Monday, December 23, 2013

Investing is about Swaping Cashflows

If we strip down to the bare basics of investing, it is swapping today's money for tomorrow's cashflows (or future cashflows). So, you buy a stock at $100 today. What you actually want is that the stock can generate more than $100 in terms of future cashflows into perpetuity. The goal of value investing is then to determine how much all these future cashflows is worth today, and pay a lower price (at least 30% lower). So in theory, if you can accurately calculate that the value of all the future cashflows is worth $200 today and you buy the stock for $100. Then you have made a lot of money. Of course that's the hardest part - estimating all the future cashflows.

So, how do we calculate all the future cashflow? The simplest methodology is to apply a multiple. If the co. earns $10 today, give it a reasonable multiple, say 15x - there, you have it. The value of all its future cashflow is $150. Now that's crude right? But essentially that's what the whole finance industry does and that's also what the world's greatest investor, Warren Buffett does. Of course Warren Buffett perfected this art, by buying businesses that have predictable cashflow into perpetuity. Well it's still an art, so by default, it is hard to get it right most of the time. I have also discussed this in detail in the 5 Things You Need to Know about Investing.

Buffett also thinks hard about how to discount future cashflows correctly. Discounting is essentially saying that a dollar in the future should be worth less today as a result of compounding. The methodology is discussed in detail in this post: Faces of PE - DCF. But at the crux of it, the ways and means to value a stock is not different. For those readers yearning for a short cut. the easy way out is to determine a long term average earnings per share (EPS) of a company with a solid business (like Colgate or Swatch or Coke) and then multiple it by 12-18x. For a great business, you can pay up to 18x. For a so-so business, better just pay 12x or less.

That's Warren Buffett, world's greatest investor.

Many things affect whether a stock should be 12x or 15x or 18x. You can find some discussion in the Valuation label. Now once you have determined the right valuation, the right EPS and have gotten the intrinsic value of the stock, you compare it with today's stock price. If the stock price is significantly lower than its intrinsic value (like 30% or lower), then you have got a strong case to buy. That's really putting it in very elementary terms and no guarantee for you to make money. To learn more, do read the rest of the 250+ posts on this blog and you can start with this 1,500 word introduction on Value Investing :) Cheers! 

 Ok, next we talk about something more mind-boggling. If we think in terms of swapping cashflows, then we must also realize that this is a totally different ball game vs buying a stock at $100 and hoping that the price goes up and we sell and make a profit at $120 to a Greater Fool. The mind-boggling way to think about this is that there is no stock market and no daily price after you bought the stock. You are buying an asset at $100. The only return you are assured of is how much this asset will generate down the road ie how much cash will this investment eventually churn out over time, into perpetuity. There is no other buyer who will come quote you a price every day. And you cannot hope to sell at a higher price to a Greater Fool who is willing to pay for it at the higher price. 

That is the way we should invest. Warren Buffett ever so often says that the market can shutdown for 10 years, he doesn't really care. Because essentially he is buying future cashflows. And he doesn't give a damn if nobody is willing to buy his business or give him a quote tomorrow, or one year out, or 10 years out. When he paid $100 for the business he wants, he is already sure he would make money. Because the future cashflows from the business is very likely to be more than the $100 he paid today. So essentially, money is already made when we buy, not when we sell.

 I believe that's the way to invest.

Thursday, December 12, 2013

Swatch’s Everything (including Serina Wee)

The first Swatch post started in Sep 2012. After 15 months and 8 posts, I am still not done! It’s a marathon competition against the City Harvest trial to see who can last longer. But City Harvest would win the popular vote I guess, with Serina Wee, Singapore's prettiest accused criminal. All Singapore straight guys are just jumping around and can’t wait to see her strut down Supreme Court again in January. But, this blogger would not go down without a fight to win the popularity contest.

Here’s a pic of Serina Wee.

Ah! My eyes… No… Sorry, paisei, sala pic. You can see Serina at the end of the post :)

Anyways, 15 months! That’s too long a time to do a trial, sorry I meant an analysis. So, this is the post that shall end it all. It must be stressed that a good analysis need not take 15 months. Warren Buffett does his in two days. For the rest of us mere mortals, I would say we might be able to do it in a week or two if we put our minds to it? Anyways, sometimes you don’t really need to know 100% or even 90% of the company. Just know the few key drivers.

For Swatch it would be their retail expansion/distribution strategy, the reform of Harry Winston and in the longer run, succession planning. I have discussed these in the previous Swatch posts and Harry Winston would be discussed below.

Do take a look at my work on 3M and Colgate as well to get a feel.

Today we shall cover the rest of the stuff with Swatch. The key remaining components are: Industry and Geography Exposure, Harry Winston (a new topic), Risk and Mitigators and the final questions.

First stop: Industry and Geography. These are no.s that an investor would like to look at. For Swatch I have decorated them into the nice pie charts below. Take that! Serina!

On the left chart, you can see that China and Asia are the key sources of earnings for Swatch. It is worth pointing out that a big part of the sales in Europe is also driven by Chinese and Asian tourists. On the right chart, needless to say, watches and jewellery would be the main contribution. But what is more useful could be the further splits into watches vs jewellery and the split between manufacturing vs retail.

Another important split is by its brands. It should be highlighted that Omega is by far the most important brand for Swatch generating 35% of sales and 40% of EBIT. EBIT is short form for Earnings Before Interest and Tax, also known as Operating Profit. It is the most important line in the P&L statement.

Some of these no.s would not be easy to come by. It would take a lot of reading (of annual reports and analyst reports) to figure them out. Sometimes it’s best to be able to ask someone, like an analyst or the investor relations of the company. But that is not usually an option for retail investors. So for really serious investors, we might want to think about setting up a company if only to gain access to more information.

Next topic: Harry Winston.

Swatch bought over Harry Winston in 2013 with USD 1bn to further its reach. As luxury watches are a very men thing, Swatch is deemed as not capturing the women’s market. With Harry Winston, a niche jewellery brand, Swatch can further increase its expertise both in retail and in nurturing the women’s segment and can also perhaps carve out some synergies with its existing businesses in the future. Harry Winston made sales of US 400m or so with 5% operating margin before its integration with Swatch. Compared to Swatch’s own margin at 20%, there is some room for Harry Winston to improve. Nayla Hayek, the Chairwoman for Swatch will become the CEO of Harry Winston. Hopefully she can put some of her magic to transform and synergize Harry Winston.

Every investment has its risk and we need to be able to identify the 1 or 2 key risk factors and hope to be able to mitigate them. For Swatch, the biggest risk is the anti-corruption clamp down in China. This risk turned out to be a far greater threat than was previously thought as 2013 panned out. It impacted everything from flowers to hard liquor to even mooncakes! And right in the middle of it was luxury spending on watches. You see in order to do business in China, a lot of time and effort is spent taking officials and important counterparties to places, buying gifts and stuff for them. When Xi Jin Ping took over, he wanted to clean up this corruption issue in a big way. So a lot of these gifting was stopped, elaborated parties were cut down. Fresh flowers were not needed at banquets anymore. Mooncakes as gifts for officials were banned too. Swiss luxury watches bore the brunt of the blow. In the past, gifting someone a Swiss watch was one of the best ways to open doors. But now that it was banned, sales plummeted.

The Omega Speedmaster, also known as the Moon Watch.
It was first worn on the moon by Buzz Aldrin on the Apollo 11 mission.

Well, actually, this risk is now almost behind us. What was the mitigating factor? It's the rising middle income class. Swiss watches are part of the aspiration package as the number of middle income families increases globally. The family needs a nice car, which over time gets upgraded to a luxury German one. The mother starts buying high end fashion and jewellery. The father buys a luxury watch and in time buys more for his kids or passes down the old ones and buy new ones. It is a rite of passage for many modern countries, including Singapore. Well for some, it goes further, like launching a music career for the wife while siphoning money from a church, in the meantime engaging a beautiful accountant to do the dirty work. (yes yes piccoming... at the end of the post.)

So, since we will see the rise of the middle income not just in China but globally in the next few decades, the story for Swatch should remain intact after the Chinese government harvested all the bad seeds from this anti-corruption saga. (No City Harvest pun intended :)

The final questions refer to the last few that was listed on the Stocks Page ie "Is there a Second Level Thinking angle here?" or "Can I sleep well at night?" These are part of a sanity check that investors should always bear in mind. Usually there won't be easy answers. Esp for Second Level Thinking. Swatch is a luxury brand and will continue to be one. The angle could well be what's been described above: instead of worrying about anti-corruption, we should be seeing the rise of the middle income class.

As for sleeping well at night. I would say that if you bought the stock and it's been too volatile and you are not sleeping well because of that, then please sell it. Life is too short to brood over a stock. But if you are not sleeping well because you are too excited that you can see Serina in a few weeks on Straits Times, sorry I have no advice for you. Maybe go join City Harvest? Haha... just joking.

As promised, we have come to the end of our analysis of Swatch, so here's her "melancholy look" pic snapped from Google. Stop drooling please.

Do also take a look at my first post on Swatch.

Friday, November 29, 2013

Parents vs Education System

A discussion on Singapore's education system will almost always come face to face with kiasu parents. The logic goes like this: Yes Singapore's education system is not perfect. We have teachers that keep leaving to become private tutors because they actually get the pay they deserved teaching at Learning Lab, the elite enrichment school. And enjoy the work they do i.e. teaching. Not like now, where public school teachers are doing a bunch of ECAs and other unrelated stuff like preparing a visit for Ministers etc.

Ok, next issue: our education system focuses on teaching ahead of the curve. In the past kids learned multiplication and math problem sums way later. Today they are doing these before they enter Primary One. Maybe in 20 years, Primary One kids will have to solve differential equations or do Laplace transformation. Geez, that would be fun.

But wait, that's because kiasu parents wanted to game the system and went for enrichment to arm their kids with Primary One knowledge before they enter Primary One. It's the parents fault, as long as they remain Kiasu, with a capital K, no matter how we improve the system, parents will find a way make their kids one up. It's not the system fault. It's the kiasu parents fault. Kiasu parents, wake up, stop being so kiasu and make life difficult for everyone else.

Oh yeah! That's the final answer to solve our nation's greatest problem. Yes, final answer. Ask all the parents to stop being kiasu, wake up and get a life, maybe make a few more babies and stop doting and worrying too much about their single child.

Just tell the parents, "Stop being kiasu!" Why didn't anyone think of it?

Come on...

Parents will be parents. Singaporean parents are not more kiasu than Chinese, Koreans, Japanese or Americans parents. The original Tiger Mum came from the States. Everyone is just working in their own best interest. Yes, this sometimes conflict with the interest of the community but it can't be helped. There is even a term for this: tragedy of the commons. It happens everywhere. Girls wearing high heels to gain that height advantage. Hey, let's ask all the girls in the world to break their heels! That should work. Fishermen over-fishing the shared ocean. The global arms race etc.

The solution obviously cannot be asking all parents to stop being kiasu right?

It is changing the system. Dis-incentivise parents to act in a kiasu manner. I have discussed in previous posts about how the Singapore's elitist education system concentrates resources in the best schools, creating paths that benefits only good students and causes the issues we face today. It's just unwinding all these.

I think we are moving slowly that in that direction. PLSE scores will be scrapped. That's a good start. In time, we should create multiple avenues to higher education, not just making it more difficult via through-trains and what not. Bring up the lowest denominator, not just bringing up the best and leave the rest behind. In the army we are taught, "leave no man behind". The education system has to follow that through. Learn from Mindef!

This is Aloysius after he was the first to run away and left all men behind. Lobang and his whole platoon mocked him by singing,"Training to coward, fight for myself, whole of my life, leave all men behind."

Yes there will always be those really, really kiasu parents who will compete to the last decimal point. Every test score, every ECA, musical instruments played, sports, maybe even countries visited/toured that could earn bragging rights. But just let them be. This is a marathon with no end. What's more important is to instill in our children tenacity, adaptability and ingenuity. Teach our kids to appreciate learning and then compete intelligently.

For that, we need the Singapore system to change. Luckily, it looks like it's changing.

Monday, October 21, 2013

5 Things You Need To Know About Investing

I have always wanted to write something about investing incorporating some well known statistics which I think every investor should know. Only then we can appreciate how the value philosophy will help us win this complicated game. Well, though first we have to define what the definition of winning is:

Winning, in my opinion, is to generate a long term annual return that is higher than the market return. The market is usually defined by an index like the Straits Times Index or the Hang Seng Index. Needless to say, the most famous of them all is the US S&P500 which has generated a 8-10% return per annum since like 1900. Yes, since more than a hundred years ago.

It would be a feat to actually beat this tall order (of 8%pa or 10%pa for that matter) over a long timeframe like 20 to 30 years. Warren Buffett who managed to achieve this feat over the last 50 years have recently admitted that he would probably fail to beat the S&P in the next five years as his fund size has gotten too big.

Why is achieving 8-10% per annum so difficult? This is related to the 5 things that you need to know (all are statistical numbers) which I would like to highlight today.

1. The top 10% takes all. Since the inception of fund management, only 10% of all investors (roughly speaking), or statistically proven, only 20% of all professional fund managers have actually beaten the benchmark that they were supposed to beat. This means that 80-90% of investors actually earn less than 8-10% over a very long periods like 20 to 30 years.

2. 20% of your bets will make 80% of your profits. This is the well-known 80/20 rule and it sure works in investing as well. Later we shall see how this plays out to ensure that most investors are destined to earn mediocre returns.

3. 30% margin of safety. One paramount rule of investing is the margin of safety rule. According to Ben Graham, the father of value investing, if you have to surmise investing into 3 words, it's margin of safety. It is that important. What this means is that we can buy only when there is a significant buffer, or when there is a huge gap between price and value. Again Ben Graham advocated that one should ask for at least 30% margin of safety ie if you determined that a stock is worth $100, you should only pay $70 for it.

4. There is always a 40% chance of getting it wrong. No matter how much analysis you have done and how many expert opinions you have consulted, for every stock that you buy, there is a 60% chance that you will get it right, and a 40% chance that you will lose money. This is a well-known probability statistics in investing that applies to both for investors and traders. Actually it's more like a 55% or 57% winning ratio. But this is already far better than the casinos as the highest winning ratio for any casino game is always less than 50%. (Closest being Blackjack apparently at 49.4%. In casino parlance, it's call the house edge of 0.6%. I haven't confirmed the exact math in converting it to a winning ratio - my own terminology, but the idea is the same.)

5. Invest with at least a 5 year investment horizon. This is something that is almost impossible with today's MTV culture of instant gratification. We don't even want to wait 5 min most of the time, especially not for the MRT at peak hours. The investment horizon has declined to 6 months in a recent study on the holding period for investors of the New York Stock Exchange. But compound interest only works well the time period is long enough. Anything less than 5 years is basically not cutting it. The famous rule of 72 tells us that even with a high 10% return, it will take 7.2 years to double our money. Trying to achieve anything significant in 5 years is just plain illogical in the world of investing. Strangely, Wall Street and most market participants think otherwise.

Summing this all up, what does it mean?

First we should think about Pt 3 and 4. We must understand that 4 out of 10 stocks we buy will not make money. This means that every time we lose, we must ensure that the loss is minimal. This can only happen if you have a good margin of safety for any bet. So a 30% margin of safety and a 40% winning ratio goes hand in hand. Incidentally, trading tactics talk about a similar strategy. One must have a strict cut loss rule. Like maximum 3% loss or 5% loss. This is then offset by a "let your winners run" rule, usually at least a 10-20% profit. That way you can lose 3-4 trades but still make it back with 1-2 winning trades.

Now with Pt 3 and 4 in mind, we then take in Pt 2 which says that 20% of your bets will generate the bulk of your profits. This means that out of the 6 winning bets, only 1 or maybe 2 will make it really big like doubling the initial money or more. But if we have a short term investing mindset we would then take profit in Year 1 or 2, (or sometimes even shorter) which means that we lose all the upside that comes with the compounding effect. Then we are destined for mediocre returns, aren't we?

Let's just do a simple math on all these.

We have a capital base of $100 and we make 10 bets. 4 bets will lose money. But because we diligently adhere to our margin of safety rule, say we lose 10%. So of the $40 invested, we are left with $36. The remaining $60, let's just assume that 4 bets did ok, ie we make 20%. So we have grown our $40 to $48 from these 4 bets. The last 2 bets we make 100%. So from $20 we now have $40.

Adding the numbers up $36 + $48 + $40 = $124. So we managed to make 24% return. But over what time period? If we can do this in 1 year and repeat for the next 50 years, we are on our way to beat Buffett's record. That's very unlikely, so I would say this is probably achievable over 3 to 5 years. Then we would only barely make 8%pa.

Most investors don't think in terms of 5 years, they take profits off their 20% winning bets way too early, they are not interested in adhering to a Herculean 30% margin of safety (which means they will just buy when they are afraid of "losing out", like everyone who bought tech stocks at the height of the tech bubble, or every Singaporean who rushed in to buy Sky Habitat at the peak of Singapore's property bubble) and obviously they also think that they will lose not 40% but 4% of the time.

Is it then a wonder why only 10% of all investors can actually beat 8-10%pa over time?

Tuesday, October 08, 2013

Ms. Market

This post is rehashed from an old post written many, many years ago.

The father of value investing, Ben Graham, likes to describe the market as a person who is always ready to buy or sell you a part of his business, but the problem with him is that he is very emotional. And when I say emotional, I don't mean that Taiwanese actress Liu Xue Hua shedding one teardrop from her left eye over some bloke. (kudos to you if you actually know who is Liu Xue Hua).

So what's very emotional? Picture yourself sitting in a roller coaster with some Ah Lian yelling her head off one second and cuddling up to you the next. That kind of emotional. Anyway, let's calls this person Mr. Market. That's how Ben Graham and Warren Buffett calls him. But I think maybe it's more appropriate to call her Ms. Market.

On some days when Ms. Market is very happy, she sees everything in an optimistic light and she will offer to sell you a part of her business at a very high price. Like Singtel for $5. Or SIA for $20. On other days, she will be all depressed and can see only doom and gloom, and she offer to sell you the same business at a very low price. Lay-Long Lay-Long! Singtel for $2.50, or SIA for $7.50. So as you can tell, Ms. Market is that Ah Lian in a roller coaster, regardless whether anyone is beside her. Screaming her head off. Every day.

You are free to transact with Ms. Market on any particular day, or not transact at all. She will always come back tomorrow and quote you a different price. Depending on her mood, the prices will be all over the place. You are free to take advantage of her, and buy a good business cheaply from her on her down days, or sell back to her a bad business at a dear price when she is feeling on the top of the world.

However, you should never be influenced by her mood, i.e. you too, start feeling super happy on days when she is on a high (i.e. you imagine yourself sitting on that emotional roller coaster with her), and buy a lousy business from her at a high price. Millions of individual investors never understood this, so they never took advantage to buy a good business at a cheap price from Ms. Market when she is feeling sad, but instead, only buy from her when she is bright and sunny and offers to sell Singtel at $15 and SIA at $20.

PS: Singtel trades at $3.50 and SIA trades at $10 currently (in late 2013).

See Lemmings and herd mentality

Tuesday, September 24, 2013

Swatch's Financials

Now, in this post, we get into the really nitty gritty details of investing: financials and revenue and margins and numbers and ratios. This is really the bread and butter of stock analysis which is also perhaps the most difficult part for most laypeople. As alluded to in the previous posts, I would usually like to pick up a few important numbers and ratios out of the financial statements. Most of the time, it would give a really good sense of how the company is doing. I have posted in details what all these numbers meant like a million years ago. You can find the old descriptions in the labels: Financial Statement Analysis and Financial Ratios. For your convenience, I have also added hyperlinks at the relevant paragraphs below. But for Swatch today, I would just do a quick commentary on what’s interesting.

Here’s an updated version of the cheat sheet that I would normally use. As you might be able to tell, I have added some colours and made it look prettier in order to compete with Serina Wee. I hope our beloved media will take some pics here too!

Swatch's Cheatsheet

First, let’s explain the structure. I have divided this table into a few parts, the titles for these parts are in red and underlined. The pure financials are PL, BS, CF. If you do not know what they stand for, I suggest you message Serina Wee on Facebook for a crash course, she would be able to help since she is a certified accountant and a devoted Christian. Of course, you should also make known to her that you will be joining City Harvest tomorrow and pledge 50% of your household income to support her wardrobe.

Well, short of pledging 50% of your income to support Serina Wee’s wardrobe, which isn’t really a bad thing since you will be doing a big favour to all Singaporean guys watching her strut down Supreme Court, you can read the posts I wrote a million years ago under the in the labels: Financial Statement Analysis and Financial Ratios. I just need a Like for my Facebook page on the right of this post.

You are most welcome :) Ok, jokes aside. So the financials are PL, BS and CF. The other segments are:

Stock related: which relates to stock information and the numbers used to calculate its valuation and the all important target price (TP) or intrinsic value.
Stakeholders: who are the big owners and managers of this company.
Comps: how does it compare with industry peers in terms of valuation.

So we see a bunch of no.s all over. I guess it would be easiest to focus on those numbers in blue. Basically these are derived numbers ie they are formulas in Excel rather than hard coded. What does it mean? Take dividend yield which is at 1.4%. It is simply DPS or dividend per share of CHF (Swiss Franc) 8 divided by its share price of CHF 587, ie no.s in blue are derived from other no.s in the spreadsheet.

So as you can see, Swatch is pretty much a top notch business. GPM or gross margin at 80% and OPM or operating margin of over 20%, these are some of the highest margins in any industry. Essentially, when you pay $10,000 for an Omega watch, the cost to produce it in the Swiss watch factory would only be $2,000. *Gasp!* That’s why the gross margin is 80%. Well, since OPM is 20%, it then means that the cost to do marketing like getting James Bond to wear it, putting it in a fancy retail store on Orchard Road and finally packaging it nicely in a wooden oak box, these add up to another $6,000, which is the difference between the gross profit and the operating profit. So Swatch only makes $2,000 at the operating level for every $10,000 Omega watch that it sells.

Then there’s the ROE or Return on Equity, which measures the growth rate of the business. For Swatch it’s 21%, another world-class number. How’s your salary increment this year? If I read the published stats, it’s about 5%? For every year that passes, the capital base in Swatch grows 4x faster than our salaries. So if your savings pool is large enough, you have to think really hard if you should work or you should just put all your money in Swatch. Well, that’s another topic. But even when compared to peers like Tiffany (ROE 16%) and Richemont (20%), Swatch’s ROE is still superior.

The other measure I like to look at is the FCF yield which stands for free cash flow yield. This is basically cash the business churns out after it has re-invested back in the business, divided by the market cap. So it means that if you buy Swatch now, it churns out 3% cash for you, in theory. In reality, it pays out 1.4% as dividends to shareholders. This two no.s then compares whether the dividend is sustainable. If you see a dividend yield higher than the FCF yield, it means dividend cut akan datang (or coming soon).

FCF yield of 3% is actually considered low in most circumstances which means that the stock is expensive. Cheap stocks give close to 10% FCF yield, like Microsoft or Apple, the maker of iPhone 5S, which stands for Same and 5C for which stands for Cheap. Even Singaporeans’ infatuation with the 5C dream would not save Apple. Tim Cook probably needs to seek divine help from Serina Wee.

So Apple 10% FCF yield vs Swatch 3% FCF yield? Shouldn’t we buy Apple? Things are cheap for a reason. Just comparing the plain FCF yields ignores the growth angle. Swatch has a sustainable ROE of 21% while Microsoft or Apple would probably see its ROE decline over time. This means that whatever cash Swatch’s business can churn out, that amount should grow at 21% per annum. For Microsoft or Apple, the cash churned out would decline over time. Hence it’s not really an apples-to-apples comparison (no pun intended :).

Now growing at 21% is powerful. Remember compound interest is the Eighth Wonder. This means that in 2 to 3 years, Swatch’s FCF yield based on today’s price is then 6%. And in 4 to 6 years, it would be 9%. That is not far from the 10% for the 2 loser techland dinosaurs described above. And Swatch's free cash flow will continue to grow after six years, into perpetuity as long as people don't stop buying luxury watches and diamonds.

Finally, we should talk about how we get to Swatch’s target price or intrinsic value of CHF 650. There’s no rocket science here. I simply used the EPS or earnings per share of CHF 36 multiplied by 18x. Why 18x? This is actually at the high end of what I would pay for. (I have advocated paying not more than 18x PE) But 18x should be justifiable for such a great franchise with strong growth, brand recognition and all the business moats we have discussed.

Now do take note that intrinsic value is just a number. The most important point about investing is the margin of safety. At CHF 587, the margin of safety is a mere 10%. Ben Graham, the father of value investing, would want 30%, so this is definitely not enough for him. But Warren Buffett also did say that if the business is great, not just good but great, then it’s ok to buy even with no margin of safety.

Investing is an art and I would leave it to you and your artistic talent to determine what is a good entry price for Swatch. For me, although I started the analysis and bought it way cheaper, I believe Swatch still offers upside at today’s price. I would advocate buying a toehold for now and if it falls, it’s a chance to load the truck! Hopefully we would make enough to fund Serina’s wardrobe in time!

PS: For those who have no idea who’s Serina Wee, where have you been dude? Here’s her pic below.
Singapore's hottest accused criminal

Saturday, September 14, 2013

Swatch's Management

Swatch Group came about via a series of mergers around the time of the near death experience of the Swiss watch industry in the early 1980s and was finally helmed by this legendary guy called Nicolas Hayek, a Lebanese who later became a Swiss. His kids, Nick Junior and Nayla Hayek - a brother and sister tag-team, run the Swatch Group today. Nick Senior passed away in 2010 but he created a lasting legacy by rescuing and reinventing the whole Swiss watch industry.

Nick started his own management consulting firm called Hayek Engineering in the early 1960s and became very successful in consulting and helping to turn around ailing companies all over Europe. Hayek Engineering corporate philosophy embodies Nick’s belief that an entrepreneur is essentially an artist. This is not different with investing which is also an art. Also, an investor should also manage his portfolio with an almost artistic creativity to make outsized returns.

In Nick's own words,

An entrepreneur is first of all an artist, full of fantasy and inventions. He or she needs to be able to communicate, be open to new ideas and able to question everything. – Not only our society but also oneself. An entrepreneur ought to be captured by the beauty of and sensitive to the outcome of our planet. This attitude does not only allow him or her to create new products and more jobs, it also allows for the creation of true values and riches for all people. It is also necessary if one wants to overcome all obstacles using courage and fantasy…

This is how Nicolas Hayek approached entrepreneurship and by 1979, Hayek Engineering had 300 clients in 30 countries and Nick was well regarded as a true entrepreneur and on top of that, a teacher to other entrepreneurs. Today the company still exists as a niche consulting firm headed by Nayla Hayek, Nick’s daughter.

So that was all before Nick got involved in Swatch. Then, in the early 1980s, the onslaught of the cheap Japanese quartz watches drove the mechanical Swiss watch industry to the brink of bankruptcy. A lot of watchmakers and their movement companies were going bankrupt. At age 52, Nick was roped in to oversee the liquidation of two of these companies: ASUAG and SSIH but he thought and decided there could be a way out for the Swiss watch industry.

At the same time, Swatch was created by a group of entrepreneurs led by another guy called Ernst Thomke who was also trying to rescue ETA, a very important Swiss watch movement company. Nick then joined hands with Ernst and a group of investors to form a Swiss watch giant called SMH, which later changed its name to Swatch Group.

Swatch Group today is an integrated watchmaker producing 50% of the world's high end mechanical watch movements and owns a slew of brands including Breguet, Harry Winston, Blancpain, Glashütte Original, Jaquet Droz, Léon Hatot, Omega, Tiffany & Co. (watches), Longines, Rado, Union Glashütte, Tissot, Calvin Klein watches and jewellery, Balmain, Certina, Mido, Hamilton and needless to say, Swatch.

On its website, Swatch also lists all its production companies. Some of which are critical to the development of the human race. Like Nivarox-FAR, one of Swatch Group companies that produced the world's smallest springs and gears for impeccably accurate time-keeping in mechanical watches.

Swatch Group production companies
ETA, Nivarox-FAR, François Golay, Comadur, Rubattel et Weyermann, MOM Le Prélet, Universo, Manufacture Ruedin, Simon Et Membrez, Lascor, Novi, Swatch Group Assembly, DYB, EM Microelectronic, Renata, Micro Crystal, Oscilloquartz and Swiss Timing.

We already know the turnaround story. Swatch was driven by innovation: funky, fashion styled cheap watches that managed to beat the Japanese in their own game. Nick’s masterstroke came with the re-positioning mechanical watches as luxury products. The Swiss mechanical watch became a symbol of art, a reflection of the owner’s appreciation of craftsmanship, a mark of personal achievement, a family heirloom and everything else (including a status symbol, a wealth flaunt and a bragging right). It worked. Swiss watches became the luxury item of choice for successful men and now women as well. A multi-billion dollar industry was born.

Today Nick Jr is the CEO and Nayla is the Chairwoman of Swatch Group. While lacking the larger-than-life charisma of their father, both brother and sister are respectable business people in their own right and have created value for shareholders. Nick Jr seemed to be very interested in movies and his profile says nothing about his achievement in the company. But as CEO of the Group, he holds his own ground and his views on the watch industry and the Chinese consumer are highly sought after. Nayla appears to be the more serious and capable of the two and she recently took on an additional role as the CEO of Harry Winston, the newly acquired diamond ring and jewellery specialist.

The following is a picture of the Chairwoman of Swatch Group and CEO of Harry Winston.

After she became the CEO of Harry Winston, she decided to help a Singapore church pastor and his tone-deaf wife launch a Hollywood music career by siphoning some money from the church fund. Since she was an accomplished accountant, this was child's play to her. She successfully did so for seven years until the whole scheme was found out by the authorities. This picture was taken as she attended court hearings.

Ok just kidding. For the un-initiated, that's Singapore's hottest criminal-in-question Serina Wee who is currently involved in the City Harvest saga. Apparently, she is so hot she singled-handled converted the courtroom to Christianity.

So much for jokes. Let's get back to Swatch. The following is a real picture of Nayla Hayek.

Nayla Hayek, Chairwoman of Swatch Group

Well, she would have rivalled Serina in her younger days. At 62 today, she and her brother are diligently continuing their father's legacy. They have managed to surround themselves with very capable people: PhDs, lawyers, engineers and MBAs to help them run the Swatch Group. It suffices to note that they have not done anything drastically detrimental to shareholders and should continue to help us grow the company in the foreseeable future. Together the Hayek family still owns 20% of Swatch and their interests are aligned with the minority shareholders.

Friday, September 06, 2013


"Patience is a Virtue."

I was googling around for this topic and as usual, Wikipedia came to the rescue. Sadly, it's still loss-making because donation somehow doesn't work on the internet. Google should just buy them out.

So what did Wiki says about Patience? It's actually part of the seven heavenly virtues which are counterparts of the more famous seven deadly sins, protrayed in the cult movie starring Brad Pitt and promoted Kevin Spacy and Gwyneth Paltrow to stardom. Patience is described in more context than our current world usage: usually like waiting patiently for someone or for the MRT to actually move smoothly. Accordingly, it is about endurance, moderation, grace and forgiveness. The counterpart in the sins is wrath.

In investing, the masters have talked about this over and over. And this is the Nth time I am re-learning this lesson as well. Baseball is the favourite analogy. It is known that the best baseball players do not anyhow swing. They wait for the perfect pitch. When the pitcher screws up and throws a slow ball, in the right zone, they swing the bat and hit that sayonara home run. In buying stocks, it's the same. You don't just buy when Singtel drops 10%. You wait for something to happen or some crisis for the stock to fall really, really cheap. Actually it's sort of happening now with some of our Indonesia exposed names like Jardine Cycle and Carriage.

And you swing when the slow fat pitch comes. Like when Jardine drops to $30, when it's PE hits 8x and its dividend yield goes up to like 6%. Imagine! 8x and 6% for the No.1 auto and motorcycle distributor in Indonesia where both auto and motorcycle market would likely be in the Top 5 globally in the next few years. 

These opportunities do not come often. Usually once every few years. The last time Jardine was this cheap was 2011 when the Greek tragedy hit. As for Singtel, the No.1 stock in market cap in Singapore, the last time it was cheap enough was Lehman, that's half a decade ago. So as patient value investors, most of the time we should really just do nothing. It's called "sit-on-your-ass investing" according to Buffett. To deploy capital over mediocre opportunities simply just doesn't cut it, especially if we are trying to hit 8%pa kind of return.

Ok, that's patience in investing, but what about patience in life?

I think this could be the more important lesson. Patience in life could work in various circumstances:

1. When we are preparing to do something bigger. Hence needing the patience to remain in the current situation for longer, allowing more time for training and mastery.

2. In facing our adversaries, one of the best weapon is patience. Wait for them to commit mistakes. But we need to do our part in maintaining our best. The wait would usually take months if not years. Although sometimes we ought to leave the mud-house especially when the bosses are not on the right side. Choose not to wrestle pigs, if possible.

3. To garner support for change, sometimes it take years for things to move. Like the changes in our education system. Together with others (more prominent opinion leaders and education specialists), I have discussed about revamping PSLE a few years ago in a few series of posts on Education. Finally, something would be done. Well, at least, PM Lee promised.

Being patient in situations is not about admitting defeat. It is taking a step back to leap forward. It is taking time to strategize, recognizing that the time to act is not now. Recall the old battle scenes before machine guns were invented. The army needs time to reload their guns. So you cannot fire when the enemy is coming until they get near enough. Patience makes the difference.

Of course, there is a spectrum to everything. Pulling patience past its limit is cowardice. Unwilling to act after waiting and the opportune moment passed. That would also be a grave mistake. How do we know when is the right moment then?

Oh, we know. We ALL know. When the stock hits 6% dividend but we fail to act even though we already decided we must buy when it hits that price. We didn't because our balls shrunk and we say let's wait. It's the same feeling as seeing the girl leaving and our balls shrunk and we say, "next time I'll ask for her number."

To sum up, we need a suitable amount of patience to succeed in investing and in life. Train up and be prepared. Focus and wait for the opportune moment. Then seize the day! George Savile, an English statesman who lived 400 years ago also summed it up pretty nicely, "A man who is a Master of Patience, is a Master of Everything Else."

Thursday, August 22, 2013

Choose Stocks Like You Would Choose Friends

I attended a wonderful class gathering a few weeks ago. It was our 20th year since graduation. Gosh, time flies (and I am revealing too much about my age here :). We were teenagers then and now mums and dads. In a few years, our kids would be teenagers themselves. How would we advise them how to choose their friends? How did we ourselves end up with good friends?

Well, a lot was actually just fate. We were classmates. We didn't really get to choose. Even if we could, we were young and innocent teenagers then. We wouldn't really pull out a checklist and choose whom we should or should not be friends. We just clicked and here we are, after 20 years, sharing life moments and having fun. But it is also true that we gravitate towards people that we like and enjoy their company. Some of us are closer to secondary school friends, others in JC and some others have good friends from the army or university days. So we somehow, unknowing, do "choose" our friends.

Life, in my opinion, provides a lot of lessons for investing and our attitude towards investing is also a reflection of our way of life. So how should we choose our stocks? Can we learn from how we choose friends? If I think about a quick template for "choosing" friends it would be as follows:

1. Character
2. Trust
3. Long Term

Character: Birds of a feather flock together. We hang around with people that are not very different from ourselves. So non-smokers usually have few friends who smoke. People who value similar qualities will find people who think like them. Of course, it doesn't have to be a 100% match. We can be different enough yet we find it enjoyable to hang out together. Someone who values integrity, humility, tenacity (I really like all these "ty"s) will seek friends with similar values and character.

In investing, I believe similar principles hold. You want to find stocks that fit your temperament. If you like excitement, maybe Tesla, Facebook or Hyflux are stocks that appeal to you. You can still apply value philosophy, buy them at the right price (ie when price is way below intrinsic value) and make money. For me, I would prefer the Colgates and Heinekens of the world. Slow and steady winners with strong branding. Value investing can work for different stocks. But you have to find the right stocks for yourself.

Trust: Of course, friendship is also about mutual trust, respect and helping one another. Some of these once broken can never be repaired. Investing is a bit like that sometimes. There are times when you actually disappoint a stock by selling too early, or by not buying and you never get a chance to own it again, Ever! I speak from experience and this can really be painful. Especially seeing these stocks go from strength to strength after you sold, way too early! Or get taken out at 50% premium like F&N, after you missed buying it bcos it rallied 20% and you refused to pay up and buy. Ouch! Then, there are times the stock disappoints and you sell it the first chance you get. But good friends like good stocks can be life long relationships. It's a commitment.

Long Term: Some people might prefer hi-bye friends all their lives. But for most of us, I would believe we want to stick around our friends. Investment is the same. Invest with a long term mindset. A good stock is really like your best buddy or your sworn sister. Of course this analogy has its limit. You can't really be there or be a shoulder to cry on for a stock. But like a good friend who will help you whenever you need help, a good stock just will pay you dividends whenever the payable date comes. It will also grow as you grow. And when you have time to learn more about it (ie the company and its business, as owning a stock is simply owning a small part of the company), you also learn more about yourself.

Investing is a process of discovering: who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people. I really like this quote. This quote comes from Li Lu, a famed value investor who introduced Chinese companies to Warren Buffett. I would add that good stocks, like good friends, help you tremendously in that process of self discovery.

Saturday, August 10, 2013

Happy National Day!

Singapore turns 48! We have come a long way, though still young as a nation. I would say that Singapore had a few hiccups in the last ten years or so but nothing insurmountable. There is a lot of hope that things will be better.

The timespan of 48 years is a also a good period to think about investments. After all, we don't live forever and companies don't stay as they are forever. A lot of companies don't survive for 48 years. Great companies are built to last. Some of them can do well for 30, 40 years. But to be the leader in its field for much longer, it takes much, much more. This is why there is only one company still in the Dow Jones Index today since the index's inception a hundred years ago.

Well, food for thought.

Meanwhile, found an interesting story drawing parables in Singapore's education system. It's called Nanyang Butterflies. Link below.

Happy National Day!

Friday, July 19, 2013

The China Conundrum

I was also quite positive on the China equity story earlier on, closer to the time of the inception of this blog, before the Beijing Olympics. But after 5 years, I now realized it could be a big mistake to buy China because it is a country that has lost something important and it could take a long while to find it again. There isn't a good single word to describe this, is it morality? Or the good in mankind, or a sense of righteousness? Whatever. This is not just about cutting queue and stealing buffet food. We are talking about melamine milk, flushing babies down toilets, running over injured people a 2nd time to make sure they die because if they don't, the monetary compensation imposed on the driver would be more damaging.

I am sure most would agree that China has some serious issues here.

Yes other big nations have their fair share of such moral issues. US has serial killers, Japan has panties stealers and Germany has that real life Hannibal Lecter who ate someone alive but I think China brings immorality to a whole new low.

I believe the cultural revolution was a big reason. When a whole generation was taught to betray their parents and families, Confucianism was burnt and intellects witch-hunted, one could expect what happens to the society at large. Together with intense competition brought about by its sheer population, lack of the rule of law, well, you basically have to join the dark side and become evil to survive. Morals come after you stop the stomach grumbling.

As a result, we have the China today. The name of the game: corruption, deceit and counterfeit. Nothing works if you go by the book, be righteous, honest and noble. But with these three traits now defining the nation, it is hard to see how the Middle Kingdom can progress from here.

First and foremost, China cannot reform, because corrupted officials would stand in the way. The whole system is rotten and it will take multiple standard deviation miracles to change the under-the-table ways of doing things quickly. Secondly, China cannot build world class companies or global brands because a good brand represents trust and quality. Deceit is the anti-thesis of building a legacy, hence there are no respectable Chinese brands today, even 30 years after Deng Xiaoping opened up China. The Chinese themselves don’t buy their own cars, shoes and watches for goodness sake! Last but not least, obviously China cannot innovate with counterfeit. Why would innovators want to stay in China knowing that what they create would be lost in a blink to copycats?

During the Beijing Olympics, it was often touted as the start of China's great leap from a developing to developed country. Japan went through that after the Tokyo Olympics in 1964 that and enjoyed 20 years of good growth until everything culminated in the 1989 property bubble. 1980s was Japan's decade. Japan Inc ruled the world! A lot of money could be made if you invested in Japan in 1964 (let's not talk about Japan after 1989, that's story for another day). So 1964 to Japan should be 2008 to China, but sadly there might not be a 1989 for China. The China story could have already ended in 2008.

Why? Corruption, Deceit and Counterfeit.

The great Deng Xiaoping pointed out correctly that the nation cannot embrace capitalism all at one go. Some will get rich faster. But with the unholy trinity of corruption, deceit and counterfeit plaguing the system, it just complicates the issues. Logically speaking, those who have gotten rich first would be the smarter folks who managed to climb up successfully. Albeit a significant portion of those would be people whose core "values" ARE corruption, deceit and counterfeit. Smart doesn't mean virtuous. Now we don't want them to reform China, do we.

So we are left with others who slightly more righteous and has slightly more integrity, humility, honesty, tenacity and all the other right "ty"s. But they want to leave China as they cannot stand the ungraciousness and ruthlessness of the society.

Even top leaders send their kids overseas and are well prepared to be able to leave the country any time. The very people capable of redeeming China from the dark side are not committed. It will take a long, long time before China can ever embrace Confucianism and recover all the right attributes. Maybe like 50 years or more. But it is good sign that the current top leaders like Xi Jinping and Le Keqiang are embarking on this right now, trying to eliminate corruption and punishing opposers.

If we try to put the countries on a global spectrum from gracious societies to mean societies, we might get something like the following:

Gracious --------------------------------------- Mean
Nepal, Japan, UK, Singapore, France, US, HK, China

Totally arbitrary, global readers please don't get upset to see your country in the mean zone. I would like to highlight that while the US may not be overwhelming gracious as a society, the underlying core values such as freedom of ideas, trust and integrity, meritocracy are what defines the country and makes it strong. Hence US is still the most powerful nation today.

So if China can reach the level of the US in 50 years, it would already be a great accomplishment. This would mean I might see Chinese companies innovating like Apple, Facebook, Google when I am like 80 years old. And they would also be building lasting brands like Colgate, Tiffany, 3M, companies blazing trails today. Alas, I think this is a very tall order. Most probably not achievable in my lifetime.

To end this, I shall leave you with one of my favourite quote which I got from Charlie Munger but originally from George Bernard Shaw:

"Don't wrestle with pigs, because even if you win, you get dirty and muddy and the pig likes it."

This is a policy I try to live by. If the game gets dirty, then get out. Don't wrestle with pigs. And there are lots of pigs walking around wearing suits. The bulk of them in China.

I can imagine why successful Chinese would want out. If you are naturally mild and good natured, to survive in China, you have to be mean. By trying to be mean, you change yourself and become a pig. Good people don't want to be pigs. For China to be a true global powerhouse like the US, it has to punish the pigs, clean up the mudhouse and replace corruption with integrity, deceit with honesty and counterfeit with quality.

Tuesday, June 25, 2013

Trees, Mass Destructed, Masks and Madness - 3M

Last week was hell week in Singapore.

For the global folks who are uninformed, Indonesia burned down Sumatra's virgin forests to make way for crop plantation and resulted in drastic air pollution as the haze from the smoke invaded half of South East Asia, with Singapore and West Malaysia most adversely affected.

For those of us in Singapore, it really felt like living in hell, right? We were breathing smoke, our clothes and food smelled like ashes and we were queuing to reincarnate. Well, fortunately (or maybe unfortunately) no, we were queuing to get 3M’s N95 masks that were supposed to help us breathe better in bad air.

But there weren’t enough to go around. We hear stories of how poor aunties queue for an hour at Guardian pharmacy only to find out that the inventory ran out. We then activated our friends overseas to bring masks back from all over the world. Masks were running out in Hong Kong, Taiwan and Australia. Air purifiers ran out too. Sharp’s ionizer sold so well that the stock actually bounced a bit. This Japanese firm did went to hell and came back.

So turning a threat into opportunity, I decided to revisit an old stock that I looked. I always liked to co. but somehow, never got a chance to own it. Yes, it’s 3M, the manufacturer of the all important N95 masks.

Since it has been years since I looked at 3M. I just want to share my process how I approach a stock analysis for the first time. As mentioned before, I ask 10 questions and try to answer them. Also, this would be a really prelim analysis. A deep dive analysis (like the one I did on Swatch which is still incomplete) should follow if you are really serious.

So here goes:

1. What is the Investment Thesis?

3M is a global industrial conglomerate founded on principles of science, imagination and innovation. It is a global niche leader in fields that it conducts its businesses and its products resonate quality assurance. 3M is a story about branding, innovation and shareholder return.

2. It is Cheap?

Sadly no.

3M trades at 16-18x PE (1 to 2 year forward) for an industrial company
4x Price to Book on ROE of 20+%
FCF yield 5% and Dividend of 2+%

Buy at $80, when it is 20% cheaper vs now at $108.

3. It is a Good Business, Good Franchise?

Hell, YES!

3M began operations as the Minnesota Mining and Manufacturing Company in 1902. The company started as a sandpaper manufacturer and later manufactured masking tape in 1925. Today 3M has over 55,000 products in six business segments. 3M is headquartered in St. Paul, Minnesota and has operations in more than 60 countries.

Some of its best well-known products include Post-It Notes, Scotch Tape (yes the brand became the product!), 3M Solar Film and Car Floor Mats and not forgetting N95 masks! It also has a huge array of products used in almost all aspects of our lives, just that we are not aware. This includes film used in our mobile phones, safety goggles, tapes, etc. You name it.

30% of 3M sales comes from new products which allow it to reset price points and capture customers’ time and mindshare.

3M also focuses only at the top of the pyramid high performance products to differentiate itself from the competition. Top tier products account for 50% of its sales.

15% Time: In 1948, 3M’s management introduced this concept that allows its staff to spend 15% of their time to do non-core related idea generation. Post-it notes and some products we see today were born from 15% Time. Today many innovating firms use the same concept to help foster innovation. For example: Google’s 60:30:10 concept.

4. How’s the Management?

3M’s management is very focused on shareholder return. It has been paying dividends and it regularly conducts share buybacks.

5. Does it have Strong Financials?

Here's a cheatsheet that I would often use as a first cut to look at the co. In short everything is in order.

6. Geographical and Industry Exposure?

30+% Sales to EM markets.

Quick Regional Operating Profit (OP) breakdown
Asia Pacific 41%
Europe, Middle East, Africa 19%
Latam, Canada 14%
US 26%

Segment OP breakdown and OP margin (2012 USD) Industrial 2.2bn 23%
Safety and Graphics 1.2bn 22%
Electronics and Energy 1.0bn 19%
Healthcare 1.6bn 32%
Consumer 0.9bn 22%
Others -0.6bn
Total 6.5bn 22%

7. Dividends?

3M is a Dividend Aristocrat ie it has been giving and increasing dividend for the past 40 years. This company has been giving dividend since Singapore was born. It’s current dividend yield is 2.4%.

8. Risks and Mitigators?

3M is very geared to the global economy. Weakness and slowdown has an amplified impact on 3M. During the Lehman GFC (Global Financial Crisis), 3M fell to a 10 year low of $40.

9. 2nd Level Thinking Angle?

In this kind of weak stock market and macro environment 3M is not on investors’ mind. But the stock has not corrected as much. This could be a reflection that the 3M brand is also growing stronger.

10. Can I Sleep Well at night holding this?

With the N95 mask on, maybe not. But no haze, Three Yes's!

Well that's that for 3M. Hope to do a really deep dive analysis in time. But this is a great stock and I do hope to have a chance to own it soon!

Friday, June 14, 2013

2013 High Dividend Stocks in Singapore - Part 2

This is a continuation of a previous post on dividends.

Finally, here is the long awaited part 2 of the list of high dividend stocks listed on Singapore's SGX.

The criteria/factors used to screen these names have not change much over the years. Although I did tweak the numbers eg. the cut off for dividend in the past could be 4-5% but now it's 3.5% bcos you won't find enough names using 4-5% dividend. If you study the previous lists carefully, you would also notice that about 20-30% of the names would be the same but their dividend yield should have gone down (ie prices have gone up). Having said that, being on the list too many times may not be a good thing, bcos it means the stock didn't do much over the past few years.

Here's the real kicker bonus: a not insignificant portion of the old names rallied way too much and hence dropped out. Some got taken out like Cerebos and Adampak. Now, we are talking about multiple baggers. That's where the real money was made! Of course there are also duds like Raffles Education, which I have warned could have serious issues. So again, this list is always just a starting point.

These are the factors used this time round. It is interesting to note that about half the names drop off after every criteria. From a start of 366 names, only 28 names remained.

This second half of names, in my opinion, contain some of the best run companies in Singapore. Veteran investors looking at Singapore stocks for some time would probably agree, mid caps like Sarin, Boardroom, CSE Global, Boustead are really companies run by some of the most competent business managers Singapore has seen. They have done us proud. Ok, one is an Israeli co. and the other is run by an angmo but never mind, they are listed on SGX and that's what counts! My favourite though, has always been Sembcorp Marine. Together with Keppel Corp, these two companies conquered the world of oil rigs with 60% worldwide market share. In no other industry does our small little red dot have such dominance in the global arena.

We are so good that Brazil, a country that is like 50x bigger, entrusted some of their most important national oil exploration projects to Sembcorp and Keppel. It is a strong vote of confidence in the capabilities of some of our finest. Every Singaporean should feel proud of Sembcorp and Keppel. Sembcorp Marine is also building the first world's largest dock capable of repairing and maintaining mega containerships and oil tankers. While the co. is now going through a bad patch with its rig tilting incident last year, I believe things would turn. The world is running out of oil and gas and it needs to keep exploring and drilling in deeper and deeper waters. That's playing to our rigbuilders' strengths.

Investing in some of these great Singapore co.s just adds so much more to the fun. It's like owning a piece of our heritage and feeling good and proud about it. Not to mention receiving the all important dividend every payable date. That's la vie est belle!

Again here is the past lists:
2013 Dividend List - Part 1
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Disclaimer: this blogger owns Sembcorp Marine.

Friday, May 03, 2013

How much should HDB pay for the land?

One of the most popular posts talking about HDB Singapore on this blog is titled: What's Wrong with HDB Prices?

This has a perennial debate since Marlboro Tan's time and recently our new HDB Minister Mr Khaw talked about this again. Obviously Mr Khaw is a more eloquent man and what he says make a lot of sense:

"You need to acquire a piece of land , you need to reclaim a piece of land. All those costs money to tax payers and we are just trustees of tax payers and those costs are to be accounted for. And even when you have got that land prepared, then land is only valuable when we invest in infrastructure, roads, MRT, etc etc. And all those costs billions of dollars. So to say that land cost is pittance and therefore should be excluded from total construction cost, I myself think it is not quite an appropriate argument."

The problem is always in the calibration. So how much should HDB pay? So in the 1970s HDB paid almost nothing for the land and hence it cost $10,000 to buy a 3 room then. Of course, that's too ancient to talk about and now HDB pays market rate for land parcels and sells at a loss to Singaporeans. To Mr Khaw, this seemed to be the correct approach.

However market rate is determined by supply and demand in which supply is determined by the government. Market mechanism also sometimes breaks down because moving prices create anxiety and cause people to behave irrationally. We saw that in the Singapore property market when people pay S$1700 psf for some suburban project and more than S$3000 for super luxury condos. In absolute quantum of millions and tens of millions of dollars, these are monies that can buy villas and hectares of productive land in other countries.

Perhaps the solution is for HDB to move towards targeting a long term moving average of market prices which could reduce some volatility in HDB selling prices and also for the government to better regulate the sale of land to control the market. HDB should also move towards percentage based subsidy for new buyers and receive a percentage based grant from the government to ensure that it doesn't go bankrupt.

Well actually since it's a Singapore government entity, HDB Singapore technically shouldn't go bankrupt as the Singapore government has the obligation to bail them out as the MOF had done by providing billions of grants over the years.

Monday, April 29, 2013

2013 High Dividend Stocks in Singapore - Part 1

Part 2 is out as well.

I am close to 5 months late in publishing this. But better late than never. Here is the new and updated list of high quality dividend stocks traded in the Singapore stock market.

This is the first half of this year's list.

This round produced 28 names in total and I have splitted up the list into 2 tranches so as to gain more traffic :). Dividend related posts are the best traffic drawer for this blog in this yield hungry environment in an even yield hungrier Singapore.

Actually, to be fair to Singaporeans, this is a global phenomenon as central bankers drive down the risk-free rate and as a result pushed up asset prices and inflation. To more advanced readers, you would know this is unchartered territory in the history of global finance. What does it mean if risk-free rate goes to zero? This is something never taught in textbooks. In fact, it should never happened. Without the risk-free rate (usually taken to be the 10-year government bond yield) how do you price all other assets like corporate bonds, stocks, real estate and other instruments? Nobody has an answer, and meanwhile asset prices shoot through the roof. More on this in time.

So, knowing that will make studying this current dividend screen all the more important! Make sure you study every name here religiously!

Ok, just kidding. As I have emphasized in all my past annual dividend posts (below), this screen alone cannot help you make money. It is just a starting point for you to study the stocks here in detail. To really know a stock, I try to answer 10 key questions to understand a stock as dictated in my Stocks page.

The past dividend lists:
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Friday, April 12, 2013

Swatch's distribution

Well we should get back to Swatch after a few digression. So this is a continuation on the full fledge analysis on Swatch. Today we look at the distribution prowess of the company.

Swatch has 900 point of sales from its directly operated stores but these stores generate only 20-30% of sales for its watch division. The remaining 70-80% comes from its distributors and other 3rd party sellers. This is much lower than Richemont or LVMH, its key competitors at 50% or more sales coming from their own stores.

Here is a quick breakdown of the 900 stores:

Mono-brand stores
Swatch 600
Omega 260
Blancpain 30
Breguet 22
Jaquet Droz 6
Glashutte Original 5

Multi-brand stores
Tech Airport 40
Tourbillon 21

Most of Swatch's retail operations are actually in Europe, some airports and major retail outlets while others are in major global cities such as New York, Hong Kong, Singapore etc. Control over distribution has grown in importance in the last decade and Swatch has lagged in this aspect since it had strong history as a watch manufacturer with its watch movements business, not a retailer. Also, it did not have enough key brands to muster a formidable retail strategy, unlike its peers. That was partly why it wanted to buy over Harry Winston, a high end jeweller.

However, Swatch has now emphasized the need to expand directly operated stores so as to be able to get closer to the end customers, understand their preferences better and also have a better grasp on inventory. Not to mention, posh retail outlets are one of the best ways to market luxury brands, which is why we see megabrands like Louis Vuitton and Tiffany go all out to create the grandious stores in major shopping malls all over the world. To that end, Swatch has committed USD 400-600m (CHF 300-500m) in capex for the retail expansion annually. (Note: these no.s are before the acquisition of Harry Winston)

As a result of its smaller retail operations hitherto, Swatch has relied more on distributors to sell its watches. These are the Sincere Watch and Hour Glass that we see in Singapore. But more importantly for Swatch are its distributors in China: Hengdeli and Emperor Watch. Hengdeli has close to 1,000 stores in China while Emperor has a few hundred stores.

These distributors have allowed Swatch to expand rapidly into China at the expense of Swatch giving up the distribution margin. More importantly it has also allowed Swatch to hold less inventory and hence free up its working capital for investment into its movement and other businesses. Insofar, it looks like the strategy paid off with Swatch commanding a higher market share in China while its competitors Richemont and LVMH tries to play catch-up and are still building retail operations.

The next battle for Swatch is for the firm to claw back part of its distributor margin (est to be around 15-25% judging from Hengdeli's and other distributors' gross margins). However this will require time and capex but ultimately it should pay off with the benefits listed earlier (better inventory management and better customer understanding).

Having said that, distributors will still exist side by side as Swatch and other watch makers would still need them for nurturing new brands (the up and coming Omegas and Tag Heuers) and also their presence in inner cities and regional airports etc. With 20% of the global luxury watch market, the distributors cannot afford to ignore Swatch even if the firm decides it should distribute its megabrands (Omega, Breguet) by themselves.

This dual distribution model is one of Swatch's most enduring business moats as new players find it hard to engage distributors like Sincere or Hengdeli with a value proposition that Swatch cannot offer. On the other hand, the new players are also incapable of building up huge retail operations like LVMH and Richemont. So new entrants are almost a non issue.

How does Swatch compares with other branded competitors then?

As alluded to before, Swatch is playing catch-up by building up the retail stores as it sees the value of engaging customers at the last mile. One key difference is that Richemont and LVMH are both conglomerates with businesses that stretches far beyond watches. LVMH has bags and champagne while Richemont has jewellery and pens. Swatch has always been the watch company and by focusing on its strength, it should be able to compete on an even scale in the world of watches. Although this is changing with Harry Winston coming into the picture. Also Swatch always have leverage over these players via its movements business since Swatch provides the movements to these competitors. In an earlier post, we have also talked about how Swatch wanted to prioritize in-house movement to the detriment of its competitors.

As for Rolex, Patek Philippe and a few other remaining independent watch brands, Swatch's edge is again, both scale and again movements. Swatch, with its multiple high end watch brands, sells a much larger volume than Rolex. In terms of value, Swatch is also one notch ahead. Coupled with the fact that Swatch supply some key movements even to Rolex and Patek, we can say that Swatch is not in an inferior position vs these guys.

To conclude, Swatch's dual distribution via its own retail network and outside distributors, together with its dominance, allow it to create a strong business moat that rival the best competitors and should help Swatch maintain a sustainable advantage in the watch business.

Thursday, February 14, 2013

Sky Habitat's Crash Landing - Part 4

This is a continuation of a series of posts analyzing the Singapore property market. Interested readers can start from the first post.

We talked about valuation in the last post. We shall examine where the "right prices" should be for Singapore property and what if this blogger is completely wrong.

By "right prices" I mean when prices become less than intrinsic values and hence if we buy, we stand to protect our capital and hopefully earn a decent return. As with the most simple stock valuation method, we need to come up with a good earnings estimate then multiply it by a multiple. In property space, this translates to estimating a good sustainable rental income, multiplied by a multiple, or inversely - divided by a reasonable yield.

To use a specific example, we use our favourite development: Sky Habitat. Say we think that Sky Habitat can rent out at $4psf per month. ie annual rental is $48psf but after taxes and expenses we are likely to get to $40psf. And we think that a reasonable yield should be 4%. So this means that Sky Habitat's fair value should be $40 / 0.04 = $1000 psf. So at $1400psf today, it has to decline another 40% in order to become palatable to value investors.

Now how do we justify these no.s? Why $4psf? Why not $5psf? And why 4% yield and not 1% like Monaco? I have always advocated that investment is an art, not a science. These no.s are merely one set of assumptions. Well we can always explore a couple of ways to triangulate to a real and good sustainable rental and a reasonable yield.

Yield is easy, so let's start with that. Singapore's own historical range is 2-5%. 2% yield today points to super ex, and 5% in 2005 was when nobody talked about property. Globally, as shown on the previous post - 4% looks like a good average yield, with some margin of safety. You can argue using 3% too, but that is not being conservative and hence not giving yourself that important margin of safety. So I would use a 4% yield.

Let's look at rental. How do we come up with the right long term sustainable rental rate for Sky Habitat?

One easy way is to look at rental across Singapore.

River Valley $4-6psf
Orchard $5-6psf
Current Bishan $3+psf
MRT locations $4-5psf

So where should Sky Habitat be? I give it $4psf. Well some might argue for $4.5psf, or maybe $3.5psf but I shall leave it to you to work out the ranges. Remember this is an art!

Another good starting point would be our GDP per capita. Singapore's GDP per capita currently sits at SGD 80,000. This represents the average pay of a worker in Singapore. From here we need to work out what is the comfortable rental that a worker would pay. Yes most Singaporeans have a place to stay and won't rent. And most expats who would rent don't just earn SGD 80,000. But, this is the most easily accessible number so we start with this. Super eng readers (those with lots of free time) can go singstats and dig out better no.s. But do update us here!

Let's say this hypothetical average worker and his hypothetical wife also earning average pay is comfortable with using 30% of their annual combined salary ( of SGD 160,000) to pay the rental, this works out to be SGD 48,000. Assuming they are comfortable living in a 1,000 psf condo and not Mickey Mouse's toilet, this would mean that they can pay $48psf per year, or $4psf per month. So qian right? (As in such a coincidence!) $4 psf is a rental level that can be supported by an average household earning our average GDP per capita.

Well, we could always tweak the assumptions. Say Bishan should not just attract an "average" worker but an expat household earning SGD 200k. So the household income is higher, which can then support a higher rental, which leads to a higher intrinsic value. Investment is an art. So use your own liberty and artistic skills.

But no matter how you tweak, you will probably find it very hard justify $1700psf is Bishan's true intrinsic value. Not today, at our current GDP per capita, at our current rental and yield levels.

It can only happen if we push the yield very low. Remember global rental yield has a 1-9% range?

Just to make things clear again, there are 2 variables here. Rental and yield. In order to justify a high intrinsic value, you either push up rental, or push down yield or both. So to justify $1,700psf, you can argue that Bishan rental should be $5psf (ie $60psf per year or 60-70k absolute annual rental!) and yield should be 2%. So $60 / 0.02 gives you $3,000psf. So $1,700psf is now cheap! Buy Sky Habitat! Buy 2 units at one go! Wait maybe should buy the whole floor!

Ok, need to be serious.

This point on the yield actually leads me to the next important topic. What if all I have analyzed is wrong? Singapore becomes a Monaco and our yield is forever at 1-2%. This is not an impossible scenario. As we looked at the charts on previous post. Most key Asian cities have low yields. Shanghai, Taipei, Hong Kong are at 2-3%. (Though none at 1%, Monaco is still the lowest.)

In investment, you need to bet in a way such that you don't get killed if you are wrong. Nobody gets it right all the time. In fact the best investors gets it right about half the time only. So don't do silly things like selling your only home into this market or go short $300k of Capitaland. A good way would be to buy long dated puts on City Dev, or Ho Bee for that matter (this is for advanced readers here) or simply wait for property prices to collapse and then buy or upgrade to that dream condo.

But back to Monaco. Will Singapore become Monaco? And hence property rental yield is forever at 1-2% (currently it is about 2-3% which translates to 50-100% upside for here!).

This will happen if that is what our beloved Government chooses or what happens if the rich property-vested Singaporeans' opinion overwhelms that of the rest. Singapore becomes the Monaco of the East. A tax haven, a safe city for the region and a playground for the global rich to park money. We now have F1, casinos and yacht harbours, just like Monaco. Damn it, even our flag looks similar! Why not property yield?

Flag of Monaco

It can happen. I am not kidding.

But it will be a sad day for Singaporeans because our kids will never afford their own homes, and the majority (sorry actually Singaporeans will become minority since foreign talent will be more than 50% of the population when it hits 6.9 million) of Singaporeans will become slaves in their own country, working hard, earning relatively ok money but yet unable to afford anything.

Fortunately, recent Government moves sort of mitigated this. Property prices have become a political issue and the government seemed quite determined to bring down prices. And yes the white paper probably wouldn't fly given all this backlash. Let's hope that Sky Habitat lands safely.

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