Sunday, June 16, 2024

Thoughts #34: A.I. vs Human Portfolio Manager

Portfolio Management has never been easy. 80% of portfolio managers cannot beat the benchmark. Would it be the case that this becomes 99-100%? There could be a few scenarios:

1. A.I. beats everyone -> all portfolio managers cannot beat the benchmark

2. A.I. plus the best portfolio managers beats everyone, including A.I. These hybrid A.I. + best human portfolio managers make up the best 1%.

3. A.I. competes with A.I. and only the best A.I. beats everything else. 

The chart below shows humans don't really stand a chance...

Huat Ah!

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Friday, June 07, 2024

QYLP: Global X Nasdaq 100 Covered Call ETF

Covered call ETFs are relatively new and literature on the internet provide little insights on how such an asset is good for investors. Hence, this post hopes to add knowledge to whoever is interested. First we need to cover the following sub-topics to understand this idea better. 
  1. What is a covered call ETF?
  2. Why buy on the London Stock Exchange or LSE?
  3. What is the thesis?
  4. What are the risks?
First up, a covered call is an option which allows the seller to sell a stock which he or she owns, usually at a higher fixed price vs today some time in the future. This allows the seller to receive a premium from the buyer. Call options give the buyer the right to buy a stock at a certain price (i.e. the seller has the obligation to sell at that same price)

There is also something known as a naked call, when the seller doesn’t own the stock. But that is a topic for another day. Today, let’s discuss the thinking for the buyer and seller of call options:

The call option buyer thinks it is good bargain to buy a stock at a certain higher price but doesn’t want to pay up for it. So he wants to only buy the right (i.e. the call option) which is much cheaper. In a way, call options provide stock buyers leverage. He is bullish on the stock.

The call option seller (i.e. us) is obliged to sell at this higher price, but in return, receives a premium. He doesn’t want to sell the stock now but at a certain higher price, he is okay to sell. On top of that, he receives a premium and is therefore even happier. In a way, the seller is bearish but not bearish enough to sell today.

Covered call ETFs

Now that we have covered covered calls. We can go on to how it works for an ETF. So extrapolating form the above, the Nasdaq 100 covered call ETF will own the 100 Nasdaq stocks but sell covered calls on them. In the US, this goes by the ticker QYLD and in UK, the author would be buying QYLP which is part of the group of ETFs listed in 2022 with the same manager Global X but this particular ticker is denominated in pounds. The reasons shall be discussed in the next section. 

This ETF essentially owns names of the Nasdaq and sells covered calls on them to generate returns. The list of names, which are publicized regularly and differs in weightage vs the index, are as follows:

The US listed entity has a much longer history and we can see from the below that the track record is not far from the index return assuming that all proceeds are reinvested. Since inception (which was 2013), the ETF has returned 7.4% while the index returned 8.3%.

Yes the ETF return is actually lower than the index, so shouldn't we buy the index? This too shall be discussed below in the thesis section. For now, let's call that covered call provides premium to the owner and is less volatile than the index. Covered call ETFs generate very high dividend and this particular one, QYLP has provided 11-12% dividend since inception (which was 2022 on the London Stock Exchange).

This is a good segue to go into the next section.

Why the London Stock Exchange (LSE)?

The reason is that UK has no withholding tax. So the 11-12% goes directly into investors' pockets. If we have bought the US listed one, 30% would be taken away by taxes which makes it less interesting. The author has chosen the GBP denominated one because of future currency needs but most investors should just use USD, which is the default currency and that means less complications.

The dividends come monthly and has been very beneficial for many retirees. Some people have invested in covered call ETFs for decades and benefit from the monthly income. Notable ones include DIVO and JEPI which interested readers can also dig into from the link below.

Thesis and Risks

Okay, let's discuss the main topic. Thesis and risks. Why buy such a complicated instrument when we can buy the index. The answer is that in other times other than 2024, you should probably buy the index. Index buying has been proven to be the easiest way to compound returns and dollar cost averaging into index buying will create good wealth over time. The index of choice will be the S&P500 which has returned c.11%pa over the last 10 years and more than 10%pa over the last century.

So why bother with covered call ETF on the Nasdaq? 

Here's why:

  1. We don't want to miss out on the tech and Gen AI bubble.
  2. The regular income is good.
  3. Covered call ETFs will outperform if the market is flat or if it goes down.
There is real upside risk that we are at in the middle of yet another tech bubble which is driven by the Magnificent Seven, Generative AI and perhaps cryptocurrency (again!). Yes these names have rallied a lot but it seemed that we are not in the final legs of any huge bubble. It could go up a lot more from here and we stand to miss all the upside from here.

If you owned Nvidia when it was below $100 and has rode the stock up, then good for you and perhaps this idea is not for you. But for most of us, this might be a good way to participate without taking on all the risk. The covered call ETF owns the underlying names and will go up as long as the index goes up. It also provides regular income. However, it will underperform the index over the long run due to higher expenses, 

This brings us to the second point which is the monthly dividend. Covered call ETFs provide regular income which is very attractive for people who require this. As mentioned, for QYLP listed on LSE, this is 11-12%pa which is very significant. 

The last point is simply a reiteration that we are hedging ourselves should this bubble scenario not play out. If Nasdaq collapses, then we are saved by the dividends and should outperform, at which point, we should then actually buy the index like QQQ or SOXX. 

Let's talk about the risks!

The full post is on


Friday, May 31, 2024

[Globe Newswire] - YY Group Announces Strategic Entry Into Vietnam’s Booming Labour Market Within the Dynamic Hospitality Industry

This is a collaboration post with Globe Newswire which provides earnings update and salient financial news globally.

SINGAPORE, May 02, 2024 (GLOBE NEWSWIRE) -- YY Group Holding Limited (NASDAQ: YYGH) (“YY Group”, “YYGH”, or the “Company”), a data and technology-driven company that specializes in creating enterprise intelligent labor matching services and smart cleaning solutions, is pleased to announce its entry into Vietnam’s thriving hospitality industry, which is worth USD $5.16 billion in 2024. This underscores YY Group’s commitment to supplying skilled manpower to meet the growing demands of Vietnam’s dynamic hospitality sector.

Following its successful entry into the Malaysian market last year, YY Group is leveraging its sophisticated technology and scalable digital platform to penetrate the growing hospitality sector in Vietnam. With a robust presence in Singapore, YYGH currently supplies skilled manpower to major hotels such as Ritz-Carlton, Hilton, and Shangri-La Hotels and Resorts. Building on this success, YYGH aims to adopt the same innovative approach in Vietnam, tapping into the growing demand for high-quality hospitality staff in the region.

The YY Circle Super App (YY App) is a one-stop intelligent manpower outsourcing platform that simplifies and streamlines the staffing process for customers across diverse industries, including luxury hotels, food and beverage outlets, clubs, and retail outlets. YY App, as an online marketplace for manpower outsourcing has recorded approximately 400,000 downloads and 150,000 total active users as of June 30, 2024. The YY App has proven its effectiveness in connecting businesses with qualified talents.

Vietnam, known for its vibrant tourism industry and bustling hospitality sector, represents a significant growth opportunity for YYGH. Vietnam National Administration of Tourism predicted that by 2025, the number of international tourists would climb to 32 million and domestic tourists would reach 110 million. According to Mordor Intelligence, the market size of hospitality industry in Vietnam is projected to reach USD $9.91 billion by 2029, with a compound annual growth rate (CAGR) of 13.94% from USD $5.16 billion in 2024. With a sizable addressable market and a robust CAGR, Vietnam offers immense potential for YY Group to establish a strong presence and deliver innovative manpower solutions tailored to the needs of the hospitality industry.

“We are thrilled to bring YYGH’s innovative solutions to the vibrant hospitality market in Vietnam. With our proven track record and advanced technology, we are confident in our ability to drive positive change and deliver exceptional value and quality talents to our clients in Vietnam and beyond,” said Mike Fu, Founder and Chief Executive Officer of YY Group.

About YY Group Holding Limited

YY Group Holding Limited is a Singapore-based company dedicated to redefining digital interactions and creating impactful connections in the ever-evolving digital landscape. Rooted in innovation and a commitment to user-centric experiences, YY Circle leverages sophisticated technology to foster engagement, collaboration, and community building.

For more information on the Company, please log on to

Friday, May 17, 2024

UK Dividend List

This post is also available on

The world is moving into a new high interest rate environment and as investors, we should be demanding higher dividends. Today we are looking at UK's dividend plays. The UK is one of the few countries in the world with no withholding tax on dividends. The other is Singapore. Today, we shall take a look at what are the good UK dividend stocks using our favorite poems screen.

The usual poems screen with idiosyncratic cut-offs like 8.5% ROE 

As per previous years, we have used the above screen with ROEs, ROAs and Operating Margins driving the screen. The UK list this year generated 20 odd names. Many of which had been discussed here: Reckitt, Diageo, BHP amongst others. They are still here because they have not outperformed. The market has been very focused on the Magnificent Seven and similar stocks such that the rest of the good old names are forgotten. We believe the above names are compounders and the investment theses described are still intact.

Good UK names

The other top names are also worth mentioning. Unilever and its closest rival Nestle have also been good compounders currently trading at reasonable valuations. Rio Tinto is similarly another version of BHP. We all remember BP and Deepwater Horizon. Amazingly, it rebounded 2x from there, collapsed near those lows during the pandemic and is now almost at all time high! It appears on this screen because cyclical names like oil majors have good ROEs at the peak. So this is not a call to buy BP. 

BP's share price

The flavor on fossil fuel names have also changed with Greta Thunberg and her environmentalist gang shaming our generation and companies destroying the planet. Stocks like BP and miners are unable to command good premiums and hence the high dividend. The other name that falls into the same category is Imperial Brands (formerly known as Imperial Tobacco).

Burberry looks really interesting with its share price almost halving in a couple of months. It is very rare to see a luxury name on such lists. We have done the due diligence so there are no good analysis why the stock tanked and whether it is a good buy today. It does look reasonable on 14.7x PER, 6.8x EV/EBITDA and free cashflow c.7%. If it gets cheaper, LVMH will snap it up in a snap!

Burberry's share price

That said, works need to be done. This author had never bought well buying something on three sentences of analysis. But perhaps some readers have the luck and if you do make money please report back!

Huat Ah!

Thursday, May 02, 2024

WBD Update - Full Post on Substack!

Full Post:

We have discussed Warner Brothers Discovery (WBD) and deemed it as an interesting and cheap alternative to Disney. Share price has collapsed on the back of its heavy debt and poor earnings performance in 2023. The company is still losing money at the net income level for the past few quarters and looks like it could continue and even if it somehow breaks even, net income level will be low. As such, the stock is best valued using FCF. Here's a look at its full year 2022 results:

WBD was created in 2022 with the merger of Warner Media, which was spun out of AT&T, and Discovery. The current entity is an entertainment IP franchise powerhouse and a global media giant that operates cable TV networks with both premium entertainment and low cost family-friendly content as well as non-fiction science and lifestyle programming.

More interestingly, WBD is now home to iconic franchises like Game of Thrones, Harry Potter, Friends, Batman, Superman & the DC Justice League universe and Looney Tunes amongst others. It also houses distinguished media brands such as CNN, HBO, Cinemax, Discovery and Cartoon Network that most of us would be familiar with. As such, CEO David Zaslav estimated that WBD has 35% market share of the best content on Earth.

The investment thesis is therefore about owning such an entertainment content juggernaut which also generates tremendous amount of free cashflow at an attractive entry price today.

Let’s look at the simple financials which we skipped in the initial discussion.

Simple financials (Dec 2025 estimate, USD)

  • Sales: 42.5bn
  • EBITDA: 10.8bn, EBIT: 3.1bn
  • Net income: -0.2bn, FCF: 5.8bn
  • Current Debt: 40.0bn, Mkt Cap 21.0bn
  • ROE 16%, ROIC 9% in 2019, currently negative
  • EV/EBITDA 5.8x (Dec 25), PER currently negative
  • Past EBIT margins: 10-25%, 0% in Dec 23 and 7% in Dec 24
  • FCF yield >20%

While net income is negative, the company has been generating positive free cashflow. The slide from the full year earnings deck above showed how FCF ended at a spectacular USD6.2bn. Analysts are estimating that EBITDA and FCF would be sustained into 2024 and 2025.

Management has listed other key objectives above. While the targets were ambitious, WBD is led by a management with strong track record and we are seeing good progress. EBITDA has grown with the losses in DTC business segment gone now and 2023’s FCF has well exceeded its original target of USD4.5bn. WBD has been laser focused on FCF. If we count from its days when it was still just Discovery Ltd (i.e. since 2012), the firm has generated USD27bn in FCF cumulatively which is more than its market cap today!

1. Business Segment Updates

In the initiation, we did not discuss the segments in detail. WBD has three business segments: Studios, Network and DTC.

Studios create the core IP content and oversee the release of such content into films, TV programs, streaming services and the distribution of related consumer products, themed experience licensing and gaming. It is the engine of the WBD franchise but the segmentation sees it contributing to just 20-30% of EBITDA with EBITDA margins of 17-18%.

Networks consists of the US and international TV networks. This business is in secular decline with the disruption of Netflix and streaming. It is also the reason for the weak share price and therefore the attractive valuation. Analysts estimate that the business is declining c.5% annually. However, Networks is the main earnings generator today (c.90% of EBITDA) with EBITDA margins of >40%.

DTC which stands for Direct-to-Consumer is WBD’s premium pay TV and streaming service but is significantly weaker than Netflix or Disney at just single digit market share. In 2023, revenue grew 40%YoY reaching USD10.2bn (table below). But more importantly, EBITDA also just broke even.

Full Post:

Thursday, April 18, 2024

Finance Acronyms

After doing this for twenty years, I find it sometimes amazing that we can have so many acronyms. It must also be frustrating and confusing for people not in tuned with them. This is an attempt to put down a non-exhaustive list for everyone since I use them a lot myself and will direct new readers here in the future.

AML = Anti-money laundering

ALM = Asset Liability Management

BRICs = Brazil, Russia, India and China which led the growth in emerging market economies

BS = Balance Sheet

Capex = Capital Expenditure

CF = Cashflow (from CF statement

COGS = Cost of Goods Sold

DE Ratio = Debt-to-Equity Ratio

DM = Developed Markets

DVD = Dividend

EBIT = Earnings before interest and tax

EBITDA = Earnings before interest and tax, depreciation and amortization

EM = Emerging Markets

ESG = Environment, Social and Governance

EV = Enterprise Value

FAANGs = Refers to the Facebook, Apple, Amazon, Netflix and Google but that has now evolved in the Magnificent Seven: Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla

FCF = Free Cashflow

FOMO = Fear of Missing Out

FX or Forex = Foreign Exchange

FY = Financial Year or Fiscal Year

GFC = Great Financial Crisis of 2008-2009

GIGO = Garbage In Garbage Out

HHI = Herfindahl-Hirschman Index, common measure of market concentration

IRR = Internal Rate of Return, an important return calculation methodology in the PE world

IV = Intrinsic Value

LIFO = Last In First Out, one of the accounting terms

MOS = Margin of Safety

NAV = Net Asset Value, often used used in conjunction with IRR calculation.

NI = Net Income

OP = Operating Profits which is similar to EBIT

OPEX = Operating Expenses

PBR = Price-to-Book Ratio

PE = Private Equity

PER = Price Earnings Ratio

PL = Profit and Loss Statement

RE = Real Estate

ROE = Return on Equity

ROIC = Return on Invested Capital

SGA = Sales, General and Administrative Expenses

TMT = Tech, Media and Technology, often used to described the 1999-2000 IT bubble, a.k.a. the TMT bubble

That's all for now, but this will be updated as new acronyms come along.

Huat Ah!

Thursday, April 04, 2024

Fortinet - Cybersecurity Play

It was reported that Singapore lost >SGD500m to cybercrime in 2023. Imagine, our small country of a few million people, losing that much. What would that number be in China, US and Europe? Based on population sizes, it could be 300x more ((China’s 1.3bn + US’ 300m + Europe’s 500m) / Singapore’s 6m = 300). That’s USD150bn!

The company we are discussing today is one of the cybersecurity play listed in the US. Recently, the firm published some good quarterly investment materials and we shall be highlighting many of the key slides here starting the one on Total Addressable Market. The company estimates that its TAM is currently USD125bn but will grow to USD200bn by 2027.

Cybersecurity is big business!

Next, let’s take a look at the simple financials. It is also worth noting that the company has generated high teens growth to sometimes 30% YoY growth for more than 10 years. 

Simple financials (Dec 2024 estimate, USD)

  • Sales: 5.5bn
  • EBITDA: 1.7bn, EBIT 1.5bn
  • Net income: 1.2bn, FCF: 1.7bn
  • Debt: -1.0bn (net cash), Mkt Cap 38.7bn
  • ROE >100%, ROIC 70%
  • EV/EBITDA 21.7x (Dec 24), PER 29.9x (Dec 24)
  • Past margins: OPM 15-20%
  • FCF yield 4-5% (4.4% based on no.s here)
As one the leaders in the cybersecurity space, the company has also enjoyed stable high margins, extraordinarily high ROICs and good Free Cashflow. Due to its recent earnings weakness, shared price collapsed, presenting an opportunity for us to buy. That said, it is still not cheap with PER at close to 30x based on consensus no.s although it looks better with c.5% FCF yield.

1. Fundamentals

Cybersecurity is a megatrend with hackers being way more sophisticated vs 20 years ago and companies and individuals needing more software and solutions to protect themselves. The company has projected market growth to be c.12% but its own revenue has grown close to 20% over the last 15 years.

The company has implemented its own rule of 40 stating that revenue growth and operating margins should exceed 40 in any given year. As we can see, it has comfortably achieved this over the last 5 years. Management is also focused on Free Cashflow and it started generating billion dollar FCF in 2021 and looks like it should hit USD2bn this year.

The company we are discussing today is Fortinet (FTNT US) and we have the following investment thesis:

Fortinet is a leader in network security and is a key beneficiary of the ever-growing cybersecurity megatrend. It is a differentiated player in its space with unique technology which has allowed the firm to build a strong and diversified customer base across geographies. It also boasts higher margins and stronger FCF growth vs its peers.

Fortinet is a network security specialist with 70% of revenue coming from its security network business. The firm is the only cybersecurity vendor with its own SPU or security processing unit with application specific design multi-core processor that has supported generations of secure infrastructure with every iteration. Its main product FortiGate Firewall has 20 years of track record and helped the firm expanded its business portfolio to encompass more recurring revenue and value added services such as SASE*.

Today, Fortinet has an another 20% of revenue coming for universal SASE and 10% from security operations. While its business is entirely related to network security, Fortinet has diversified its business across customer types, geographies and industries. The following charts provide the breakdowns showing how its businesses are evenly split.

*SASE or Secured Access Service Edge, extends networking and security capabilities allowing work-from-anywhere and remote workers, to take advantage of firewall as a service, secure web gateway and zero-trust network access and a medley of threat detection functions. 

Continuing increase in penetration of secured networks: Networking used to be simple installations. We only needed LAN cables but with the advent of cloud and increased cybersecurity threats, network has become increasing complicated and needed to be secured. Starting from a few years ago, secured network installation picked up globally and penetration stands at 40% of all networks today. This is expected to grow to more than 52% in 2030 i.e. more than half of all networks are secured networks. Fortinet stands to benefit from this trend as the leading player in the field.

High recurring gross profits: The nature of the cybersecurity business calls for monitoring, service and support. As such, c.65% of Fortinet’s gross profits comes from service and such high recurring gross profits look set to grow as we can see from the chart below:

As its installed base grows, cost is spread across to a bigger revenue pie and use cases are learnt and reapplied to solve similar problems with other clients. The strengthens Fortinet’s moat and widen the knowledge gap between the company and its smaller competitors. We shall revisit this point later.

Strong shareholder returns via share buybacks: Fortinet’s business is highly FCF generative and it has spent a significant sum in share buyback over the years, repurchasing 214m shares (c.20% of outstanding shares) for USD5.8bn. Fortinet’s current buyback until Jan 2024 will be accretive at current valuation and providing further downside support for share price.


High growth markets are naturally highly competitive and cybersecurity is no different. Fortinet needs to compete with its bigger and more prominent peer - Palo Alto Networks alongside a slew of US and global competitors. It is unclear if the firm can maintain its high margins indefinitely.

At the same time, behemoths like Microsoft, Google and Apple would also be keen to enter this space given its importance to their core business. These are trillion dollar companies that have all the resources to compete. Fortinent’s own slide below illustrates the risk we are discussing well.

Mitigating factor: Fortinet has USD5bn of revenue in its space, second only to Palo Alto (as shown above) and should be strong enough to compete against the peers listed above. On the other hand, if Google or Microsoft is looking for something to acquire in cybersecurity, then Fortinet will also be interesting as a target. So as long as management continues to execute well, earnings and share price should do okay.


Fortinet is founded in 2000 by two brothers: Ken Xie (60) and Michael Xie (54) and together they still own c.20% of the company. Ken is Chairman and CEO while Michael is President and CTO. Needless to say, Fortinet will not be here today without them and while the management team is professional and strong, Ken and Michael will be instrumental to Forinet’s continuing growth.

2. Technicals

The following chart shows how Fortinet has traded over the last 5 years. Recall that Mar 2020 was an important point in time for many stocks as it reflected maximum fear at the height of the pandemic but looking at Fortinet’s stock price, it is probably not relevant and we see a stronger support near today’s share price of USD52.

Without looking at valuations (just pure technicals), the risk reward seemed to suggest USD50 at the downside and USD80 on the upside, as marked by its historical high. But if we want to be more conservative, the next support at USD30 marked around 2020-21 could be used. The math would then be 40% downside (USD 52, today’s share price / USD30 support) vs 60% upside (USD80, historical high/52, today’s share price).

To be clear, this is a first-cut rudimentary exercise using just technicals and we shall revisit this later with valuations which is more reliable.

The other important point to note with technicals is the drawdown. As we can see, drawdowns have been treacherous at close 50% twice just looking at the last 2 years. As our past investments have shown, it is not inconceivable that share prices plunge 50% even when our analysis shows everything is cheap. Just look at Idea #11 - Bayer!

So, I would caution that we size slowly with Fortinet given its business nature, share price volatility and high valuation.

3. Valuation

As a cybersecurity play, Fortinet does not come cheap and our usual valuation table below shows marginal upside. To recap, earnings are represented by Free Cashflow, EBITDA and Net Income.After ascribing the respective high multiples (20-25x) and adjusting for cash on its balance sheet, we are just getting USD54-61 which is quite far away from its historical high share price of USD80.

Compared to its peers (table below), Fortinet trades at a slight discount but it’s still not cheap. Again, this is a name that we should size small initially to adjust for its high valuation. If share price declines and valuation becomes reasonable, Fortinet could also become a take out candidate. As mentioned, megacaps like Google, Microsoft or even its peers might be keen to acquire Fortinet should it trade cheaply.

Intrinsic Value 

 There are two ways to think about Fortinet’s intrinsic value. We can take the average of the three intrinsic values, that gives us USD57 or c.10% upside. Or we can use the FCF IV of USD61 which has 19% upside. Personally I think the latter better reflects the cybersecurity growth opportunity. 

Now that we have the valuation numbers, let’s do the risk reward analysis again. On the downside, if we take down the valuation multiples by 5 turns across the three metric, we get -4 to -19% downside. As mentioned, the upside would be 19%. This shows that risk reward is just balanced. Not asymmetrical with a lot of upside and little downside but I would say that’s good enough.

Putting everything together, I would be initiating a small position at current share price of USD51. 

Huat Ah!

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.

Thursday, March 28, 2024

[Globe Newswire] Fluence Expands Presence in Asia-Pacific Region, Opens Local Office in Taiwan

This is a collaboration post with Globe Newswire which provides earnings update and salient financial news globally. 

TAIPEI, Taiwan, March 15, 2024 (GLOBE NEWSWIRE) -- Fluence Energy, Inc. (“Fluence”) (NASDAQ: FLNC), a leading global provider of energy storage products, services, and optimization software for renewables and storage, has expanded its presence in the Asia-Pacific region, opening a local office in Taiwan to further engage in the country's energy storage market. According to the Energy Administration, Ministry of Economic Affairs, by the end of 2023, Taiwan's cumulative installed renewable energy capacity had reached 17,916 MW, an increase of 150% from 2019. This consistent year-over-year growth in renewables to meet the country’s ambitious clean energy targets is positioning Taiwan as a prime regional market for energy storage.

“We are proud to announce our expansion in Taiwan, a key market for energy storage in the Asia-Pacific region. Having already successfully collaborated with local partners to complete 10 storage projects in Taiwan, this expansion underscores our long-term commitment to the region,” said Jan Teichmann, SVP & President APAC at Fluence. “Harnessing our cutting-edge energy storage technology and leveraging our extensive field experience, we are committed to enhancing the reliability and stability of Taiwan's power grid. Together with our customers, we aim to accelerate the pace of the energy transition, contributing to a more sustainable and resilient future for the region.”

To date, Fluence has been selected to deliver over 2 GW energy storage projects within the Asia-Pacific region to help enhance grid stability and promote the region’s clean energy transition. Globally, Fluence has deployed and contracted 8.7 GW of energy storage projects.

About Fluence

Fluence Energy, Inc. (Nasdaq: FLNC) is a global market leader in energy storage products and services, and optimization software for renewables and storage. With a presence in 47 markets globally, Fluence provides an ecosystem of offerings to drive the clean energy transition, including modular, scalable energy storage products, comprehensive service offerings, and the Fluence IQ Platform, which delivers AI-enabled digital applications for managing and optimizing renewables and storage from any provider. The company is transforming the way we power our world by helping customers create more resilient and sustainable electric grids.

Full article:

Friday, March 15, 2024

Diageo - the luxury spirits compounder

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):

Simple Financials (Jun 2024 estimate, USD)

  • Sales: 21.0bn 
  • EBITDA: 7.2bn 
  • Net income: 4.5bn 
  • FCF: 3.2bn 
  • Debt: 19bn, Mkt Cap 84bn

Financial Ratios

  • ROIC: 13% and ROE: 40%! 
  • EV/EBITDA 13.4x 
  • PER 16.8x 
  • Past margins: OPM 27-31% 
  • FCF yield: 2.4-3.7%

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.

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.

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.

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.

1. Fundamentals

We have written about Diageo on the original infosite and the investment thesis has not changed much:

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.

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.

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.

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:


Growth in TAM via volume and premiumization: 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.

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.

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.

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.

Strong Financial Metrics: 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.

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.

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.


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.

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.


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.

Tepid growth: 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. 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.

Geographies: 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.

2. Technicals

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.

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.

3. Valuations

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.

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.

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:

Diageo's dividends 

  • Track record of increasing dividend since 2001 and in the last few years, consistent dividend growth between GBp1.5-3.8 annually 
  • Enhanced shareholder return with further share buybacks 
  • Paid out c.GBP5 in dividends over the last 7 years which accounts 16% of today’s share price 
  • Current dividend yield of GBP 0.8/30.6 = 2.6%

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.

Huat Ah!

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.

Friday, March 08, 2024

The Property Strategy

There are two topics that dominate social conversations in Singapore. Children’s Education and Real Estate. Nothing else seemed to loom as large.

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.

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.

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).


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.

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.


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.



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.

This is so important, I feel I must repeat, be very careful with:
  • large percentage of net worth
  • leverage and margin trading / financing
  • savings we cannot afford to lose
  • property investment  
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.

I have dissected the discussion into the following sub-topics which we will delve into for the rest of the post:
  1. Thoughts on the first property 
  2.  Rent and mortgage 
  3.  Second property in Singapore 
  4.  Overseas properties
1. First property

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.

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.

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.


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.

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.

This is a good segue to talk about rent and mortgage.

2. Rent and Mortgage

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:
  • Working in a foreign city for just a few years
  • Rent is subsidized or has other benefits (e.g. tax)
  • 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)
Otherwise, if things checked out well, we should always strive to buy our first property well and pay mortgage.

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.

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.

3. Second property in Singapore

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.

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!

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!

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.

4. Overseas properties

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.

To sum things up: 

  •  Don’t trade your first and only property 
  •  Use mortgage wisely and try to pay down as much and as soon as possible 
  •  Weigh second properties against the investment portfolio well and 
  •  Don’t buy overseas properties

These are my views inherited from very smart people who had successfully navigated life in Singapore with some based on my own experience. 

They are definitely not gospel truths and I would welcome further discussion.

Huat Ah!