Sunday, April 24, 2011

Investing in Growth Themes Part 1

Technology appears to have made a strong come-back after years of investor neglect, epitomised by Apple's meteroic rise from US$80+ in early 2009 to US$350 currently, a rise of over 300%. Apple's success has been attributed to its strong product offering, beginning with the iPod, then iPhone and more recently, the iPad. Apple fans will wax lyrical over the superiority of Apple's products, and long queues which form at each new product launch is possibly a testament to the fanatical respect the company commands from technology product users.

At its current price, Apple's market capitalisation is about US$320 billion, and few companies are larger. Google Finance puts Apple's historical PE at 16.72X, not an expensive multiple of earnings, while the company's latest earnings blowout suggests that valuations are likely to fall further, should the company's explosive growth continue. Also, the macro-picture for Apple appears extremely favourable, considering the huge shift towards mobile computers like the iPad. Coupled with the relatively untapped emerging markets, the growth possibilities are enormous. Is Apple the sure-fire way to tap on an unstoppable growth theme? 
Before we get ahead of ourselves, history offers an alternate opinion. The automobile was a revolutionary invention which changed the way people travelled. However, few investors made money investing in this "sure" trend, and the 2008-2009 crisis even saw the collapse of the "venerable" General Motors, a member of the Dow Jones Industrial Average since 1915. Many automobile companies have collapsed, leaving investors much poorer, even though the industry has boomed (if the number of automobiles on the roads is a measure of the industry's success). Warren Buffett has been quoted to say that the best way to invest in the automobile industry would have been to short the stocks of horse-drawn carriage companies.
Similarly, the airline industry revolutionised long-distance travel, but investments in airline companies has been generally fared poorly in comparison to the growth in the sector. Engine and aircraft manufacturers were the beneficiaries of the sector's boom, while the airline operators saw shrinking margins as competition intenstified. Many airlines also went bust despite the astronomical growth in air travel over the years.

What does this tell us about investing in the next major growth trend? We could take an appathetic approach and ignore the growth trend (which has not generally not resulted in poor investment returns, if one considers both the airline industry as well as the automobile makers). Alternatively, we could seek investment opportunities that ride on the trend - we are looking for the horse-drawn carriage companies to short, the Boeings and Airbuses which benefit  directly rom a trend, but maintain pricing power, or the indirect beneficiaries like the Exxons and Shells, which drill and refine oil needed to power the increasing number of vehicles on the road.

Given all this, how then does one ride the growth trend of "portable new media"? We will highlight two themes that may benefit from this growth trend in our next post.    

Sino Techfibre - Fraudulent Fire?

Last Thursday, Sino Techfibre announced that a fire broke out at an office which did not affect any staff, but unfortunately destroyed books and financial records (see$file/Sino_Techfibre_Announcement_210411.pdf?openelement).

How convenient. The company's stock was halted for trading on 13 April, after auditors raised issues over the legitimacy of invoices. Now, the financial records to "verify" those invoices (likely to be "receivables" on the company's books) will most probably be lost in the fire, rendering an audit impossible.

This latest incident only serves to highlight the poor quality of S-Chips listed on the Singapore Exchange, something which has kept us from investing in the sector despite having bombed-out valuations. When balance sheets cannot be trusted, it is impossible to ascertain the true value of a company, and the track record of the sector in terms of corporate governance has been attrocious. In academic terms, the "risk premium" attributed to an investment in the S-Chip sector should be extremely high, which goes a long way in explaining the ridiculously-low valuations of most companies in the sector. We sympathise with investors who have fallen prey to these poorly managed companies and will continue to seek value opportunities outside of the S-Chip sector.

Saturday, April 16, 2011

Excess Cambridge Rights

In the recent Cambridge 1-for-8 rights issue (at $0.429 a share), we subscribed for excess units (920 more) to bring our holdings in the REIT to a round lot multiple. On 15 April, we received all our excess units, and now hold 29 lots of the trust.We are looking forward to receiving about $350 each quarter from our holdings, based on an estimated $0.012 quarterly distribution.


Thursday, March 17, 2011

More Buying For The Portfolio As Markets Remain Weak

We added CapitaMall Trust to our holdings today on general market weakness (3 lots at $1.73). We estimate that the annual dividend yield of 5.5% (based on $0.095 p.a.) is sustainable, and that rate has potential to expand as J-Cube completes and begins contributing to the trust. The recent acquisition of Illuma looks like a shrewd move - The mall's full potential was not being realised by the previous owners (thus they were selling relatively cheap), and CapitaMall's management should be able to ride on synergy between Bugis Junction and Illuma.

Recall that we sold CapitaMall Trust in July 2010 on the basis that a 4.5% yield was not a sufficient reward for holding the stock, despite the trust holding many prime assets. The stock has since corrected almost 15%, with the running yield now about 5.5%, 100bps higher than when we sold it.

We also added to Wells Fargo (50 shares, US$30.75) as the stock was slumping even as the broader market rose. There was no apparent reason for the sell-off, and with more clarity on the stock's ability to pay dividends soon to come, there could be some upside potential in the near-term. Nevertheless, the longer-term prospects for the bank continue to look bright, and we believe that the stock could trade nearer the $45-$50 range once bright sunny skies are upon us once again.

Tuesday, March 15, 2011

Japanese Nuclear Worries Roil Market - Adding to the Portfolio

Stock markets were roiled by concerns over a potential nuclear meltdown in Japan, triggered by the 9.0 Mw earthquake which hit the Sendai region of Japan last Friday. While the initial reaction of global stock markets to the earthquake was relatively muted (in contrast to the hefty declines posted by the Japanese stock market), concerns over the impact of the earthquake on several nuclear power plants sent global stock markets reeling on Tuesday.

Prime Minister Kan's live video telecast today (15 March 2011) did little to comfort the jittery global community, and as the PM revealed that the possibility of nuclear leakage was increasing and that those in a 20km radius around the Fukushima Daiichi nuclear power plant were being evacuated, stock markets in Asia plunged on uncertainty surrounding the situation in Japan. The STI fell by as much as 3.3% as selling intensified on concerns that nuclear power plants in Japan could suffer a meltdown, which would have dire and unthinkable consequences. The Singapore market ended the day 2.8% lower, with losers on the exchange outpacing gainers 610 to 59. 

Taking a step back from the frenzied selling and huge uncertainty, we see the sell-off as a manifestation of uncertainty and fear, rather than a rational adjustment of prices for various assets. The Sendai earthquake will likely cause a series of contractions in the Japanese economy, but will have limited impact on the global economy, given that Japan's contribution to overall growth has largely been discounted. As Japan embarks on its rebuilding process, this should boost economic growth (in a perverse way), and given sufficient time, we can expect the economy to emerge from this crisis on relatively firm footing. This will have some impact on select sectors in the near term, but ultimately should prove to be little threat to the overall growth of the global economy.

A 16% discount in the Japanese stock market over two sessions appears excessive, and it is increasingly tempting to punt the Japanese stock market now. The risk-reward tradeoff certainly appears in favour for those long the market, despite the heightened volatility, especially if a longer-term investment horizon is employed. Nevertheless, we remain unfamiliar with the situation with specific corporate names in the country and will not seek opportunities in that area.

For the local stock market, we think the selloff in blue chip names remains overdone, and we picked up 500 shares of OCBC at $9.115 and 1 lot of WBL Corp today at $3.90. Both are unlikely to face any severe reprecussions of the latest series of problems, and we will be looking to employ more cash should the irrational sell-off continue over the next few days. 


Sunday, February 27, 2011

Further pain in the S-Chip sector; China Hongxing and Hongwei both suspended

Both Hongwei and China Hongxing are set to be suspended, following audit issues "regarding issues pertaining to the cash and bank balances confirmation" for Hongwei and "irregularities in the cash and bank balances, accounts receivables, accounts payables, and other expenses during the course of their audits of its subsidiary companies in the People’s Republic of China (“PRC”)" in the case of China Hongxing. Ernst & Young are the auditors in both cases.

We have highlighted our concerns over S-Chips in the past (see and and the latest audit problems in the case of Hongwei and China Hongxing serve to showcase that S-Chip companies are indeed poor quality companies which cannot be assessed based on balance sheet strength alone. We do not own any S-Chips and will continue to adopt a sceptical approach towards the sector, which is fraught with fraud (pun not intended). 

Thursday, February 24, 2011

Added to Guocoleisure and OCBC

We added 5000 shares of Guocoleisure (at $0.685) today, and a further 250 shares of OCBC (at $9.12). Quek Leng Chan has been consistently buying back shares of Guocoleisure over the past few months, which indicates management confidence in the company's stock. In addition, oil and gas royalties have increased with rising oil prices, which should provide a boost to the company's profits.