SGX

This post first appeared on https://8percentpa.substack.com/p/investment-idea-5

Exchanges are the core hubs of financial activity when it comes to stocks, shares, some traded bonds and in today’s context, ETFs, derivatives and a suite of financial instruments As such, today’s idea is another Singapore company that has built its business as the electronic trading marketplace for stocks, bonds, derivatives and other financial instruments. 

The Singapore Stock Exchange or SGX is Asia’s most international multi-asset exchange and is one of the most profitable companies in the Straits Times Index with operating margins at c.50% and ROE at c.30%. It has been a phenomenal compounder since IPO. It started trading at 30c back in 2001 and the share price today is $9 and its market cap is slightly shy of SGD10bn while its revenue topped SGD1bn for the first time in 2021.

1. Fundamentals

SGX, like many other global exchanges which are highly profitable, trades like a start up with its market cap at c.10x of its revenue (i.e. c.10x Price-to-Sales) but it is justifiable because profits are ridiculously high. The key difference: startups at 10x Price-to-Sales are usually still in red. They are selling a concept, a dream. Exchanges have made those dreams reality, churning out crazy profits. Importantly, valuations based on earnings, as we shall see later, make sense. We will also compare across different exchanges, they are all drowning in profits. 

Why are exchanges so profitable? 

First, the business has no cost of goods sold. The platform provides the venue for buyers and sellers to transact. There is some cost but it is negligible compared to a manufacturer requiring raw materials or airlines requiring heavy investments to buy airplanes. Furthermore, when the platform establishes itself as the venue of choice, naturally it attracts more buyers and sellers. Like grocery stores and marketplaces, exchanges are about connectedness. The more you connect market participants, the more others will want to join. In financial markets, this translates to liquidity, the ease to buy and sell shares, bonds and other financial instruments. If you wanted to buy shares of Singapore Airlines, well, the Singapore Stock Exchange is most liquid exchange to buy from and for some retail investors, it is also the only place to get those shares because they do not have global brokerage accounts or are simply not comfortable to buy the depository shares or receipts on other exchanges. 

This brings us to the second point. Exchanges are also monopolies. At the height of the FAANG boom, if you wanted to trade the FAANG* stocks, the natural venue is NASDAQ. Before that, if you wanted to trade the cool China internet names or industrial names during China’s boom in 2003-07, you got to go to the Hong Kong Stock Exchange and in the 1980s, if you wanted Japan exposure, there is only the Tokyo Stock Exchange. Singapore stocks do not have the same drawing power but the SGX team has more made up for this shortcoming by targeting very niche instruments and becoming the marketplace for trading such instruments. 

To list a few examples, SGX today has positioned itself to be the exchange for commodities like iron ore, rubber, some petrochemicals and certain types of forex and futures derivatives. In the past, SGX was also a pioneer in launching REITs and ETF products in Asia and continues the lead today with a large number of listed REITs and it recently established itself as one of Asia’s largest international trading venue for Chinese fixed income ETFs.

Building on core bases such as fixed income and cash equity trading and clearing, securities settlement and depository management, SGX has also branched into the indices and connectivity (co-location) businesses, which provides market data and collects licensing and subscription fees, which forms the base of its recurring revenue. This helps to reduce the volatility of earnings as these businesses are less impacted by market volume. By my estimate, recurring earnings from such operations contributes c.25% of overall profits and will continue to grow (see segment information above). 

The crux of the exchange business is also its scalability on the same platform with very little additional overheads required when growing revenue. This can drive supernormal profits thanks to the proliferation of electronic trading. Trading systems are not as expensive as banking systems and capex intensity is very manageable at c.3-4% of revenue (c.SGD30-45m). Additional trades simply create revenue that drops straight to profits. For banks, their systems need to handle ATM withdrawals, cross-border money transfer, fraud detection which incurs a lot more costs.

Besides systems, SGX has labor cost as the other big cost component, as with most other exchanges. It employs c.1,200 people and pays out c.SGD240m in salaries. There is also processing costs and royalties but those are smaller compared to IT systems and salaries. The end result is this high margin (OPM at c.50%) cash generating machine churning out almost half a billion in net profits which is almost fully paid out as dividends annually.

This story is the same as we look across global exchanges:

SGX is also highly free cashflow (FCF) generative. It only had a single year of negative FCF in 2001 when the dotcom bubble burst. Since then, the company made c.SGD300-600m of FCF annually over the last 10 years which it is mostly paid out as dividends to shareholders. The largest beneficiary of which is Temasek, which owns 23% of SGX and therefore receives SGD60-120m annually which has more than covered the original investment cost after collecting this amount for the last many donkey years and yet the stake is still worth c.SGD2.3bn today. 

*FAANG was the acronym for the hottest internet stocks from 2015-2022: Facebook, Apple, Amazon, Netflix and Google, before Facebook and Google changed their corporate names to Meta and Alphabet respectively.

Risks

Is it too good to be too profitable? The affirmative answer to this question is one of the key risk for SGX. When the company has money coming out from its ears, management simply cannot resist the urge to spend. Over the last few years, SGX spent more than half a billion dollars buying companies and goodwill on its balance sheet is now SGD708m which is c.45% of its equity. If this is impaired, the share price would collapse. 

The second risk is competition and how can SGX stay relevant. As alluded above, Singapore is not Hong Kong or NASDAQ and we do not have sexy stocks or sectors that can drive investors to come to trade. The SGX model is built diligently on niche markets which could simply migrate elsewhere tomorrow. SGX’s management knew this and desperately wanted to create stronger business moats. In 2011, SGX tried to make a joint bid for the London Metal Exchange (LME) after failing to acquire ASX, the Australian Exchange. LME was ultimately sold to SGX’s arch rival HKSE for c.USD2.2bn.

It is difficult to say if SGX have strong moats around its niche instruments. The mitigating factor is that SGX has managed to grow its revenue steadily from c.SGD200m in 2013 to more than SGD1bn today. In some ways, the SGX growth story draws parallel with Singapore’s own story. We have nothing yet we built a modern city state that thrives on efficiency and effectiveness. Things just work and foreigners loved it! Now Singapore is well-known as a global financial hub and that has contributed to SGX’s moat directly.

2. Technicals

Despite the strong business model, SGX’s share price has gone through a roller coaster ride during the pandemic. It rode to a $11 high and then dropped almost 1/3 to $8 and is now closer to $9 today. The main reason could be the dividend, which wasn’t increased when everyone expected them to do so for FY ending Jun 2023. The other could the risk that we discussed above, the company is squandering away the money into bad M&As. 

For the above reasons, share price is not too far from the pandemic low of $8. Recall that this is a level at the height of global pandemonium during covid and market participants capitulated. The most bearish sellers sold out and the stage is cleared with all selling pressure abated. As such, prices then (around Mar 2020) marked a strong support level and we are at a mere 10% above that. This makes things interesting.

$8 has been a very strong support for the stock over the last 5 years and if we go further back in time it was hovering at $6 for a long long time. But it is very hard to imagine SGX would trade to that level because that would mean that dividend can be c.6% and PER is at 13-14x which would make it the cheapest exchange (based on the peer list above) by 7-8 turns and provide us the opportunity to buy a high 15-20% sustainable ROIC at c.8% FCF yield. 

So I would draw the downside at $8 and not $6. Conversely, the upside is dictated by the recent $11 but also the valuations of its peers which can be as high as 30x PER, 19x EV/EBITDA and as low as 3% FCF yield. Assuming SGX can generate 50c in EPS in the near future and applying 25x to that, we are talking about the stock going to $12.5. This does not account for the net cash it has on its balance sheet. 

So in terms of risk reward, we have the risk of falling to $8, which is 20% downside from here, but the upside could be $11-12 which is 15-25% upside. Even if we assume the stock falls to $6 which is a scary 47% downside, we have strong compounding as the tailwind which means the stock should double over next 6-7 years. The strategy would be to buy on dips if the stock for some reason collapses to $6, then we will buy more and enjoy much more compounding in the years ahead.

3. Valuations

As with the previous ideas, let’s use the usual three valuation methodologies (FCF, EV and PE) to triangulate to a more concrete intrinsic value. On FCF, we have it at c.SGD500m and using the same 3.5% FCF yield that we used for Vicom given its strong fundamentals, we get to SGD14.3bn and adding back its SGD200m cash, we get to SGD14.5bn of market cap. 

The rest of this post is on https://8percentpa.substack.com/p/investment-idea-5

Huat Ah! 

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

Thoughts #32: Tharman wins!

Singapore has its first Presidential Election in 12 years and the ruling party's chosen candidate Tharman Shanmugaratnam has won with an overwhelming 70.4% share of the vote. Our First Lady would be Jane Yumiko Ittogi, a lawyer of mixed descent whose father was Japanese but she grew up speaking Teochew in Singapore. Tharman would be Singapore's first elected non-Chinese President by the people. 

As the saying goes, the stock market is a voting machine in the short run but a weighing machine in the long run. We do not vote rationally and most market participants do not buy stocks rationally. Hence we see bubbles and crashes all the time and stocks can trade at 50x PER and people buy them knowing they are getting 2% earnings yield ignoring the fact that they can buy T bills and earn 3+% risk free.

However, in the long run, the dues will always come. The stock market is a weighing machine and weighing machine never lies. Mr Tharman's track record as a formidable politician provided him the win today but will be judged again during his term as President. Hopefully he can propel Singapore to ascend further in the global arena and more of our stocks can trade at higher valuations, validating what he said about Singaporeans enjoying the Singapore premium.

Huat Ah!

China's Lehman Moment

When the GFC broke out, we discussed that the repercussions will be felt worldwide across many years. In 2015, it hit Europe hard with the Grexit crisis and it was said that Asia and China needs to see its own Lehman moment. 

I think we just witnessed that - Country Garden's default and the collapse of Evergrande.

The buildup of woes at Evergrande was well known but no one thought that the biggest developer Country Garden could face issues. Now, all is laid bare and we know how deep the issues are. Property is a huge part of China's economy and when this piece of the chain breaks, it threatens the entire financial system. China's GDP growth may fall below 5% and there are concerns about China going into deflation, following Japan's experience in the 1990s.

Chinese authorities recently launched a stimulus bid by allowing major banks to reduce mortgage and deposit rates to boost sentiments. The stock market reacted positively for two days but the bullishness has since faltered as investors confidence remained low. The draconian measures to curb the Chinese private sector, notably private education and internet / gaming sectors remained fresh on people's minds and many market participants are still licking their ghastly wounds.

The representative stock would be Tencent (chart above). Once the darling of Chinese stock market, along with Alibaba, it is now trading not far from its pandemic low and the drawdown from 2021 to the bottom this year was a whopping 70%. The broader market is similarly trading near all time lows. See 2828 HK below.

China has been the world's growth engine for the past two decades and with this engine gone and with US equity valuation still high, it is unclear to me how markets can continue to rally. With risk free rate at 3-4%, the big question is why would anyone buy anything at 40-50x PER? We might be due for a big correction but as ex-Citi CEO Chuck Prince famously said in 2007:

"As long as the music is playing, you gotta keep dancing"

So, we continue to buy 50x PER names and not worried about just getting 2% earnings yield even though it doesn't make sense any more because risk free rate (or yield) is now 3-4% in the US. Interestingly, we can buy Chinese banks at 5x PER and receive 6% dividend yield but no, investors will still prefer 50x PER concept stock in the US rather than invest in China.

Many global investors believe that China could be an un-investable market as long as Xi continues to rule with an iron fist with the wrong advice and motivation from his top echelons advisors and inner circle. While he is not Putin, he needs to be more pragmatic and focus on the economy rather than his ego and China needs to return to the pre-pandemic days of embracing innovation, restore diplomacy and providing entrepreneurs freedom to grow their business domestically and then expanding globally to challenge western rivals.

Let's hope that can happen.

Huat Ah!

Vicom

I have written about this name in 2017 and not much has changed since then. The stock did well and the thesis played out and it seemed that it should continue to perform. The company entered a rough patch during COVID and I think this presents an opportunity for us to buy / add today. 

The following is what I wrote on Substack a few months ago and am reproducing here.

Vicom is Singapore's leading testing and inspection company with two core businesses. The first is the vehicle inspection business which it has 70% market share across 7 inspection locations in Singapore. The second business housed under the brand SETSCO does industrial testing and calibration. It also provides certification services to various industries. The important ones are construction, oil and gas, aviation amongst food, sanitation and other test-heavy industries.

1. Fundamentals

I believe little has changed since my last analysis a few years ago. Vicom enjoys very strong fundamentals with stable demand that comes from regulatory requirement for vehicle testing. It conducts tests for 500,000-700,000 vehicles annually across its 7 test centres in Singapore. There is room to increase pricing as with everything else in Singapore.

SETSCO which makes up its second business in industrial testing, benefits from the global ESG* global trend. There will be more requirements and demands for tests and certifications in various industries. Singapore, the South East Asia’s hub for many industries, can also attract companies to do tests from other countries and SETSCO stands to benefit from this.

The company stopped disclosing the business splits years ago. We can only speculate that revenue is split roughly half in each and margins also more or less similar at 20+ percent. Putting the two businesses together, Vicom comes out as a solid compounder. Its revenue has grown from c.SGD50m in 2003 to c.SGD100m today. Similarly, its operating profit expanded from c.SGD11m to SGD30m with margins maintaining at 20-30% throughout the last 20 years

The ompany has never had a single year of negative free cashflow (FCF). It averages c.SGD20m over the last 20 years and is poised to generate a higher average over the next 10 years. In some good years, it has achieved over SGD30m and as you can imagine, cash has piled up nicely, reaching SGD100m back in 2017 but is at SGD65m today after returning some to shareholders. Its ROE is a healthy 18-20%, mostly on the back on strong margin and high asset turnover

Risks

That said, Vicom is not without risks. Every investment idea will have downside and it is vital to get these out in the open. Nothing is worse than being blindsided by obvious risks that we should have considered. Even when we have identified the risks, we have to keep monitoring and make sure things are under control. It will take willpower and courage to cut loss when things go wrong. Case-in-point is Hyflux, Singapore’s poster child in water purification that went bankrupt. I lost 100% of my capital even though I identified the key risk!

For Vicom, the key risk pertains to its passenger vehicle business. While this business does not account for the majority of revenue (only c.30% or less of overall revenue by my estimate), it is very visible and top of mind. Analysts and market participants immediately think about the drop in the number of passenger vehicles in Singapore when stratospheric COE prices and vehicle quotas are announced. These announcements come regularly!

It may be true that the number of passenger vehicles in Singapore will not increase much. But the majority of inspections are actually made on commercial vehicles (trucks, lorries, buses and also taxis) and importantly, there is room to raise prices to offset any volume decline. As such, the bigger risk, in circumspect, is the cyclicality that comes into Singapore’s economy for both vehicle inspection and industry testing and certification businesses

Vicom's end customers are subjected to the whims and fancies of business cycles. This is more pronounced in Singapore because we are a small open economy in the global ocean with big fishes generating bigger waves. In 2016, Vicom suffered a small revenue decline in more than a decade as the global economy plunged into crisis with China slowing down and Europe imploding on Grexit and Brexit. Although the share price did not react much, it did stagnate until 2019 and only crossed $1.5 for the first time around June in the same year.

Then in Mar 2020, at the height of the pandemic, share price suffered a 20% drawdown and fell through $1.5 again. On hindsight, that was also a good opportunity to add to this rare Singapore compounder

2. Technicals

This is a good segue to talk about technicals. As mentioned, all stocks have risks and the even best compounders suffer from drawdowns. With Vicom, we face a similar situation as the share price dropped from $2.1 to $1.9, c.10% decline in the last few months of 2022. This was likely due to:

• a slight decrease in dividend and special cash over the calendar year when comparing 2022 against 2021 (8.5c vs 9.2c). Singapore shareholders hate dividend cuts. So, they voted with their feet (or sell orders in this case).
• the relentless increase in COE prices bringing the initial cost of owning a car to SGD150,000-200,000 which was enough to buy a small 3-room HDB flat just a decade ago. Market is postulating that the Singapore car population will decline, therefore the number of inspections will decline and hence the share price weakness

This presents the opportunity for buying as the risk reward is now favorable. We shall further illustrate below:

The pandemic low for Vicom was $1.75 in Mar 2020. We always refer back to this period because the market exhibited complete pandemonium as panic and uncertainty gripped the world back then. As such, share prices around this time should mark the low price where shellshocked shareholders cowering in fear will capitulate when everything is messed up.

This is not to say that prices will not fall below this level. We have seen a lot of stocks trade below their Mar 2020 lows, like Netflix (until recently) and Peloton, the Netflix + bicycle gym stock darling of 2020-21 (PTON US) and Zoom Video Communications (ZM US). But for Vicom, with its stable business profile, $1.75 should represent some sort of threshold and we are here today!

In terms of risk reward, downside is limited from here, but the upside could be $2.4, which was the recent high. This is c.26% upside. Since this is a compounder, assuming that it compounds at 7%, the stock should double in 10 years (the famous rule of 72). So we are talking about c.9% downside but c.40% upside over a few years. Meanwhile we are also getting c.4% dividend annually

To add a cherry on top of the icing, Vicom is 67% owned by Comfort Delgro, the transportation conglomerate in Singapore that operates taxis, buses and the North East Line. For historical reasons, and because its fleet of taxis represent one of Vicom’s largest source of business, it has held to this 67% stake and suffers a 33% leakage to minority shareholders.

If Vicom gets too cheap, Comfort Delgro (CD) can simply take the whole company private. This is how the math can work. To buy the remaining stake that CD does not own today, it will require approximately SGD260m. This is assuming we put a 20% premium to buy out Vicom at market cap of SGD800m. Vicom has SGD65m on its balance sheet and churns out, say, another SGD75m in 3 years. So, technically, CD only has to fork out SGD120m (SGD260m - SGD140m). At a certain lower share price, for CD, putting some cash upfront to take Vicom private pays for itself.

Therefore we always have this situation that some kind of floor will be put on the share price. Of course, this is a theoretical exercise. We do not know whether CD will ever take Vicom private. But history has also shown that past share price drawdowns rarely exceeds 30%.

3. Valuations

Intuitively, we know Vicom can be worth a lot. Let’s use the usual three valuation methodologies (FCF, EV and PE) to triangulate to some intrinsic value. On FCF, we have alluded to Vicom capable of generating c.SGD30m per year. It did c.SGD18m last year and to be conservative, let’s assume it would do SGD25m on average for the next few years. Assuming it should trade at 3.5% FCF yield given its strong fundamentals, we get to SGD714m and adding back its SGD65m cash, we get to SGD780m of market cap

Based on experience, companies with strong business moats seldom trade above 5% FCF yield (except during crisis) and it gets to expensive to buy them at 2+% FCF yield. As such, I believe 3.5% FCF yield is a good level to get in.

With Enterprise Value or EV, Vicom will likely achieve an EBITDA of c.SGD45m in Dec 23. Using 15x which is near its last 5 year historical average, we get to EV of SGD675m and again adding back cash of SGD65m, we get to market cap of SGD740m.

Lastly, using Price Earnings or PE, Vicom should be able to achieve Net Income of SGD30m in Dec 23 and using PER 25x on the basis of its inherently strong business, we get to SGD750m and adding back its SGD65m cash, we get to market cap of SGD815m

Intrinsic Value

Taking the average of the three market caps, we arrive at SGD780m and translating this into share price, we get to c.$2.2 in terms of intrinsic value per share. This is 28% upside from today’s price and not as mouth-watering but that’s simply a function of the market’s efficiency. As we hold out stock for a couple of years and wait for compounding to do its job, we should see the stock going back to the recent high of $2.4 and exceed that in time to come.

Huat Ah!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

Books 20#: Play Nice But Win

Michael Dell depicted his life story in this riveting book starting from his high school days to his battles with Carl Icahn and finally the birth of Dell Technologies, a USD36bn market cap company today. It was an eye-opening journey into the world of private takeovers, corporate sabotage and how to play nice but win. This book really resonated with me and hence this post to detail my takeaways.

1. Form your team

This is a lesson that most leaders would know. You cannot do much alone. Even Superman needs the Justice League and we have to assemble our own Avengers team to take on the world. Not just any team, but the Avengers team, the best people you can find. Early on in Dell's journey, he sought out people who can help him and that was how he kept scaling and grew Dell Technologies to what it is today.

2. Persistence

In Michael Dell's words, this is the all-important quality and we must always persist and not be defeated by failures. He kept mementos to remind him in bad times how fortunate he was and that kept him going. We give up too early sometimes and that happens a lot with younger and younger generations. I think this is a good reminder for everyone to simply persist.

3. Dell Process

Somewhere in page 284, Dell talked about a proven Dell process, when faced with difficult decisions, lay down the Facts and Alternatives and then decide on the Choice and Commit to it. These are simple truths but in our busy lives today, we tend to just forget and decide base on emotions and other trivialities. 

In my own experience, it is very much about discussing with other smart thinkers. All my bad investment experiences were made alone. I thought it was a good idea myself and went ahead and bought and sold stuff. Only to suffer the consequences. Somehow, for me, talking to people clarifies most things and allow for better decision making. As such, it is important to cultivate a good decision making process, just as Dell did. He even said it is proven! Q.E.D.

4. Play Nice But Win

The most riveting parts of the book has to be his battles with corporate greenmailer Carl Icahn. When facing adversaries, all the above comes in. You need a team, you have to be persistent and you need a good process. Dell fought hard and finally triumph and he did play nice and win. It is not easy because most people don't play nice. If you do, you are playing with one arm tied behind your back. But it is possible. Michael Dell proved it. Just so hard that most people give up. 

That said, Play Nice But Win is a motto that really resonates. Difficult to achieve but the victory that comes afterwards makes it that much sweeter. 

Huat Ah!

Charts #49: HK property prices

I recall thinking HK was the ultimate litmus test on whether property in Asia always goes up. With all the issues, protests and 2047 - full return to China looming, can prices actually hold?

Over the last few years, data has shown that what goes up must come down. On the broad aggregate basis, prices have fallen 5-7%. Amongst the developed cities in Asia, it is by far the worst performing city on a 5 year basis. 

A closer look at the price index chart shows that the drop is worse. From the peak of the index at 400, it has dropped c.15%. That means that some properties could be deep in red, having fallen 30-40%. Those owners could be in a lot of financial trouble.

Our own little red dot has done well so far. But we never know. My advice would be, don't trade your only property. Don't be too greedy and over leverage on multiple properties and in today's interest rate environment, pay down that mortgage fast!

Alphabet / Google

This post first appeared on 8percentpa.substack.com, as part of a new effort to share investment ideas. It is updated in Jun 2023.

Alphabet / Google (ticker: GOOG) needs no introduction. The company is the largest search engine in the world and the giant in the world of online advertising. It controls 40% of the online advertising market while Meta / Facebook has another 20%. Today, GOOG generates the bulk of its revenue from ads via search and its own services (such as Gmail) and Google Networks - websites that hosts its ads. GOOG also provides a slew of critical services that we all know well: Youtube, Google Maps, Android, Chrome and DeepMind amongst many others. In 2015, CEO Larry Page announced that a parent company Alphabet will be created to house Google and its sprawling empire of subsidiaries. 

Thanks to shrewd business strategies and acquisitions, GOOG has managed to grow phenomenally almost without interruption from the beginning. The world might not have seen such a growth juggernaut. It has one quarter (or maybe two) of revenue decline since IPO! The company grew well above 20%YoY for more than a decade and continues to grow into new verticals which it can. These include cybersecurity, cloud services and A.I. enabled voice search could become very big with proliferation of smart speakers in our homes. 

Despite recent noise about chatGPT and upcoming competitors, we believe the company will manage this transition better than it did during the PC-to-smartphone switch years ago. One test of a strong business moat is how our lives would be impact if hypothetically, the company cease to exist. For example, what if there had been no Pfizer, how would our lives have changed? Well, maybe a significant percentage of us wouldn’t be alive since there we won’t be vaccinated for COVID-19. Similarly if Alphabet / Google disappears today, a billion or more people including most of us here will not be able to function. So, the question is, what if chatGPT disappears today? 

Meh, let’s see what’s new on Google News.

1. Fundamentals

We showed a stylized version of Google's revenue breakdown, courtesy of FourWeekMBA a few weeks ago. Google's own disclosure has always been super high level. The following is from its recent quarterly earnings results.

Amazingly, GOOG generates more than the GDP of Singapore with c.70% of its revenue from search and Google Networks, platforms that uses Google to manage advertising. The other three buckets are important by themselves. Youtube, something most kids and teenagers cannot live without today, Android, something most phone users cannot live without today and last Google Cloud, an upcoming formidable competitor to Amazon's AWS and Microsoft's Azure. Perhaps, someday, most business cannot live without these cloud services.

Here's following snapshot of GOOG’s important financial numbers and ratios: 

•  Revenue (2022): c.USD282bn 
•  3 year revenue growth 23% 
•  Gross margin 55% & Operating margin 26% 
•  ROE 24% & ROIC 22%
•  FCF USD67bn and FCF yield 4.3% (Jun 2023) 
•  Net cash on balance sheet c.USD90bn

2. Risks

Every investment has risks and Google's biggest threat today is none other than ChatGPT. As a frequent user, I must say I see how ChatGPT can disrupt Google. It is simply a better way to get answers. That said, Google has launched its own A.I. called Bard. Given Google's early foray into A.I. with its c.$500m purchase of DeepMind in 2014, it should have a good headstart in this arms race. I would believe that the verdict is not out yet. Even if Google eventually loses, we will have time to get out.

The bigger risk today is anti-trust and lawsuits. Google has dominated the search world for more than two decades and governments around the world has tried to break this dominance. According to chatGPT, the following are the biggest fines against Google over the last 10 odd years.

1. European Commission Fine (2018): In 2018, the European Commission imposed a record-breaking fine of €4.34 billion ($5.1 billion) on Google for violating antitrust laws. The Commission found that Google had abused its dominant position in the mobile market by imposing illegal restrictions on Android device manufacturers and mobile network operators.

2. European Commission Fine (2017): In 2017, the European Commission fined Google €2.42 billion ($2.7 billion) for favoring its own shopping comparison service in search results and demoting rival services. The Commission considered this practice to be an abuse of Google's dominant position in the search engine market.

3. European Commission Fine (2020): In 2020, the European Commission fined Google €1.49 billion ($1.7 billion) for abusive practices in the online advertising market. The Commission found that Google had imposed restrictive clauses on third-party websites, preventing them from displaying ads from Google's competitors.

4. Federal Trade Commission (FTC) Fine (2012): In 2012, Google agreed to pay a $22.5 million fine to settle charges by the FTC. The charges were related to Google's tracking of users of Apple's Safari browser without their consent, in violation of an earlier privacy settlement between Google and the FTC.

As we know, ChatGPT is known to have accuracy issues. So we need to verify the details. A simple search showed that EU indeed fined Google c.USD5bn in 2018 and the litigation process is still underway today. Google's legal team has 400 lawyers and Google's court cases have its own wikipedia page with a long list of past lawsuits. 

https://en.wikipedia.org/wiki/Google_litigation

3. Technicals

GOOG peaked at c.$150 and was at c.$100 just a few months ago which was attractive. Share price has since rallied to $123 and I would argue that the margin of safety is no longer big enough. In market cap terms, it is USD1.6trn today and USD2trn at its peak. Share price bottomed at $84 in Nov 2022. At the height of covid in Mar 2020, it was c.$50. The stock went for a 20 for 1 split in July 2022 and these are no.s post split. 

If we use $50 as the low, $123 for current price at $150 for the upside. The risk reward is now skewed towards the downside. We have to make the assumption that share price can see $200 or more before the risk reward becomes palatable. As such, based on the above, Google is not too attractive for entry today, but since I am holding on to it, I will continue to do so unless there are more attractive similar opportunities out there.

4. Valuations

The chart below compares Google with its associated peers which may or may not be direct competitors. We can see that Google trades below this peer group average for all measures (PE, EV/EBITDA, Price-to-Sales or PS and FCF yield). It is worth noting that Free Cashflow (FCF) was USD11-13bn in 2012 and if we extrapolate its growth from then till now, it should be able to generate USD100bn in FCF in a few years alongside Apple. Although Apple would probably also grow its FCF bigger, maybe to USD150bn!

Triangulating the various valuation metrics below, we can see that Google's upside range from -9% to 17% which, as discussed above, does not warrant enough margin of safety.

If we bump up the multiples across (FCF to 30x, EV to 18x, PER to 25x and PS to 8x), we do get some upside but that's really stretching and not wise with the global recession looming and the disruption of chatGPT uncertain.

Previously at Substack, we had GOOG’s intrinsic value at $150 which was its peak in 2022. Perhaps things shouldn't be changing too much in just 6 months. Alphabet / Google is a HOLD now.  

Huat Ah!

Charts #48: SWF and PPF Returns

 This is a good chart on returns of SWF (Sovereign Wealth Funds) and PPF (Public Pension Funds)

Most large funds cannot beat the S&P500 return of c.10%pa.

2023 Dividend List

The wait is over. Today we will talk about *drumrolls* the 2023 Dividend List. This list has consistently generated the most popular posts on this infosite over the years. I started using Poems' simple dividend screen a few years ago. It allows adjustment for only 8 factors: ROE, ROA, Operating Margin, Dividend Yield, PE, PB, Current Ratio and Debt/Equity. While crude, it worked and we discussed good ideas in the years past (the full lists at the end of this post). This year, I came up with a 8818 4D winning formula to screen and would like to share the results. 

The above shows what 8818 is about. ROE > 8%, Operating Margin > 8% and PE < 18x. Dividend is no longer used as a criteria so it has become a misnomer to say this is a dividend list. But since Poems will always show the dividend yield, we can still see it as a reference and surprisingly, all the stocks featured today pays dividends. Although it doesn't really make any sense today to buy anything for 4% dividend since we get that risk-free buying Singapore T-bills. However, if it is a name with strong growth but still gives 4-5% dividend, then it's a steal. Buy, buy, buy!

For the Singapore market, I have cut off the market cap at SGD100m and we have 77 names. The last name cuts off at market cap of SGD1.5bn and honestly, I have also avoided small caps because the risk of seeing that investment going zero is way too high for me to stomach. I have discussed this point in Lessons Learnt from My 4 Biggest Losses. As such, the screenshot shows the top 30 names, the good blue chips on SGX sorted by market cap. We see the banks, REITs, Thai Beverage, Jardine Cycle and Carriage, Yangzijiang, Property names and Venture, Singapore's answer to Foxconn, albeit in a very small way, led by its founder Wong Ngit Liong. The following shows Venture's share price.

While it does not show the usual compounding graph, we can still see that Venture has created some value in the last 10 years after a long stagnation from the early 2000s to 2016-17. Contract manufacturing is a difficult business and hats off to Mr Wong and his team for being able to reinvent themselves, bringing the share price to $30 at one point. Venture went into niche contract manufacturing for MNCs by providing Singapore's branding for quality, process and timeliness and made a killing there.

But, let's move on from Singapore. In the next screen, I used the same 8818 (i.e. >8% ROE, >8% OPM and <18x PE) for NYSE, Nasdaq and Amex with the market cap cut off at USD100bn. Unfortunately, that is the quantum difference between our Little Red Dot and the World - USD100bn vs SGD100m as the cut-off in market cap. *Sigh* Anyways, the following shows some of the biggest names in the  world today:

I would note that TSMC is the most interesting name but it also comes with the most dangerous risk: China invading Taiwan. If that happens though, everything will be falling apart, so not sure which is worse, owning a diversified portfolio with TSMC or owning a lot of stocks in general that will see 20-30% drawdown if war breaks out. I don't have a good answer and that is why I have also advocated buying physical gold. In the middle of WWIII, all your stocks and money in the bank account may not be worth much, but physical gold will get you food and petrol in your $100k COE car.

The last screen is the same 8818 criteria for LSE listed names. I would highlight that BHP and Unilever which appeared in both the London and US screens are good compounders. The chart for Unilever below shows the nice exponential curve as most compounders' long term share price chart shows. Different from the Venture one right?

Interestingly, we are also seeing many stocks trading below 1x PBR (e.g. HSBC and British American Tobacco) that has good ROEs and not necessarily basket cases. During the growth era from 2010 to 2022, this couldn't happen. Perhaps we are truly in a new value era. Long Live Value!

As usual, here's the past lists:

2022 Dividend List - Australia!

2022 Dividend List

2021 Dividend List - HK!

2021 Dividend List

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

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Huat Ah!

Thoughts #31: Investment Advice for Friends

As self-proclaimed investment gurus, friends tend to seek us out for investment advice and we tend to give freely, without contemplating the consequences. Most of the time, we share ideas that we are thinking of OR ideas that we already own and as conversations with friends go, there is no in-depth discussion and exact instructions are not provided. For example, a typical conversation will be:

Friend: "Hey, any stock lobang (good investment opportunity)"

Investor: "Yeah, check out Sembcorp Marine,  I bought already."

Friend: "Why is it good?"

Investor: "Energy is in demand, now oil price so high. Sembcorp will benefit."

Friend: "Oh yes, that is true, any risk?"

Investor: "They always need to put in a lot of capex, basically capital expenditure to build rigs and the industry is highly cyclical, so some competitors go bust. But no worries, Keppel will buy them if anything goes wrong."

Friend: "Ok, ok, I go buy tomorrow."

There are a few issues right here. There is no entry price, no target price and as such we do not know when to exit. Also, what is the size to commensurate the risk involved? These important points are all not spelt out. So when things go wrong, the investor sells at a loss and recommends that the friend do so, he or she may not follow because psychologically, loss-aversion is at work. Most people find it very hard to cut loss. Even when things go right, it is time to take profit, greed takes over and when the investor has sold, sometimes friends do not want to sell also. 

Such is the difficulty of providing investment advice on a casual basis.

Well, most friends are understanding and they know, it is always caveat emptor. You cannot fault your investor friend for providing advice just as you cannot fault your makan guru (foodie) friend for recommending you to his favorite restaurant which may not be to your liking. Of course, not all friends are like that.

To continue to hypothetical situation above:

Friend: "Hey Sembcorp died! What happened?"

Investor: "Well, it is highly cyclical, they did a lot of capex in the wrong regions, so when things go wrong, I sold and asked you to sell. Did you sell?"

Friend: "But you said Keppel will buy them."

Investor: "Well they did merge in the end. But did not go too well for Sembcorp shareholders. That is why I sold. Why didn't you sell?"

Friend: "I was hoping can rebound. But now lost so much money. Thanks bro... Guess your stock tips are not too reliable."

Investor: "Sorry... can we still be friends? Can I buy you dinner?"

Over the years, I have come to realize that the negatives of providing investment advice outweighs the positive. If he is serious, maybe he should consider subscribing to my Substack and we can have real in-depth and robust discussions on the Substack platform with other like minded subscribers.

Alas, most people just want stock tips. Not to read a 15 minute deep dive note on Substack or anywhere else. Just gimme the get-rich-quick tip bro!

Well, to each its own, we can still be friends.

Huat Ah!