September 2020 Update

S&P 500 Index Fund 3.27%
Straits Times Index Fund -23.84%
Tracker Fund of Hong Kong -15.36%
My Portfolio +14.19%

Notable Transactions Made:

1) Total Divestment of LHT

I first purchased LHT in May 2019, before selling most of them pre-COVID lockdown in order to secure some gunpowder. My feelings at that point of time is simple: it is always possible to find cheap companies all the time, but it takes a once-in-a-life-time disaster like COVID-19 to bring down the prices for some good companies, particularly Perfect Shape and others.

Nevertheless I would comment that LHT's management are honest folks and tries their best for shareholders.

Part of the reason for divesting LHT is that I have too many companies in my portfolio. Ideally, I want less 15. At the moment, it stands at 16, inclusive of an arbitrage holding in Xinghua Port Holdings.

No matter how big your portfolio is, I have difficulty understanding how you can have 27-30++ holdings, unless you are doing it like Schloss. The Schloss way is to simply buy cheap-by-asset companies and diversify widely. The target is to better the index by small but meaningful percentages yearly. Over long term, these become extremely meaningful. 

 

But is it possible for one to have 27 well thought-out and researched ideas? Does the market seriously throw up such fine opportunities? I have no idea. Combined with serious amount of churning/turnover, it could means huge fees. The amount of fees I incur shocked me yearly, and I dread to be in the 27-30+ camp.

2) Huge increase of Cross-Harbour & Subsequent divestment

Cross-Harbour's selldown reached a 3-year-low this week. No new announcements were made, and the only event was that the stock went ex-dividend.

Again, the rationale for buying this stock is that its liquid assets far outweigh its share price, with little or no value attributed to its current business. Unlike an investment firm like Value Partners (which is selling above its book value), buying into Cross Harbour by asset value is a very comfortable approach. The lower the price goes, the better the odds of price-to-value discrepancy in your favor. Value Partners is after all an investing firm, and the value of the company comes from its earning power and fund returns.

Fortunately for me, in a space of less than 2 months from my initial investment, Cross announced a privatization deal. Given that it has a large amount of holdings in Evergrande stock, I guess it is good to sell out and move on.

Gains are in the region of 40%.

3) Complete Divestment of ChangShouHua

Without having to read through the announcement too thoroughly, it appears that the Bloomberg article is spot on-- the sale of ChangShouHua is to finance payment for its parent's debt. The offer price of 4.19 HKD is not well received by the market in general. Quite honestly, I am fairly disappointed by the price and the market's reaction to reluctance to tighten the spread. IMO, it is better for me to sell out as the odds of a failed deal is higher than normal. 

Sold out at 4.0 HKD recently. 

4) Initial Investment in Emporer Entertainment Hotel, Haw Par and Centurion

A small amount of investment is in EEH for book value reasons. I expect dividends to be paid and this is as much desperate for yield as I can get. This stock has a decent history of dividend payment, and payout % to earnings/cash earnings is not on the high side.

Haw Par is priced cheaply based on book value. Current price reflects a modest discount considering its investment portfolio and the margin of safety is provided by its cash and medical business.

Centurion's debt will come calling in 2 years so I treat this as a LEAP of some sorts. High risk high rewards, so I am not going to put in a huge amount unless I see a "variant perception." Interest Coverage is on the low side, and management's clout will determine if they are able to re-finance. I do believe that if the yield is on the high end, it will get subscribed.

These are cigar butts. One last puff. Don't hold them forever.

5) Huge increase in Perfect Shape Medical

Stock is reasonably cheap on earnings adjusted for cash. It doesn't seem justifiable that the stock should suffer-- reason being that it is a very cash efficient business, and I am not paying for growth.

This stock is currently my biggest holding based on cost.

Investing Dad's Money

Recently, a part of my dad's fixed deposit has matured and it took me a while to convince him to invest in stocks instead. My reasoning is simple: If his long term plan is to re-invest in fixed deposit no matter how the stock market does (which a person like him only heard about the bad news), then a period of 3-5 years means a small amount of it should go to stocks. 

It is to me a pretty decent amount of cash but he is quite worried, constantly reminding me to be careful with it. I could not convince anyone that the approach I used is sound and careful, without forcing the subject to a 1 hour lecture which includes blowing my own trumpet, neither which I am fond of.

So about 50% of the funds went back into fixed deposit, yield a paltry 0.5% for a year. Unfortunately, that is the way risk-free investment goes now. The hunt for yield drives normal folks to take risk. Stocks are inherently risky investment because

- it takes some work to find ideas

- it takes guts to hold on to them during sell-downs

- and you constantly harbor self-doubts during these sell-downs.

For those who are reading, and are frustrated about not having a place to grow your money... may I suggest that you turn your attention off the market itself and concentrate on reading about investing instead. I just bought Value Investing in Asia for fun. It is a truly well-written book.

Softbank's Whale Option issue

The investing community is reeling from the news that Softbank had bought major call options for quite a bit of tech firms. The speculation is that their counter-parties has in turn, bought positions in these tech companies in order to cover their positions, which in turn drives the prices higher. I think this rumour is believable.

Again, I am not impressed by Softbank ever since the days of "blitz-scaling", its boasting of the size of their Vision Fund, and now, the Whale Option saga. Blitz-scaling is truly silly idea-- to scale up the business, no matter how much cash burn it is, in order to monopolize the market, is damn silly. First, you could be underestimating the stamina of your competition. Secondly, the companies that are ordered by Softbank to blitz-scale, couldn't care less if they lose the money (it is another thing if the manager-owners were investing with their own cash). 

If I am given a sum of money to invest, and the only way I am going to earn more is that I spend that money very quickly.... well.... I am sure I would make a lot of stupid decisions very quickly. The Vision Fund is overwhelming in size, but underwhelming in its smarts.

"Disruptive Investing"

Combined with Robinhood traders, the rise in tech stock prices, we are living in a crazy but foolish period of time. We have idiots thinking that companies like Tesla will grow 40% yearly, and no price is too high for it. No PE is too high if their earnings increase-- that is true, but you are depending on too much good things to happen-- and the prices are already reflecting the hope and dreams of far too many people who 'invest' into companies just because they are disruptive.

It is difficult for others to accept my way of thinking: find stocks that are reasonably or attractively priced so that not too many things has to happen for you to make money. I am not looking to make 300-400% in short order-- no amount of intelligence with value investing methodology can give you that. I am aiming to beat the index and profit in a consistent and easy manner.

To play devil's advocate, I do believe in the CANSLIM method. William O'Neil do believe in paying for high PE companies if they are worth it. But I just feel that the CANSLIM way is just too difficult, and I could not convince myself of their belief: that a company is now more attractive because it has become more expensive.

Opinions vs Facts

In your day-to-day life, you're bound to read or hear ideas from others. Quite often, these ideas are presented so strongly and confidently as if they are facts. However, one should think slowly, and critically, if they are actually just strongly-worded opinions.

Consider a little over a year ago, I was involved in a snooker (that is a table-game/sport, for the uninitiated) match with pretty high networth individuals. We were talking about investing in general... and soon we were talking about opportunities.

One of those discussed was First REIT ("First"), which had its stock price fell from 1.4x to 0.9x. This particular individual was quite confident that it was a good idea. My first reaction was that the shareholding changes involving Lippo group/OUE would mean that any future rental arrangement (First is on triple-net lease, and do not have to suffer from currency-risk as all rental is collected in SGD) would tilt towards Lippo's favour. 

His conviction arises that "the price is below book value already, and management would have to acquire income accretive properties for the sake of shareholders."

Let's go through the points very quickly

---My Points---

1. Major shareholding changes in favor of Lippo/OUE - fact.

2. Cash crunch in Lippo group due to problems with overly ambitious development in Indonesia (Meikarta?) - Fact.

3. Rental arrangement that would be less favourable for First, given that Lippo now enjoys a larger shareholding now in the REIT management than before - Opinion (though likely)

--- His Points---

4. Price is below book value- fact. 

5. Management would acquire properties that are accretive- Opinion. 

The key point is #5. There is an obvious conflict of interest between rentee and landlord here.

My view is that when a company is in trouble, the management must not be part of the problem. Management can think of one hundred and one ways to tilt things in their favor.

Today, First's share price is a paltry 0.46 a share. One should be open-minded and evaluate it...It might be an opportunity.

Aug 2020 Portfolio Update

In view of probable higher work commitment in the coming weeks, I decided to update my portfolio review a tad early, 9 days before the end of the month.

S&P 500 Index Fund +5.15%

Straits Times Index Fund -22.16%
Tracker Fund of Hong Kong -9.70%
My Portfolio +7.32%

Transactions made this month:
-Purchase of Cross-Harbour for my mum's portfolio

I understand there is significant earning pressure for this company, but there is little need to worry as the asset value (based on its portfolio and cash net of debt) of this stock should indicate an underpricing of about 30-40%. I plan to increase on weakness. Meanwhile a decent yield of 4% reward one for waiting.

I plan to concentrate heavily on this stock.

-Complete divestment of Colex before XD

Divesting a cigar butt that has rewarded me with a 40% return for a period of 1.5 years. Not a huge holding. This business is cheap on asset value, but I suspect it is used by Bonvest to funds its immediate needs by dividends. It might not be wise to hold a mediocre business such as Colex for long.

I used to joke that Colex often "collapse" due to its price plunges when they lost the bid on the Jurong contract. It was heart-warming to see stocks like these finally rewarding you, often due to outcomes or catalyst you would never expect.

-Light purchase of XHP as a risk arbitrage

Not a huge holding, but the 4% gap would bring some relief in case of market volatility. The key, imo, is not to concentrate on 1 stock for risk arbitrage, but many. I am pretty sure the deal will go through, despite XHP not having the cleanest of balance sheets.

July 2020 Portfolio Update

S&P 500 Index Fund -0.32%
Straits Times Index Fund -15.82%
Tracker Fund of Hong Kong -11.13%
My Portfolio +5.63%

Transactions made this month:
-Complete divestment of remaining shares in Xinghua Port at 2.0 HKD
-Purchase of Comfortdelgro in the CPF account.

------------

Divestment of XHP was taken into consideration that it is currently selling at a high multiple to past earnings. I think it is reasonable to expect that the port business will be resilient but not outstanding enough to warrant a high earnings multiple. The latest result from XHP is out just as I wrote:

Earnings of 7 cents HKD a share, at $2.1 HKD, that is 30 x earnings.
Cash of 161.7m RMB with a debt of 578.8m. Market cap is 1.71B HKD. Translating all to HKD, that is 461.7 HKD of net debt, the enterprise value is 2.171B HKD.

Enterprise Value = Debt - Cash + Market Capitalization

The latest operating cashflow suggest 56m RMB of FCF this half, annualizing bluntly, that is 112m RMB or 123m HKD this year. That is about 17.7 times cash flow, or a cash yield of 5.6%. Not too exciting.

Of course the buyer can be very generous, but I can only deal with that is within reasonable estimates...

Initial Investment in Comfortdelgro. I do not have big mathematical models to tell you why CDG is a sound idea. It is a conglomerate, and earnings are therefore hard to predict. The market pays too much emphasis in the growth of a company. CDG is not a book value play: it is now, imo, selling at a reasonable cash yield of about 8% over a average of the last 10 years or so.

I going to stick my neck out and predict a couple of things:
1) It is likely that the business would not be killed by the likes of Grab.
2) Its dramatic price fall from 1.7x to 1.3x was largely brought about by COVID-19 and it getting dropped from the index, forcing pseudo-funds managers to follow suit.

Looking forward: There is a substantial uptick in ChangShouHua's price in recent weeks. It could possibly mean that the company have found a buyer, or that the market is giving it its due.Regardless, I do not have a huge amount invested in this sum to feel upset if this idea do not work out.

OKP's lawsuits are still on-going. I do not believe the company will be substantially damaged by the outcome due to a couple of reasons, which I am not going to share. I do have a huge amount riding on this idea. Hopefully the dorms will be clear of COVID screening soon and work can resume. It is quite obvious that the grass at my area are not getting cut, which says something.


That is all for now.

June 2020 Portfolio Update

S&P 500 Index Fund -4.52%
Straits Times Index Fund -17.95%
Tracker Fund of Hong Kong -10.96%
My Portfolio +0.81%

Transaction made in June 2020:
For mum's portfolio:
No transaction was made.

For personal portfolio:
Liquidate about 64% of Xinghua Port Holdings
Small purchase of OKP

------------

Earlier this month, rumours abound that the controlling shareholders is looking to sell their stake at about 200m USD.

That worked out, net of debt, to be around 1.1x-1.2x a share. So it was surprising to see the market giving it a sky-high 1.8x valuation just a few days ago, albeit briefly.

Unfortunately, I was not around to see it. Investors are commonly advised not to monitor the market so intimately and closely, but unfortunately this is one of those exceptions. I believe the market was out of wack-- the business, though sound, was not worth the earnings multiple. I have every reason to believe the management is responsible and honest, and the bad news (occupational death of 3 workers a couple of years ago) was the reason why I bet on it.

It wasn't the easiest decision as the balance sheet was not built like a fortress. But I attended the AGM and I believed strongly that my money is in safe hands.

I liquidated my shares at about 1.46-1.49. Optimistically, the take over price should not be anywhere over 1.6x. But that is my opinion.

The purchase of XHP began in 2018 March, and net me 66% in returns. I had the good fortune of buying more stock at 0.73 earlier this year during the COVID-19 selldown. Port business is resilient, having just reported results then. Insider had bought stock at 0.9x, and I trust them.

------------
When it comes to management integrity, Wirecard is right on the other end of the scale.

News this week was that it could not account for over 2B in cash. That is about as much cash in its balance sheet.

The cruel thing is that investors were, just last week, ready to buy that stock at way over 30 PE, given its place in the DAX30 index. When the news broke, the stock was sold down terribly, and traders bought them up. It was (though low probability) possible that someone could have made a quick 60% that day.

Those who depend on the market for guidance would then lost way more. As I write, the market has sold it down 70% from last evening's close. This is incredible.

The ex-management of Wirecard is subsequently arrested.

-------------

There will be no chance in my investment strategy-- look for beaten down stocks which a nice balance sheet. It would be great if they are under a dark cloud of bad news... as long as the management isn't one of them.

A Vulture Looks at the Sembcorp/SembMarine Re-cap deal

Kyith of InvestmentMoat was probably the first prominent blogger to write about the implication of Sembcorp Industries (SCI) and Sembcorp Marine (SMM) deal. I would not repeat his (and many other bloggers' effort here). Kyith did a very good job in his prognosis on how the stock would go. He penned his post a day before trading resume, and the market did respond in line with his numbers.

In the minds of most investors, the jewel is SCI. Having got rid of its loss-making subsidiary, SMM, the earnings would be higher, and therefore deserve a higher stock price based on the same Price-Earnings (PE). Now, PE is subjective to the mercies of the market, but a range between 8-10 would still bring it way above than its pre-announcement of $1.5 a share.

Not only that, SCI's investors would receive 470-ish SMM stock for every 100 SCI stock held. It is clearly a fantastic time to be an SCI investor.

While everyone's attention is on SCI, the vulture (and contrarian) in me is looking at SMM instead. Let me explain why.

Firstly, let's establish that SMM's business is not wonderful. We are not talking about a capex-light-cash-rich company like Perfect Shape. SMM is far from a cheap price-to-book value stock like... ChangShouHua. We have no idea how valuable SMM's assets are, since the profits of SMM is somewhat, in a lagged manner, correlated to oil prices.

SMM's share price is going to be heavily depressed for a few reasons. When the prices are depressed to an unreasonable limit, it might make sense to buy a little. Here is why the prices will decline:

1) Nobody likes right issues to pay for debts. This is not a REIT acquiring a property, where it can be proven mathematically accretive.

2) It is a terrible business

3) Huge dilution

3) SCI's share holders are going to receive 470-ish shares from SCI's management. I believe they would dump the shares. It makes sense. Firstly, nobody likes uncertainty (maybe only value investors). Secondly, the odd number of shares make selling in the future, awkward.

Let's do some guesstimation on the numbers.

SMM shareholders would look at having to cough up $0.20 for every rights they wish to convert. They would receive 5 rights for every stock, which means the dilution is a considerable 1/6.

The existing number of shares is 2090.904569 million shares. Post-event, that would be 12545.427414 million shares.

Looking at the annual reports since 1998, SMM had very good years between 2009 and 2011, where they earned about 700, 860 and 751m in profits. 

Let's not depend on these rosy numbers and be conservative. when the oil prices are in the region of 45-50, SMM is capable of making around 90-120m annually at best. When oil prices were at 70+, it could earn 200m.

I going to make it easy for everyone and value SMM at about 12 PE. If SMM makes 100m a year, 1200m (12 x 100m) spread across 12545.427414m shares is 9.6 cents.

If SMM makes 200m a year, that would be 19.2 cents.

***

As I write (17-June-2020, 1010pm), SMM is selling at 52.5 cents a share. 

In other words, $1.525 would give you six shares of SMM post-rights conversion.

The price of 1 SMM stock, in the eyes of the market, is 25.4 cents a share.

***

Let's assume that it takes 5 years for sentiments to pick up, If you expect a 20% return annualized, then you will be hoping that SMM, post rights, is priced at 12 cents a share. That is if you are expecting a 200m profit/year. It feels optimistic today, but maybe not when times are good.

IMO, the market is not stupid all the time, but just for brief durations. I expect the opportunity to come from possibly SCI shareholders dumping the free shares, another oil crisis, or something else. 

I do not believe too much in forecasting a trigger, but to pay attention to value/price gap. As of now, SMM is not a buy in my list based on my amateurish assumptions/projections, merely on the price itself.

In Defence of Buffett

In recent weeks, Warren Buffett had been criticised for not utilising Berkshire's cash hoard during the March correction, and hence missing out on its rebound. In fact, Ken Fisher (son of Phil Fisher, whom wrote the seminal "Common Stocks and Uncommon Profit." Ironically it was one of Buffett's favourite books) attributed it to Buffett's old age.  Selling all of the airlines holdings was puzzling, especially as he had made purchases on them just weeks prior.

It is true that Berkshire's performance in the last ten years were inferior to the index, and that Buffett, while managing Berkshire, has access to many deals that are not available to retail investors. However, in my humble opinion, Buffett had taught me things which I felt is still commendable and relevant. 

IMO, retail investors have a lot to learn from what Buffett did as an individual investor, and while managing the Buffett Partnership (BP).

1) Concentration, Conviction and Courage
As a young investor working/learning from Benjamin Graham, Buffett studied GEICO, and made a trip to the company to learn more about the business. Convinced that GEICO is a sound idea, he put 75% of his net worth into it. I am not sure if there are many people who can do this.

In buying GEICO, Warren Buffett shown that he is his own man, despite being told repeatedly by his idol and mentor, that "GEICO prices was too high."  

How many of you would have bought a stock at $19, and bought more at $8? This is what he did for Philadelphia Reading & Coal. When the price of a stock goes down after your first purchase, the discrepancy of value and price is now even wider, and your odds and risk is lower. This is what I learnt, but still have difficulty applying, because though the idea is simple, it takes a lot of courage.

2) Thinking Deeply
The Rockwood deal, as described in Alice Schroder's Snowball, was the the perfect example of how one should go beyond the obvious.

Rockwood was a company who had a large inventory of cocoa beans. At that time, the prices of cocoa beans shot up, but selling the beans would incur a huge amount of tax for the company. As such, they sought Jay Pritzker for advice, who spotted a loophole. Rockwood could avoid the tax by liquidating its butter-cocoa business and liquidating the cocoa beans.

Soon after, Jay Pritzker made an offer to all Rockwood shareholders. For surrendering every single share of Rockwood ($34 then), they would receive  $36 worth of cocoa beans. Hence the $2 arbitrage is riskless, and most money managers would settle for the 5.9% return (2/34). But Buffett had other ideas:

3) Avoid Questions that are "Too Hard"

"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

Be it managing BP or Berkshire, Buffett avoid purchasing shares of business which he has little to no understanding. Word was that he avoided buying a certain bank just because he could not understand a small portion of its annual report. And banks are supposed to be something within his circle of competence... having such discipline is hard to come by.

With regards to his inaction during the selldown in March, it mirrored his decision not to buy any internet companies during the dot.com boom.

Even in Singapore, there will always be a company in focus, which might be in positive or negative light. It seems like one has to have some opinion of how that company will perform. 

Is SingTel going to recover to its earning ability of 2000s? I don't know.

Is SingTel able to earn sufficiently more than its dividend? I could tell the odds were not great. 

So I avoided the stock.

I have learnt not to be a smart-ass by just saying "I don't know." I will just wait for a simpler puzzle to solve-- and the stock market is not like a school examination. You don't get more marks for solving the harder questions.

4) Alignment with his clients' interest

In setting up the BP, his remuneration was as follows:

How many funds nowadays would do something like that? And how many open-ended funds would liquidate when they were still showing profits? Buffett did that in the 1969 when he felt that the market was overheated, and the opportunity of losing money for his clients is high.

5) Early Years Returns

Recent biases, such as Berkshire's underperformance to the index, is grave injustice to Buffett's ability, particularly when you study his BP's returns. Many of his ideas in BP, while in his own words, are not scalable for Berkshire, is still very much useful for the little guys like myself.

Any portfolio, especially a concentrated one, is capable of making 40+% and upwards of returns in a handful of years, but to do that over a decade, added to the pressures of managing other people's money, is the true hallmark of an investing genius. 

If you are keen to learn about his partnership years, Ground Rules is an excellent resource.

Conclusion

I don't really care if people thinks that value investing is dead-- in fact, it is to my advantage that I have it the room all to myself.

Value investing is simply sensible investing. There are multiple ways to determine the worth of a company, and it is not as simple as just looking at mathematical ratios like price-to-book. Having a sensible framework and an intellectual approach to investing, with a successful, consistent long term track record, is my objective.

I seriously doubt Buffett cares too much about what was said about him recently. A value investor that often seeks validation from others, is probably a poor investor.

May 2020 Portfolio Update

S&P 500 Index Fund -5.18%
Straits Times Index Fund -20.62%
Tracker Fund of Hong Kong -18.21%
My Portfolio -2.31%

Transaction made in May 2020:
For mum's portfolio:
Small initialization in OCBC
Increases in Perfect Shape

For personal portfolio:
Increases in Perfect Shape
Slight increase in Mapletree North Asia Trust

Huge improvement over last month was attributed largely to the price recovery of Xinghua Port and TTJ holdings, and marginal increase of Perfect Shape. Paper losses in Southwest Airline pare in recent days, as domestic travel seems to pick up again. Unfortunately I did not average down earlier: this shows you my conviction in this idea is piecemeal and insignificant.

The SIA Situation

I am sure most local investors are aware of the details of this SIA "rescue package" by now.

There are many local writers and sites whom had put in the hard work to explain to (pitiful) SIA shareholders, of their options, and the various deadline, prices, etc. This post will not attempt to do the same, especially when I am not capable of it.

My objective is to point out whether the rights/MCB will likely make you money, and make some (very) bold predictions on the coming future.

TL:DR:  I think there are better opportunities out there, unless these MCBs are available at very depressed prices.

I am still unclear about the following:

• Will the MCB trade in the market? My assumption is no, which is regretful because I do not think they are attractive at par.
• Should the MCBs NOT get redeemed, what exactly is the conversion rate? Market prices at year 10, or 373 maximum of shares?

It is anyone's guess how much the company is worth in 10 years!


Why I am not looking at the Rights Issue?
Rights issues are basically discounted stock for existing share holders. IMO, one should only subscribe when the company, during "normal times," is profitable, and capable. Based on the numbers since 2007, SIA is an extremely poor business.

In other words, it only makes sense to subscribe to rights if the problem is going to be temporary. Looking at the numbers over a decade, I do feel that the business is poor, or worse, the management is prone to taking huge risk.

So if you were to ask me to buy more stock, abeit discounted, of a company that is not efficient, the odds are poor that it will be profitable, long term (4-years is my perspective of long term).

Pre-crisis, SIA has about 1199.851millions of shares. It was trading at $9, which means its market cap is about 10.8B.

Based on an Enterprise Value approach, it has about

• 3 billion worth of liquid cash/investment,
• 9billion dollars of debt. 
• That translate to a total Enterprise Value of 16.8 billion dollars (market cap + debt - cash). 

It has to be earning 1.1B of Free Cash Flow yearly (15x is fair value imo), which it has never been able to do so consistently. The average over 12 years is a negative value.

I believe SIA to be a lost cause as a shareholder, no matter how much it was priced in the past.

Is present debt the worry for SIA?



I am going to use simple estimates, since nobody knows for sure.


SIA has about 3 billion worth of cash + investments. SIA has about 800m of "Associated Companies" on book. A quick look at SIAEC and SATS reveals that they are not in bargain price category, so it is unlikely to be worth anything more.

It has about 9B worth of debt. Which.... sounds worrying. But it isn't.

This is what I saw in 2018-9's annual report.

If we assume this dark period to last for 3 years (conservatively speaking, since everyone expect a vaccine in 2021), under date repayable,
-500m, to be repaid on Jul 2020
-200m, to be repaid on Apr 2021
-600m, to be repaid on Oct 2023
That is a total of 1.3B in three years time.

What happens if we stretch the timeline to 4 years?
-750m Mar 2024
-300m Apr 2024.
That is cumulative total of 2.15B in four years time.

What about operating lease commitments? The total, after 5 years, is 2.3B.

Inclusive of debt, that total up to about 4.5B. Add in interest payment of about 200m a year, that is 5.3B.

The problem isn't the debt

In short, looking at the total sum needed for 5 years of lease obilgation, 5 years of interest payment, and 4 years of debt maturing, the debt is the least of their problems. This rescue package totaled 8.8B. Furthermore, the company indicated that about 4B in secured financing is available by pledging their unencumbered aircraft (See below screen capture).

IMO, the only easy money-making opportunity was the publicly traded perpetual bonds, and that opportunity had passed.

The bear in the room is the yearly expenditure
SIA has an analyst media presentation , on page 9 whereby the capex is dissected.
The big numbers are coming from fuel hedges, staff cost, and depreciation and lease charges for aircraft.


More worrisome is the fleet renewal on page 18, where it should cost SIA about 5B yearly for the next 5 years.
In their presentation slides for raising rights and MCB, they claim to put aside 3.3B in capex, however, I have no idea how many years of capex is this sum for. I going to assume this will last 1 year at most.

I going to guess that the follow will happen
a) Dividends is going to be withheld for a handful of years. This would save them about 350million yearly.
b) They will issue additional MCBs, in view of the capex requirements and planes on back order. I think it is unlikely for them to issue 6.2B immediately, but the likelihood is it should be utilize within 2-3 years.
c) Increased secured financing, or sales and leaseback of any airplanes available-- but who is going to buy? As mentioned by management, this will net them 4B.
d) Restructuring for staff. I pray for them.
e) The 2nd tranche of MCB might not happen if the current ones are not well-received.

There is a slight chance that SIA might divest part of their associated companies holdings, albeit unlikely.


Conclusion
From the looks of things, it is likely that SIA will be solvent for 3-4 years down the road, with visibility of the future within a year. This is the uncertainty. The capex is the issue


It will benefit the company and MCB holders that the interest rate to remain low for the next 3-4 years.It is common sense that risk-free interest always affect prices, but another 10 years of low interest environment? I don't know how likely is that. But should bank interest rate be substantially higher, it will be logical to utilize cheaper capital.

To make things clear, what I am saying is, given limited cash, one would redeem the more expensive debt. If borrowing from the bank is cheaper (i.e. higher SIBOR), of course they are going to redeem the MCB. Else, it would cheaper to just let the MCB lapsed into equity.

It does not make sense for Temasek/SIA to redeem the MCB just to score political points. A CAGR of 6% for 10 years doesn't make sense, especially when the end-game is share dilution involving a poor business

I will be keeping my eyes peel on the amount of rights and MCBs that Temasek have to back-stop. I suspect SIA would likely get privatized under a stable political climate.

As of now, the lazy-man thinking is that, with Temasek, the MCB will surely be redeemed. But...

I think there are better opportunities out there, unless these MCBs are available at very depressed prices.

April 2020 Portfolio Review

Overview
S&P 500 Index Fund -8.36%
Straits Times Index Fund -19.71
Tracker Fund of Hong Kong -13.31%
My Portfolio -8.38%

Transactions
-Purchase of Lendlease REIT.
-Purchase of another company in Hong Kong with strong cashflows, mainly for its dividends.

Commentary
Market seems to have recover tremendously, especially REITs. The fear of their investment properties getting revaluation, the pressure of enforcing distribution for tax purposes, have eased. Unfortunately, I am one of those who were cautious of these two issues, and did not double down on them during the sell down. Some of them were marked as much as 40% down.

TBH, I was waiting for a rights issue.

Unfortunately, the G decided to intervene and REITs do not have to distribute 90% of their income until March 2021. In certain ways, it reflects the G's expectations that things should more or less recover by Sep?

Market movement in recent period reminded me of the ironies of life. Last year, investors who are very optimistic (and naive, to the point of borrowing /on margin) about REITs earn spectacular returns on them. Many of them thought they were geniuses, but fled like cowards when REITs were sold down. Some even sold stolen ideas while giving some lame-ass excuses. Hilarious.

The market always have a way of revealing one's conviction. It is what you do that matters, not what you said.

My conviction in Southwest Airlines (SA) is not too high, other than the fact that they have probably the best ROIC among all airlines. However, by choosing to receive aid from the government, they are disallow to purchase shares, give out dividends, etc until September 2021. That means we are looking at 1.5 years of misery in this sector. I am assessing the situation slowly to see if this is an opportunity.

The purchase of Lendlease REITs is based on 2 simple ideas:
1) It has 2 years before they have to re-finance; in other words, they have no current interest-bearing liabilities
2) It is a small REIT and hence it is easier to grow. How do REITs grow? Purchasing properties and increasing rent, of course.

Till next month.

***
What a difference a few days could make.
As of 11-May-2020, the market treated me really well, as prices for XHP and TTJ recovered. I am a little suspicious of TTJ's resurgence as the volume of shares is not significant.

Let's hope it stay this way.

March 2020 Portfolio Review

Overview
S&P 500 Index Fund -22.65%

Straits Times Index Fund -25.21%

Tracker Fund of Hong Kong -18.39%

My Portfolio -16.37%

Transactions

With some luck, I managed to convince my mum to invest a modest sum of money with me, after the markets has plunged to probably 5 years low. As of March, I have purchase up to about 50% of the capital, namely on:

-Straits Times Index Fund

-Perfect Shape Medical. It was suppose to be for my portfolio, but as there is already a modest appreciation in capital, I decided to gift it to my mum instead.

-Genting Singapore

-Southwest Airlines 

For my own portfolio, there were a lot of buying and very little selling. Let's start with the sells.

-Sold down a huge chunk of LHT, with the intention to raise cash for Perfect Shape Medical.

-While I have mentioned it earlier, I have redeem all my Singapore Saving Bonds. This raise a small amount of capital for purchase in equities. I do not believe in buying bonds if you have a realistic chance of living another 20 years.

-bought a significant amount of TTJ Holdings.

The year to date fall of TTJ is a staggering 38.3%. Note the increase volume in the last three days of trading. This suggest to me that someone is dumping a huge amount of shares.

TTJ is starting to look very cheap, although it is not a dream business of any sort. It has about 0.099 cash per share deducting non-interest bearing liabilities. The boss owns a huge amount of shares... and we are now at its all time lows.

-bought a small amount of ChangShouHua

It is just another net-nets stock. Unfortunately, the latest result announcement indicate that in view of the virus and business expansion, there will be no dividend paid. A real bummer.

ChangShouHua, dropped 9% today but iliquidity brought it to a 1% decline.

-bought a respectable amount of Xinghua Port Holdings

Results are actually better compared to last year-- the port business should be pretty resilient to the disease. Pulp and paper cargo handling did increase a little. Debt is pared down slightly and management is still shareholder friendly...

Dividend yield is now a decent 6+%. I think I can trust the folks running the show. Unfortunately, I am still holding on to a significant paper loss to this stock.

It couldn't be helped since the stock has fallen 29% YTD. It is not the most comfortable stock to hold but I am pretty sure my money is in the right hands.

Overall, I am currently holding 14 stocks. 4 of them are down more than 30% even after taking into account of dividends-- that is how bad this year is for me... and we are only 3 months into this year.

The 4 -30s club are:

• SUTL (-39.22%)
• TTJ (-35.06%
• Mapletree NAC (-30)
• Colex (-32)

I am not too concern with Mapletree NAC and Colex as they are relatively small holdings, but SUTL & TTJ is about 25% of my total portfolio... not a nice feeling.

Enduring is part of value investing. Michael Burry used to say that he will always cut at 15% loss. Looking at it now, good move Dr Burry.

There are stocks that did okay in my portfolio, and they are all stocks that have relatively high dividends and respectable valuation to their earning power. Some out there might call them "good companies." Cheap-by-assets stocks get no mercy from the market these days, and I agree.