPPkneDi_45rJv7vQ5LqDbyppKX491sHYy3kEshpSsFwrNCJ1eugOlmeDngEe7zShHMNSeGLhv9919R9dNVbVz3Oa6-quveaNTHBgT8mDWVbuTimJGFQlGvzhsNfpIeGw1mQpovyUK_/s1101/Screen%20Shot%202023-06-22%20at%2011.24.09.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1092" data-original-width="1101" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCC37jyp14wxZ79O7PiMgWG9rTeAKf5_7Td-7GGMsbQdPPkneDi_45rJv7vQ5LqDbyppKX491sHYy3kEshpSsFwrNCJ1eugOlmeDngEe7zShHMNSeGLhv9919R9dNVbVz3Oa6-quveaNTHBgT8mDWVbuTimJGFQlGvzhsNfpIeGw1mQpovyUK_/w400-h396/Screen%20Shot%202023-06-22%20at%2011.24.09.png" width="400" /></a></div><div><br /></div><div style="text-align: justify;">The pandemic low for Vicom was $1.75 in Mar 2020. We always refer back to this period because the market exhibited complete pandemonium as panic and uncertainty gripped the world back then. As such, share prices around this time should mark the low price where shellshocked shareholders cowering in fear will capitulate when everything is messed up.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This is not to say that prices will not fall below this level. We have seen a lot of stocks trade below their Mar 2020 lows, like Netflix (until recently) and Peloton, the Netflix + bicycle gym stock darling of 2020-21 (PTON US) and Zoom Video Communications (ZM US). But for Vicom, with its stable business profile, $1.75 should represent some sort of threshold and we are here today!</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In terms of risk reward, downside is limited from here, but the upside could be $2.4, which was the recent high. This is c.26% upside. Since this is a compounder, assuming that it compounds at 7%, the stock should double in 10 years (the famous rule of 72). So we are talking about c.9% downside but c.40% upside over a few years. Meanwhile we are also getting c.4% dividend annually</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">To add a cherry on top of the icing, Vicom is 67% owned by Comfort Delgro, the transportation conglomerate in Singapore that operates taxis, buses and the North East Line. For historical reasons, and because its fleet of taxis represent one of Vicom’s largest source of business, it has held to this 67% stake and suffers a 33% leakage to minority shareholders.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">If Vicom gets too cheap, Comfort Delgro (CD) can simply take the whole company private. This is how the math can work. To buy the remaining stake that CD does not own today, it will require approximately SGD260m. This is assuming we put a 20% premium to buy out Vicom at market cap of SGD800m. Vicom has SGD65m on its balance sheet and churns out, say, another SGD75m in 3 years. So, technically, CD only has to fork out SGD120m (SGD260m - SGD140m). At a certain lower share price, for CD, putting some cash upfront to take Vicom private pays for itself.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Therefore we always have this situation that some kind of floor will be put on the share price. Of course, this is a theoretical exercise. We do not know whether CD will ever take Vicom private. But history has also shown that past share price drawdowns rarely exceeds 30%.</div><div><br /></div><div><b>3. Valuations</b></div><div><br /></div><div>Intuitively, we know Vicom can be worth a lot. Let’s use the usual three valuation methodologies (FCF, EV and PE) to triangulate to some intrinsic value. On FCF, we have alluded to Vicom capable of generating c.SGD30m per year. It did c.SGD18m last year and to be conservative, let’s assume it would do SGD25m on average for the next few years. Assuming it should trade at 3.5% FCF yield given its strong fundamentals, we get to SGD714m and adding back its SGD65m cash, we get to SGD780m of market cap</div><div><br /></div><div>Based on experience, companies with strong business moats seldom trade above 5% FCF yield (except during crisis) and it gets to expensive to buy them at 2+% FCF yield. As such, I believe 3.5% FCF yield is a good level to get in.</div><div><br /></div><div>With Enterprise Value or EV, Vicom will likely achieve an EBITDA of c.SGD45m in Dec 23. Using 15x which is near its last 5 year historical average, we get to EV of SGD675m and again adding back cash of SGD65m, we get to market cap of SGD740m.</div><div><br /></div><div>Lastly, using Price Earnings or PE, Vicom should be able to achieve Net Income of SGD30m in Dec 23 and using PER 25x on the basis of its inherently strong business, we get to SGD750m and adding back its SGD65m cash, we get to market cap of SGD815m</div><div><br /></div><div><i><b>Intrinsic Value</b></i></div><div><br /></div><div style="text-align: justify;">Taking the average of the three market caps, we arrive at SGD780m and translating this into share price, we get to c.$2.2 in terms of intrinsic value per share. This is 28% upside from today’s price and not as mouth-watering but that’s simply a function of the market’s efficiency. As we hold out stock for a couple of years and wait for compounding to do its job, we should see the stock going back to the recent high of $2.4 and exceed that in time to come.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>Huat Ah!</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.</i></div><div><br /></div><div><br /></div><p></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-22742058183051644042023-07-20T23:30:00.003+08:002023-07-20T23:30:00.137+08:00Books 20#: Play Nice But Win<p style="text-align: justify;">Michael Dell depicted his life story in this riveting book starting from his high school days to his battles with Carl Icahn and finally the birth of Dell Technologies, a USD36bn market cap company today. It was an eye-opening journey into the world of private takeovers, corporate sabotage and how to play nice but win. This book really resonated with me and hence this post to detail my takeaways.</p><p style="text-align: justify;">1. Form your team</p><p style="text-align: justify;">This is a lesson that most leaders would know. You cannot do much alone. Even Superman needs the Justice League and we have to assemble our own Avengers team to take on the world. Not just any team, but the <i>Avengers</i> team, the best people you can find. Early on in Dell's journey, he sought out people who can help him and that was how he kept scaling and grew Dell Technologies to what it is today.</p><p style="text-align: justify;">2. Persistence</p><p style="text-align: justify;">In Michael Dell's words, this is the <b>all-important quality and we must always persist and not be defeated by failures</b>. <b>He kept mementos to remind him in bad times how fortunate he was and that kept him going. </b>We give up too early sometimes and that happens a lot with younger and younger generations. I think this is a good reminder for everyone to simply persist.</p><p style="text-align: justify;">3. Dell Process</p><p style="text-align: justify;">Somewhere in page 284, Dell talked about a proven <b>Dell process, when faced with difficult decisions, lay down the Facts and Alternatives and then decide on the Choice and Commit to it. </b>These are simple truths but in our busy lives today, we tend to just forget and decide base on emotions and other trivialities. </p><p style="text-align: justify;">In my own experience, it is very much about discussing with other smart thinkers. All my bad investment experiences were made alone. I thought it was a good idea myself and went ahead and bought and sold stuff. Only to suffer the consequences. <i>Somehow, for me, talking to people clarifies most things and allow for better decision making. As such, it is important to cultivate a good decision making process</i>, just as Dell did. He even said it is proven! Q.E.D.</p><p style="text-align: justify;">4. Play Nice But Win</p><p style="text-align: justify;">The most riveting parts of the book has to be his battles with corporate greenmailer Carl Icahn. When facing adversaries, all the above comes in. You need a team, you have to be persistent and you need a good process. Dell fought hard and finally triumph and he did play nice and win. <b>It is not easy because most people don't play nice. If you do, you are playing with one arm tied behind your back.</b> But it is possible. Michael Dell proved it. Just so hard that most people give up. </p><p style="text-align: justify;">That said, <i>Play Nice But Win</i> is a motto that really resonates. Difficult to achieve but the victory that comes afterwards makes it that much sweeter. </p><p style="text-align: justify;">Huat Ah!</p><p><br /></p><p><br /></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-25900601540117141582023-07-07T00:00:00.001+08:002023-07-07T00:00:00.186+08:00Charts #49: HK property prices<p style="text-align: justify;">I recall thinking HK was the ultimate litmus test on whether property in Asia always goes up. With all the issues, protests and 2047 - full return to China looming, can prices actually hold?</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu8nuI3EctkZJGSmtTLehZi1UiHf21vVaLS-XK8VkNfdIlrwetTxkJqHMjWI6dQsJEA7DHIkxLjd_0XzDAwg9nIxzAFvPkCnBmipVQNob08DGlDPFTzz2-yXsn0HtDUtVT80FKN2C8YMfcnuJdyNHNs4psJknBIXWC97dth1Rp04hMdxkI82mc/s749/Screen%20Shot%202023-06-22%20at%2022.29.07.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="728" data-original-width="749" height="389" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu8nuI3EctkZJGSmtTLehZi1UiHf21vVaLS-XK8VkNfdIlrwetTxkJqHMjWI6dQsJEA7DHIkxLjd_0XzDAwg9nIxzAFvPkCnBmipVQNob08DGlDPFTzz2-yXsn0HtDUtVT80FKN2C8YMfcnuJdyNHNs4psJknBIXWC97dth1Rp04hMdxkI82mc/w400-h389/Screen%20Shot%202023-06-22%20at%2022.29.07.png" width="400" /></a></div><p style="text-align: justify;">Over the last few years, data has shown that what goes up must come down. On the broad aggregate basis, prices have fallen 5-7%. Amongst the developed cities in Asia, it is by far the worst performing city on a 5 year basis. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCjirut6Hzxj7UH58-cghPxStYSpWxRt4STRvY1xJjOTgyl6lZxX3QFFZVCrr_6qXKCny0FmdDCkOBccO7dqYPmP7gngXmes5IStclg9ZNlIQOaKZJ2CZoQegegkBmPMVGfWjvDqxlF26ZgLEs3sd65B-xYrPe4-g98fjfUEo78VGOsK_g1aUn/s743/Screen%20Shot%202023-06-22%20at%2022.29.49.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="477" data-original-width="743" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCjirut6Hzxj7UH58-cghPxStYSpWxRt4STRvY1xJjOTgyl6lZxX3QFFZVCrr_6qXKCny0FmdDCkOBccO7dqYPmP7gngXmes5IStclg9ZNlIQOaKZJ2CZoQegegkBmPMVGfWjvDqxlF26ZgLEs3sd65B-xYrPe4-g98fjfUEo78VGOsK_g1aUn/w400-h256/Screen%20Shot%202023-06-22%20at%2022.29.49.png" width="400" /></a></div><p style="text-align: justify;">A closer look at the price index chart shows that the drop is worse. From the peak of the index at 400, it has dropped c.15%. That means that some properties could be deep in red, having fallen 30-40%. Those owners could be in a lot of financial trouble.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmcTJWhn-OoyaUWsFvqhNLRGBh9U1yTZhnVEBKSjWrukCLljrADjrtMiPGFQ_UefKBQfai4a49dhQ4db6Xl49pFsB-O6HAdoL2OqebyyR2VSPgrmAJ8Oz_TqI41sroqELp7ZKj-M7AXv7FpUA-wGnPbwOKiizIdu7ilWmkUgzlW-Pa1R3S9Zlq/s755/Screen%20Shot%202023-06-22%20at%2022.37.56.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="483" data-original-width="755" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmcTJWhn-OoyaUWsFvqhNLRGBh9U1yTZhnVEBKSjWrukCLljrADjrtMiPGFQ_UefKBQfai4a49dhQ4db6Xl49pFsB-O6HAdoL2OqebyyR2VSPgrmAJ8Oz_TqI41sroqELp7ZKj-M7AXv7FpUA-wGnPbwOKiizIdu7ilWmkUgzlW-Pa1R3S9Zlq/w400-h256/Screen%20Shot%202023-06-22%20at%2022.37.56.png" width="400" /></a></div><p style="text-align: justify;">Our own little red dot has done well so far. But we never know. My advice would be, don't trade your only property. Don't be too greedy and over leverage on multiple properties and in today's interest rate environment, pay down that mortgage fast!</p><p><br /></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-65370098942019902072023-06-15T23:30:00.058+08:002023-06-15T23:30:00.137+08:00Alphabet / Google<p><i>
This post first appeared on <a href="http://8percentpa.substack.com">8percentpa.substack.com</a>, as part of a new effort to share investment ideas. It is updated in Jun 2023.</i></p><p style="text-align: justify;">Alphabet / Google (ticker: GOOG) needs no introduction. The company is the largest search engine in the world and the giant in the world of online advertising. It controls 40% of the online advertising market while Meta / Facebook has another 20%. Today, GOOG generates the bulk of its revenue from ads via search and its own services (such as Gmail) and Google Networks - websites that hosts its ads. GOOG also provides a slew of critical services that we all know well: Youtube, Google Maps, Android, Chrome and DeepMind amongst many others. In 2015, CEO Larry Page announced that a parent company Alphabet will be created to house Google and its sprawling empire of subsidiaries. </p><p style="text-align: justify;">Thanks to shrewd business strategies and acquisitions, GOOG has managed to grow phenomenally almost without interruption from the beginning. The world might not have seen such a growth juggernaut. It has one quarter (or maybe two) of revenue decline since IPO! The company grew well above 20%YoY for more than a decade and continues to grow into new verticals which it can. These include cybersecurity, cloud services and A.I. enabled voice search could become very big with proliferation of smart speakers in our homes. </p><p style="text-align: justify;">Despite recent noise about chatGPT and upcoming competitors, we believe the company will manage this transition better than it did during the PC-to-smartphone switch years ago.
One test of a strong business moat is how our lives would be impact if hypothetically, the company cease to exist. For example, what if there had been no Pfizer, how would our lives have changed? Well, maybe a significant percentage of us wouldn’t be alive since there we won’t be vaccinated for COVID-19. Similarly if Alphabet / Google disappears today, a billion or more people including most of us here will not be able to function.
So, the question is, what if chatGPT disappears today? </p><p><i>Meh, let’s see what’s new on Google News.</i></p><p><b>1. Fundamentals</b></p><p style="text-align: justify;">We showed <a href="http://8percentpa.blogspot.com/2023/02/charts-47-alphabet-google.html">a stylized version of Google's revenue breakdown</a>, courtesy of FourWeekMBA a few weeks ago. Google's own disclosure has always been super high level. The following is from its recent quarterly earnings results.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0QC9F2t8CYK8JPFsy9FTO70RZYfQ2wpkeHyXi5XyOFqEyxR0oOVf2fiviJNXijaJxoJqPbzb_O5ZkDnrdtWEBsP63cbiZYxd5hNXr4OI1A51aHd_DmEY6UBpsevSrl7gB42fe6z7IDTdTOULrWcT0DN9L69AN6QQjOvuk0yPk7-7bFYXHLQ/s710/Screen%20Shot%202023-06-13%20at%2021.35.44.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="534" data-original-width="710" height="301" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0QC9F2t8CYK8JPFsy9FTO70RZYfQ2wpkeHyXi5XyOFqEyxR0oOVf2fiviJNXijaJxoJqPbzb_O5ZkDnrdtWEBsP63cbiZYxd5hNXr4OI1A51aHd_DmEY6UBpsevSrl7gB42fe6z7IDTdTOULrWcT0DN9L69AN6QQjOvuk0yPk7-7bFYXHLQ/w400-h301/Screen%20Shot%202023-06-13%20at%2021.35.44.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><span style="text-align: justify;"><br /></span></div><p style="text-align: justify;">Amazingly, GOOG generates more than the GDP of Singapore with c.70% of its revenue from search and Google Networks, platforms that uses Google to manage advertising. The other three buckets are important by themselves. Youtube, something most kids and teenagers cannot live without today, Android, something most phone users cannot live without today and last Google Cloud, an upcoming formidable competitor to Amazon's AWS and Microsoft's Azure. Perhaps, someday, most business cannot live without these cloud services.</p><p style="text-align: justify;">Here's following snapshot of GOOG’s important financial numbers and ratios: </p><p></p><ul style="text-align: left;"><li> Revenue (2022): c.USD282bn </li><li> 3 year revenue growth 23% </li><li> Gross margin 55% & Operating margin 26% </li><li> ROE 24% & ROIC 22%</li><li> FCF USD67bn and FCF yield 4.3% (Jun 2023) </li><li> Net cash on balance sheet c.USD90bn</li></ul><p></p><p><b>2. Risks</b></p><div><p style="text-align: justify;">Every investment has risks and Google's biggest threat today is none other than ChatGPT. As a frequent user, I must say I see how ChatGPT can disrupt Google. It is simply a better way to get answers. That said, Google has launched its own A.I. called Bard. Given Google's early foray into A.I. with its c.$500m purchase of DeepMind in 2014, it should have a good headstart in this arms race. I would believe that the verdict is not out yet. Even if Google eventually loses, we will have time to get out.</p><p style="text-align: justify;">The bigger risk today is anti-trust and lawsuits. Google has dominated the search world for more than two decades and governments around the world has tried to break this dominance. According to chatGPT, the following are the biggest fines against Google over the last 10 odd years.</p><ol style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #444654; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #d1d5db; counter-reset: item 0; display: flex; flex-direction: column; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; list-style-image: initial; list-style-position: initial; margin: 1.25em 0px; padding: 0px 0px 0px 1rem; white-space: pre-wrap;"><li style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px; padding-left: 0.375em;"><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px;"><i><span style="font-size: x-small;">European Commission Fine (2018): In 2018, the European Commission imposed a record-breaking fine of €4.34 billion ($5.1 billion) on Google for violating antitrust laws. The Commission found that Google had abused its dominant position in the mobile market by imposing illegal restrictions on Android device manufacturers and mobile network operators.</span></i></p></li><li style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px; padding-left: 0.375em;"><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px;"><i><span style="font-size: x-small;">European Commission Fine (2017): In 2017, the European Commission fined Google €2.42 billion ($2.7 billion) for favoring its own shopping comparison service in search results and demoting rival services. The Commission considered this practice to be an abuse of Google's dominant position in the search engine market.</span></i></p></li><li style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px; padding-left: 0.375em;"><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px;"><i><span style="font-size: x-small;">European Commission Fine (2020): In 2020, the European Commission fined Google €1.49 billion ($1.7 billion) for abusive practices in the online advertising market. The Commission found that Google had imposed restrictive clauses on third-party websites, preventing them from displaying ads from Google's competitors.</span></i></p></li><li style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px; padding-left: 0.375em;"><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(69,89,164,.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; margin: 0px;"><i><span style="font-size: x-small;">Federal Trade Commission (FTC) Fine (2012): In 2012, Google agreed to pay a $22.5 million fine to settle charges by the FTC. The charges were related to Google's tracking of users of Apple's Safari browser without their consent, in violation of an earlier privacy settlement between Google and the FTC.</span></i></p></li></ol></div><p style="text-align: justify;">As we know, ChatGPT is known to have accuracy issues. So we need to verify the details. A simple search showed that EU indeed fined Google c.USD5bn in 2018 and the litigation process is still underway today. Google's legal team has 400 lawyers and Google's court cases have its own <i>wikipedia page</i> with a long list of past lawsuits. </p><p><a href="https://en.wikipedia.org/wiki/Google_litigation">https://en.wikipedia.org/wiki/Google_litigation</a></p><p><b>3. Technicals</b></p><p></p><p style="text-align: justify;">GOOG peaked at c.$150 and was at c.$100 just a few months ago which was attractive. Share price has since rallied to $123 and I would argue that the margin of safety is no longer big enough. In market cap terms, it is USD1.6trn today and USD2trn at its peak. Share price bottomed at $84 in Nov 2022. At the height of covid in Mar 2020, it was c.$50. The stock went for a 20 for 1 split in July 2022 and these are no.s post split. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfsLpc_vh930vXbdx527yyS7lXWFVVbDInA8-NX3XlOvQsKr2wqgTzC57qZbKVtJ59kSB6AnM2PFrO6x_0zEdtm3LENqSJc4ixuQp5tsnBkpcq90HK_PI3-VVei3-6a5OdkH_ofAJepgE8dslZMXAQVWoQkVGfK_kxFIetYfUkrJ-DHnr1tA/s677/Screen%20Shot%202023-06-13%20at%209.21.10.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="513" data-original-width="677" height="303" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfsLpc_vh930vXbdx527yyS7lXWFVVbDInA8-NX3XlOvQsKr2wqgTzC57qZbKVtJ59kSB6AnM2PFrO6x_0zEdtm3LENqSJc4ixuQp5tsnBkpcq90HK_PI3-VVei3-6a5OdkH_ofAJepgE8dslZMXAQVWoQkVGfK_kxFIetYfUkrJ-DHnr1tA/w400-h303/Screen%20Shot%202023-06-13%20at%209.21.10.png" width="400" /></a></div><p style="text-align: justify;">If we use $50 as the low, $123 for current price at $150 for the upside. The risk reward is now skewed towards the downside. We have to make the assumption that share price can see $200 or more before the risk reward becomes palatable. As such, based on the above, Google is not too attractive for entry today, but since I am holding on to it, I will continue to do so unless there are more attractive similar opportunities out there.</p><p><b>4. Valuations</b></p><p style="text-align: justify;">The chart below compares Google with its associated peers which may or may not be direct competitors. We can see that Google trades below this peer group average <i>for all measures</i> (PE, EV/EBITDA, Price-to-Sales or PS and FCF yield). It is worth noting that Free Cashflow (FCF) was USD11-13bn in 2012 and if we extrapolate its growth from then till now, it should be able to generate USD100bn in FCF in a few years alongside Apple. Although Apple would probably also grow its FCF bigger, maybe to USD150bn!</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8boS6aumXpyoPy2yxSlj10L-vEtL-A9_vJisN_mAEX7mOfaqvE96GfMVWrm2DrvQ_QVHc8NbXa6LpWpvVo6rf4wBj4X8qCnhjfOfur4j3YM5Z76M42nfwj64Vit4kOcNs7YRIKMrKOelbGgO4H8mEA2nerL-EICKnwf6uIASVLrObNavsng/s728/Screen%20Shot%202023-06-13%20at%2021.47.51.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="243" data-original-width="728" height="134" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8boS6aumXpyoPy2yxSlj10L-vEtL-A9_vJisN_mAEX7mOfaqvE96GfMVWrm2DrvQ_QVHc8NbXa6LpWpvVo6rf4wBj4X8qCnhjfOfur4j3YM5Z76M42nfwj64Vit4kOcNs7YRIKMrKOelbGgO4H8mEA2nerL-EICKnwf6uIASVLrObNavsng/w400-h134/Screen%20Shot%202023-06-13%20at%2021.47.51.png" width="400" /></a></div><p style="text-align: justify;">Triangulating the various valuation metrics below, we can see that Google's upside range from -9% to 17% which, as discussed above, does not warrant enough margin of safety.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBgTmegwCqiBFShwbgyUC2Hpw6Qq1hWhG93rpvlUowtQVsbwhpJRyoZP8mLXYXV_TpFpK6Ja8m5lJtlOd0WqtybjIecHjxaadN_l_YD151MDtYvX3ppTfrDCW-JjZEJ5QGVpZc26saaYrLwpAXNw11B9P-a0_tcTXreOHr-zMbHPZXiM7GSw/s402/Screen%20Shot%202023-06-13%20at%2021.50.09.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="145" data-original-width="402" height="144" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBgTmegwCqiBFShwbgyUC2Hpw6Qq1hWhG93rpvlUowtQVsbwhpJRyoZP8mLXYXV_TpFpK6Ja8m5lJtlOd0WqtybjIecHjxaadN_l_YD151MDtYvX3ppTfrDCW-JjZEJ5QGVpZc26saaYrLwpAXNw11B9P-a0_tcTXreOHr-zMbHPZXiM7GSw/w400-h144/Screen%20Shot%202023-06-13%20at%2021.50.09.png" width="400" /></a></div><p style="text-align: justify;">If we bump up the multiples across (FCF to 30x, EV to 18x, PER to 25x and PS to 8x), we do get some upside but that's really stretching and not wise with the global recession looming and the disruption of chatGPT uncertain.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3ecx8d6isInfwoiiaajBI5g4yKeLEQWRRGq-AuJgxCUKWdsXG9lHlyjQT7x9p4Iml8faV6mGwX3f2KJY5cMax_vimwODa7GD-luz-HAbrJP1rgpNpViVu3v7iNANxJVlYaLediuUD5V5_qT30MRlT_kwjZ4WuVjy1xNnlMSGdhH7S2iW0JQ/s401/Screen%20Shot%202023-06-13%20at%2021.51.15.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="146" data-original-width="401" height="146" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3ecx8d6isInfwoiiaajBI5g4yKeLEQWRRGq-AuJgxCUKWdsXG9lHlyjQT7x9p4Iml8faV6mGwX3f2KJY5cMax_vimwODa7GD-luz-HAbrJP1rgpNpViVu3v7iNANxJVlYaLediuUD5V5_qT30MRlT_kwjZ4WuVjy1xNnlMSGdhH7S2iW0JQ/w400-h146/Screen%20Shot%202023-06-13%20at%2021.51.15.png" width="400" /></a></div><p style="text-align: justify;">Previously at <a href="http://8percentpa.substack.com">Substack</a>, we had GOOG’s intrinsic value at $150 which was its peak in 2022. Perhaps things shouldn't be changing too much in just 6 months. Alphabet / Google is a HOLD now. </p><p><i>Huat Ah!</i></p><p></p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com0tag:blogger.com,1999:blog-28086856.post-23840209352129913032023-06-02T20:52:00.001+08:002023-06-02T20:52:00.133+08:00Charts #48: SWF and PPF Returns<p> This is a good chart on returns of SWF (Sovereign Wealth Funds) and PPF (Public Pension Funds)</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEib6426A-3bOt9eQihrdFCxi7LZNFDqBts31gBHiGW83stQ6myprZJwyFPnxgY-9tmwQaSqmHdrsV-xtIR9YfyjDtFF3oGzI8DK7kKQVmEKaBeZr3BBbcf2ognFoaKicDkAuy_qZ3r5yDZ10SVkSmENkmbVvUgnXn8DgPWj88WtEGdwpCoRDg/s976/Screen%20Shot%202023-05-18%20at%2021.52.01.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="976" data-original-width="962" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEib6426A-3bOt9eQihrdFCxi7LZNFDqBts31gBHiGW83stQ6myprZJwyFPnxgY-9tmwQaSqmHdrsV-xtIR9YfyjDtFF3oGzI8DK7kKQVmEKaBeZr3BBbcf2ognFoaKicDkAuy_qZ3r5yDZ10SVkSmENkmbVvUgnXn8DgPWj88WtEGdwpCoRDg/w394-h400/Screen%20Shot%202023-05-18%20at%2021.52.01.png" width="394" /></a></div><p>Most large funds cannot beat the S&P500 return of c.10%pa.</p><div class="blogger-post-footer">"The best investment you can make is an investment in yourself. The more you learn, the more you earn." - Warren Buffett</div>Arvelhttp://www.blogger.com/profile/11839015943857744320noreply@blogger.com2