Monetary Bazooka and Multi-Curves

This post was first published in 25 Mar 2020 but things moved rapidly and my views have changed. The updated parts are in red.

Since we last discussed COVID-19, the world has gone from bad to worse. We now have a global pandemic which is increasingly out of control. It is becoming a crisis in the same order of magnitude as the 2008-2009 Global Financial Crisis. I have been using the original thebaselab website of daily checks. It is depressing. We have exceeded 15,000 100,000 deaths with no end in sight.

Courtesy of thebaselab

To combat the virus, many affected countries have gone into lockdown mode following China's example. But they didn't do it fast enough. Some countries' healthcare systems could not handle the situation and many lives were lost. It is important not to stress the healthcare system because there are only so many ICU beds and only so many respirators. Unfortunately, we don't learn fast enough. The first lesson from Wuhan was not learnt quickly enough to prevent the tragedies in Italy, Span and Iran and New York. Hopefully other countries and cities can still save themselves by working hard now.

Meanwhile, global markets went berserk. It did not help that Opec and Russia decided to shoot themselves by not reaching an agreement on production thereby causing a huge collapse in oil prices. (They finally agreed but the damage was done) The direct link between COVID-19 and crude is not clear. There is reduced demand but it's not 40%. However oil prices fell from the 50s to the 20s. In stressful times, as we had seen during the Great Financial Crisis (GFC), market participants adopt the mentality of "sell first, talk later". Hence the correlation of different asset classes goes to 1. Everything gets sold. Even gold got sold.

So last week (19 Mar) gave us a glimpse of the confusion that took place. As markets collapsed, we saw indiscriminate selling across stocks, bonds and commodities. The USD spiked because investors sold assets in other currencies and revert their holdings to USD cash. But the US Treasuries also got sold off, because that's another way to raise cash for redemption as well. This selling will continue. In Singapore, we have seen many blue chips hitting multi-year lows. As long as the global situation remains dire and fluid, we should not expect any recovery. (Then the market saw one of its sharpest rebound in history)

Why is everything going to hell in the markets?

While some of us in Singapore probably don't feel this way, this crisis could actually be worse than the GFC. The 350,000 1.7m infections had affected hundreds of millions of families directly. They are seeing their loved ones succumbing to the virus. But as the lockdown continues, the livelihoods of billions are are now badly impacted. We are talking about millions of people being laid off. They could be in the service industries, their employers only have days of cash left before going bankrupt. They could be the small suppliers in the airline/aerospace industry and/or the oil and gas industry. The big boys in these sectors are having issues, so what are the chances that the little ones can make it? 

The situation is really, really bad. People cannot pay their bills, their electricity is being cut off. They cannot pay rent, and face eviction. They have no money to buy food. It is literally life and death, even when the virus is not nearby. Some experts have drawn parallels to war. We are at war with the virus. Hence we need the monetary bazooka to come and save the day.

Helicopter Money

Alas, politics get in the way. The politicians cannot agree how this could be done. Can we bailout the corporates with no strings attached? What if these big oils and big aerospace just use the money to prop up share price instead of saving their suppliers? What about helicopter money? This is an interesting notion Milton Friedman coined in 1969 but made really famous by the previous Fed Governor Ben Bernanke. He famously said he would get on the helicopter and throw money on Main Street in order to stop the rout during the GFC. We are now doing it because families really need that $1,000 to tide over this month. Not next month, this month. 

So the politicians need to sort this out. They probably have days. Lives are at stake. (30 Mar update: they got their act together) The saving grace is that they managed it during the GFC, so it can be done. Then we need the virus situation to subside. China managed to contain it. So did South Korea. We need the major affected economies now (US, UK, Italy and Spain) to follow the playbook. Lockdown for a few weeks, things should get better. The situation will be different for many developing countries. Hopefully their leaders are learning fast. If they don't, their healthcare systems will not be able to cope. We will see a lot more deaths. May the Force be with them.

Finally, we come back to the big question, what do we do now? Buy, sell, wait?

Like I have said many times before, it is not possible to predict what happens next. The politicians could get their act together tonight and we are done with the bloodshed. Then we curse and swear that we didn't buy enough. My base case is the selldown continues and things get really cheap. It could be close to or even below GFC levels for some stocks. Then it will be the best time to buy. But we cannot tell in advance. So we buy incrementally. I plan to buy 1/5 of what I intend to deploy fully every week or two, something like that. It is not hard math or science, so you need to figure out what works for you.

Markets have since rebounded sharply but it might be consensus that this is a bear market rally. It is quite unthinkable we will recover and exceed the previous 2019 high any time soon. The upside is capped and given the bounce, the time to buy is not now (10 Apr 2020). If there are things that could be sold to raise cash, maybe we should raise some cash to have some more dry powder. The next selldown will test the 2020 lows.

The worst case is that the COVID-19 pandemic drags on for months and we did not move fast enough. One, two or three large corporates fail and drag down some banks. 100 million or even more jobs are lost globally. Or, we see continuing rise in infections and many more outbreaks. We see waves and waves because different countries are on different curves. Some successfully flatten their curves but not others. 

In Singapore, we see a full blown community spread. The fourth wave gets us. Our healthcare system gets stressed. Then we will fall below GFC levels. It is a doomsday scenario. Maybe we won't be worrying about our portfolios at that point. We must not let this happen. Stay at home. Keep the social distance. Flatten the curve!

In short, there are many scenarios. No one knows which one will pan out. I would wait now but would look out for stocks that becomes too cheap to ignore. For example, DBS at 0.5x book with more than 10% dividend yield looks good (albeit banks may not be able to pay dividend in 2020 given the situation). Sadly, I have bought it way too early at $21. Now the stock is trading at $18. Dairy Farm breaking its all-time low at $3.30 or Ho Bee revisiting $0.90 will be interesting. Genting does look cheap at $0.50 (it has since rebounded to $0.70) but we have to assume its businesses will recover strongly once the virus is defeated. We have discussed these stocks before so click on the links for related posts if interested. 

Meanwhile, hang in there. This is a marathon. WFH is here to stay. Don't scold the kids. Avoid the spouse. Flatten the belly curve on top of the other curve. 

Huat Ah!

Let's talk about Money and Gold too!

A very Happy Valentine's Day to all!

This is a continuation of the previous post.

In the last post, we discussed asking some really fundamental questions about companies to see if they stood the test:

1. Does the company help improve the well-being of its customers?

2. Does the company add value fundamentally in ways that make all lives better?

3. If the company did not exist, would the world cease to functional properly in some ways?

These questions help us explore fundamental concepts that are really the basic tenets of life. These things are more fundamental than money or our notions of countries, democracy or even human rights, which are essentially concepts of the collective human consciousness. A dog or a monkey has no interest in money or where the country boundaries lie between France and Germany. But they do know kindness, reciprocity, value add and love. These are the true fundamentals in life. In my opinion, if investing is deviated too far from these, then it didn't make sense and would ultimately fail.

Minions at Genting's Universal Studios Singapore

Let's take a look at Genting, a stock which had been discussed previously as cheap and perhaps a good buy. But how does it fare against the three questions posted above? Does the company help to improve the well-being of its customers? Well, that's really tough. How does gambling help improve one's well-being. I would really scratch my head here. In fact, gambling would destroy one's well being and also affect those around him, especially his family. Especially if he suffers from gambling addiction and is forced into debt and other woes.

Does the company fundamentally add value to make all lives better? Again, it is hard to see how a gambling resort add value to all lives. Perhaps it adds value to its employees by creating jobs and its shareholders, but not all lives, and definitely not those who were addicted and driven to debt and detrimental ways. So, if the company did not exist, would the world cease to function properly? In the last example, Dairy Farm, we could argue that some neighbourhoods might face disruption, until the competitors fill the gaps. But for Genting, even if all the hotels and theme parks disappear tomorrow, does it matter?

I would argue it doesn't. Life goes on. Perhaps the tens of thousands of Genting's employees might need to find new jobs but for the rest of the world, it really didn't matter if Genting disappeared. That's the sad truth. Having said that, vice stocks have created the best value for shareholders. Hence this is a philosophical argument whether we, as responsible and astute investors, want to own vice stocks that fundamentally do not add value to the world.

Ok, food for thought but let's move on.

In the last post, we also discussed the concept of money. Money is a trust system that is established over millennia by humans to faciliate transactions using currency mediums like sea shells, gold, or in today's context electronic ones and zeroes. There is a very remote risk that the system might fail, as it did in Germany during the 1920 hyperinflation, or in Singapore after WWII when banana money issued by the Japanese became worthless when the Japanese lost the war. During the Global Financial Crisis of 2009, we were very close to the collapse of the global monetary system.

Hence as astute investors, it might make sense to put a small portion of our investable assets into something that would mitigate this risk. Some very notable investors had always advocated having some money in gold although Warren Buffett, the Oracle of Omaha himself, never approved this idea. However as a risk mitigator to the collapse of the global financial system, it really does make sense, to buy gold, as a hedge. Yes, while gold will not compound its value over time - a block of gold will be the same block after 10, 20, 50 years, it will store and retain value in the improbable event that everything breaks down and all our bank notes, all our zeros in our banks, all our electronic stock and bond certificates fail to register.

In that same vein, we should think about investing into valuable stuff in the real, physical world that would still be essential for living - hard assets like land, modes of transport - motorcycles, electric vehicles and perhaps, value creating assets like solar panels or power storage like Tesla's Powerwall. The idea is that if the global financial system does fail and we are going back into the Dark Ages, then we need stuff that would be useful in sustaining lives. Land to plant food, means of transport, energy etc. Of course, this is a very, very remote scenario. It is more likely that life goes on for the next 100 years. But the idea is that we shouldn't rule things out. It make sense just to put 1% of our assets or less into these. In the most practical terms, maybe we should just hold some physical gold.

Bollywood actress purchasing gold from a Gold ATM

Gold is an unique asset class. It represents the ultimate store of value because its status had been independently verified and had since evolved together with the collective human consciousness over time. Almost all ancient civilizations used gold as a status symbol, in decorating temples and tombs alike. In modern times, it was the standard for the global currency exchange and even when that broke down, it remained as a safe haven asset class in times of crisis. It is the universal currency for all which would transcend failures of the financial system. So, do buy some physical gold from the local jewellery store. Remember, it shouldn't be a gold ETF, but real physical gold! 500g would cost roughly S$25,000 and fits in the pocket, which could be a good start.

So rather than buying roses, maybe it's worth buying some gold accessory for your Valentine today! That would kill two birds with one stone! Investment and love does go together! Again, a very happy Valentine's Day!

Genting's Management and Financials

Geez 2015 came and the first month is ending! Time and tide really waits for no man. In investing, time helps in compounding, and we just have to keep reminding ourselves that we need to act early and incrementally while we are young. Because, if we don't, before we know it, we are 40, or 50 and the first half is gone and we are into half-time. Need to think quickly how we want to play the second half.

Today, Let's continue our analysis on Genting. We answered the first few questions: what's the investment thesis, is it a good business, is it cheap etc. Next, we focus on the management. Genting Singapore is essentially being run by two savvy executives and supported by strong managers who know the business well. The chairman is from the founding family and his lieutenant helps him run the day to day operations. Meanwhile the board is also made of more independent directors than insiders which is good for governance. Overall Genting's management has shown to be above board and has generated value for shareholders. The only caveat would be its minimal disclosure and its shareholder return policy while that has also improved with the recent share buyback announcement.

Genting's Board

Next questions: does it have Strong Financials and its Geographical and Industry Exposure? Well, Genting is all Singapore and gambling (just a bit of non-gaming entertainment). For financials, we use the cheatsheet that has appeared various times here (below). Numbers in blue are derived from others on the sheet. The first thing to highlight is that the sheet was updated in Sep 14. Well that's with investing, we are so busy with life, so things like updating spreadsheets shouldn't be top priority. Today let's use this one. Most of the time, things don't change that much in 3 months. Investing is a long marathon. People who wants to play it day by day and week by week are missing the point.

Ok, besides the date, one of the other first things worth highlighting would be its strong free cashflow. Genting is estimated to generate S$800m in free cashflow or FCF in the sheet but it is likely to have the ability to do a billion in the future. Casino is bloody good business once the initial capital outlay is done. Gamblers simply keep coming to drop money, and when times are good, they actually don't mind doing it. Genting is suffering now as per the Macau casinos because of the impact of Xi Jin Ping's anti-corruption campaign. But as the Asia middle income continues to grow, wealthy people will also keep spending and they would want to visit Singapore. Hence it should be a matter of time that free cashflow reaches a billion over time.

Genting's cheatsheet

As the stock nosedive with bad news about delays in Japan, Korea and clampdown in China, we can now get Genting at 5.8% free cash flow yield. If it its a billion in free cashflow, we are talking about 7% and if we consider that the S$2 billion of cash needs to come back to shareholders, then we get close to 10% free cashflow! 10% free cashflow is like a super bargain for a multi-billon dollar firm. It doesn't come often. 

Now, one might question, if Genting is generating so much cash, why doesn't it pay more dividend? Well, that should come in time, but again, things move in years in the world of investing, so shareholders would just have to be patient. Genting didn't start out throwing close to a billion dollar cash. It was listed in the early 1990s but only started to have stable positive free cashflow in the last few years. Before Resort World Singapore was opened, it was committed to build it at the doldrums of the financial crisis, burning S$2 billion in 2009. 

So dividend was never discussed then. Now that things have change, investors hoped for a better shareholder return and Genting responded with a share buyback. Part of the reason was also that the capex needed for Korea and Japan would be delayed, so might as well return cash to shareholders and generate some goodwill. That could be the start of better dividend and shareholder return.

Ok. We discussed all the good news, what about the bad news? 

The key risk is Genting's working capital. In the cheatsheet, it is shown as WC of S$4.7 billion. Somewhere in the right column there is also Accounts Receivables at S$1.5 billion .These are huge no.s considering that Net Profit and free cashflow are still just S$800-900 million. This also relates to Genting's strategy of growing its VIP clientele. 

VIP gamblers don't bring cash to play. They play on credit and Genting has to provide that credit. Some of these clients come from god-knows-where and they disappear after playing. So these are the account receivables on Genting's balance sheet. Some of these monies would likely not come back. So there is this huge risk of impairment in the quantum of S$500-1,000 million! This would be a big hit to its balance sheet with just S$9 billion in equity.

Well the mitigating factor is that Genting has clarified that things are under control and they have provisioned for 1/3 of the amount. Also the market has known this for quite a while so this negative is probably largely factored in.

Genting's franchise

So that's really the short and sweet analysis on Genting, the stock is at a multi-year low, there is the slowdown in gambling and the looming account receivables, but we should continue to see stable growth as the mass affluent from ASEAN and China continue to flock to Sentosa. Not forgetting that Universal Studios still have a lot of room to grow and it is opening its own brand hotel in Jurong later this year which will contribute to near term growth.

As the picture above shows, Genting's transformation to a world class resort would continue. By leverage on the brand name of Universal, Sentosa and Singapore, it would grow and generate even more cash going forward. To be able to get it at 7% free cashflow should look like a bargain years from now. 

This is one stock that probably won't affect our sleep at night.

The first post on Genting.

Genting Singapore

The author owns Genting and dollars in this post refers to SGD.

Genting Singapore has recently dropped to multi-year lows and the stock at this level looks increasingly interesting. The stock has fallen from its high of $2.30 in 2011 to a dismal $1.04 as investors lamented about the lack of growth and the looming accounts receivables on its balance sheet. 

Genting, needs no introduction. It started the first casino in Malaysia some 40 years ago and was awarded the licence to run the Resorts World casino in Sentosa, Singapore in 2006. Its transformation from a local casino operator in Malaysia to an entertainment conglomerate today is nothing less than spectacular. Today, the Singapore business alone makes close to 3 billion in revenue and it has a market cap of more than 12 billion dollars. 

In this and the next few posts, we would do some analysis on this name to determine its intrinsic value and try to understand its business moats. As with the past analyses, we would be asking the few questions on the Stocks page.

1. What is the Investment Thesis?

Genting is one of the only two casino operators in Singapore earning over 3 billion dollars in gross gaming revenue or 45% market share on the island. While Singapore's gaming market has not grown much in recent years, growth should track the regional GDP over the medium term at 5% YoY. It has also sought to differentiate itself by providing family entertainment and a different experience for tourists. It owns Universal Studio Singapore as well as other strong entertainment franchises that would continue to grow alongside its casino business.

Genting has also eyed opportunities overseas and it announced an investment in Korea and would likely be a key player in Japan when its gaming market opens up. These overseas business remain free options of $0.20 to $0.40 per share today as most investors and analysts do not factor any value into its share price given the time horizon is still a good 5 to 7 years away.

2. Is it Cheap?

With the 60% decline in stock price, Genting is becoming quite palatable. Genting trades at 17x forward PE and 9x EV/EBITDA which are at the lower ends of its historical ranges. Its PE is still pretty high if we just think about PE as we discussed before ie 17x means it would take 17 years to recoup our capital. But we have to understand that this is fundamentally a great business and the 17x PE is based on next year's earnings which would not necessarily do justice. Looking over the past few years, it managed to achieve a record of over 1 billion dollars in net profits and if we use that number, then PE goes down to 15x.

Based on free cashflow (FCF), the preferred way to look at valuation, Genting could generate around 600 million dollars to 1 billion dollars of FCF annually. If we use a conservative 600 million, we are talking about a 5% FCF yield which is quite high by any standards. This would also reflect that the stock has really corrected to such a level which makes it attractive enough for value investors.

Unfortunately, Genting does not pay a lot of dividend, so despite having a 5% FCF yield, its dividend is only 1%. But as the stock price correct further, its management might think about strategies to boost it, including raising dividends or perhaps a symbolic share buyback to signal that the stock is too cheap.

Genting's stock chart since IPO, at $1.04, it's back to 2009 levels

3. Is it a Good Business?

Well, gambling is great business. Not just good, but great, especially for the casino operator though not necessarily for the gamblers and their families. It is said that all vices make great businesses: smoking, drinking, gambling which is why they are also heavily regulated. Such businesses are driven by the idiosyncrasies of the human behaviour namely habit and addiction which makes consumption very sticky and allows the operators to have pricing power. Hence gambling is a good business, sorry great business.

Gambling habits have been well studied globally and statistic showed that around 1% of the population would suffer from gambling issues. The 1% of compulsive gamblers would also contribute to a significant 30-40% of the casino's revenue. In Singapore's case however, with the various restrictions and the focus on attracting VIP gamblers, the revenue contribution from Singaporeans and residents had declined from a high of 60% to 30% today. For Genting, it also has a significantly high VIP revenue of over 50% driven by Chinese and South East Asian tourists.

When looking at the global VIP gambling dynamics, one would then have to consider where Genting stands in the regional high class luxury entertainment and how this would evolve in the next 5 to 10 years. With half a dozen countries talking about integrated resorts, competition would undoubtedly intensify in the next few years. Genting's focus on entertainment and gambling could be its value proposition against the other competitors in Macau and some of the other ASEAN countries coming up with their own integrated resorts. It is also developing its brand name alongside megabrands like Universal Studios and Hard Rock Cafe.

In the last few years, the VIP gambling market suffered quite a bit as the Chinese economy slowed and the government clamped down on corruption/extravagance of its officials and this had a huge snowball effect on the whole global luxury market. However while this trend would continue, the rise of the global middle class and high income earners would in time offset this weakness.

Genting is well positioned to attract these high rollers both from the ASEAN region and from China and we would further examine its financials and risk in another post.