The Curious Case of UOI

This post first appeared on substack.

This is a short commentary about UOI and not a full review for the stock to be in the portfolio. Interested readers, please click the following newslink for context.

https://sg.news.yahoo.com/minority-investor-says-uoi-over-014825695.html

Activism is coming into Asia. It has already taken Japan by storm. It may take years, or even decades but it is a matter of when, not if. Why? Because tonnes of Asian stocks trade below book. In Singapore, >50% of our listed stocks trade below book. We are worse than Japan (which only has 40%).

320 out of 620 listed stocks on SGX trade below book!

We have listed stocks trading at 0.03x price to book. More than one. There is Sapphire Corp, China ShenShan Orchard and Fuxing China Group. All trading at 0.03x. (See screenshot below).

Take the case of Fuxing China Group trading at $3.15m (not enough to buy a 3-bedroom condo in Singapore) which is at 0.03x book value. What it means is that you can buy the company for $3.15m today (technically, you may need to pay a takeover premium but let’s keep is simple), but the net assets on its balance sheet is worth c.$100m. Isn’t that the bargain of the century?

A couple of them trading at 0.03-0.09x Price to Book!

Alas no. I dug into its financials. $50m of that is account receivables, which is money not paid to Fuxing yet. The other $50m is supposedly depreciated property, plant and equipment: its factories and facilities. Apparently, Fuxing make zippers in China. Someone needs to fly down and check those assets. They may not be there. So, yup, even though its 3c to the dollar, nobody is buying.

But there are real unpolished gems around. Usually companies that are, for one reason or another, trading very cheaply for some time already. That is when activists come in to try to unlock value. Today’s story is about the curious case of United Overseas Insurance (UOI) with an individual activist.

First, let's look at UOI's financial numbers:

Simple Financials (Dec 25 estimate, SGD)

    • Sales: 100m, Net income: 30m 

    • Operating Income: 35m, Investment Income: 17m 

    • Debt: -100m (Net cash), Mkt Cap: 477m 

    • Investments: c.414m of which 47m in Haw Par shares 

 Financial Ratios 

    • ROE: 6.5%, ROIC: 2.6% 

    • PBR: 1.0x (Dec 25) 

    • PER: 15.9x (Dec 25) 

    • Dividend: 23 cents per share, Yield: 2.9%

UOI used to trade below book but has since rallied because the said individual activist called management out via the media. The market got interested and bought the shares up. However, without more firepower, it might be difficult to create genuine change.

That’s the difficulty and complexity about activism. Many things need to fall in place. E.g. Low allegiant shareholder ratio. Latent value that needs to be unlocked. Potential angle to catalyse some transformation and importantly, the core business should be sound and valuations should make sense.

Here’s the usual Fundamentals, Technicals and Valuation framework.

1. Fundamentals

UOI operates a simple business of selling insurance via Singapore’s second largest banking group - United Overseas Bank (UOB) Group. It is a unique bancassurance business which has enjoyed steady growth alongside Singapore’s economy (or perhaps more relevantly Singapore’s property market). By leveraging on the UOB Group’s infrastructure, UOI has also been able to keep underwriting cost low (no agents and lower IT cost), thereby generating steady underwriting profits.

Actually, both underwriting and investment profits had done well. From what I can tell, UOI had positive investment income for the past few years. Please see slides below:

It is not clear if other income is investment income. The assumption is yes. The slide above shows it has been positive from 2018-2022 and the next slide shows 2023-24 did well too.

Investment profits had grown last year as a function of the stock market. UOI uses its own inhouse asset management team and Schroders and both adopt conservative investment strategies and have, by and large, made returns. In short, it’s a decent business.

Let's discuss the elephant in the room.

Activism in Singapore: What's really the crux of the issue here is that an individual activist has called out poor management under UOB’s leadership. He believes that UOI is over-capitalized (>400% capital adequacy ratio) and should sell stuff to return capital to investors and he proposed the following two resolutions: 

    Resolution 1: To distribute UOI’s 4,274,600 ordinary shares in Haw Par Corporation directly to UOI shareholders. 

    Resolution 2: To appoint a financial advisor to evaluate strategic options for maximising shareholder value.

As we can expect, UOI threw them out, citing no legal requirement to put these to the vote. What transpired was a tense shareholder meeting which we all get to learn more a little bit more about UOI’s business. 

Due to to the lack of disclosure, it is hard to analyze UOI. What we know is that it runs a profitable general insurance business (after selling the life insurance to Prudential) and pays 2+% dividend yield. It used to be cheaper, but thanks to the spotlight being shone on it now, share price has rallied. The investment thesis should still be intact though.

Investment Thesis

UOI enjoys an interesting niche general insurance business (Residential mortgage, property, personal accident) in Singapore with its lower-than-industry cost base by leveraging on UOB’s group infrastructure. It enjoys marginal growth alongside the strength of Singapore’s property market. Recent shareholder activism while un-successful would keep management on their toes to continue to increase its dividend payout (currently 47% payout ratio).

Risks

Conversely, the risk is that management decides to do the opposite, since the activist would never gather enough shares to mount any serious challenge to the UOB group (which owns c.60% of UOI). It is a given that UOI will not sell Haw Par shares nor change anything that the activist demanded (even though he may be right, and especially if he is right, that’s how politics work right?). The only hope is that dividend can be raised because the UOB group will also benefit.

Should that not happen, share price will then trade at where it is now and we can only eat the 2+% dividend or worse, the bigger risk is that share price corrects back to a lower level (c.$6.50 from current $7.70). That’s 18% downside!

The rest of it is on substack.

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.

Tariff Tantrums and the SPX Bear Run

This post is also on substack.

Thanks to Trump, April 2025 might go down in history as the first President-inflicted bear market of the 21st Century. Veteran market participants (like this blogger) would remember the past bear markets well. There was the dotcom bust which lasted almost three years. There was the March 2020 pandemic scare which was a 29% drop in just one month. More recently, in 2022, the market dropped more gradually and the whole ordeal lasted 9 months. 

Then there was the mother of all bear markets, the GFC, which was a whopping 55% drop over 17 months back in 2007-2009. Scary, would be an under-statement. The global financial system as we knew it could collapse. We were days from the Second Great Depression. It was hard to believe, and still is, but both God of Fortune and Lady Luck smiled on us all. So we can just talk about it rather than experience it.

S&P Bear Runs since the 1950s

For the story today, the S&P500 peaked in Feb 2025 slightly above 6,000 and then things fell apart, as they do when markets peaked. Only this time, we shot ourselves in the foot. Or rather Trump did. We are now almost 20% below the peak, which by definition, means we are entering bear market territory. In the last two weeks, the drop was drastic enough that Trump himself got nervous and backtracked his tariffs by postponing it for 90 days. 

The markets heaved a sigh of relief, stock prices stabilized and some hoped that the good old days will come back. By that, I mean Nvidia leading the Magnificent Seven to higher highs. Bitcoin and A.I. names rallying again. S&P500 revisiting 6,000 and surpass that, with major global indices (except China) following behind. And more euphorias, kumbayas and what not. Alas, the probability of that happening seemed pretty low now.

Change in world order

What we are seeing could be a generational change in the world order which started when Trump became President back in 2016. That coincided with Xi's rise in China amongst many global events (Brexit etc) which culminated to Russia's invasion of Ukraine. The world, led by US to cooperate, globalize, trade and prosper since WWII changed to one that is about self-interest. We are talking about protectionism. De-globalization. Every country for herself. Friend-shoring, onshoring, you know the rest. 

The markets ignored these seismic geo-political shifts because there were exciting stories. It started with the FAANGs (Facebook, Amazon, Apple, Netflix and Google) which then morphed into the Magnificent Seven (Tesla, Nvidia, Microsoft, Meta, Amazon, Alphabet and Apple). There was the whole Bitcoin mania and then the A.I. mania. If we dig deeper, there were also other sub-plots like shareholder activism, Novo Nordisk and some big pharma with their gamechanging obesity drugs. There was also Japan, with Nikkei breaking its 1989 high after 34 years. Even in Singapore, we had DBS having its market cap exceeding USD100bn and taking over Singtel as Singapore's proxy stock. 

https://companiesmarketcap.com/sgd/banks/largest-banks-by-market-cap/

Today, DBS' market cap exceeded SMFG's (Japan's second largest bank) market cap and also UBS' momentarily when it had to rescue Credit Suisse. This is quite unthinkable. Japan has a population twenty times bigger than ours. And UBS is the pre-eminent wealth manager and now Switzerland's only big bank. What did we do so right? If you scrutinize the table above (courtesy of companiesmarketcap.com), we are on our way to surpass more G7 banks like BNP and Citigroup. Citigroup! The Citi that never sleeps!

Anyways, back to the story, so, the markets were busy. Who cares if Russia and Ukraine started a war. Or if China threatened to invade Taiwan. Market participants were enjoying the bull market and making money left, right, centre. But Trump slapped the markets in the face and everyone woke up. So the question now is would he double down or would he backtrack? Extrapolating from these two simple actions, there are two possible scenarios:

Slight return to normalcy

This is the bull scenario that everyone hopes for. Trump, worried about his own finances, or simply focuses to whip China differently, backs down. The markets think its business-as-usual and we avert that 50% drop we saw with the GFC and the dotcom bust. But still, it is hard to imagine that we go back to the previous world order of global cooperation, more trade, less bitching. Even if this scenario pans out, it will not be Mag7 leading the markets. It is hard to say who are the new leaders, I would focus on what I have preached - strong FCF companies which are now featured on substack.

All hell breaks loose

This is the doomsday scenario where Trump loses it (which is highly possible) and we have full-blown trade wars, not just with China but with allies, neutral countries. Basically, total collapse of the world order since WWII. This bear market could become a combination of the dotcom bust and GFC, lasting into years and dropping 50% at the end. The only safe assets to hold would be cash and gold. Ironically, property as well. The end game here is WWIII.

This is not impossible. And if WWIII happens, cash is worthless. Only gold can preserve wealth.

Of course, predicting the future is never so simple. The future is a set of probabilities and the two scenarios above probably lies on a spectrum with normalcy at one end and hell at the other. So we might avert WWIII like how we averted the Second Great Depression back in 2009. Regardless, it would be a very uncertain 12-18 months ahead. Hold more cash and be less courageous.

2025 FCF and Dividend List

This post first appeared on 8percentpa.substack.com

This year's first batch of dividend lists are out!

Instead of using Poems, we will try out a new platform - Finchat.io. This is one of the most powerful toolkit for publicly listed stock research and I would encourage all readers to give it a try. It's a freemium model, so anyone can use the free ones, which is already very powderful!

For this year's lists I have similarly used FCF as the main filter, but added dividend and net cash and excluded certain industries. Here's the list for Singapore:

Venture (Market cap c.SGD 3.6bn) is the stand out here, with 35% of its market cap in cash and generating a whopping 12.7% free cashflow yield. This stock used to be a darling with share price hitting >$25 a couple of times since its IPO (today's share price is $12.5). It competes in a very good niche today, making hardware for the leading players in life sciences and networking equipment the growth segments of today, having successfully transitioned from PC and printers eons ago.

However, such hardware manufacturing business is inherently cyclical and share price had gone through  many boom and bust cycles. Today, it is trading near trough valuations but without studying closer, it is hard to say when things would recover. It is also worth noting that the founder still runs the company and Venture's success over the last 40 years is largely attributable to him. Should he retire, it is unclear if the company can continue to grow and compound as it had.

US FCF and dividend list for 2025

This second list churns out the US names of which Acuity and Dolby are the largest. Acuity makes lighting and Dolby makes sound systems. In our substack, we have covered IMAX, which is in the same space as Dolby - cinemas. Both names look interesting but again, without doing the work, it is hard to say if they are good buys are not. The other issue with US stocks for us is also that dividends get taxed. 20% would be withheld and taxed so it makes more sense to buy stocks with little dividend if we really want to optimize returns. Almost all the stocks on this lists all have very high dividends. Dolby has a whopping 9% dividend! 

Japan's list

Given the craze on Japan in 2024 and hopefully we see more buzz in 2025, this last list is on Japanese names. For those of us who don't look closely at the land of the rising sun, Japan has been undergoing a stealth transformation for many years after the burst of its bubble, banking crisis and corporate governance overhaul. The stock market finally exceeded its high in 1989 and a huge wave of shareholder activism is under way. We might see Nikkei successfully breaking through at hit 45,000, if not 50,000.

This is not a number plugged out of thin air. The math around it is as follows:

• Next year's Topix EPS (2026) is c.220 yen (and growing) and multiplying that by PER of 16x (one turn higher than its historical average to reflect Japan's transformation discussed above), we can explain Topix at 3,520 (vs only 2,800) today.
• The Nikkei / Topix ratio has a historical average of 14x and using that (i.e. 3520 x 14), we have Nikkei at 49,280.
• With that, 50,000 is not too far away. 

Although we do need the yen to remain weak and the activism momentum to continue. Japan has had so many false starts over the decades it is hard to believe whether the country could really embrace capital markets transformation. I think Japan can change and will change because this provides part of the solution to solve its aging issue (e.g. more capital to attract workers into Japan) and Japanese themselves are frustrated that countries that were behind are now richer. This is a strong impetus to push the country to progress.

With that, we shall discuss two names on the list briefly. Both have what Japan is most famous for - animation:

Bandai Namco (Mkt cap USD22bn, net cash at c.USD2.5bn, dividend yield 4.5%, FCF yield 5.7%): this is the ultimately anime IP play with its strong library of the most famous IP and manga titles like Dragonball, Naruto, Gundam and One Piece. Its businesses span toys, games, amusement centres but as with most sleepy Japanese management, financial metrics such as OPMs and ROEs are not optimized and hence we see the stock trading cheaply. Activists need to come in to shake things up.

Nippon TV (Mkt cap USD4.8bn, net cash USD1bn, dividend yield 1.1%, FCF yield 5.5%): broadcasters are right in the middle of shareholder activism with Fuji TV being targeted. The other four broadcasters including Nippon TV. They all face similar issues with Fuji TV: traditional management who knows nothing about capital markets and doesn't give a shit about shareholders. Hence, they all trade below book despite owning the most valuable real estate on prime land in Tokyo. Nippon TV also owns the crown jewel of Japanese animation - Studio Ghibli. As such, there a lot of hidden value beneath the PBR <1x apparent cheapness. 

So, hope these ideas help. Please conduct your own deep dive research. Our substack will also write these out should they qualify to be in the portfolio.

Huat Ah!

Past lists:

2024 Dividend List - Tokyo!

2024 Dividend List - UK!

2024 Dividend List

2023 Dividend List

2022 Dividend List - Australia!

2022 Dividend List

2021 Dividend List - HK!

2021 Dividend List

2020 Dividend List

2019 Dividend List

2018 Dividend List - Part 4

2018 Dividend List - Part 3

2018 Dividend List - Part 2

2018 Dividend List - Part 1

2017 Oct Dividend List - Part 2

2017 Oct Dividend List - Part 1

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Inspection Update on Vicom

This post first appeared on substack. 

Vicom has done almost nothing over the past 18 months and hence I believe it is time to do a quick update and see if this is worth adding. For the uninitiated, here’s the original writeup about Vicom, the largest vehicle and industrial inspection company in Singapore:

https://8percentpa.substack.com/p/investment-idea-4

Vicom, while it is a decent SGD460m market cap company, has no analyst coverage and its published materials for analysis is atrociously lacking. The company only has its annual report and bi-annual earnings update. Meanwhile, the annual report has no Management Discussion & Analysis (MD&A), the most important section of any annual report.

That said, financials are solid:

Simple Financials (Dec 2025 estimate, SGD)

• Sales: 120m
• Operating Profit (OP): 35m
• Net income:30m
• FCF: 30m
• Debt: -55m, Mkt Cap: 500m

Financial Ratios 

• ROE: 21% ROIC: 21%
• EV/EBITDA: 10.7x (Dec 25)
• PER: 16.9x (Dec 25)
• Past Margins: OPM 30%
• FCF yield 7%

The stock has completely underperformed in 2024. With global stock markets rallying 20-30% and the STI itself going up mid teens, Vicom’s share price has actually gone down since our last review. This post serves to provide an update, redo valuation and decide if we should add.

1. Review

Vicom share price has stagnated primarily because revenue has not grown much since COVID-19 because Singapore’s vehicle population has not grown at all. Thanks to the exorbitant cost of car ownership here. Before the announcement of 20,000 new Certificate of Entitlements (COEs) last week (see video link below), there was no prospect of significantly revenue growth.

To add on the above point, c.50% of Vicom’s revenue comes from vehicle inspection and since the number of vehicles in Singapore is capped by the number of COEs (the certificate that allows for vehicle ownership), there has been no volume growth over the last few years, as mentioned.

For the un-initiated, the price of the COE in Singapore (essentially a piece of paper that the government issues to vehicle owners) is six figures. That’s household’s annual salaries. While goods vehicle like vans, light trucks and lorries have cheaper COEs, they are still crazily expensive which explained the lack of volume growth for vehicles and hence lack of revenue growth for Vicom.

With no volume growth, investors then want price increase. Sadly, Vicom has not raised inspection fees, due to potential far-reaching repercussions. Singaporeans require our vehicles, both passenger cars and goods transport trucks / lorries, for their livelihoods. With COE prices higher than the sky, should Vicom raise inspection fees during election years (i.e. 2025), it would become a major issue for the government in power. And that is a big no-no.

Vicom's inspection fees as per Vicom's website

As such, prices have more or less stayed the same for many years as shown above. The basic inspection fee is SGD68.67, which is cheaper than dinner at Macdonald’s for a large family. This is quite a rarity in Singapore where prices of everything has gone through the roof in recent years.

Electric Vehicles (EVs)

The other risk not discussed in the initial analysis was EVs. While the basic price for inspecting EVs is the same, there are no additional tests required (e.g. emission related) and hence should the number of EVs grow significantly, Vicom’s future revenue growth might be impacted.

Investors' mind are on this issue because many believed Elon Musk and Tesla will take over the world. This is now supercharged with nitro boost with Donald Trump coming back into power. That said, this author believes that EV should not change the picture for Vicom. The main reason that EV penetration will take years, if not decades to play out. Vicom is a steady compounder with strong FCF generation. EV or not, stock price should compound at single digit over time.

Growth Angles

Future single digit growth might be supported by the release of 20,000 new COEs and the remaining non-vehicle testing business in SETSCO, Vicom’s subsidiary doing testing for food, manufacturing and construction materials. The balance between vehicle and non-vehicle testing revenue has underpinned part of Vicom’s steady growth story. This business is featured prominently in its annual report.

Management

Vicom is currently helmed by Mr Sim Wing Yew who has led the firm since 2011. He is supported by a strong and experienced team with varied backgrounds. As expected, a significant number of managers come from the Comfort Delgro Group while others are recruited within Singapore Inc.

The following is an excerpt of the profile of Chairman Dr Tan Kim Siew, who has had a distinguished career spanning the Ministry of Finance, Defence and National Development. Dr Tan undoubtedly provides the oversight for Vicom to continue to perform to shareholders’ expectations.

Dr Tan Kim Siew is the Chairman and Independent Non-Executive Director of VICOM Ltd. He is the Chairman of Nominating and Remuneration Committee and a member of both the Technology Committee and the Sustainability Committee. He is also an Independent Non-Executive Director of SBS Transit Ltd.

Dr Tan is presently a Senior Consultant in the Ministry of Finance. From 2012 to 2014, Dr Tan served as Commissioner of Inland Revenue. Prior to this appointment, Dr Tan was the Permanent Secretary (Defence Development) of the Ministry of Defence from 2003 to 2012. He had also held other appointments in the public service, including Chief Executive Officer of the Urban Redevelopment Authority, Deputy Secretary in the Ministry of Finance and in the Ministry of National Development, Chairman of the Defence Science and Technology Agency, and Chairman of the DSO National Laboratories.

2. Valuation

As Vicom’s business is simply so stable and predictable, there isn’t really much reason the change the numbers in the previous analysis. With FCF and Net Income at SGD30m and applying the same multiples, we get to an average intrinsic value (IV) of c.SGD1.7 which gives c.30% upside if we take the average for the three metrics below. This is lower than the original SGD2.2 IV because we used 25x multiple which on hindsight was probably too high for a single digit compounder.

Vicom has also continued to distribute good dividends as its parentco - Comfort Delgro probably relies on that for its own earnings growth. As such, we should expect Vicom to continue its c.4% dividend yield, which is a good spread vs Singapore’s T-bills at 3% today.

The rest of the post is on substack. Thanks!

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.

Where is Bitcoin Going?

This post is first published on substack.

Bitcoin hit all time high again, exceeding USD100,000 momentarily (SGD >130,000). Greater fools (including this author) buying at the previous peak are now elated because they finally broke even. Based on what happened in previous halvings, there could be a little more upside. The chart below from Google shows the full price history (in SGD).

Bitcoin seems to follow a rough four year boom bust cycle largely driven by what is known as halving. The timing of the actual bottom and how high it can skyrocket is difficult to call but based on the price chart above, we can make the deduction that halving is an important event in Bitcoin. Rather than explaining everything myself, I have asked A.I. for help. Isn’t it wonderful we live in this artificial intelligence era?

1. Halving Explained

Bitcoin's four-year cycle, also known as the "halving cycle," is primarily driven by the cryptocurrency's underlying protocol and the economics of its supply and demand. Here are the key description and factors contributing to this cycle:

2. Four Year Cycle

Bitcoin supply started with 10.5m Bitcoins and with 50 Bitcoin as mining reward. Approximately after every four years, the supply of Bitcoin and reward for mining Bitcoin is cut in half. This event, known as the "halving," reduces the supply of new Bitcoins entering the market. It will continue until 2140 when the total supply reaches 21m Bitcoins. 3. Supply and Demand Imbalance

Following a halving event, the reduced supply of new Bitcoins can lead to an imbalance in the market, causing prices to rise. As demand for Bitcoin remains steady or increases, the decreased supply creates upward pressure on prices.

4. Speculation and Market Sentiment

The four-year cycle is also influenced by market sentiment and speculation. Investors, anticipating the halving event and the potential price increase that follows, may buy Bitcoins in advance, driving up prices.

5. Market Maturation and Adoption

As the cryptocurrency market matures and more investors become aware of Bitcoin, demand for the asset increases. This growing demand, combined with the reduced supply after a halving event, contributes to the price appreciation.

6. Volatility

That said, halving increases the volatility of Bitcoin prices. Inactivity during the in-between years have also caused prices to stagnate or go down. The combination of these factors has resulted in Bitcoin's historical four-year cycle, with significant price increases following each halving event:

- 2012 halving: Price increased from around $10 to over $1,000

- 2016 halving: Price increased from around $650 to nearly $20,000

- 2020 halving: Price increased from around $7,000 to over $90,000

- 2024 halving: Prices increased from around $40,000 to ?

The above is copied from A.I. and slightly refined by yours truly but as you might be able tell, the A.I. reasoning is at times, still not perfect. But what’s important are the price levels at the end which I have checked to be accurate. However, as with all else in finance, the timing around the bottom and jump in prices are very hard to call.

Unlike previous halvings, this 2024 one saw the prices jumped before halving actually happened. While the 2016 and 2020 cycles saw the jump in prices about a year (very roughly) after it happened. The magnitude of the price jump is also crazy. Should we expect the same magnitude as the previous halving in 2020, Bitcoin could reach $400,000 or more.

Of course it would not because there is finite amount of money out there. Bitcoin and the total market cap of crypto at a few trillion dollars is already bigger than most listed companies except for the top few (see ranking below). Bitcoin itself is at c.USD2trn, which is quite inexplicable as Bitcoin was basically created out of nothing and generates no cashflow. These trillion market cap companies below generate an insane amount of free cashflow.

Bitcoin prices can go up a bit more (pick a number, my guess for this peak is USD150,000) and then we go down the rollercoaster like past cycles. This is an art. It could be higher or lower. Who knows? Your guess is as good as mine. Then we wait a few years for the next high which will come around the next halving in 2028.

Boom and bust, this is the nature of Bitcoin.

Some like to compare Bitcoin to gold. Since gold’s market cap is c.USD18trn, Bitcoin at just 2trn still has a lot more room to go, right? No, because gold is an established store of value since human civilization began, like freaking 10,000 years ago. Bitcoin is still a teenager. In desperate times, you can trade gold to get rice in Zimbabwe. Do you think the same Zimbabwean will accept your hot / cold wallet and give you rice?

Undoubtedly, the boost is coming from the popularity of Bitcoin ETFs and the market cap is at c.USD100bn. There are also more institutional buying. Some listed companies like MicroStrategy has also shifted its entire cash base to cryptocurrencies. However should such momentum wane, then we have to worry that the party could end soon.

The other big risk is just overall market sentiment turning south. There is currently a lot of euphoria after the presidential election and animal spirits are high up in the air. Tariffs or not, markets just keep going up. The S&P500 hit all time high. Even Singapore’s Straits Time Index is near all time high. It’s inexplicable.

To sum it up, it always pays to be always vigilant because the markets are like dance parties where eventually the music will stop and everything will crash and burn. Crypto crashes will be the most treacherous. 

So, beware!

The complete post is on substack.

Thoughts #36: 100 Years

As humans continue to live longer, it is not inconceivable that we could live up to 100 years. Monaco's life expectancy is at 89.5 years, with females hitting 93.5 years! It is also well researched that people living in Blue Zones lived more than 10 years longer vs the rest of the world and this brings their life expectancy in the late 80s as well.

In the world of investing, the investment horizon is usually 5-10 years. We create models with 5-10 year forecasts, but we rarely hold them for as long. We trade them. We look for exits in 3 years to boost the IRR. It is a true conundrum.

To be honest, 5-10 years is a very long time. Humans live day by day and we thrive on activity. Therefore our monkey brains cannot comprehend in 5, 10, 15 year time frames, let alone 100 years. 5 years ago, nobody could predict that Taylor Swift could make a billion dollars doing concerts, Jensen Huang could become a demigod giving signatures on bosoms and we may have 10 trillion dollar companies in 2024 and none of them from China.

Looking things from this time frame, anything that happens in 1,2 or even 3 years matter very little. In the moment when the going gets tough, it could be very long. For example, NS is two years. In the middle of it, some wished we were never born in Singapore. But when it is over, we look back and say, it was nothing.

It is very sad when we hear about teenagers taken their own lives. Whatever they were going through, it wouldn't be an issue in 10 years. It is not about belittling their troubles. Even WWII, it was a long and arduous 5 years. But then, things change and improve. Somehow, I think we need to train ourselves to truly think long term.

I heard a firsthand account about a primary school reunion gathering of people in their 70s. The lives that schoolmates lived could really give us perspectives in life. People who did not do well in primary schools could thrive in secondary and then later in lives. 

There are others who fumbled through but succeeded in strawberry farming in their 60s. Conversely, smart teenagers struggled later in their lives because of ego, lack of social skills, lack of friendly support. The morals of these stories are really to live our lives truthfully and rightfully, always. 

Coming back to investing, perhaps we should adopt the same approach, if something is only going to be bad for 1-2 years, then it is not an issue. The crux is then to determine if the issue is going to last 5-10 years. Secular changes and multiple contractions would last that long. So we need to be careful of those.

One example that comes to mind would be the rise of the smartphones and the collapse of digital cameras and before that, how digital cameras themselves replaced film. Today, it could be EVs destroying gasoline cars and renewable energies replacing fossil fuels.

Bayer's share price languishing for almost a decade

The other long term impact that comes to mind is lawsuits. Bayer being the case-in-point. The lawsuit that came with the M&A of Monsanto took almost 10 years and it is still not being resolved. It was difficult to established back then but now armed with such knowledge and benefit of hindsight, let's be careful with lawsuits!

The other point about being long term is really establishing habits that help us compound the quality of our lives over 100 years. In investing, this would be dollar cost averaging, monthly into portfolio opportunities and quarterly into ETFs. In our normal course of work, it would be good daily habits such as exercising, reading, writing to nourish the body and mind.

Hope this helps!

Huat ah!

We are migrating to Substack. Post on this original infosite will be irregular going forward. Please follow us on 8percentpa.substack.com.

 

Tokyo Dividend List

This post is also on 8percentpa.substack.com

In this post, we shall explore dividend stocks in a brand new market, Japan!

Thanks to poems, we have the ability to screen US, UK, Hong Kong, Singapore, Malaysia and Japan! Japanese stocks have never been interesting since they paid little dividends, had lower ROEs and lower margins. But things seemed to be changing with the Nikkei breaking its 1989 high this year. 

Let's look at the list:

The names above show the blue chips of Japan and companies we have heard of. NTT, Bridgestone, Komatsu. Today, the trade at 3-4% dividend, at single digit to low teens PE and some below book value while Nikkei rises above all time high. It seemed we might be able to find some bargains. The criteria for the screening is as shown below:

As per past screens, we simply used ROE of 10%, operating margins of 8% and dividend at 3% which churned out the interesting list of names. While there are many interesting names, I would highlight the following two: Bridgestone and Tecmo Koei.

Bridgestone

This is the world's largest tire company trading at 1x Price-to-book while giving a 3.6% dividend yield. The stock has always traded cheaply as there isn't much growth in the auto industry and tires being tires, are just not sexy enough. Listed in Japan, it is also associated with the Japanese auto industry which is being disrupted by electric vehicle. Toyota led Japan into the hybrid and hydrogen solution for cars only to be upended by Elon Musk and then China.

Nevertheless, unless cars can fly, they need tires and Bridgestone will continue to grow as long as we buy cars. Management simply needs to buck up and drive the company to grow or perhaps consolidate the Japanese tire industry with still at least four tiremakers fighting each other in Japan much like the shoguns back in history.

Tecmo Koei

This is a Japanese gaming company famous for its slash and cut games based in Chinese and Japanese history. It has carved out a 40 year niche in this gaming segment. Some of us might remember playing the classic Three Kingdom strategy game back in the 1980s. Gaming is a highly profitable and highly cashflow generative business and Tecmo Koei has simply compounded growth as such.

Today it is trading slightly cheaper against its peers as the company has not been able to create more hit titles. The founding family also still owns a big chunk of the company and therefore restricts trading volume. But at teens PE and 6-7% FCF, it does feel cheap. 

That said, we have not studied Japanese names in detail. These names are also not in the portfolio. So do do more research and always remember caveat emptor!

Huat Ah!

Past lists:

2024 Dividend List - UK!

2024 Dividend List

2023 Dividend List

2022 Dividend List - Australia!

2022 Dividend List

2021 Dividend List - HK!

2021 Dividend List

2020 Dividend List
2019 Dividend List
2018 Dividend List - Part 4
2018 Dividend List - Part 3
2018 Dividend List - Part 2
2018 Dividend List - Part 1
2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Best Semiconductor Gem!

Semiconductor stocks had a superb run in the last fwe years driven by shortage of chips and then the current A.I. craze. The following chart from finchat.io showed that investing in the SOXX ETF would have delivered over 200% return or CAGR of 25%.

Today, we are going to discuss a related idea with potentially more upside given that the stock has corrected more than 45% but the big tailwind story hasn't really changed. But first let's look at the financials:

Simple Financials (Mar 25 estimate)

• Sales: 2.3trn and EBITDA: 700bn
• OP: 600bn and NI: 500bn
• Market Cap: 10trn
• FCF: 450bn and Net Cash: 500bn 

Financial Ratios

• PBR 5.3x and ROE: 26%
• EV/EBITDA: 11.3x
• PER:16.7x
• FCF yield: 5%, Dividend Yield: 1.8% 

Isn't it amazing to be able to buy such a high-octane semiconductor play at such valuations? Hence the tagline that this could be the best semiconductor gem! As an experiment, we shall not reveal the name today. Interested readers could try to guess and go onto substack to find out. But for convenience, let's call this company T. 

1. Fundamentals

The following is the investment thesis for T:

T is the one of the top players in the semiconductor industry with high market share in certain core products. It stands to benefit from the continuous growth of the semiconductor market and is especially geared to capex growth in its home country. At current valuation, investors can enjoy 5% FCF yield and almost 2% dividend with 80% technical upside if market sentiments improve quickly.

The chart below shows that the market is estimated to double from USD500bn to USD1trn by 2030. As one of the top companies in the value chain, T will grow in tandem with the market and current share price correction provides the opportunity to buy cheap and gain good exposure today!

The manufacturing of semiconductors is also highly complex and in various parts of the value chain only the best of the best survived. The number of players have shrunk to just 1-3 in most segments. In actual high end cutting edge production, there is only Intel, Samsung and TSMC and in the field of lithography, there is only one player left - ASML.

Positives

High and growing market share: the production of semiconductors requires many types of equipment which are manufactured by T. It would take up too much space to describe all of them. The following paragraph describes the opportunity well:

T commands a share of more than 80% of the coater/developer market and more than 60% of the thermal processing system market*, but has less than a 30% share of the etch system market and less than 20% of the cleaning system market. Etch systems and cleaning systems are both used in key semiconductor production processes and therefore their markets offer strong growth prospects going forward. 

Increasing dominance in servicing: as the largest player in the field, T also has a huge installed base of past equipment globally and only T can service its own equipment. This has led to the growth of its servicing business (currently 20-30% of revenue) and at the same time strengthen its business moat as customers are unable to switch to competitors while new entrants are also not able to gain market share.

Risks

However, the thesis is not without risk. T has significant exposure to China and stands to lose this portion of its business should the trade and technology war between US and China exacerbate. The mitigating factor is that there is no other provider and China will find a way to still buy from T via different routes not unlike how arms dealer can find ways to sell weapons around embargoes.

The rest of the post can be found on substack.

When to Top Up?

This post serves as a note-to-self to refine the right process to top up names that are already in the portfolio. It deserves a post because of how our monkey evolved brains work with all its biases and blind spots. It also describes why investing is difficult because the initiation of a position is the start of a very long process for value investors. The position could stay in the portfolio for years, an initial bump up makes it difficult to top up later on and a mistake will take years to unwind.

The scenario we are talking about here is usually when we have done an initial analysis on a name, decided it was worth to take the risk and buy an amount. However, things did not pan out the way it should, bad news erupted, shit hits the fan and the stock collapsed, usually c.20%. We need to decide if we should buy, sell or hold. After years of going through some of these scenarios, having gained some experience, I believe the following would be the right process to follow, with the caveats and strategies attached.

1. Review the new info
2. Redo valuation
3. Write an update 
4. Decide to buy, sell or hold

Review

The first step is obvious. We need to review what happened. This could be an earnings miss, or some bad news at some competitors or some lawsuits etc. The short-term bad news would be the easiest to handle as they would usually provide the opportunity to add because longer term we know things will revert to normal, if the thesis is still intact. 

By and large, we did our homework well when buying initially. So if it is now cheaper, than it should mean we should buy more! But there are some shit that we should look out for: big lawsuits, impairments, potential fraud and solvency issues. These could be negatively gamechanging and we might run the risk of putting good money after bad.

Redo valuation

The next step would then be redoing valuations. This would require doing some assumptions of how much the intrinsic value was impacted and did the share price fall more than it should. This is an art and it could be quite difficult at times to make a good judgement and establish the right valuation when new info is scarce. With lawsuits, impairments and all the big bad stuff, it could really be difficult. If the solvency issue looms big enough, perhaps it would be best to just wait for the next opportunity to get out.

Update

After the above initial analysis, the logical next step would be to write out an update and pencil the thoughts out. This serves to help us crystallize the thinking and of similar importance, for future reference and learning. The update should relook at the thesis, reviews the risk, see if there could be any silver lining and provides the new valuation to see if there is strong basis to top up the position.

The update should also include:

• New information from the 2-3 quarters of recent earnings update
• Information from newswire and the internet, including Youtube and substack
• Alternative sources from interviews with experts (if we can find them via our network)

Decide

Once we have the update in hand, we then need to decide whether we should buy, hold or sell. I will go through the thought process for each of them.

Sell

The decision to sell happens when the thesis is no longer valid. The news was devastating, the intrinsic  value is impaired. This could be fraud, or some mega lawsuit or some big changes. As such, it should not be as difficult because if we have followed the discipline never to put too much into any position, this means that the losses should not be big. 

Percentage wise, it would be big, usually 30-50% type but if we did our risk management well, it could be losing a few thousand dollars or a couple of air tickets for our holidays in today's context. It would make sense to recoup the remaining capital to deploy into better names, with more upside. We can also set a target sell price and wait for the stock to bounce to sell. 

Hold

This would usually be the default decision. It could be because the new data and hence the review was inconclusive. We need more time for more data points to reveal themselves. For example, if the company is involved in some class action lawsuits, the verdict could be months out. It might make sense to wait for that verdict or at least some clearer indication closer to the verdict date. Or it could be simply waiting for the next quarter results. In such cases, we just need another review when there is more data.

Buy

Lastly, the decision to buy more should un-ambiguous. The valuation checks out. There is now more upside than before. What is left is how much more to buy. It would make sense to slowly build the position up to a max size. If we are now at 1% of the portfolio and target to go to 4% then perhaps it could be adding another 1%. Incremental step ups would be my preferred option.

Fear and Greed

Even when everything checked out logically, there will be one final hurdle. Emotions. Fear and Greed. Fear that despite all the analysis, we will make the wrong decision, sell and then it goes up. Or top up only do catch a falling knife. Ouch!

Greed can also come into play, for some reason, we are blinded by some biases and want to buy more despite everything pointing the other direction. At this point, we may need to speak to like-minded investors to help us straighten our thinking, resolve blind spots to make the right decision. 

So that is it!

Hope this lay out a good top up process. As you can see, investing is a full time job. It does not end with one analysis. So much is at play and luck is definitely involved. Sometimes, it is really way simpler to just put everything in T-bills!

Huat Ah!

Update on Reckitt

 This idea was first published on substack.

Consumer staples have always been a feature in the 8% eco-system because the revenues are recurring, the businesses easy-to-understand and generate good cashflows and dividends.

We have discussed Reckitt (RKT) briefly on this blog and more extensively on substack. This post serves as an update with the following framework: review, update, value and decide. The stock has performed terribly since 2020 and while the substack portfolio added at the lows in 2023, we have not seen a strong recovery. The position today is slightly underwater.

Hence, this update today. Let's start with the review of the investment thesis.

1. Review thesis

The following is the original thesis:

Reckitt is one of the strongest consumer staples companies in our times with best in class margins for OPM at 20-25% over the last 20 years and has generated consistent growth on the back of strong brands in strong categories. 

Reckitt's portfolio of Power Brands ensures that the stock in defensive in volatile times and compounds nicely over time as it has done. Reckitt's overall geography split has also geared towards developing markets which contribute to 40% of its total revenue. Its strong brands allow its products to establish themselves as premium products, with pricing power but continues to enjoy volume growth. 

While Reckitt has 33% exposure to Europe & ANZ and 27% to US, revenue growth for developed markets had also been stable. The company has generated consistent and strong FCF to the tune of GBP2bn and this should continue and reach GBP3bn in the future.

The thesis has not change much since inception. Reckitt continued to deliver the high margins and cashflows in the recent 1H results. The company grew its emerging markets (EM) business in single digit which was not too different from US and Europe. Its portfolio does have products that are more catered to developed economies such as dishwashing powder and air fresheners. Going forward, growth might have to come from both EM and US/Europe.

Reckitt also continued to manage its cashflow well growing its FCF and returning via dividends and share buyback. Its dividend yield is at a very palatable 4.4% today. Being listed in UK, there is also no withholding tax. Due to the collapse in its share price. FCF yield is close to 7%.

2. Update

The biggest elephant in the room today related to the looming litigation in its infant milk business. Earlier this year, Reckitt and Abbott were sued because its specialized milk formula allegedly caused the deaths of premature babies fed with their products. Verdicts ruled against both companies stated that they failed to warn of the risk of necrotizing enterocolitis (NEC) which has fatality rate of 15-40%. 

Reckitt was ordered to pay USD60m to a mother while Abbott also subsequently lost another case and was order to pay USD495m! There are c.3,000 cases filed against both companies and the legal liabilities could be GBP3-5bn or more for Reckitt. Reckitt has another trial with important dates starting in end Sep 2024 to Mar 2025 which would provide more datapoints. 

3. Valuation

It is worth noting that Reckitt's market cap fell from GBP38bn to GBP31bn today, more than the abovementioned legal liabilities. Although we cannot rule over future revenue impact and more litigation, the share price collapsed have broadly discounted this NEC issue. Let's look at how valuations are:

The table above shows that Reckitt has c.49% upside with IV at GBP67 per share, c.10% lower than the previous GBP70 calculated 18 months ago. However given the litigation is not over, it might be risky to do anything now. 

Peers have largely rerated in the last 18 months with average EV.EBITDA at 17x vs a more reasonable 15x when the last exercise was done. RKT does look exceptional cheap here.

4. Decision 

While there is good margin of safety, it would be prudent to buy more today as litigation could be very detrimental as we had seen with Bayer (share price dropped 50% and never recovered). The 2024 low at GBP40 would be broken should the verdict be unfavorable. If so, Reckitt could fall further to GBP35. This means the risk reward is -c.30% downside (GBP45/35) vs 49% upside (GBP45/67).

As such the decision would be to HOLD for now.

Huat Ah!