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.

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.

http://nanyangbutterflies.blogspot.sg/

Happy National Day!

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.

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
9x EV/EBITDA
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!

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.

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.

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

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.

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

Sky Habitat's Crash Landing - Part 3

This is a continuation of an analysis on the Singapore property market. Interested readers can start from the first post.

So we debunked the three major bull arguments in the last two posts.

1. Strong demand. While true, it is supply and demand that matters and we saw that supply should outstrip demand in the next few years.

2. There are a lot of rich people to support prices. Rich people do not simply buy when prices fall. They are also governed by greed and fear.

3. Interest rates are low. This was partly the reason why property prices skyrocketed to stratosphere and caused instability in the system. Now that the system is on the verge of collapse, interest rates do not matter that much.

But what is most important, as in all investment, is always valuation or a methodology to gauge how cheap or expensive is the investment in question.

Property valuation can be calculated based on rental yield. Rental yield is calculated simply by dividing th annual rental over the property price. A normal range of rental yield globally goes from 1-2% to 8-9%. 1-2% being very low meaning that the property is very expensive and 8% means that yield is very high and hence implying that the property is very cheap.

Singapore's residential property market has ranged from 2% to 5% looking at our own history. Most high end property today are closer to 2%. In stocks PE terms, this translates to PE of 50x - Facebook and Amazon trades at such crazy valuations. In the global property space, only a handful of cities trade at or below 2% yield, such as Taipei, Beijing, Shanghai and Monaco. The charts below give a good comparison where Singapore stands.

Asia rental yield comparison

The other way to look at the 2% yield is to think about payback in years. At 2% you need to to rent the property for 50 years just to make back the capital (and this is simplistic bcos we are talking about gross yield and not net yield - ie after we take out taxes, downtime and other peripheral expenses like renovation etc). Some might argue capital appreciation matters not rental. But this argument is so absurd it is actually laughable. Why do I say so?

Essentially what the above argument means is that from 2% yield, prices can still go up further compressing yield to 1+% (Price and yield has an inverse relationship, if price goes up it means that yield should fall). Assuming that yield in Singapore actually goes to 1%, then it takes 100 years to make back the capital, and leasehold is only 99 years in Singapore. (Recently most of the launches are leasehold as developers realized it is actually much better for profits this way.) So isn't laughable that someone would buy something at $100, get $1 every year for the next 99 years, and be happy with $99 at the end of the century?!?

There is 1 country in the world where yield is at 1% level, it is Monaco. Luckily for Monaco, nobody actually lives there as it just a getaway for rich and famous. Yes, the rich and famous do like to pay $100 and only get back $99 after they go from ashes to ashes. But that's rich and famous for you. Of course, there are also no taxes, no restriction on foreigners and property ownership is freehold.

Monaco at 1.9% rental yield

Back to Singapore, so what is the likelihood that yield goes lower to 1% matching Monaco, i.e. prices can still double from here or yield actually fall to historical norm like 4-5%, i.e prices fall a lot from here?

The answer is pretty obvious. Even if prices do not fall, it is hard to imagine a lot of upside from buying at such prices as yield should not go to 1% unless Singapore becomes like Monaco. Therefore upside can only come from absolute rental increase which can then support absolute higher prices. (In equity parlance, this means upside is coming from earnings growth and not valuation expansion.) Alas, our rental rates are already at a high level comparable to global cities such as New York, London and Tokyo. So again, this points the conclusion that prices is likely to fall.

Sky Habitat is leading that descend from heaven now as prices plunge from $1,700psf to the current $1,400psf. I would expect it to fall closer to $1,000psf over time as that is the price level that is supported by valuation.

Next post, we talk about where prices should be and what is the alternative scenario.

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