Wednesday, December 26, 2012

Sky Habitat's Crash Landing - Part 1

I have had a lot of interesting discussions with a lot of people on Singapore property over the past few years. It's always an exhausting though thriling intellectual debate especially when you are the only non-consensus view in the whole room. Yep, I was the only bear and it was a really good time for bear bashing: property prices can only go up in Singapore, there are so many rich people, even if prices fall, they will buy up everything! Look! The Marq is selling for S$3,000 psf. Sky Habitat in Bishan just sold for S$1,700 psf, see how wrong the bear is...(Yep a very bruised bear...)

Everyone became a property expert (though I did always profess that my expertise is in stocks, not property, which perhaps gave them a reason to shout louder). Yet I can remember the days when nobody talked about property as it was actually not so long ago. In 2005, my block had 30% empty units. Blocks of unsold flats stood in Sengkang and Punggol. At one point there were 10,000 empty flats. Marlboro Tan, our ex HDB Minister, was slammed in Parliament for overbuilding and costing taxpayers money. Hence he resolved not to build more HDB than needed (and we now know what happened next). These were interesting bear stories that most people choose to forget. Today the bulls have 1,001 reasons why Singapore property will rise forever. Below are the most convincing bull arguments:

1. Singapore's population is increasing to 6 million, the government has to bring in more foreign talent to keep the economy chugging along. There is a lot of demand for property so it will never fall.

2. Singapore is a safe haven and global money is flowing in Singapore, the rich Chinese, Indians, Indonesians and all the global rich and famous will continue to buy property here. Plus there are so many rich Singaporeans around. They will just buy everything if prices just drop 10%. So Singapore property will never fall.

3. Interest rate is so low, everyone can afford the mortgage. Even if prices fall, people can manage the mortgage. So who is there to sell? There will be no distress selling, in fact low interest rate will encourage more buying. Some will even buy to increase debt to fight inflation. So Singapore property will never fall.

Well, it's falling now.

Sky Habitat fell from S$1,700psf to S$1,300psf. A 25% fall and still on its way to crash land back to Earth. What is happening now?

For the uninitiated, Sky Habitat is the Capitaland development in Bishan (pic below) that was touted as a gamechanger a few months ago. Its first phase was launched at S$1,700psf and was 80% sold in the first week. Nobody has ever sold S$1,700psf in Bishan. Hence it was seen as a benchmark and the new normal for Singapore property. Hiterto, S$1,700psf was a price meant for prime areas in District 9, 10, 11 meaning Orchard, River Valley. Bishan though popular, was not supposed to be S$1,700. So when it sold well, Capitaland bid up the land next to it, at an exorbitant price, hoping to renact the success. Well, good luck cashing crashing in.

Sky Habitat

Okay, let's do a real good fundamental analysis here. Actually I did a few some time back in the Property label. But this series should serve to debunk the most bullish arguments. We start first by looking at supply and demand.

There is very strong demand - both from foreign talent and Singaporeans. This argument can easily be disputed with good demand supply analysis. Let's start with demand. We know that property demand from Singaporeans is about 20,000 to 25,000 based on the no. of marriages and also previous years of property buying (esp HDB buying). While we do not know the foreigner part we can estimate that it should be similar or just slightly less because there are 2 million foreigners vs 3 million Singaporeans. And when we get to 6 million population, it will be 3 million foreigners vs 3 million Singaporeans (since I don't think emotionless Singaporeans can make 1 million babies).

So, total demand for property should be around 40,000 units growing into 50,000 units in the future. In fact it has been less in the past few years at 35,000 units or so. Now let's look at supply. The headline no. that always jumped out is the 100,000 units that Mr Khaw, our new HDB Minister, pledged to build after a huge supply squeeze that Marlboro Tan brought about after his phobia of overbuilding. On the private property side, there is also another 80,000 units in the pipeline for the next few years. So rounding the no.s we have 150,000 to 200,000 units coming out say in the next 3 years.

So no matter how you play with the no.s we can conclude that we should see a huge over-supply over the next couple of years. Only in the most blue sky scenario - we see a maximum 50,000 demand for 3 years matched with 150,000 units being built - we can avoid a supply crunch. All other scenario will leave us with at least 10,000 of unsold flats all over Singapore (Again!).

Btw these are rough no.s that I gathered over past readings. There should be more accurate info on URA and Google. So interested parties can do more independent research (but do update back here!).

Next post, we talk about the rich and famous!

The full series:
Part 1
Part 2
Part 3
Part 4

Thursday, November 22, 2012


After one of the most high profile saga, which is still ongoing - our favourite Tiger Beer / Ice Mountain love triangle and breakup, we have yet another major story hitting the Singapore stock market. Isn't 2012 exciting? Only this time, it's not a love story, and is looking more like a tragedy!

Olam International, an integrated global agricultural commodities player listed in Singapore has been slammed by short selling research house Muddy Waters. The stock crashed 10+% but only to recover most of the gains after Olam's outspoken CEO Sunny Verghese halted stock trading and hosted two conference calls to quash Muddy Waters' claims.

Now this is where it gets interesting. Muddy Waters issued a strongly worded letter to Sunny and Olam's Board of Director mocking them for not doing the right things.

Here's an excerpt:
Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached.

This disproportionate reaction was with reference to Olam's trading halt and conference calls after Muddy Waters' criticism. Yes, Olam said they would buy back shares when they do not even generate cash and has SGD 8bn in debt, an amount more than twice its shareholders' equity, which a significant portion itself was raised from the equity markets. You see, Olam's business never actually generated much cash since it got listed. It kept asking for more money to keep going. No wonder Muddy took note and he was not the first. Some CLSA analyst raised alarm bells 2 years ago.

Here's another interesting part:
You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger... Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore (this blogger's note - OUCH!), Olam’s mismanagement of the public trust is that much less forgivable.

This really reminds me of David Einhorn's seven year battle with Allied Capital, a complex finance company that operated a sham business but was only brought to the brink of bankruptcy by the sub-prime crisis. Einhorn shorted the stock for seven years to prove he was right amidst threat of lawsuits, getting his phone tapped and constant ridicule by Allied's management.  In an almost identical plot development, Olam is now suing Muddy Waters for defamation.

Well you can argue that suing is the appropriate course of action. After all, our Ministers sue when people mis-represent the truth about them. When truth is mis-represented, you have to set things right. The key is: when truth is mis-represented. So what's the truth? Is Olam a great commodities supply chain manager or Alamak! (Gosh!), Olam's a sham?

To understand shams, we look at past shams such as Enron, Autonomy, Olympus etc. Below are three things that keep popping up in shams:

1. It's VERY complex. To make money, the business model must be complicated.
2. The accounting is creative. Not illegal per se but controversial.
3. There are a lot of big transactions. M&As, affiliated buys and sells, asset injections, you name it.

Unfortunately, Olam hits all 3 counts. It's complicated. Olam claims that it operates in over 60 countries handling 20 commodities including cashew nuts, cocoa and coffee, just to name a few. It also claims that its business model enables it to extract value from selective integration and from its capable midstream supply chain management to bring commodities from seed to shelf.

Hmm, so it's an integration, but we have to be selective, must differentiate (dy/dx) to integrate ( ∫ ) - math lovers note the pun. And midstream supply chain know-how to bring seeds to shelf, so... how... I mean what does it mean? Integrated but midstream supply chain? But can do from seeds to shelf? Sounds like a mid-river mudfish that can jump better than carps and swim faster than sharks. I guess oxymoronic business models do perhaps add value if you incorporate them into Shakespeare's tragedies. Parting is such sweet sorrow, let me selectively love you wholeheartedly, my dear Juliet.

It's complicated. So was Enron. That was a real grand complication, like those in Patek Philippe watches. Enron was buying and selling energy via a myriad of transactions, sometimes to itself and making money out of it. People who don't understand are stupid, simply couldn't get it and do not deserve to ask questions.

Enron was also "good" with its accounting. In fact it was the best. It was booking upfront revenue for contractual agreements of energy purchase that are supposed to come over 20 years. Btw this was an accepted accounting practice back then. Its auditor, Arthur Andersen approved it! Of course, Arthur Andersen died, holding hands with Enron till the end.

Now, Olam has "biological gains" which refer to profits coming from valuation gains of its assets such as livestocks and plantations as they grow up and start to produce milk, oil, whatever, which the owner can then sell, some years down the road. So our beloved Government (not forgetting the Capital G) was forthright sincere in their plea to encourage emotionless Singaporeans to make more babies. It's for biological gains and for our own good. That explains their big investment in Olam as well.

Emotionless Singaporeans

To clarify, biologic gains is an accepted accounting practice. Olam did not break any rules. Other companies use that too, like Wilmar, another commodities play listed on SGX (Singapore Stock Exchange), where a bunch of sham Chinese co.s also got listed.

So that's the innovative accounting part.

On transactions, we must first understand that to grow big you need to do deals. Reputable companies such as IBM and P&G grow to become global leaders by buying complementary businesses, growth companies and even competitors. Scale is everything. Olam is pursuing a golden strategy. Muddy waters, pls go do some filtration!

In the past few years, Olam bought 20 companies or more with USD 1+bn, the largest two being Timbercorp, an almond producer, for USD 200+m and Gilroy Foods, a vegetable producer, for USD 250m. It is also building a huge fertilizer plant for close to a billon dollars in Africa. Bear in mind that this was a mid size company with only a few hundred million in equity at that time. Why such bold moves?

As the saying goes, no venture no gain and so the Board and CEO Sunny thinks Olam (and himself) can "show hand" and pull this off. And their investors will fully back them. I guess prudent risk-taking is not in Olam's dictionary of oxymorons.

No disrespect to Mr Sunny, but it is really hard to bet that this firm of 18,000 staff have enough talent and expertise to execute 20 M&As and multiple mega projects flawlessly. IBM, a firm with 400,000 staff makes somewhat the same no. of acquisitions and projects (somewhat over the same time frame) and is trying real hard to squeeze out synergies.

Well, we have yet to see Olam touting the synergies gained. But I must say that its small SGD 100+m of goodwill for all these buying might be evidence that Olam did not overpay all that much, though there were accusations of too many bookings of negative goodwill.

But with mega and multiple deals, eyebrows are always raised. Frauds usually have to have the deal/transaction element. The Japanese medical device and camera company Olympus comes to mind. Olympus had been cooking its books for years and kept doing shady deals to hide losses. The last deal, its USD 2bn acquisition of Gyrus, another medical device company, which was supposed to pull it all off and cover all tracks, was so big that it finally blew in the fraudsters' faces. But they just might pulled it off if not for Michael Woodford, the British CEO turned whistle-blower.

In this light, Olam's big deals do cast doubts. Does it really cost a billion to build a fertilizer plant in Africa? Why another $600m of buying up biscuit makers and sugar mills after buying 20 companies. Shouldn't we pause for digestion? Even Jabba the Hutt sleeps a day or two without eating right?

Having said all that, we must be cognizant that Muddy Waters had its misses. It got one big hit with Sino-Forest but that's about it. There was Focus Media, the elevator TV maker, that it got wrong. Focus Media was no sham and is now privatized bcos the money's too good to share with other shareholders. Not to mention New Oriental Education, the Chinese test prep course trainer. The stock plunged 60% after Muddy says short and is now almost back to where it was. There is no shorting for seven years to make a point and tell the truth like Einhorn. Maybe for Muddy, the whole point was only to market the sell recommendation as loud as possible and make some cheap money. Then that's not so honourable.

So the verdict is not out. Olam may not be Olamak. Though I have to say Olam probably won't make it to my list of recommended stocks or most value investors' lists, for that matter. Huge debt, perennial negative free cashflow, multiple equity financing and an un-understandable business model. Sorry, not my cup of tea. It may or may not be a sham, we won't know until we know, but it is definitely not a value stock.

Wednesday, November 14, 2012

And Patek

After Rolex, we have to talk about the world's most coveted watch brand: Patek Philippe. Or just PP or Patek in short. Meanwhile for those who are here for the first time, this is actually part of a bigger analysis on Swatch. Do read from the first post.

Patek Philippe belongs to the few exquisite Swiss watch brands in the world of high horology, which is a chim (difficult) word for timekeeping. To borrow an avid watch lover blogger's words (again): some of these brands in the uppermost echelon of the watch world are spoken with hushed reverence. In my interpretation, it probably means they exist solely to perfect the art of watchmaking and nothing else.

This is a ranking of the top super luxury brands that I found randomly using Google:

1. Patek Philippe
2. Blancpain
3. Vacheron Constantin
4. Breguet
5. Audemars Piguet
6. A.Lange & Sohne

What is meant by perfecting the art of watchmaking? Well, some of these watches are designed with multiple grand complications (very difficult movements) such as the perpetual calendar (a watch that can tell the date, day accurately for 100 years, taking into account of leap years), the minute repeater (a watch that can tell you the exact time by chimes) and the chronograph (a mechanical stop watch, which doesn't really meet the grand complication hurdle but never mind), just to name a few.

The more complications, the more difficult it is to design a mechanical watch. Brands like Patek Philippe, Vacheron Constantin (VC) or Audemars Piguet (AP) take pride in their ability to design and integrate complications into their watches. Whereas Rolex appeal to the masses and the mass affluent with stories of human triumph, simple and useful innovation and popular conspicuous designs, these super luxury brands impress with their wilfulness in achieving perfection.

For most Earthlings, it doesn't really matter if a watch can keep a perfect calendar for the next century taking into account leap years or chime 11:59 PM soothingly but for these top echelon brands, this is their pursue of excellence. It's not about usefulness or utility, it's about creating impeccable masterpieces. Obviously there are people who do appreciate and are willing to pay for such works of art, mostly UHNWIs or Ultra High Net Worth SIngaporeans who also happen to like to buy overpriced shoebox apartments.

As with other artform, there are a few attributes that are common amongst these brands such as a long history (Vacheron Constantin was established a quarter millenium ago), rarity - every model is produced in very limited quantities, usually only a few hundred, and originality - most of these brands do not import any movements or components but take pride in producing almost every component in-house. As such, some of these upper echelon brands have actually been "downgraded" as they now belong to bigger groups (Blancpain and Breguet are owned by Swatch Group) and hence are deemed to have lost that original touch. Although this doesn't seem to apply to the said Vacheron Constantin, which is now owned by Richemont.

But why does Patek stands out above the rest? Shouldn't those that are still independent (basically PP, AP) be as good? I would attribute Patek's success to three reasons:

a. Marketing
b. Ingenuity
c. Luck

Without a doubt, Patek is one of the most powerful marketing machine mankind has ever seen. With taglines such as, "Begin your own tradition" and "You never actually owned a Patek Philippe, you merely look after it for the next generation" etc, you have to give it to them. Like we discussed in a previous post on property, how do you put a price to a family heirloom? It's supposed to be priceless!

Building on this, Patek goes out to hire famous fathers and sons to appear in their commercials, further enhancing the marketing effect. Not to mention, the controlling Stern family own father and son are true to life examples of its own marketing belief. Hence all the more people buy their stories and their watches!

But, Patek's marketing is more ingenious than that. It is believed that the firm intricately strategizes its launches and production of models such that their rare watches will do well in auctions. They make only 200+ models and 50,000 watches every year ie on average, some models can have only 250 pieces in existence! Although most popular models should go into thousands of pieces. PP is also known for its sudden announcement of production cuts for popular models such that these models will then subsequently fetch exorbitant prices in auctions.

Furthermore it has its own museum which participates in auctions to re-acquire their old watches, brush up their stories and re-market to the world, again enhancing the inspiring tales of their traditions. Its own museum had also successfully created some record prices in the past.

No other brands come close to what Patek has done with its marketing and its auction strategies. Of course, this has invited speculators as well as the criticism of honest watch lovers, some of whom then tend to favour others that remained true to just making really, really good watches.

That is not to say Patek is inferior in technology. Amongst the trinity as it is known in the watch world (Patek Philippe, Vacheron Constantin and Audemars Piguet - PP, VC and AP), Patek is still the one that has best history of innovation (though far less than Rolex, a lower ranking brand in this aspect). The most important being the perpetual calendar, which PP invented. Its minute repeater is also perhaps the most intriguing and produces the nicest chimes which contributed to its popularity.

Success = Luck + Perseverance

Patek has persevered in its marketing and ingenuity since 1851, capable employees in the firm making things happen, esp so in the last 30 years. The last piece of the puzzle I believe is simply Lady Luck smiling. With the Queen of England publicly expressing fondness for Patek and the Popes of the past owning Patek's timepieces and the famous story of Henry Graves winning the bet on making the world's most complicated watch which was commissioned to PP, luck has undoubtedly also played a role in Patek Philippe's ascent to the No.1 coveted brand in Swiss watches.

Saturday, November 03, 2012

Of Rolex

I supposed a full analysis of Swatch and the Swiss watch industry would never be complete without talking about the two most prestigious brands: Rolex and Patek Philippe. Hence this post and the next are here to fill the gap. Interested readers can start from the first post on Swatch.

Rolex is undoubtedly the most renowned brand in world of watches. In fact it's so popular that most youngsters today would eschew Rolex, believing that it's over exposed, too loud or simply too common. Some would even think that it has degraded to an "Uncle Brand". Only uncles who want to show off would buy that gold Rolex watch that is easily recognizable and the perfect way to brag about the wealth that they actually do not possess.
The Rolex logo and the model Uncles like

I read at another blog where an avid watch lover blogger aptly wrote that when people see his Rolex, there would be almost as many who would go, "Eeee, another Rolex, this guy is all about showing off." versus "Wow, cool, it's a Rolex GMT Master II!".

To understand the story of Rolex, we need to study its history (trust me, it's fascinating) and its founder. Btw, the Rolex wiki also has a good short writeup for those who want the full story.

It is worth noting that major Rolex innovations and events stopped some 50 years ago but what has transpired before that is so profound that it lasted half a century and hence till this day, Rolex is still the No.1 watch brand selling almost a million pieces per year (to be exact, experts estimate 800,000) and Rolex has a revenue of USD 6 billion, an almost 20% market share in the luxury watch market. On average, each Rolex sells for USD 7,000+.

Rolex today remains unlisted and is owned by a foundation with part of its profits going to charity. Its financials are not public and much of what the company does remains illusive to analysis. What we do know is its illustrious history.

Rolex SA was founded by Hans Wilsdorf in 1905, with a dream to make the best reliable watches for people and for those in important and noble but sometimes dangerous professions. As a result of his passion, ingenuity and a lot of business mind, Rolex has a good list of world's firsts, including the world's first waterproof watch, first automatically changing date (apparently in the past, you have to change the date yourself, every day!), first watch to show 2 time zone (GMT) and first to show both day and date. All movements were practical and yet with displays of ingenuity. Needless to say though, they were also made in-house, a trait that serious watchmakers took serious pride in having. Sadly, its innovations ended when Hans died in 1960.

But what's more fascinating about Rolex is its participation in significant events of human triumph. Such as being the watch that was wore on the first conquest of Mt Everest or the watch that went to the deepest dive in Mariana Trench some 10,000 metres deep. Still working, of course at the extremes of our beloved planet. (Well... Omega went to the moon, hence this blogger recommends Swatch which owns Omega :) It was also the preferred watch for soldiers and pilots during the WWII which were, unfortunately, confiscated by the Nazis.

Its enduring effort to help others with innovation and pure simple generosity is another hallmark of its legacy. For the POWs who lost their watches to the Nazis, Hans made sure that the soldiers received a free watch as long as they wrote a letter to Rolex. Then in the 1950s, when pilots needed to fly transcontinental, Rolex developed the GMT watch for PanAm so as to help the pilots and crew cope with jet lag and communications back home.

For workers working in environments that caused interference with mechanical watches (engineers in power plants, doctors using MRI etc), Rolex developed the Milgauss that is anti-magnetic. As for sea-farers, mountain climbers, racers, trekkers and explorers, Rolex have dedicated models to them and some of these are also the best selling and are the best retainers of value.

The Rolex Milgauss

It is hard for us to fathom today, but during those times some 50 years ago, an accurate watch was very important not just for professionals but also for normal folks. There were stories of train crashes because the operator's watch wasn't working well. Hans understood this need for accurate timekeeping for everyone, especially for some who cannot afford Rolex. So he created a second line called Tudor, which uses ETA/Swatch movements so that others can afford them. Today Tudor is seen as 2nd class and hence almost fading into oblivion, but I see the decision back then as a noble one of empowering the working class. One that is close to the heart of Hans and Rolex's legacy.

With all these strong powerful emotive stories behind Rolex, is it a wonder it grew to become the most well-loved watch brand globally? Of course, most aunties and uncles probably don't know the stories of trials and tribulations behind the Rolex brand. They just buy to show off, or they buy it as a store of value, knowing that it will be worth at least 70-80% of their purchase price should they need to pawn it some day. Actually most Rolex watches if held long enough (like more than 10 years) sells for more than its purchase price.

For aspiring watch lovers who bothered and researched about the world of watchmaking, they would usually go full circle with this love-hate Rolex relationship, just like many others before them. We hate it for its conspicuous ubiquitousity but grow to love it for what it stands for and what it is worth.

That's the story of Rolex.

Sunday, October 28, 2012


As mentioned, one of Swatch's biggest advantages is its dominance in the business of making mechanical watch movements.

Start from the first post on Swatch.

When the Japanese started making watches in the 1970s, it decimated the Swiss watch industry. Production in Swiss movements declined from 40 million units per year to 4 million units (90% Crash!). Most Swiss movement manufacturers bankrupted and Swatch was formed initially as a merger of a few movement companies. The most important two being ETA SA and Nivarox FAR. This resulted in Swatch having dominant market share in various parts from 50% to almost 100% for some key components.

Today, movement unit sales have risen to about 6-7 million shipments (up from 4 million 30 years ago) and Swatch produces 3 million movements via its ETA subsidiary, roughly half of which is being used for its own brands. The bulk of the remaining movement makers are Rolex, Patek, Audemars Piguet and Jaeger-LeCoultre (Richemont) that produces movements for their own usage only. Two independent players Selitta and Soprod makes a few hundred thousand movement each. As you can see, this industry is a closed oligopoly. New entrants have a hard time since they have no way to produce or source enough movements to make an impact.

It is estimated that a mechanical watch has approximately 130 parts and the movement which forms to core of the watch sells for roughly USD 200 (Swatch's estimated average selling price). As history has it, Swatch/ETA produces movements to supply other players such as Richemont and LVMH for years, in fact since its inception from the aftermath of the Japanese onslaught. It was a neat arrangement for the industry to counter the Japanese. But today, these other brands will take these movements at USD 200, put on their own outer design and branding and sell for USD 5,000 to the end consumer.

Hence Swatch decided to prioritize in-house use a few years ago, announcing that they would like to reduce supply to external buyers, earning the wrath of its clients. This issue went all the way to the Swiss Competition Commission for arbitration which ended in favour of Swatch. Swatch/ETA will reduce its supply to external parties by a few percentage over a few years, forcing the other players to find alternative sources of movement or invest in new capacity on their own.

So that's the story of ETA but what's more powerful is Nivarox FAR (or Nivarox in short). Nivarox produces nano mechanical components such as escapement and balancing mechanism and hairsprings needed for "automatic" mechanical watches. This innovation basically allows mechanical watches to self-wind whenever the wearer moves and also increases the no. of hours without winding (the reserve). It is estimated that Nivarox has 80-90% market share here with the rest of the players basically producing a portion for their own in-house use.

As a example, Rolex both produces such escapement and balancing movements in-house but also procures from Nivarox because it does not have enough capacity to supply all its watches. So if one day, Nivarox says, "Rolex, we are sorry, we won't supply you anymore.", Rolex will be in a tight spot. But this is also the story for every Swiss watchmaker as Nivarox basically supplies to all the big brands including Rolex, Patek and most of Richemont's brands (IWC, Panerai etc). As a result, Nivarox is actually one of the most critical company in the mechanical watch industry. Swatch owns Nivarox.

Despite Swatch's recent change of heart, the Swiss watching making industry has come a long way since its near death experience. The industry is very closely knitted and it is unlikely for Swatch to turn very hostile towards its peers/competitors. To add, Nivarox does not necessarily sees it the way Swatch does. The company will dutifully produce its nano components be it Rolex or Patek or Tag Heuer since they are all Swiss watches and have gone through a lot together. Besides, Swatch has 150 production centres in Switzerland with employees with friends and relatives all over the industry. It is not as easy as to just cut supply outside Swatch Group tomorrow.

Also, Swatch earns 20+% operating margin in its movement business, quite a good margin as a result of its dominance. The difference in operating margin is about 3-5% between its movement and brand business (brand being higher). So while there is some product mix improvement by producing more movements for in-house brands, it is not game-changing for Swatch. Swatch would most likely continue both businesses while shifting marginally to increase its brand business over time.

To be continued...

Tuesday, October 23, 2012

Is Watchmaking a Good Business?

This post is a part of a full analysis of Swatch.

Swatch is in the business of making and selling watches. After determining its investment thesis and valuation, we must dive deeper into understanding its business better.

So is watchmaking a good business?

In the 1980s, most people would argue that mechanical watchmaking sucks. Who needs watches that require winding, maintenance and yet not as accurate as battery operated ones? The story of the demise and revival of the Swiss watchmaking industry is a fascinating one. I suppose you can find a much better version using Google, but for your convenience, let me just briefly summarize here.

About 40-50 years ago, there were no battery operated watches and the Swiss dominated the watchmaking industry. But the Japanese came along, with quartz watches (Seiko and Citizen) and pure battery digital ones (Casio) and virtually wiped out the Swiss watchmakers. Export volume plunged 80% and employment halved. It was a major catastrophe.

In the midst of the crisis, Swatch was born. It started combat with the Japanese from a different angle: cheap watches with bold designs and innovations such as very thin watches and a totally different time concept using decimals instead of hours and minutes. Then as it consolidated its mechanical movement making subsidiaries and acquired more brands, Swatch began reviving the mechanical watch industry by positioning themselves (and other Swiss watchmakers) as luxury items. Its key brand being Omega - the watch that went to the moon which is also wore by the world's most famous spy: 007. Swatch started viral marketing decades before the term viral marketing came about.

Today there are 50-100 brands in the mid to premium luxury mechanical watch segments (price range from USD 500 onwards) and Swatch has 18 of them, of which 3 of them: Omega, Breguet and Blancpain accounts for USD 3 billion out of these market segments which has an estimated global revenue of USD 20 billion . The top 5 players account for the bulk of the revenue as shown below.

Swatch: 6bn
Rolex: 5bn
Richemont: 5bn
LVMH: 2bn
Patek Philippe: 1bn

It is worth noting that Swatch, Richemont, LVMH and PPR (another luxury conglo with brands such as Gucci and Bottega Veneta) owns 45 or more watch brands out of the 50-100 top brands. In reality, counting all the smaller brands, apparently there are 400-500 Swiss watch brands altogether, so the Big 4 have roughly 10% market share in brand names (but it's 80% market share in value). Most luxury watch brands that we see are actually no longer independent such as IWC, Panerai (Richemont) and Tag Heuer (LVMH). New brands also aspire to be bought out by these conglomerates as it represents a windfall for the owners while adding firepower to the buyers. Obviously the two biggest mega watch brands: Rolex and Patek are still independent and privately owned. The other major independent brand is Audemars Piguet.

So how is this business now?

I would say that luxury watches continue to enjoy good secular growth driven by increasing no. of mass affluent households globally with the top few brands continuing to dominate given their high market share (Swatch 20%, top 5 players account for more than 80%) and mind share.

Swatch and the Swiss watchmakers have successfully hypnotize global affluent consumers to accept the inexplicable high values of Swiss watches. This is very similar to De Beer's campaign a century ago, "A diamond is forever". Well, we now know that a diamond is just a rock and definitely not in scarce quantity (it's carbon, one of the most abundant element on Earth) but yet we way overpay for them anyways. The proof of way overpayment: an industrial diamond costs a fraction of the one that sits on your wedding ring.

You see, branding is perhaps the most enduring business moat. Somehow consumers are wired to pay a premium for brands. This phenomenon ought to be studied deeply but I would argue that humans dislike unpredictability and adores familiarity since prehistoric times. A good brand brings about just that: familiarity and a promise that what you pay for is what you expect it to be.

It is said that babies can recognize the Macdonald's golden arches before they recognize other alphabets and even for ourselves, when we are on an overseas trip, in a foreign supermarket, we will buy the brands we know so well right? Why risk using local diapers or generic toothpastes?

Luxury brands obviously have that same appeal: it is a guarantee of a certain quality. On top of that, it is also a status symbol. For better or worse, we buy luxury items to show off. (Yucks but true.) For some, it's as loud as possible. For others, it's subtle and only the like-minded would appreciate. There is no way to justify luxury good purchases using a value philosophy. Value and luxury are opposite poles.

Watches lean towards subtlety. Only people who like watches can tell whether it's really expensive, or really really expensive. Of course there will be Rolexes that are all about flaunting but real watch lovers learn about movements, appreciate the intricacies of grand complication movements such as perpetual calendar (watches that can accurately tell time, day and date adjusting for leap years for the next 100 years) and world time (auto adjust when you are in different cities).

Swatch is the embodiment of all these as the largest player in retail sales and movements. It is in the business of building brands, with key competitive strengths coming from huge economies of scale and its distribution prowess.

See the first post on Swatch's investment thesis.

Tuesday, September 25, 2012

Swatch Group

As promised (more company analysis and stock ideas), in the next couple of posts, we will discuss a new stock idea: Swatch Group. To most people, Swatch represents the trendy Swiss watch brand with colourful and bold designs. The evergreen outlet at Raffles City might be most Singaporeans' key contact point. And some of us remember its "Skin" line which was THE coveted watch for teenagers in the 90s. Something like the iPhone 5 today. Well... those were the days.

The Swatch Group, besides the Swatch brand, is also the world's largest supplier of watch movements for mid to high end watches and owns a portfolio of brands from basic, to mid, high, luxury and prestige brands including Swatch, Rado, Tissot, Longine, Omega, Blancpain and Breguet. Don't play pray right?

Ok it doesn't have Rolex and Patek lah. Which are both privately held and we probably won't see them become listed entities any time soon.

Here's the Investment Thesis.

The Swatch Group is the the world's largest vertically integrated manufacturer of watches, components and movements with an estimated 50% market share in watch movements and 20% in mid to luxury/prestige brand segments. Its huge portfolio of basic to mid, high, luxury and prestige brands enables it to have distribution clout while its luxury and prestige brands such as Omega and Blancpain also help capture significant mind share of both general and affluent consumers. With 50% of its sales comes from Asia, which is also the fastest growing segment, Swatch is posed for sustainable long term growth with formidable business moats including brand, distribution and scale.

Well as you might have guess, I am going through the questions on the "Stocks" page where I try to answer all the questions. So next is Valuation.

Swatch trades at 15x earnings this year, but 13.5x one year forward and 12x two year forward (based on my estimates) which is not exactly expensive for such a strong franchise. Obviously the reason why it is not trading at 18x is bcos everyone is afraid of China. 1st level thinkers are saying China continues to stumble with GDP growth slowing further. The escalating tension over some remote islands and Bo Xilai coup de'tat remains to be huge risks near term. So Swatch which is so exposed to Asia and China should be avoided.

Well, good franchises seldom give you the chance to buy at low teens PE. Anyways we will discuss this issues again when we reach the "Risks" part.

Dividend is not great, 1.5-2% based on my estimates but that's to be expected for such a strong franchise. The caveat is that dividend should grow over time.

On other measures, which we will discuss in detail when we get to the Financials segment, Swatch looks reasonable too. EV/EBITDA is roughly 8x and Free Cash Flow Yield is 5%. Again, these are fair valuations and not screamingly cheap. But for a global franchise, it's probably as cheap as you can get. If it gets cheaper, gotta sell your mother and buy liow! Ok just kidding. Investments can always go wrong. Exercise risk controls.

So there you have it, a great Swiss franchise with great brands, exposure to growing markets and at a fair valuation. What more can a value investor ask for?

Next post, we discuss in deeper details the Business and other stuff!

Disclaimer: this blogger owns Swatch.

Thursday, September 06, 2012

Selecting Unit Trusts

As mentioned in the last post, there are 400 unit trusts in Singapore. How to choose the good ones from this mega-menu? I guess that’s why most people rely on 23 years old sweet young looking financial advisers, who usually does as great a job as a monkey promised bananas. But never fear, there is always help for those who are keen to explore.

Again, we take a look at PhillipCapital since they have one of the best online brokerage systems in town. I tried out their Fund Finder to see what I could get.

The first place to start is at the Advanced Search Criteria. But what if we are not advanced yet? Not to worry, it’s just terminology. It’s easy enough for monkeys so we should be ok. First, select the different asset class, geography and strategy so as to reduce the 400 unit trusts to a fraction so that you can eye-ball them better.

I have alluded to before that unit trusts would make better sense for bonds since ETFs haven’t really come up with a lot of bond ETFs yet. (Well it’s much harder to construct bond indices, and without bond indices you cannot have bond ETFs. So we need to rely on bond unit trusts.) So in the screen shot below, I simply selected “Bond”. Then the 007 logo appeared and I was treated to a 5 min sneak preview of Skyfall, starring Daniel Craig and Cecilia Sue as the bond girl.

Ok, just joking. After selecting Bond and clicking filter, I get to see just the bond unit trusts. Though that’s just the beginning. At the Search Results, you would then have to click on each unit trust to see the details. For me, I drilled into this PIMCO High Yield Bond. (see screen shot below)

The webpage goes down all the way, with general info, dividend info etc. I shall focus on a few key points to think about when selecting a unit trust.

Who is the Fund Manager?

There are 20-30 bond fund managers listed here and for those of us in finance, we see familiar names like Fidelity, PIMCO, Schroder, Templeton and also local ones like UOB, Lion, Fullerton etc. PIMCO is really the stand out brand here, which is why I chose it. As you might know, PIMCO stands for Pacific Investment Management Company and is the world’s largest bond house. Its top management such as Bill Gross and Mohamed El-Erian are also world renowned investors. Real investing gurus! Don’t pray pray.

So the key point here is to really stick with the good names, such as PIMCO, Templeton, Legg Mason. There are others like Fidelity, Aberdeen which are good at equities, traditionally. PIMCO is the only one good at bonds, seriously. Of course, no rules ever work without caveat in the world of investing. So you start by picking the brands, but you still need to drill the performance and other no.s.

But to my dismay, PIMCO is not on promotion, which means you pay full fees. Bo pian lor (We have no choice), go for others like Aberdeen, Legg Mason.

I would say avoid Lion for now, this is a local house that has gone through a lot of issues and still has a lot of issues. Maybe things will change in time.


The other way to cut through the grass is to look at the sector/strategy filter. I would say filter via something like Global, Asia Pacific, Emerging Markets. I tried High Yield but the results were a bit strange (the performance of different funds differed too much). High Yield is a really appealing term in yield hungry Singapore but in the bond world, maybe it means something else. So really, these are just filters. It takes a lot more work to get to the real selection.


The other criteria that a lot of people will look at would obviously be the fees. As mentioned, PhillipCapital is having a promotion for bond funds and sales charge is zero during the promotion period. So this helps to cut down the fees.

Investment is a product that has no intangible benefits. If you pay 1% to your broker, or financial adviser, you get 1% less return. Over time, this 1% will significantly reduce your total return. This is unlike an LV bag, or Rolex watch, whereby you can pay a lot, benefit a lot of middlemen in the whole food chain and yet still feel good. Bcos there are intangible benefits: mostly just feeling shiok (awesome) that you hold a $8,000 bag or wear a $10,000 watch and can brag about it. Hence make use of the promotion and get a good deal! As mentioned, PIMCO, the best bond house, is not in the promotion, so can only go for others like Aberdeen and Legg Mason.

It also pays to look at the annual fees being charge. Although the sales charge is gone. You still need to pay the asset manager an annual management fee. Usually it adds up to 1% for most bond unit trusts. This cannot be helped. Over time, hopefully management fees will decline as well. So just make sure it is not exorbitantly high.


The other key factor would be performance. Most people, when shown the chart below, would be happy to buy. Their rationale: if this thing has gone up, then it’s time to join the bandwagon. I would advise against that. Unit trusts invest in assets that move in cycles. It is always better to buy cheap, not at the top of the market.

The important performance no. to look at is the one in the last column: Return/Volatility. Over time this number falls below 1. It is said that even the best investors would only have a ratio of 0.5. Obviously the history is not long enough for this PIMCO fund. Try to look at the 5 year or 10 year track record. If it’s still more than 1, then it means that the fund manager really has skill. Put your money with them!


At the end of the day, we come back to Price. Looking at the chart with the benefit of hindsight, the best time to buy would be Oct last year (2011) when the Europe crisis was full blown. Greece was going bankrupt and everything. But usually, no guts to buy then lah. Phillip advocates this savings plan, ie you just keep buying say every 6 months. $1,000 at a time. But the problem is that the commission on this plan is 2% or more (if I read correctly). Hopefully they come up with a promotion for this too!

It also pays to really just spend time to find out more. (Not too different vs researching on stocks). You talk to other investors who have bought unit trusts before. You read up old reports, old prospectors about the unit trust etc. Just like stocks, sometimes it takes a while to understand to full picture. Esp when we all have full time jobs and can really handle these things parttime.

Nevertheless, personal finance and investing is something really crucial in today’s modern world but yet most people have limited understanding of the workings and how to really make the intermediaries work for us and not vice versa. Phillip/Poems is a good place to start. So go down Raffles City and open an account!

This is a sponsored post.

Sunday, August 26, 2012

Unit Trusts’ Price War!

As we were discussing in the last post, unit trusts charges slightly higher fees vs ETFs but it allows retail investors access to other asset classes outside equities.

Last checked there are about 400 unit trusts in Singapore with Asset Under Management (AUM) slightly under $40bn. The unit trust industry as a whole is not growing that much as alluded to before. When the market is not growing, the players need to grab market share in order to survive.

One of the bigger players here is again PhillipCapital. They have a good introductory site for unit trusts for those who are still not familiar.

In the past unit trust charges high fees and doesn’t really value add much since most of the fund managers never fulfill their mandate anyways (which is to beat their benchmark). With the pie shrinking, the players have resorted to lowering fees in order to gain market share. Hence, the fees have been coming down over time. It used to be 5% upfront, now it’s closer to 1-3%.

A couple of years ago, our beloved national paper Straits Times happily announced a Unit Trust Price War was under way when some players cut the fees to 1%. The same article also happily interviewed so-called seasoned investors who invested $300k in unit trusts and who didn’t mind paying when upfront fee was 3-5%. Bcos if the financial adviser gave good advice, it was worth it! Well with that upfront fee amounting to $15k, I hope that he really did receive golden advice. Meanwhile, I give free advice here.

So since then, the industry never looked back, fees are coming down, though still high compared to ETFs at less than 1% but it’s much better than 5%. We don’t even get salary increment of 5% right? How did these guys justify 5% upfront fees in the past? PhillipCapital has probably realized this dilemma for some time. How can fees be so high when investment return is only 5-8%pa over the long term. Even at say 2%, this still represents 25-40% of the annual return that you can get. So they upended the competition to bring fees even lower. Now Phillip charges 0.75% upfront fees and zero platform fees (see table below). Hence you save a lot of money over time. Like close to $2000 over 5 years, according to their calculations.

The table below compares their fees across the competition.

In fact, they are now having a promotion whereby you pay zero upfront fees for certain products. Of course there is still the management fee that each unit trust will charge, usually 1-2%. Sadly that’s still high in my opinion and that’s going to stay. Fund managers and analysts also have families to feed. We can’t expect them to eat their own research reports right?

Besides lower fees, Phillip also has other advantages such as zero cash deposit for investors who intend to buy (other competitors usually require some cash upfront). But if you choose to put cash with Phillip, then it is parked in a money market account that earns interest.

In fact, Phillip goes all out to grab market share.

They even offer this fund transfer service (usually FOC unless it’s StandardChartered or AIG, ie banks that are in trouble with regulators) whereby you can transfer your unit trust bought on other platforms or banks onto Phillip’s platform. And they give you $200 NTUC vouchers!

Last but not least, there is always the powderful online platform. For Unit Trust, you can read updated research published by the funds themselves, have a quick look at the funds information sheet and even screen for the top and worst performing funds. (See screen shot below)

As you can see, for 10 years, there are no funds except for this LionGlobal SGD Money Market. Maybe the history is still too short in Singapore. Or maybe any fund that get into the worst performing 10 year category auto shutdown so as not to lose face. Hopefully those seasoned investors did buy the Indonesia and Thailand funds, that would have made is $15k sales commission worthwhile.

Another interesting point is that this LionGlobal returned 15.66% over 10 years, which is like 1.4% per year. And we don’t know if this is before or after fees. So if the seasoned investor bought into this, his first 3-4 years of return would have been used to pay his financial adviser, who probably looked like Cecilia Sue.

In any case, at 1.4% return per year, you might as well buy Singapore Government Bonds (SGB), that’s risk free. Last checked, over 10 years it also gives 1.4%. Btw you can also buy SGBs over poems too! Well anyways, past performance is not a good indicator of future returns. So pls do not buy the top performing funds. Usually, that won’t work.

Next post, we discuss some tips in selecting unit trusts.

This is a sponsored post

Friday, August 17, 2012

Poems and Unit Trusts

I recently explored Poems in detail and was pleasantly surprised by all the upgrades done to its internet system. I must admit Poems (as in this one, by Phillip Securities) has one of the most powerful internet system for fundamental research. They might also have a good one for technical analysis but I am no expert here.

The current platform allows you to do screens, and access poems research database and look at past 5 year financials for all companies that you can trade on poems, which includes US, UK, ASEAN, HK/China and even Japan markets. Man, this is really powderful. I played with it for a while and concluded that this is probably one account that any serious Singapore investor should setup.

Go down to Raffles City today, they have an office at the Raffles City Tower and get the account done. Well you can actually do online, but they would need to snail mail stuff to you, get signatures and all the crap, so it might be easier to just make a quick trip down and settle stuff once and for all.

Oh and do remember to bring the relevant docs like IC, bank account book, CPF contribution history etc, do check their website for the documents required. It might also be prudent to bring your your PSLE and O Level certificate, a 300 words self-introductory essay, your Facebook photos with at least 3 friends and your next of kin or significant other, just in case. This is Singapore after all. We want to verify everything.

Ok, lets take a look at the system. I always intrigued by the stock screener. So I went in to play a bit. To access the research, all you have to do is to go to the top column, click stocks -> research. Then you can see a whole bunch of cool stuff like MyResearch, Singapore, Regional Market Focus, Dataline, News and at the right end -> Stocks Screener.

Here’s a screen shot:

Sadly I remember the old screener to be slightly better. The new one, you are given dropdown menu to choose. And to my dismay you can’t really get the dividend screen right. Bcos it only allows you to choose 0,5,10,…,50% dividend yield. Now most co. give only from 0-5% dividend yield. So how to sieve out say 3% and above? The answer is cannot… Here we have one of the most dividend hungry nation and our best brokerage house can’t get the dividend screen right. What the… But I believe they will improve this soon. Someone pls feedback.

Well you still can do PE, Debt to Equity and PB screens lor. And you can also screen overseas market.

But the coolest thing on Research is this thing called Dataline. Again to access go via Stocks->Research->Dataline.

Here once you get in, after agreeing that the info you get may not be accurate so pls use at your own risk blah blah, you can basically access the past 5 year historical financials for any companies that you can buy via poems. And you can also access analysts’ estimates and some snapshots of ratios and valuation. Well good enough for something that comes free with just signing up.

Below is a snapshot of F&N’s balance sheet. Amazing right?

So with this one account, you can do a lot of work without pouring through pdfs and paper copies of annual reports. Of course, this step is more for doing quick checks. When you do the deep dive analysis, you still need to read annual reports. Sorry bro, no shortcuts.

Besides the powerful research, I also explored Poems unit trust, or Phillip Unit Trust. For the longest time, I believed that most unit trusts take too high an upfront sales charge. In prehistoric times (ie maybe 10 or more years ago), it was like 5%! And investments only earn you 5-8% return per year… So you just gave 1 yr’s return to the distributor. But things are changing. As in the fees are coming down.

For the un-initiated, a unit trust, also known as a mutual fund, is an investment vehicle that allows retail investors to put money with a professional fund manager to help manage and grow the money. Usually the fund manager will be given a mandate, like to try to beat the S&P500 index, or the STI, or a commodities index.

Ok, for those following this blog long enough, we know that 80% of all fund managers never beat the index. Why put money with them? Just buy the index. That is true. Hence ETFs, or exchange traded funds has ballooned in recent years. ETFs charge much less management fees (usually less than 1%) and no upfront fees and you trade it like a stock. It’s so popular that the amount of money with ETFs would probably eclipse unit trusts within the next decade. Since I was at it, I estimated that the Asset Under Management (AUM) for Singapore ETF is probably around $4-5bn while that of unit trust is at $40-50bn. Yes, 10x difference now, but one is still growing fast while the other is stagnating. Btw, total AUM in Singapore is mind-boggling 1.3 trillion!

Ok, since ETF is so great, why buy unit trust then?

The answer is ETF has less offering for bonds and other asset classes (outside equities). As a normal retail investor, it is virtually impossible to build a bond portfolio by buying bonds yourself, esp in Singapore, where one bond has the face value of $200k. So unless your portfolio is like $10m, and you split $5m for stocks and $5m for bonds, then your bond portfolio can buy 25 bonds. For most of us, we struggle to buy 1 bond :)

So the alternative would be to buy a bond unit trust, which will have bonds of different companies in one offering. Yes, we then have to pay up the 1+% management fee. But in order to build a resilient investment portfolio, that might not be a bad option for now.

Next post, we discuss Phillip’s advantages and offerings of bond unit trusts.

By the way, PhillipCapital is hosting a Value Investing Conference with Mary Buffett attending. Do take a look!

PS: This is a sponsored post.

Saturday, July 28, 2012

Starring: Crouching Tiger, Elephant and Giraffe

Once in a while, we have a huge corporate saga that really deserves a book. But that's gonna take years to write. So meanwhile, I write what I can. Most avid investors in Singapore would have guessed what's this about. Well, we are going to discuss F&N, APB and Tiger Beer, Thai Beverage with Chang Beer, Heineken and Kirin Holdings of Japan.

The formal introduction of the players:

Star: Heineken
Tiger: F&N and Asia Pacific Breweries
Elephant: Thai Beverage and Chang Beer
Giraffe: Kirin Holdings

The story:

Once upon a time, there was a Tiger, an Elephant, a Giraffe and a Star. The Tiger and the Star were a couple for a long time. But one fine day, the Giraffe pronounced its love for the Tiger. So did the Elephant next day! And the Star got mad!

Ok let's get serious.

In 1884, John Fraser and David Neave founded F&N. Geez, that was the era when the East India Company fought the Pirates of the Caribbean and Chinese in Singapore then had pigtails! Anyways, nothing much happen then until 1931 when F&N decided to form a JV with Heineken to make Tiger Beer. That's the beginning of Asia Pacific Breweries and over the years, Tiger grew to be the biggest brewery in this part of the world (S.E.Asia) with 120 beer brands (and we only know Tiger right?), 30 breweries in 12 countries. It usually has the No.1 or 2 position in most countries and it makes a huge amount of money for its parents.

So it's naturally that APB got listed, with 20% free float and roughly 40% stake with each of its parent: Heineken and F&N.

Meanwhile, F&N grew to become a non-alcoholic drinks maker, a publisher and a giant property developer. It's best brands are well-loved in Singapore, such as 100 Plus, Seasons Lemon Tea, Ice Mountain, Times Bookstore, Fraser Suites and Centrepoint etc. Temasek had a stake. Our banks as well.

In 2010, the giraffe from Japan came. Kirin bought over Temasek's 15% stake for SGD 1.3bn. Paid a huge price for it. Temasek was happy selling out back then. Little did they know that that stake is now worth *gasp* 2bn today! They left 700 million on the table! Ok that's not fair lah, back then it was sold at a huge premium. The Japanese like to overpay.

Kirin wanted to beef up its overseas beverage business. It had San Miguel of Philippines for beer. It had Lion Nathan in Australia for diary products. It wanted F&N to fill in the gap. But 2 years passed, nothing much was achieved. Kirin had some good products like Afternoon Tea and Fire Coffee, but it was never distributed via F&N.

Fast forward to today, the elephant charged into the room. Thai Beverage, brewer of Chang Beer and alcoholic spirites like Mekhong and Sang Som rum, stormed in and bought 22% stake from the OCBC group effectively making it the biggest shareholder of F&N. Back in Thailand, the beer market is one big Zoo with the elephant actually getting bullied by the Lion (Singha), by Tiger, even the giraffe and other smaller animals. But it has a dominant share in white and brown spirites, with some brands even having 200 year history one. That's like when Thailand was called Siam and their Kings were busy building temples to rival Angkok Wat. That's some 80 years before F&N's founding in 1884! Really once upon a time one.

Anyways, with 2 foreign entities owning 37% of the F&N, Heineken of Holland panicked. Maybe they might do something with its baby: Asia Pacific Breweries. And so the Star decided to jump in with an offer to buy out APB, the subsidiary of F&N and Heineken, at SGD 5.1bn dollars. This throws a huge spanner into the gears as F&N without APB would become a small drinks business and a property play, which both Thai Bev and Kirin wouldn't be quite interested in. So now tonnes of questions are being asked.

What will happen to our beloved Tiger Beer brand?
Will F&N breakup?
What will the elephant and giraffe do?
Did Temasek and OCBC just sold out too cheaply?
What about Chairman Lee Hsien Yang?
He just became Chairman not too long ago, if no more F&N then where can he go?
Why did Heineken pay so much? What is it that they see in Tiger?
And Jessica Alba, our Tiger Girl, will she jump ship?

So many questions! Ending the post here would be a perfect cliffhanger. But then really quite zek ark (disgusting) with not much value add to serious readers. So let me attempt some forensic analysis.

Now APB has an EBITDA of S$700m last year and probably closer to S$900m this year. Considering the synergies Heineken can extract, which should be at around 20%, we are seeing EBITDA of S$1.1bn in 1 or 2 years. Considering the growth profile of APB, it might be reasonable to pay up to 12x EBITDA for this. Well, AB Inbev, the world's largest beer co. did pay 16x for Modelo recently. So this means that Heineken will be willing to pay up to S$13.2bn for the whole APB, or S$5.3bn for F&N's 40% (APB has no debt, if it had, the calculation will need to factor that). This means that there is probably some juice left to squeeze out of Heineken, if Chairman Lee Hsien Yang agrees with the math and leads the board to arm-twist Heineken. But not much more, remember the first offer is already S$5.1bn.

Meanwhile, Heineken blinked and extended the deadline, which was supposed to be yesterday (27 July Fri).

What about the elephant and the giraffe? Well they can't complain much since they benefitted with Heineken doing this stunt and F&N just went through the roof from recent $6+ to now closer to $9. Meanwhile, it might not be unthinkable that either of them, or both of them are scrambling to buy more F&N in the open market to get to 30% stake or more such that they have a bigger say in the eventual breakup. Which explains F&N going from strength to strength.

Now, Kirin is very interested in the drinks business and the Japanese has a history of really overpaying, especially so with the current strong yen. It might bid high for the drinks part. So will Chang Beer say OK to a good price? But then they will be left holding with a property business and cash that was sput out along the way. How does that tie in with their Thailand business? Hmmm, these are questions for Part 2, more thinking is needed.

But what's the real strategy to make money here? Sadly, there isn't any great ones. Things are playing out too fast. APB is ABOVE Heineken's offer price which means the market is saying F&N will ask for more. And F&N itself is all time high driven by more buying in anticipation of more bids for its other businesses. Chang Beer didn't really do anything after the news broke but it did rally beforehand. And so did Heineken. Meanwhile Kirin is stuck in submerging Japan, so not so interesting.

Maybe the moral of the story here is to keep looking at consumer staples names. Over the long run, they have proven to be great investments most of the time. The first ever stock discussion on this blog: Colgate, is up a crazy 60% including dividends in less than 2 years!

We shall discuss the other questions and further updates as the saga unfolds.

Friday, June 08, 2012

Start With Why

Just saw a great video on TED. The speaker was Simon Sinek and he was sharing how leaders inspire by appealing to peoples' hearts and emotions. The way they do that is to "Start with Why". The leaders share with the people why they do the things they do. When people see and believe their causes, the inspiration follows.

He asked a question: "If you ask someone what his company does, he would have no trouble answering that, but few people would be able to answer WHY the company is doing what it is doing". The reason that a great company is able to keep growing sales and profits while their competition "cui" (ie falter) in the wind is because the company has a belief and that belief is what defines them and inspires people to believe in what they believe in.

He used Apple as an example as it is easy to understand. There are a dozen or more computer makers in the world but they all cui while Apple rules the globe. Why? Apple has a mission. The firm believes its mission is to create technological products that are easy to use, fun to use and help us connect better with technology and also with other human beings. The firm believes its mission is to think different and bring the best of technology to enrich peoples' lives. Apple happens to just make computers and mobile phones. And we buy their products by the truckloads. It is not WHAT you do (or make), but WHY you do it.

Take Colgate as another example. A stock which I have talked about and own. (Yes pls read the disclaimers carefully :). Colgate does not just sell toothpaste and dental stuff. The firm believes it is their fundamental mission to help everyone have better dental health. They started campaigns to teach school children to brush their teeth when they were young. Those Singaporean readers old enough would know this! They continue to innovate and create better toothpaste (try Colgate Total for its new sensation) and toothbrushes (those that massage your gum while you brush). Colgate's competition is how to give ever better dental care, not P&G. That is why it keeps growing market share. It is the firm's belief that defines it and help grow sales.

He gave an interesting quote on employing staff: "If you hire people just because they can do a job, they’ll work for your money. But if you hire people who believe what you believe, they’ll work for you with blood and sweat and tears."

So when people believe what you stand for, not just will they buy your product, they will want to work for you. And you don't need to pay them! They will also help you spread your belief. Bcos that's what they believe in as well. Humans have an innate capability to empathize and that is why we follow those who believe in their cause.

Whether they're individuals or organizations, we follow those who lead, not because we have to, but because we want to. We follow those who lead, not for them, but for ourselves. And it's those who start with "why" that have the ability to inspire those around them or find others who inspire them. Quote from Simon Sinek.

So here is what I believe.

I believe that I can help everyone identify bargains. Not in the bargains in real life during the Great Singapore Sale, whereby it's almost effortless and everyone knows that three for $10 is a good buy. And obviously, nobody needs my help there.

I believe I can help everyone make good investments and avoid bad ones. I live in the financial world and see fortunes made and lost. Sometimes unduly lost. I brushed up my expertise in identifying bargain investments such as stocks, bonds and properties and I want to help everyone understand when we should be buying; ie when things are cheap like some global stocks now. Not when the market is hot and your grandma opens a brokerage account so that she can buy Creative in 1999. Hence I also believe that I should help people avoid expensive stuff. Like Sky Habitat at $1700 psf. Or Facebook at 50x PE.

The way to achieve my goals are already spelled out nicely in value investing and what the masters have been saying. I believe that it is the purpose of this blog to apply the principles in value investing to help identify bargain investments. It will take some effort for the un-initiated to be familiarized with some concepts such as margin of safety and valuation. But I believe that is not at all difficult if you are willing to put your mind to it.

I believe that the world will be a much better place if more people understand value. We will not see Sky Habitat at $1700 psf, or COE at $90,000 bcos people understand that it simply doesn't pay. Let alone makes sense.

Well, that is my belief.

Tuesday, April 10, 2012

Are you buying for own stay or investment?

How many times have we heard this question being touted by real estate agents when we go for property viewing, the most important pastime for Singaporeans today.

From a layperson perspective, things cannot be more common-sensical. If you like the place, and if it is within your means, then buy that dream condo. Achieve the 5C. Property prices ALWAYS go up in Singapore. Even if it falls by a little in the next 1-2 yrs, it’s ok one, they will go up in the end.

Now, as a value investor, I have always found this logic very strange.

If it is your home and not an investment then it’s ok to pay a higher price? Why is that so?

The most important issue

You see, sellers are the worst consultants. They are always trying to divert your attention away from the most important issue at hand. Be it buying a bag, a car, or a house, what’s important is always the feeling, the image, the dream. It is never about the price.

But the problem for investors, it is only about the price.

It can be the most crappy Mickey Mouse shoebox, but if the price is low enough (ie the rental yield can go to 15%), then it’s still a buy. Of course, a family of four might not want to stay there for practical reasons.

So I guess that is why the question is asked. The assumption is: if it is for staying, hence not an investment, price becomes a non-issue.

But then, should you treat your home as an investment or as an aspirational item like a LV bag, or a luxury watch?

If the answer to the above question is investment, then things are very clear. We should apply value investing concepts that we know so well already. Buy when price is less than intrinsic value, buy when there is a margin of safety. None of these criteria are in place for Sg properties now, which is why agents will never want to get into this argument.

But buying a house, is not just about investing, there is the aspiration, hope and dream element. Here is where most people get confused.

Let’s try to debunk this argument that a house is like a LV bag or a Rolex. It’s a lifelong aspiration and hence you cannot put a price tag to it. You buy it because you have attained a certain stature in life and you can afford it.

Severe damage to purchasing power

First we must recognize that buying a house is in a vastly different quantum vs an LV bag, or a luxury watch, or even a dream car. Alas in Singapore, crazy but true, the quantum can be quite close: a Ferrari can cost more than a Mickey Mouse shoebox.

Nevertheless, for most people, if we overpay for our dream home, it severely damages our purchasing power. We are talking about being set back by a few hundred thousands, it will take years, or even decades to earn that back through normal income streams. For some buyers who bought way too high, I can even see half a million losses.

What this means is that you have to forgo a lot of LV bags and Rolexes, maybe that BMW 5 series/Audi A4 is also being pushed back by a decade. The kids might need to cut back a few enrichment classes. Maybe Machu Pichu or Eygpt, which might be a more fulfilling life goal than living in a hyped-up development, gets back to places I want to visit “someday”. Not this year. Btw “someday” is also known as the code word for “never”.

This is not the best idea for a quality lifestyle in a condo.


We live in a world of priorities. Overpaying for the dream condo also means we prioritized buying this property so much that we are giving up on all other priorities in life. Looking at the concrete examples given above, we can now ask ourselves vividly, is this condo worth more than all the other pleasures added together? Lifetime worth of LV bags and watches and other tiny luxuries, the dream car, the dream tour, the kids’ educations and the many other dreams in life?

If the answer is no, then it means that we should always factor in pricing, even for a lifelong dream.

Ok some might argue, it is more than a dream, it is an asset that can be passed down from generations to generations. You never really owned a Patek Philippe, you merely look after it for the next generation. Hence the popularity of freehold vis-à-vis leasehold.

Is it really Freehold?

That powerful catch phrase from Patek sums it all up. So how can we put a price tag on a family heirloom. That is priceless. Obviously a lot of people buy this argument, hence they can pay a HDB for a Patek and they pay the equivalent of 3 to 5 condo units in Tokyo for a Sentosa Cove. If it is for the next generation, it’s what you can afford, not what it’s really worth.

This line of logic will make all the agents really happy. You are willing to pay anything for a freehold property bcos you believe it is for your next generation and generations to come.

Sadly, we all know that is never true. Ask the owners of beach front properties at East Coast who had their land taken away when the Govt needed to develop the ECP highway and the East Coast Park. Even for 99 yr leases, the old Gillman Heights saga drives the point home. Condition changes. Nothing is ever really yours, or in your family.

Price is what you pay, but value is what you get

We pay a price for something we want to give to the next generation, but value is actually what we want to imparted to them. The play of words here is meaningful. Value can mean the intrinsic value of the item in question or values: as in moral values, the really important stuff. If you pay a lot to impart something that has little worth/value, what is the point then?

Even a Patek, is it really a 100k watch that is being passed down? Or the memories of good times between father and son, the teachings and values, the joy and sorrow shared, the games played and all the wonderful times?

In fact, the most important values that we can impart: integrity, tenacity, humility, are free.

Anyways, let’s get back to the question: can we really ignore price if we want to buy a property for our own stay?

This confuses people because property, as the controversial asset class here, can be an investment and/or an aspiration.

When it is an investment, there are principles that we can use the value it. We know that rental will generate cashflows and with cashflows we can derive values. We might be staying in it and not renting out, but bcos there is a rental market, we can always know how much rental the property can fetch, and with that info, we can calculate the value. That is why evaluators have valuations for all properties in Singapore.

Agents want us to think of property as an aspiration bcos it will delink price from value. Price becomes what we can afford, and what we will pay to realize our dreams. Nothing to do with value. But as we have argued, if we follow this line of logic, we are giving up other things. And sometimes it is also not what we really want to pass on to our children.

Ultimately price must follow value just as the sun must rise from the east. It may deviate for a long time, or it may go so crazily high that it seems like it will never ever come down again. But in the end, life goes in a cycle and definitions oscillates with circumstances. Prices go up, prices go down, property becomes an aspiration, or a bad investment and then a huge liability. But when it’s cheap enough, it becomes an opportunity of a lifetime.

Tuesday, March 27, 2012

2nd Level Thinking in Real Life

2nd Level Thinking works in real life as well. We should not be thinking superficially and derive simplistic answers to some of the problems we face. Again in most cases, consensus would be right, and it's tempting to just follow the crowd. Sometimes, maybe average is good enough. But in other important issues, we might need to strive to be one level up.

Take my favourite topic: our kids' education. All the parents in Singapore are stuck in this crazy competition of getting into branded schools, tuition marathons and fighting to be one up against the rest. But the since every parent is doing that, no child stands out. To make things worse, parents waste money on tuition, waste time at volunteer work and every child actually has less free time, are more stressed and become less proficient in other non-academic areas: such as learning to iron, cook or fix a light bulb.

One solution to this issue is for authorities to step in as mentioned in previous posts. The nature of the game has evolved such that it is impossible for the participants (ie parents) to resolve the issue, even though everyone is just simply working in their own best interest. This is akin to asking all women to stop wearing high heels. (See this post if you don't get this.)

Well that's topic for another day.

The idea here today is to apply Second Level Thinking. Different but better. Needless to say, it cannot be just different. Some might say don't go for tuition lah, don't succumb to doing parent volunteer and support this elitist system. But then the kid loses out. So it has to be more innovative than that.

Again we ask questions such as:

1. What are the viable alternatives?
2. How can we invert and think out of the box?
3. Where are the kids today lacking?
4. What are other parents not doing enough?
5. Does my kid have a talent?

When we think through some of these answers we are effectively applying Second Level Thinking and some solutions might well be different and better.

Take question 3, what are kids today lacking? There are plenty! As alluded to above, they cannot do simple chores (Blame the Maids!). They speak less mother tongue (60% of homes are English speaking). They are exam smart not street smart. They don't see as well (a lot of kids are short-sighted).

A lot of the issues have no relevance in academics but still something to think about. The one key here: kids today speak much more English and are bad at their mother tongue.

20 years ago, English was a problem, bcos 60% of Chinese homes speak Mandarin at home. Today it is the opposite. Our Chinese kids are becoming bananas fast. Yellow on the outside, all white inside. Their command of the Chinese language is poor, and they and their parents either have no intention to do anything about it or are incapable of doing anything bcos the parents themselves don't speak good Mandarin. In fact, MOE wanted to lower the bar to satisfy some parents, only to get lambasted by the Chinese elites.

So the 2nd Level Thinking here would be to let our kids become proficient in at least 2 languages. In fact, we should let them be exposed to more if possible. Research have shown that kids can learn languages better than adults. So while we are at it, we can definitely throw in important languages like Malay, Japanese or even Spanish.

Of course language needs the environment, so if the parents cannot speak Spanish, it is hard for the child to pick it up out of the blue. But for some parents who are bilingual and speak dialects, or Malay or other 3rd languages, it might be useful to impart these to your kids.

Alas, as in stock market, people catch up to 2nd Level Thinking fast. What worked yesterday might not work today. Some parents prepared their children for Primary 1 when the kids were in K1, K2 many many years ago and those kids gained the one up against their peers during that time. But today, all parents do this and the bar is raised, to the detriment of those who cannot keep up.

Similarly, I won't be surprised that a lot of parents are making sure their kids are effectively trilingual and in the near future, we need to apply 3rd Level Thinking to gain that one up again.

Friday, March 09, 2012

Second Level Thinking

This is a phrase coined by Howard Marks in his book, "The Most Important Thing". This book is truly a rarity for investors, with both new and old concepts well thought out and written clearly. The best part: the concepts are even valid for institutional fund managers. Very rarely we find something useful both for professional and retail value investors.

So one of the most intriguing concept is this Second Level Thinking. What is this all about? Well to answer that, we first need to know what is first level thinking.

According to Howard Marks, most investors possess only first level thinking. First level thinking is obvious, superficial and consensus. Examples of first level thinking would be:

"Apple is launching iPad 3 in 2 weeks, let's buy."
"Oil just went up another 5%, airlines will be hit, sell SIA."
"WD is being hit by the Thai flood, buy Seagate."
"Toyota recalls 100,000 cars! Sell sell sell!"

Almost everyone can be a first level thinker. Just read the headlines and draw the obvious conclusion. Well, this doesn't mean that first level thinking investors doesn't make money. I can hear you shouting, "If this dumb blogger have bought Apple 2 years ago when the stock price was at $300, he would be so rich that he wouldn't be blogging now."

That is obviously true. Being consensus can still help you make money, but it may not help a lot over the long run. You might make money from Apple but you might jolly well be sucked into buying Yahoo! in 1999, or Li Ning at it's finest moment, holding the Olympic torch in 2008 or Singapore's Oceanus, the abalone story that went on fire a couple of years back. Btw all 3 examples would have burnt big holes in the investors' pockets.

First level thinking won't get you very far because everyone is doing it. It derives easy and average answers. That cannot help you generate good long term return. It is even less likely that you can beat the market.

2nd Level Thinking is complex and tedious. It is about mental aerobics, in-depth research and perhaps even long, difficult discussions with like-minded thinkers. The 2nd Level Thinker asks questions such as:

1) Does the market already know this?
2) What are all the scenarios?
3) How can one invert and think otherwise?
4) Are there comparison with other situations?
5) What is the probability that I am right and the market is wrong?

2nd Level Thinking is not just about non-consensus. It has to be non-consensus and yet correct. Different and better. It has to be two steps ahead.

A good illustration of 2nd Level Thinking would be about BP and its accident in the Gulf of Mexico. For the un-initiated, BP's off-shore oil rig exploded 2 years ago and caused the world's largest oil spill that impacted millions of humans, plants and animals in the vicinity.

For those who remember the drama, it was pretty excruciating. First we see footage of the explosion, then the spills, the poor ducks, the fishermen being interviewed and for days on end, they couldn't cap the well. Oil kept gushing out. Experts opinionated everything. How BP cut corners, how the ecosystem will be irreversibly damaged, the penalties and costs will run into billions. Meanwhile the CEO went sailing with his son and got lambasted further. Major media circus.

So the first level thinkers were like, BP is going bankrupt. Let's sell BP. Or even better, short the stock dead. Meanwhile BP's market cap halved. In absolute dollar terms, it fell roughly USD 100bn. A few years ago, that is the GDP of Singapore. Even today more than 100 countries still have GDPs lesser than USD 100bn.

So the 2nd Level thinkers would be going, "Wait a minute, 100 billion? Is that right?" When was the last big oil spill? What was the final tally for costs and penalties? Did the affected co. go bankrupt? What is the Gulf of Mexico's contribution to BP? Can BP simply ring-fence its US operations? Is bankrupting BP better or would the US Govt prefers BP to continue generating cashflow to pay the costs?

Well as it turns out, penalties and costs today cannot even hit USD 50bn. Even the amount that BP already paid out: 37bn or so, might not be fully utilized. A 2nd Level thinker at that time would also have found out that the whole US operations contributes only a third to BP and ring-fencing the whole US would have made sense if penalties and costs exceed a certain amount. Certainly BP would be worth much more alive than dead, why would the US Govt bankrupt BP?

So, when the market cap fell by USD 100bn, the market went crazy thinking BP would go bankrupt. It factored in more than the worst scenario that BP will lose its entire US operations. So it was time to buy BP back then, not sell.

Today BP's market cap is USD 150bn. So a 2nd Level thinking investor made 50% or more. Perhaps with more to come.