2017 Summary

The last two months were extremely volatile as my portfolio suffered 1.0-1.5% drops very frequently. In the end, I managed to pip STI by 2.93%. The smaller sum that I invested for my mother lead STI by well over 5%. The purpose of this blog is educational so I am organising it into 3 parts

a) portfolio strategy

b) short-comings

c) possible changes in the future

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a) Portfolio Strategy

• For the entire year, only stocks in SGX were traded.
• Priority given to the balance sheet over earnings
• Wide diversification; certain stocks have higher weightage due to higher confidence, or the market was kind enough to lower its price, henceforth reducing its risk.
• Companies of all sizes were considered; smaller companies were preferred for their simpler business and higher price inefficiency due to neglect or unpopularity
• Sustainable dividends
• Management with skin in the game
• Low price to tangible book ratio (60 cents to a dollar or less)
• An increasing Net Asset Value (NAV).
• Low to no debt. Numerically, anything close to 40% debt-to-equity is high.
• This is optional, but the company could have problems, but are likely to be temporary. A wider diversification is adopted for these stocks.

The last point, about companies with problems, is worth discussing. The market is efficient most of the time. This efficiency is stronger with the large-cap companies which has plenty of attention from institutions and the general public. Statistics says that majority of my countrymen do not invest, hence retail investors are overwhelmingly smaller compared to professionals/institutions. It is the institutions that move the price.

The key point is that it is difficult to recommend a buy or even hold such companies' stock . The power of the markets lies in the hands of institutions and professionals and whether they will think in the interest of their clients is debatable, and being average is less risky than trying to be contrarian-ly. 

I find that when a company (investment firms included) is large, the probability of it prioritising process or "proper procedures," over logic is strong.

The greatest advantage of a retail investor is that we can afford 

• to think independently
• the patience. 

The pay-off for purchasing stocks of companies under problems is that the payback can be significant. For some popular companies, this could a rare buying opportunity (except during corrections and crashes).

This portfolio did not include or take into consideration...

• Growth stocks. Companies like AEM, mm2, China Sunsine and Best World were not bought even though they were very popular and profitable among the crowd. 
• Macro trends. The electronic or developer boom did not influence myself to buy certain stocks. The portfolio's approach is entirely bottom-up.
• Specific preference for any industry

Growth stocks are excluded because they are too difficult. It is far easier to tell if a stock is cheap, rather than if the growth is a) worth the price b) sustainable. Generally, I hate crowds. I am motivated more by the game than the rewards.

Macro trends and industry preference were disregarded because I do not have any circle of competence.

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b) short-comings

• There are very few companies in SGX that are cheap by book value. As such, the capital employed for this portfolio is very small (since diversification has to be wide). Cash constitute a large part of my portfolio.
• Since large diversification is needed, trading cost made up a significant 0.6% of my total portfolio size.
• It can be exhausting to read numerous articles and only act only very few of them. Due to lack of discipline, certain companies were bought even though only rudimentary statistical research was done. This results in small losses, but they were avoidable. 

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c) Possible Changes in the Future

Search the world for deals, and practice diligence in my buying. With a more thorough approach to investing, I am likely to consolidate most of my positions into a concentrated portfolio.

The Portfolio Gone a Little Crazy

My portfolio continues to astonish me since two weeks ago, giving me gains that surpass the STI for the first time (3%) in as long as 1 year 10 months. Much of it had to do with advances in Wee Hur, BBR, Chuan Hup, Samudera and some recovery with Innotek, Mermaid Maritime and Comfortdelgro (which I continue to be modestly hopeful for).

TBH, I have expected results to remain poor this year, given that I hold some ugly (and more importantly, safe) stocks.

It is every active investor's wish to beat a passively-managed instrument like the index. 2 years down the road, I never expected this task to be so difficult. I hope to remain steadfast in investing by value. Hopefully I will continue to view stock picking as an intellectual exercise (and one of emotional control) because I have seen many people around me being blinded by profits. I remain doubtful that I am right unless a stock gives me at least a 20% return; and a portfolio, compared to the index over a long period of time (3-5 years at least).

There are more than a couple of stocks which ascent I missed. They belonged to the "not sure" pile which I convenient forgot after some time. Hock Lian Seng, whose sky-rocket after special dividends were announced. Chew's Group, which I thought was cheap based on solely PE, but have a huge capex in the near future due to relocation. I would have got almost 100% return, but I still think the Market doesn't know what it is doing. GP Batteries, which is quite a safe arbitrage, sneaked past quietly. I know many here had been richly rewarded by AEM, Best World and MM2 etc, but they are not my kind of stocks...

Guess I am only intrigued by "trash."

2 Years of investing

It has been exactly 2 years since I start investing. Like most rookies, I did short term trades and inherited some losses. Fortunately, none of them destroyed my savings, and I learnt something from every single loss.

I would like to thank Sembcorp Marine (bought 1.9x, sold 1.8x and 1.7x on the rebound) and Imprimis Pharmaceuticals (bought at 8.6x, sold at 6.x, now only $3.4 after accounting for splits) for leading me to value investing. Turquiose Hill Resources taught me that a cheap stock can get ridiculously cheaper (bought at 2.5x, went down to as low as 1.55, sold at 2.6 after it rebound, went back up to 3.4 after selling it) and book value plays should be largely diversified because you never know if one stock will implode. Transit Concrete taught me that it is nefariously difficult to value stock based on earnings. Noble, that I should always read the short seller’s reports (because they are usually well researched and these short sellers had skin in the game); and lastly Starhub: hopefully I will stop being such a lazy bastard!

In this bull market, many of my friends who traded blindly made a lot more money than I did. Plenty of investors in InvestingNote has also shown me crazy single-year returns (40%-60%). While I do envy their good fortune, I will stubbornly stick to my guns as a value investor because it is in my nature to be one. I don’t mind standing alone in a corner and generally avoid crowds. I know some “value investors” who have lost their way because they are only in the game for the money (in short, they are just plain greedy). It is pretty easy to steal ideas from eminent blogs or forums and earn a decent return. For me, stock picking is an intellectual exercise. 

I am only interested in cheap stocks. Financial gurus quipped that if a mall runs a major discount, products get sweep off the shelves. But they lament that the crowd does not behave similarly during a stock market correction. I am going to play devil’s advocate; companies are a lot more complex to inspect than apples. Most of my companies are genuinely in some kind of trouble. My job as a stock picker is to invest in companies that are cheap and can turn things around. When will that happen? Well, it is not my job and neither am I capable of such a feat.

The market has been extremely kind to me for the last two weeks. The ultimate test for any active (or enterprising, a term coined by Benjamin Graham) investor is whether she/he beats the market in the long run. Given that all my stocks in my portfolio are less than a year old, my portfolio under-performed versus the market until only recently, pipping it by 2%. The late Christopher Browne of Tweedy Browne wrote,

“Value investors are more like farmers. They plant seeds and wait for the crops to grow. If the corn is a little late in starting because of cold weather, they don’t tear up the fields and plant something else. No, they just sit back and wait patiently for the corn to pop out of the ground, confident that it will eventually sprout.”

Most of the time, my stocks are sleeping or falling. Good news doesn’t always arrive immediately. Wee Hur, a company that I purchased about 140 days ago, barely moved. However in the last 2 days, it advanced by 20%. I recalled purchasing some shares of Innotek because they fell 20% the day before, and right after my purchase they fell another 8%. It is very normal for my stocks to have paper losses of 10-20%. Value investing is an arrogant act because you are literally standing in front of a mob and telling them that they are wrong, doubling down your stake as the price get lower (and more attractive). 

Let me conclude this post by summarizing my investment strategy. My portfolio is largely diversified into cheap and safe businesses with little to no debt, and are run by management which are shareholder friendly. 

Some corns that has sprouted (thank you very much):

·       Chuan Hup 42.51%

·       Wee Hur 21.47%

·       Samudera Shipping 14.50%

·       Teckwah (sold) 26.1%

·       Ascendas Hospitality Trust (sold) 32.9%

Special Dividends from Chuan Hup

Many shareholders, like myself, are pleased with the dividends from CH.
Unlike others, I would not claim to possessing any special foresight-- CH is just a company that was slightly out of favor, pays a decent dividend in the past. It is also the only reason why I have included it in my mother's portfolio. So I am just a recipient of incredible luck. I held this stock for well over 200 days.

Another company that was in the modest little portfolio is Teckwah which I have already sold. The problems are no longer there. This little portfolio only contains a few thousand dollars worth of Chuan Hup and Comfortdelgro. The latter has problems but that does not include paying dividends.

Based on time weighted returns, this portfolio beats the index handily, returning 31.38% over ES3's 21.3%.

You can have very decent results from buying based on book value and shareholder-friendly management

"Good News" Companies on SGX.

As of today, 7-August-2017, a couple of "good news" companies stood out. They are AEM Holdings (SGX:AWX) and Best World (SGX:CGN). Their earning power narrative continues despite worrying signs in their balance sheet, namely the receivables.

AEM registers a negative cash flow while Best World's cashflow is positive. Would be interesting to note this down and watch how they both end up, 1 year down the road.

I remain convinced that the stock market consistently overprice companies with brilliant prospects, and sometimes undervalued companies with dim ones. The latter, given an appropriate price, will often surprise you positively because of a number of outcomes in the future.

It is nice to buy profitable companies. The problem is that everyone knows who they are-- and it is tough to affirm if its profits are legit.

On M&A Deals

Recently we have a bit of a shocker news from China-- major conglomerates like the Wanda Group, HNA, etc are being queried by the China Banking Regulatory Committee (CBRC) regarding their loans. I know very little about China, and most investor in Singapore are heavily dissuaded (with good intentions of course) from investing in s-chips. For the uninitiated, s-chip is the term given to companies listed in Singapore but actually based and managed by the Chinese.

To summarise, the CBRC is probably concern with the amount of M&A deals going around recently from these conglomerates. More specifically, they want to know the source of these loans.

The first time I have heard of HNA group was due to its plans to acquire CWT Limited, a local logistic company. After reading the fine book by Joe Ponzio (F Wall Street), I began investigating the balance sheet of both HNA and CWT.

Both have so-so balance sheets. More worryingly, I wonder how HNA group could possibly fund this acquisition from its own pocket. Some research and helpful forum posters pointed out that they depended on banks and JVs to do so. A bit of googling revealed that these companies have been on a spree of acquiring companies. There are also politicking going on behind the scenes, though most of these info are from the grapevine.

Unlike the last M&A ARA deal, the CWT deal didn't feel all that safe to me. I always looked at M&A deals as low-risk-definite-returns, and will bet a sizeable amount of my portfolio into it. To stress the point, I can assure you that it is not no risk-- anything can happened at the last minute. It isn't over until it is over (or voted).

Along with the recent inverse bond yield alert, I think it isn't prudent to bet on these deals. I glad I have stayed away.
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As of now, there are 3 "deals" going on in SGX.
- CWT
- M1 (rumoured deal. Gosh God help these investors who only just bought recently)
- GLP (another rumoured deal that can go south very very quickly).

Neither of them look safe enough for investors.

Update on 18-Jan-2018
GLP's deal concluded successfully.
MI went down from 2.1 to 1.7 after its "strategic review" between substantial shareholders concluded that a sale is not in the interest of the shareholders.
The CWT deal was seal successfully after a few dramatic sell-downs (big enough to frighten some arbitrageurs)

Dividend Investing, Part Two- Are Blue Chips Solid Dividend Payers?

There is a foolhardy assumption that dividends paid by companies listed in the index are rock solid. This is not the case as I looked at a company that has experienced some sell-off in recent times; the biggest of them all, Singapore Telecoms (SingTel).

Data were taken from annual reports, from https://www.singtel.com/about-Us/investor-relations/annual-reports#

Somewhere in the early 2000s, dividend income from subsidiaries were moved from “Cashflow from Investing Activities” to “Cashflow from Operating Activities.” As such, data can be inaccurate. However, I suppose things cannot be too far off…

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
2013	5817.5	2058.6	3758.9	2517.7	66.98%
2012	5710.4	2248.7	3461.7	4111.4	118.77%
2011	6043	2004.6	4038.4	2356.6	58.35%
2010	5328.8	1923	3405.8	2084	61.19%
2009	5163	1918.3	3244.7	1989.4	61.31%
2008	5453.7	1879	3574.7	3435.4	96.10%
2007	4584.7	1789.8	2794.9	1920.9	68.73%
2006	4485	1713.5	2771.5	1733.8	62.56%
2005	4489.6	1428.1	3061.5	915.2	29.89%
2004	4594.7	1300.2	3294.5	764.8	23.21%
2003	3771.1	1667.9	2103.2	764.7	36.36%
2002	3088.1	2999.7	88.4	697.4	788.91%
2001	3533.5	1762	1771.5	1493.8	84.32%

There were a couple of years which should be disregarded. Year ending on 2002 should be disregarded due to the purchase of Optus. 2012 should be disregarded as there was a huge one-time special dividend payout.

Let’s remove them.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
2013	5817.5	2058.6	3758.9	2517.7	66.98%
2011	6043	2004.6	4038.4	2356.6	58.35%
2010	5328.8	1923	3405.8	2084	61.19%
2009	5163	1918.3	3244.7	1989.4	61.31%
2008	5453.7	1879	3574.7	3435.4	96.10%
2007	4584.7	1789.8	2794.9	1920.9	68.73%
2006	4485	1713.5	2771.5	1733.8	62.56%
2005	4489.6	1428.1	3061.5	915.2	29.89%
2004	4594.7	1300.2	3294.5	764.8	23.21%
2003	3771.1	1667.9	2103.2	764.7	36.36%
2001	3533.5	1762	1771.5	1493.8	84.32%
			42719.2	28120.8	65.83%

One could see that based on 15 years of data, the average dividend payout is 65.83%.

SingTel was able to pay dividends effortlessly from 2001-2005. A check at the yield then was about 1-2%, which is low. Payout from FCF increases dramatically from 2006, as its yield increases.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
2013	5817.5	2058.6	3758.9	2517.7	66.98%
2011	6043	2004.6	4038.4	2356.6	58.35%
2010	5328.8	1923	3405.8	2084	61.19%
2009	5163	1918.3	3244.7	1989.4	61.31%
2008	5453.7	1879	3574.7	3435.4	96.10%
2007	4584.7	1789.8	2794.9	1920.9	68.73%
2006	4485	1713.5	2771.5	1733.8	62.56%
		Total	32488.5	24182.3	74.43%

The last 3 years has been tough for SingTel.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
		Total	8899.6	8144.5	91.52%

From the prospective of a dividend hunter, I wouldn’t say this business is one in which you buy and sleep on it, since share prices are not that depressed (EV/EBIDTA is still way higher than the other telecommunication companies). I can say with some confidence that current year’s (2017) dividend is UNLIKELY to be cut based purely from this year’s FCF and CAPEX, but the short future seems very rough.

2017	OCF	CAPEX	FREE CASHFLOW	DIVIDEND PAID	REMARKS
Q1	1736.8	504.5	1232.3	-
Q2	1121	479.7	641.3	1705.5	Already paid earlier this year
Q3	1263.3	623.6	639.7	-
Last Year's Q4	1208.3	527	681.3	1083.7 (Figure to match last year's total dividend payout)
Total	5329.4	2134.8	3194.6	2789.2	87.31%

Total dividend paid last year was 2789.2
Dividends paid so far (SingTel pays twice a year): 1705.5
Assuming dividends this year will equal last year's, next dividend should be 2789.2 - 1705.5= 1083.7

This will probably mean using up to 87.31% of the estimated free cash flow, provided this coming quarter’s performance matches last year’s. As a large company with multiple sources of revenue, I don’t expect any earnings surprises. 

As such, this is the average payout, for the last 4 years.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2017	5329.4	2134.8	3194.6	2789.2	87.31%
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
		Total	12094.2	10933.7	90.40%

Hence, if the management were to cut dividends or offer a dividend guidance, it will mean that the short future does look bleak.

The key takeaway is that dividend payout percentage from the Income Statement does not adequately express the difficulty of paying dividends.

Update
SingTel announced its 4th quarter and Full Year result recently. These are the updated figures.

2017	OCF	CAPEX	FREE CASHFLOW	DIVIDEND PAID	REMARKS
Q1	1736.8	504.5	1232.3	-
Q2	1121	479.7	641.3	1705.5	Already paid earlier this year
Q3	1263.3	623.6	639.7	-
Q4	1416.3	652.8	763.5	1110	Announced 18-May
Total	5537.4	2260.6	3276.8	2815.5	85.92%

 

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2017	5537.4	2260.6	3276.8	2815.5	85.92%
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
		Total	12176.4	10960	90.01%