SG Value Stocks

Investing in Growth Themes Part 1

2011-04-24T23:53:00.000+08:00

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?

2011-04-24T23:16:00.000+08:00

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 http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_8CBAFFB20622E74A4825787900509C58/$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.

Excess Cambridge Rights

2011-04-16T12:14:00.000+08:00

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.

More Buying For The Portfolio As Markets Remain Weak

2011-03-17T23:58:00.000+08:00

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.

Japanese Nuclear Worries Roil Market - Adding to the Portfolio

2011-03-15T23:55:00.000+08:00

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.

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

2011-02-27T01:04:00.001+08:00

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 http://sgvalue.blogspot.com/2010/09/looking-at-cash-balances-of-s-chips.html and http://sgvalue.blogspot.com/2010/06/s-chipped-reprise-2010.html) 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).

Added to Guocoleisure and OCBC

2011-02-24T21:28:00.002+08:00

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.

Correction continues, adding more

2011-02-23T23:13:00.000+08:00

Following the slump in US equity markets overnight, Singapore stocks continued to slide today. Having sold out of lower-conviction stocks in January, the correction in stock markets presents a "welcome" opportunity, and we added 2000 shares of Noble Group (at $2.00) and 1000 shares of Capitaland ($3.29) today amidst the selldown.

Market Correction - Time to buy?

2011-02-22T19:52:00.000+08:00

In anticipation of technical downside risks in the market, we actually pared down our holdings in late January to raise cash levels to over 30% of the portfolio. This has worked out rather well as Asian markets have corrected sharply due to concerns over inflation, Chinese policy tightening, as well as fears of an oil shock sparked by tensions in the Middle East.

We view such developments as short-term overhangs, and we have decided to add to the portfolio in incermental steps. A position was initiated in OCBC, which has a sizable insurance presence via its subsidiary Great Eastern Holdings as well as a strong private banking presence through its acquisition of ING Asia's private banking business in Singapore. While the stock is not cheap, we believe that OCBC will likely deliver the strongest ROE amongst the 3 local banks which should justify a slightly higher price-to-book multiple, and we picked up 250 shares at $9.25 today with a view to add more should the market continue to correct.

We also added 2000 shares of Tat Hong which delivered rather poor quarterly earnings for the most recent quarter. While the company currently faces some headwinds in China as well as Australia, we believe such issues are temporary and with the backing of $0.82 of tangible book value a share, we added 2000 more shares at $0.80.

Reduced Wells Fargo

2011-02-01T19:40:00.001+08:00

From our 350 shares of Wells Fargo, we reduced our stake to 250 shares today (31 January 2011). The stock has run up a fair bit, and while we expect more upside for the stock, we believe it to be prudent to pare down one of the larger holdings in our portfolio at this juncture.

Sold Mermaid Maritime, a disappointment

2011-01-28T19:35:00.000+08:00

We sold our meagre holdings in Mermaid Maritime (5000 shares at $0.41), which has been a disappointment. Since the loss of key management, the company has been trying to restructure as a drilling company with the purchase of two oil rigs from Keppel Corp, but we believe that without credible management, it will be difficult for the new entity to succeed. We have reluctantly cut our losses on the stock, and the experience will serve as a reminder that companies with suspect management should not feature prominently in an investment portfolio.

Sold two portfolio stalwarts - Berkshire Hathaway and Keppel Corp

2011-01-27T18:55:00.003+08:00

We sold our 50 shares in Berkshire Hathaway 'B' on the 25th of January (US$82.65) and our remaining 351 shares in Keppel Corp on 27 January. While these two companies embody many positive things which we look for in a stock (good management, strong business franchise(s) etc) and should be considered portfolio stalwarts, we have eliminated both positions for different reasons.

Berkshire Hathaway - Buffett's stable of businessess are solid companies in most senses of the word, but the growth of these underlying companies are too dependent on the US economy and considering our relatively large exposure to Wells Fargo, a bank which is almost solely dependent on the US economy, we would prefer businesses which generate a bit more revenue from overseas. In addition, growth is likely to be slow for the "lumbering" holding company, where incremental additions of small companies are unlikely to add significant value to the overall stock.

Keppel Corp - The stock has seen strong investor interest given the strong flow of contracts, but it still appears likely that the company has seen peak profitability already - we do not expect future contract wins to match the 2003-2007 cycle. Having run up considerably over the past month or two, the stock does not look attractive if one looks at normalised profits, and we have thus taken profits on our holding.

Jan 11 Sharebuilder Additions

2011-01-21T09:53:00.000+08:00

53 shares of STI ETF at $3.32
15 shares of F&N at $6.57

18 Jan 2011

More selling from the portfolio: Time to weed out "junk"?

2011-01-21T09:48:00.000+08:00

We sold our small position in Courage Marine on 18 Jan (18 lots at $0.215), following the sudden spike in the stock. The previous day, the company announced that it had plans to list in Hong Kong, which would improve liquidity and branding. While we still think that the company holds decent value, we remain cautious on holding "junk" in our portfolio for the longer term, and we see the rapid move in the stock price as a good opportunity to monetise our position and lock in profits.

We do not have a terribly optimistic outlook on the BDI; the measure has remained depressed by the weak global trade outlook, while the floods in Queensland will weigh on dry-bulk rates for some time. Coupled with the high price of crude oil, we think that dry-bulk shippers like Courage Marine will have to depend largely on prudent cost management for profit. While the company remains one of the most prudently-financed shipping companies available for investment, we have decided to take profits and raise our cash level to above 20% of the portfolio.

Sold Memtech International; What makes a well-financed company

2011-01-11T16:44:00.000+08:00

We sold out of Memtech International yesterday at $0.14 (25,000 shares), reaping a tidy profit on our cost price of $0.12 (in April 2010). We have also collected a $187.50 dividend on our holdings, adding substantially to total profits (over 20%). While the company still remains cheap, we are happy to take profits on a lower-quality company like Memtech (just as we did for Gallant Venture, albeit a little early).

We continue to endorse long-term investing, but will prefer to hold companies which have the wherewithal to survive economic downturns via strong business moats (as Warren Buffett would allude to), well-financed positions, or a combination of both. Such companies within the portfolio would include SPH, Keppel Corp, Noble Group and Capitaland. We would even consider a company like Fraser and Neave with its high leverage (given its property exposure) as well-financed, as we believe that the company's strategic assets and portfolio of brands would allow it to access financing even under distressed market conditions.

We identify that access to financing is far more critical than temporary balance sheet strength, as in the case of the US government's continued ability to refinance at ridiculously-low yields, despite already being heavily indebted. All things equal, we would prefer companies which have both strong balance sheets and easy access to financing, but we remain cognizant that strong balance sheets can sometimes be a temporary blip. We recall several apparently well-financed S-Chips on the local Singapore bourse whose balance sheets were suddenly burdened by trade receivables that could not be identified, or the inability to service debt obligations due to cash remmittance issues.

We are not saying that Memtech International falls into such a category; the company has a healthy track-record of keeping its balance sheet in order. Unfortunately, the company's business moat is nearly non-existent, and we buy such companies to sell once the stock price moves from "deep-undervaluation" to "slight-undervaluation".

2010 portfolio summary

2011-01-07T16:32:00.000+08:00

2010 performance summary
Our portfolio finished 2010 higher by 8.7% (9.4% without the subtraction of performance fees), outperforming our 6% annual hurdle rate, but underperforming the benchmark Straits Times Index's 13.4% gain. We are less concerned about our portfolio's underperformance over the past one year, but will continue to focus on picking undervalued companies for the portfolio in a prudent manner, without any regard for the Singapore stock market benchmark.

Cash holdings detracted
As of end December 2010, the portfolio held a cash position of 16.2% of portfolio assets, a fairly large percentage which weighed down on performance vis-a-vis the STI. The average cash position the portfolio held in 2010 was about 12%, and while we have no target cash level for the portfolio, our sizable cash holding is indicative of the lack of good investment opportunities we can find under current market conditions. We are also cognizant of the need to keep some powder dry to benefit from distressed market conditions, instead of watching in envy while others scoop up bargain buys. Nevertheless, we are also not terribly confident of timing the market, and will remain largely invested unless the market heads into an extremely euphoric state. We do not see this happening yet though.

Dec 10 Sharebuilder additions

2010-12-25T18:02:00.000+08:00

16 shares of F&N at $6.17 and 31 shares of STI ETF at $3.22

Sold Gallant Venture

2010-12-13T18:03:00.000+08:00

We sold our 10,000 shares of Gallant Venture on 10 December 2010 at $0.37 apiece, representing a 37% gain from our investment price of $0.27 in October this year. Gallant Venture has been a "hot" stock recently, with Kim Eng citing a $0.75 target price. While the stock looks still looks cheap relative to book value, we are not terribly confident about management's ability to translate its undervalued landbank into cashflow over the next few years, that is to say, our investment in Gallant Venture was slightly speculative.

While we tend to avoid speculative purchases, our investment in Gallant Venture appeared to have sufficient downside protection, with substantial upside potential should positive newsflow trigger a re-rating. The company does not have the quality which will render it a longer-term investment prospect in our opinion, and we are also mindful that the company does not have a solid business model. The strong gains have come over just under 2 months, and we find this 37% return sufficient to justify a sell.

Portfolio gains 0.5% in Nov 10, STI up 0.2%

2010-12-05T18:13:00.000+08:00

In a largely flat month for the benchmark Straits Times Index, our portfolio gained 0.5% in November 2010, outpacing the 0.2% return for the STI. This comes even as we hold 13.7% of the portfolio's assets in cash, and on a year-to-date basis, the portfolio is up 6.2% (net of accrued performance fees), attaining its 6% annual target one month early.

Noble Group was a strong contributor to the portfolio, gaining 10.2% in November, while Memtech rose 9.5%. Keppel Corp benefitted from renewed interest in the offshore drilling segment, while Tat Hong and Mermaid suffered with declines of 10.7% and 11% respectively. Wells Fargo remains our second-largest holding, and gained 6.6% in the month.

Nov 10 Sharebuilder additions

2010-11-23T18:00:00.000+08:00

30 shares of STI ETF at $3.265 and 15 shares of F&N at $6.43 on 18 November 2010

Portfolio rises 1% in October, STI gains 1.5%

2010-11-05T18:15:00.001+08:00

The portfolio gained 1% in October, slightly underperforming the STI's 1.5% rise. On a YTD basis, we are up 5.7% (assuming accrual of a 20% performance fee on outperformance of a 6% annual hurdle rate). The STI is 11.2% higher over the same period.

Portfolio Changes

Other than our monthly Sharebuilder additions, we added Gallant Venture to the portfolio, on the basis of low valuations (on a Price to book basis) and the potential for multi-fold gains as the company's Bintan landbank is carried at cost, while land sales have been locked in at prices far higher.

We did not sell any holdings in the month, while Guocoleisure and Cambridge Industrial Trust went ex-dividend in the month of October. CIT's distribution includes an advance distribution due to the Trust's plan to issue new units to existing investors (1 per 25, at $0.531 a unit), as well as via a private placement. We applied for excess units to top up our holdings to 25,000 units.

Performance Discussion

PAN UNITED	14.1%
KEPPELCORP	11.1%
TAT HONG W130802	11.1%
ASCENDAS I-TRUST	4.0%
MERMAID MARITIME	3.4%
GUOCOLEISURE	3.0%
TAT HONG	2.9%
COURAGE MARINE	2.6%
STI ETF	2.2%
WELLS FARGO	2.0%
BEST WORLD	1.7%
WBL Corp	0.2%
CAMBRIDGE	0.0%
MEMTECH	0.0%
K-Green Trust	-0.9%
NOBLE GRP	-1.6%
SPH	-2.4%
FRASER AND NEAVE	-4.0%
Capitaland	-4.2%
BERKSHIRE HATH-B	-5.4%
Best World W130705	-13.3%

Our new addition, Pan United Corp, returned 14.1% in the month of October, while Keppel Corp benefitted from strong oil prices. Capitaland fell amidst widespread weakness in property stocks. Cash is now 14.2% of the portfolio, and will weigh on returns against the benchmark if the market continues to trend up strongly, but we are comfortable with adopting a more cautious stance when asset prices rise too quickly. A pull-back at this juncture may be seen as healthy, and will allow the market to consolidate for further gains.

SGX to merge with ASX, to take on debt

2010-10-25T16:23:00.001+08:00

SGX has announced a takeover offer for ASX which will see each ASX shareholder receiving a mixture of cash and shares in the new combined entity.

Under the terms of the Scheme, ASX shareholders as at a record date to be determined will be paid, in relation to each ASX Share, a combination of:
• A$22.00 (approximately S$28.04) in cash (the “Cash Consideration”); and
• 3.473 new SGX Shares (the “Share Consideration”).

The aggregate value of the Share Consideration is S$5.8 billion (approximately A$4.6 billion), based on the last traded price of SGX Shares as at the Latest Practicable Date, and S$5.8 billion (approximately A$4.6 billion), based on the volume-weighted average price (“VWAP”) of SGX Shares transacted on the Latest Practicable Date.
Accordingly, the value of the aggregate consideration payable for the Proposed Combination (the “Scheme Consideration”), based on the aggregate Cash Consideration and the aggregate value of the Share Consideration (determined by reference to the last traded price of SGX Shares as at the Latest Practicable Date), is approximately A$8.4 billion (approximately S$10.7 billion), or approximately A$48.00 approximately S$61.17) for each ASX Share.

The value of the Scheme Consideration based on the aggregate Cash Consideration and the aggregate value of the Share Consideration (determined by reference to the VWAP of SGX Shares transacted on the Latest Practicable Date), is approximately A$8.4 billion (approximately S$10.8 billion).

The move will see SGX coughing up about S$4.9 billion in cash, which will inevitably see the combined entity take on between S$3-4 billion in debt. Depending on the cost of debt, we estimate that interest could cost SGX as much as $150 million a year, which will eat into earnings (and dividends!).

We have maintained that SGX looks terribly expensive at current levels, and it is fantastic that management can utilise the expensive stock to purchase a choice asset (ASX in this case) to benefit shareholders. However, the deal would have made much more sense if an all-stock offer was utilised. By offering cash and taking on debt, it appears that the EPS-accretion (as SGX touts the deal to be, EPS of $0.3008 to $0.3612) will be difficult to achieve after factoring in interest payments.

Mermaid buys rigs, price appears a good deal

2010-10-22T12:50:00.003+08:00

Mermaid Maritime today announced that it has entered into a letter of intent for the construction of two new jack-up rigs with Keppel Corp, under a proposed new entity “Asia Offshore Drilling Limited” (AOD). The contract is for US$360 million, which works out to about US$180 per rig, and is based on Keppel FELS proprietary Mod V-B class of jack-up rigs. Mermaid is in the process of seeking other investors to form a JV under AOD, and will likely be the major shareholder of the new entity.

We have talked about Mermaid’s huge cash reserves, and the company has now indicated its intent to invest in new rigs to form an offshore drilling entity, likely focused in the Asian region. Is the price paid too high? We dug out old contract values for similar (or identical) Mod V-B class jack-up rigs from Keppel Corp:

On a price basis, the US$180 million per rig price tag appears substantially lower (a 30.5% discount) compared to the US$259 million average paid by other customers from 2005 to 2010. Relative to the price of WTI Crude oil (taken as a simple ratio of rig price in USD millions to oil price in USD), the low ratio for the AOD deal suggests that Mermaid got a good deal on this one. We are slightly puzzled by the disparity in the contract value; the rig appears to be of the same make (under Keppel FELS’ Class B design) as others detailed in prior contracts. With oil prices above US$80, we would also assume that Keppel Corp would have more pricing power.

We own both Keppel Corp and Mermaid Maritime in our portfolio, and read this as a positive development for Mermaid, as the company has now indicated its intent to deploy cash in an area within its expertise. The price paid also appears cheap in comparison with other similar rig contracts. While it looks like Keppel Corp makes out worse on this one, the deal will add to Keppel Corp’s rapidly declining order book, and the positive sentiment associated with the contract is possibly more important than the associated profit.

Oct 10 Sharebuilder Additions

2010-10-21T17:58:00.000+08:00

15 shares of F&N at $6.385 each, and 29 shares of STI ETF at $3.27 each on 18 Oct 2010

Asset bubbles forming in Asia? Not yet, but early indications are there

2010-10-19T23:07:00.001+08:00

We have talked about the potential for asset bubbles forming in the Chinese property market, highlighting that as a key risk to global stock markets. The potential problem appears even more dire, with Asian (and EM) assets the likely beneficiaries of waves of liquidity flowing out of developed markets.

The current situation: while developed economies (most notably the US) are required to keep interest rates low to stimulate their domestic economies, the emerging markets (and Asia in particular) are booming once again. Output is at record-high levels, while consumers on the ground hardly feel the recessionary chill of the Western world.

A quick look around us in Singapore emphasises this: Bustling car showrooms, packed shopping malls, an extremely tight labour market (a JobsDB email I receive daily highlighting jobs in the financial sector is noticeably longer, compared to a year ago). The IPO market is booming once again, with the latest IPO of GIobal Logistic Properties 12 times subscribed, and Mapletree Industrial Trust set to join in the fray. These are all indications that sentiment is turning positive again, with the STI recently climbing to new 2-year highs.

With Asia and Emerging Markets the obvious forerunners in the post-Lehman world, investors in the US are more than happy to borrow at near-zero rates to participate in the tremendous growth opportunities in the emerging market regions. The expected appreciation of Asian currencies is an added bonus, and also the result of strong inflows of capital into the region. Singapore recently tightened monetary policy further, which will add to upward pressure on the SGD against the USD.

As with all asset bubbles, the flight of capital will be swift, and many investors will be left nursing their wounds in the aftermath. Fortunately, stock market valuations still appear fair at the moment, despite the onslaught of new capital inflows from the West into Asia. Several segments of the Asian stock market appear slightly expensive (Indonesian and Indian equities, consumer discretionary stocks in China and India, as well as hospitality/leisure plays in Singapore), but the overall market is generally fairly valued at present. We will maintain our exposure to the stock market within the portfolio, but will be keenly watching out for bubble-like symptoms which we expect to develop at some stage over the next few years.

Foreclosed Homeowners Break Into Former Home

2010-10-19T08:03:00.000+08:00

CNBC.com Article: Foreclosed Homeowners Break Into Former Home

The investors sold the home, but before the new owner could move in, the Earls had the locks changed and moved back in themselves. "Why should we lay down?" she says her husband asked her. "We need to fight back."

Full Story:
http://www.cnbc.com/id/39726698

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

Foreclosure woes have hit US bank stocks (and notably our holding in WFC) as investors worry that banks will have problems evicting homeowners due to a lack of proper paperwork.

It appears ridiculous that some homeowners believe they should be allowed to stay in their homes after failing to service their mortgages, on the basis of legal technicalities. If the courts ultimately rule that banks cannot foreclose the majority of properties due to improper paperwork, we may be looking at mass mayhem. Why should anyone pay their mortgages then?

More likely, some punitive action will be taken on improper bank practices. People who have borrowed money to buy a home MUST service their mortgage; there is no free lunch here

New position: Gallant Venture

2010-10-13T12:44:00.000+08:00

We bought 10,000 shares (at $0.27) of Gallant Venture today. Amidst the general rise in the stock market, Gallant Venture stands out as a clear underperformer, with rather depressed valuations. The stock trades at a seep 47% discount to its book value of $0.5125 per share, while that book value is similarly understated as the company's landbank is carried at cost.

The company's massive 18,200 ha landbank in Bintan is carried on the books at about $541 million, which works out to about $0.28 psf. While land sales in Bintan have been rather slow, the selling prices have been in the region of between $6 to $29 psf, representing 22-100 fold increases in realisable value. Obviously, there are costs involved in the development of the land into habitable living space, and Bintan is hardly the most popular or sought-after resort destination. We admit that there are huge risks in our investment - much of the land may never be sold. However, we think that with the stock trading at half of an understated book value, we are getting the landbank cheap and are prepared to wait for potential catalysts for a stock re-rating.

Looking at cash balances of S-Chips just ain't enough

2010-09-30T11:00:00.001+08:00

A recent examination of the US technology sector's huge cash balances highlights an interesting parallel with locally-listed S-Chips. The connection? Cash balances aren't what they appear to be. What does this mean?

A recent comment by Vitaliy N. Katsenelson suggests that Microsoft's debt issuance makes zero economic sense, as the company has approximately US$39 billion in cash and short term securities on which it is earning lower interest that what it pays for newly issued debt. The move appears to be destroying shareholder value by increasing interest costs without any apparent benefit to the company. Or is this so?

• $1 billion of 0.875 percent notes due Sept. 25, 2013

• $1.75 billion of 1.625 percent notes due Sept. 25, 2015

• $1 billion of 3.000 percent notes due Oct. 1, 2020

• $1 billion of 4.500 percent notes due Oct. 1, 2040

"Microsoft intends to use the net proceeds from the offering for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of stock and acquisitions." - Microsoft.com

Now why would a company with almost US$39 billion at its disposal need to raise US$4.75 billion to fund things like stock repurchases? The answer may lie with the location of the company's cash balances - a significant proportion of Microsoft's cash may be offshore (ie. not in the US), and repatriation of that cash back to the US could induce substantial taxes. So by raising additional capital from the bond market (which sports extremely low interest rates by the way), Microsoft is able to fund things like dividend increases and share buybacks without having to repatriate cash from overseas subsidiaries. In addition, based on balance sheet strength, the company's financial position is hardly impacted by the bond issuance, given its huge (theoretical) cash horde.

Now, how does this relate to S-Chips? We have seen various instances of S-Chip companies which have cash holdings in excess of their debt (most are usually debt-free), and even after paying off their liabilities, the company still has a cash balance which even surpasses the company's market capitalisation. On that basis, the company can theoretically purchase all its outstanding shares with its cash holdings, leaving the management with full ownership of the company at no additional cost. Now why have we not seen this happening?

A 5 Jan 2010 announcement by one of the S-Chips (China Milk) may offer some clues:

"The Board wishes to advise that the Company is still currently awaiting clearance from the State Administration of Foreign Exchange (“SAFE”) of the People’s Republic of China (the “PRC”) for the remittance out of the PRC of approximately US$170.56 million, being for the full settlement of the Early Redemption at the Option of the Bondholders (including interest). The Company believes the delay is administrative and procedural in nature and there is no legal obstacle to the remittance of the same.

China Milk was in default of its convertible debt obligations to the tune of approximately US$146 million in early 2010, and with the company yet to resolve this issue, the stock still remains suspended today. The company had a rather strong balance sheet, with sufficient cash to repay its impending puttable debt obligation. The company's bonds even traded above par prior to the default, suggesting that investors believed the company would be able to redeem the bonds.

However, facing remittance issues, China Milk has yet to settle payment with bondholders, which sends a strong message to investors who are looking for S-Chips which appear cheap based on their balance sheets. The cost (and difficulties) faced with remittance of cash held offshore may mean that cash balances on balance sheets are not what they seem. Some of this cash balances may never be able to fund a share buyback programme, or a hefty dividend payout. Sometimes, a dollar in hand (or in this case, held onshore) may be worth more than two in a bush.

Sep 10 Sharebuilder additions

2010-09-22T14:40:00.000+08:00

Sharebuilder additions on 20 September 2010:

Added 31 shares of STI ETF at an average cost of $3.13 per share, and 16 shares of F&N at an average cost of $6.12 per share.

Jardine Strategic, the one that got away

2010-09-20T23:48:00.001+08:00

Investment and emotions tend to get mixed, ultimately resulting in poor investment decisions. Our experience with Jardine Strategic is a case in point:

We sold the stock in June as the stock floated around new record highs, despite the generally weak market sentiment at the time. Our investment thesis was that market technicals were weak and we were more comfortable holding a larger cash position to capitalise on temporary weakness in the market.

The stock did slump temporarily thereafter, providing a short window of opportunity to re-enter (which we failed to do), and then rocketed out of reach.

What went wrong?

We unfortunately let our emotions get the better of us, and the urge to take profit on a stock in a slumping market was too tempting to resist. We failed to relook our investment thesis for the stock (which was a compelling buy despite being at a record high), and we ended up selling an extremely high-conviction stock idea. We also had no predetermined re-entry target price, which meant that we failed to load up when the stock declined.

A mistake which we will try not to repeat:

Never sell higher conviction ideas; always start with the lowest conviction stocks

Even now, we would be hard-pressed to find a compelling alternative to one of the Jardine holding companies, which allow exposure (at a discount still) to their stable of blue-chip franchises. Would we buy the stock at this time? The stock is already one of the best-performing stocks in the STI YTD, and cliched investment mantras relating to chasing hot stocks spring to mind. Patience is a virtue when it comes to investments, and we may prefer to wait for the next crisis (which could be years later!) to time our entry into the stock.

New position : Pan-United Corp

2010-09-06T21:44:00.000+08:00

Bought 9,000 shares of Pan United Corp at $0.485 today. The company was listed in 1993 and has a relatively long track of rewarding shareholders with generous dividend payouts. Pan United Corp has three main businesses - Basic building materials, Shipping and Port & Logistics. The company's subsidiary United Cement is a key supplier of ready-mix concrete, and we expect sustained demand for cement in Singapore over the next few years, as a huge supply of newly-built homes come onto the market.

We are less positive on the shipping business, but the company's handysized container vessel has the potential to be sold for a profit, which will provide cash for further investment. On the other hand, the company's 51.3% stake in the Changshu Xinghua port (CXP) looks particularly interesting. According to the company website:

Changshu Xinghua Port Co Ltd (CXP) is one of the main port terminal operator in Eastern and Central China along the Yangtze River. It is among the ten busiest river ports in China. CXP is one of the leading hubs for pulp & paper and steel products in China. In 2009, CXP registered a 6% increase in general cargo volume to 5.6 million tonnes. We are leading hub in pulp&paper, steel and logs.

Location

CXP lies on the southern bank of the Yangtze River just 54 nautical miles from the river mouth. It is strategically located to serve Jiangsu, China's most industralised province, and capitalise on the enormous potential of its hinterland.

Facilities

CXP boasts excellent natural attributes with a constant deep and silt-free water depth of 13-metres.Well sheltered, it has eight berths with a total berth length of 1.7km capable to handle vessels up to 100,000 dwt. CXP's total handling capacity is 10.0m tonnes per annum.

Macquarie International Infrastructure Trust (MIIF) carries its 38% stake in CXP at $92.8 million (last revalued in June 2010), while Pan United Corp's estimated carrying value for its 51.3% stake is a paltry $36.5 million (at cost, according to a DBS report). Based on MIIF's valuation, Pan United's stake in the port should be worth $125 million, or almost $89 million higher.

With 555,366,160 shares outstanding, Pan United's market cap is about $270 million, and CXP's market value is already half of that. The stock is also trading slightly under book value (about $0.50), which means that we are getting a further discount on the underlying subsidiaries.

Portfolio drops 2.9% in August, STI down 0.6%

2010-09-03T14:43:00.000+08:00

After a 3% gain in July, the portfolio fell 2.9% in August, more than the 0.6% decline of the STI. The portfolio's "NAV" ended the month of August at $0.999, a 0.1% decline from the start of the year. Wells Fargo was the worst performing stock in the portfolio, on the back of general weakness in US financial stocks in August. We added to the stock in the month as it dived to 52-week lows.

Even after adding shares of Wells Fargo, the portfolio has 20.6% in cash, and we may be looking to bring down our cash holding to 15% with the addition of one or two more attractively valued-companies to the portfolio.

August 2010 Stock Returns:

FRASER AND NEAVE 1.1%

ASCENDAS I-TRUST 1.1%
BERKSHIRE HATH-B 0.5%
CAMBRIDGE 0.0%
TAT HONG W130802 0.0%
SPH -1.2%
Capitaland -1.3%
STI ETF -1.7%
KEPPELCORP -4.2%
MEMTECH -4.5%
GUOCOLEISURE -4.8%
NOBLE GRP -4.8%
COURAGE MARINE -5.1%
K-Green Trust -5.2%
WBL Corp -6.3%
TAT HONG -8.1%
BEST WORLD -10.9%
MERMAID MARITIME -11.6%
Best World W130705 -14.3%
WELLS FARGO -15.3%

Ex-dividend
Keppel Corp $0.16
Wells Fargo US$0.05
Tat Hong $0.015
STI ETF $0.03
Cambridge $0.0068

U.S. Banks: Goldman Sachs Lowers Targets for Bank Earnings - CNBC

2010-08-23T22:17:00.000+08:00

U.S. Banks: Goldman Sachs Lowers Targets for Bank Earnings - CNBC

Bought 150 more shares of Wells Fargo & Co. on 20th Aug at US$24.3899 per share, for a total consideration of US$3,658.48. The stock is trading near its 52-week low and also near book value on the back of recent market weakness. WFC has been exceptionally battered, with Goldman Sachs recently citing "higher-than-average" yields on its security portfolio, which are expected to normalise over the next few years (to half the current 6+% yield). While this may be alarming news, the actual numbers are less dramatic. Based on the 2Q10 financial statement, about US$16.2 billion of securities in WFC's portfolio were earning excessively high interest of 6.48%, an insignificant percentage (just 1.5%) of WFC's total "earning assets" (US$1.069 trillion).

Aug 2010 sharebuilder additions

2010-08-22T22:10:00.000+08:00

18 Aug 2010

Fraser and Neave 17 shares at $5.56
STI ETF 54 shares at $2.98

Should Genting Singapore be worth more than Capitaland?

2010-08-20T18:13:00.002+08:00

Market Capitalisation in SGD billions

2Q 2010 corporate earnings update - Best World, Courage Marine

2010-08-13T22:45:00.001+08:00

Best World International

Shock loss of $806,000 for 2Q10, down substantially from $3.427 million profit a year ago
1H 10 profit of $228,000, versus $5.44 million in 1H 09
Revenue plunged 52.4% y-o-y, mainly due to 87.2% drop for Indonesia, and 54.5% drop for Malaysia
Huge amount of cash and equivalents of $36.1 million
Interim dividend of $0.012, unchanged y-o-y

The latest quarter has been exceptionally poor, largely due to the impact of lowered sales in Malaysia and Indonesia. Indonesia sales have suffered as a result of changes in cosmetic and import regulations, and Management has guided that two key products have received product licenses in 2Q10, and were launched in June. Malaysia sales have also taken a hit from increased competition.

We continue to like Best World International as a proxy to emerging Asian consumption, especially with its presence in Indonesia. Import regulations have hurt revenue in the near term, but we think that things will be substantially better in 2H10 with more product approvals granted. We like the business for its ability to generate strong cashflow, and the quality of management is decent. Management is keenly aware of the near-term negative impact of the news, and to buffer stock downside (and given the huge cash position), an unchanged interim dividend of 1.2 cents has been declared, despite poor 1H10 profits.

Courage Marine

Posted 2Q10 revenue of US$16,277,000, up 26.6% q-o-q (+168.3% y-o-y)
Logged US$242,000 disposal gains in 2Q10
Net profit of US$5,176,000 in 2Q10, up from US$3,025,000 in 1Q10
Remains net cash, with cash and equivalents of US$21.8 million
Utilisation rate about 90% for 2Q10, up from 70% in 2Q09

Courage Marine posted a strong quarter, as the BDI rose to about 4,200 in May. However, the BDI dropped to around 2,000 points in June, indicative of the volatile nature of bulk shipping rates. With the current BDI at around 2,400 points, Courage Marine is looking at a weaker 3Q10.

Management prudence is once again reflected in the latest quarter's income statement. While turnover rose a massive 168% y-o-y, cost of sales rose much less (+68% y-o-y), allowing the company to post a decent profit, even with moderate shipping rates in the quarter. The company's strategy to utilise older vessels is evidently effective, and the even after the recent disposal of a Handysize vessel, the company still has 580,000 dwt in its fleet to capitalise on a rebound in the global economy.

Coruage Marine scraps Handysize vessel

2010-08-06T18:01:00.001+08:00

Courage Marine announced that it has sent Jeannie III (a 33 year old, 34,537 Dwt Handysize vessel) for demolition, resulting in proceeds of approximately US$2.6 million. Based on rough estimates, the Jeannie III possibly measured about 5,200 ldt, which translates to a selling price of about US$475 per tonne, up from the reported US$425 per ldt which Courage Marine secured for the disposal of MV Cape Ore in April this year.

The ship is understandably old, and the transaction will actually result in a gain of about US$500,000 for the current year. Once again, the management has shown ability to profit from the disposal of old vessels as steel prices gain, an indication of how the company's focus on older vessels increases business flexibility.

Portfolio up 3% in July, STI up 5.4%

2010-08-02T18:01:00.000+08:00

Our portfolio gained 3% in July (to $1.03), underperforming the 5.4% gain in the STI (on a total return basis). As of 31 July 2010, 23.8% of the portfolio's assets were held in cash, which weighed on the portfolio's overall return. Despite the substantial cash position, the portfolio managed to capture some of the market upside. YTD, the portfolio is also 3% higher (STI: +4.8%).

In July, we sold CapitaMall Trust on the basis that the estimated yield (approximately 4.5%) was not sufficient to satisfy the portfolio's 6% annual target, and we saw little potential for upside from capital appreciation near the $2 mark. We also received bonus Best World International warrants, and may look to accumulate more should the premium to the mother share narrow.

Guocoleisure was the best performer in the portfolio for July, gaining 14.4% on little news other than a series of open market purchases by Quek Leng Chan. After being one of the worst-performing STI components, Capitaland capped July with a strong 12.5% rebound, while KepCorp also gained 10.6%. The main detractors to the portfolio were Best World (-5.9%), Berkshire Hathaway (-5.1%) and WBL Corp (-2.1%).

Mermaid secures work for MTR-1

2010-07-28T09:42:00.001+08:00

As previously guided by the management, the MTR-1 has secured work as an accommodation barge, at a day rate of US$20,000, paltry compared to the US$80-90,000 which the rig should be able to obtain as a tender rig. Nevertheless, the contract means that the MTR-1 will no longer sit idle for the next 160 days, and will bring in revenue of about US$3.2 million.

Major holdings in portfolio report 2Q 10 earnings

2010-07-23T23:05:00.000+08:00

Wells Fargo

2Q 10 EPS of US$0.55 (consensus: US$0.48), net income of US$3.06 billion
Revenue of US$21.4 billion; PTPP of US$8.6 billion
Net interest margin rose to 4.38%, up from 4.27% in 1Q 10
Supplied US$150 billion in credit, up from US$128 billion in 1Q 10
Net charge-offs declined
"We believe credit quality has indeed turned the corner"

In yet another consensus-beating quarter, Wells Fargo managed net income of US$3.06 billion, even as its peers saw profit being impacted by shaking trading revenue. Net interest margin is the highest amongst the large banks, and even managed to post an increase from 1Q 10. Pre-tax pre-provisions profit (PTPP) weaker than usual (WFC managed about US$40 billion in 2009), due to merger integration costs and severance costs related to Wells Fargo Financial. Little guidance has been offered on the potential impact of regulatory reform; until then, company remains highly profitable with very sticky deposits (US$761.8 billion, up from US$759.2 billion in 1Q 10).

Cambridge Industrial Trust (CIT)

99.97% portfolio occupancy
37 Tampines Street 92, 27 Pandan Crescent and additional 17 strata units at 48 Toh Guan Road East (Enterprise Hub) disposed, generating a gain on disposal of S$1.1 million for 2Q 10
Portfolio valued at $831,150,000 as of 30 Jun 2010
NPI down from $16.3 million in 1Q 10 to $16.1 million in 2Q 10, due to divestments
Distributable income down from $11.1 million to $10.8 million
DPU of 1.238 cents, down from 1.274 cents in 1Q 10
NTA at 59.9 cents, up from 59.3 cents in 1Q 10
Gearing down from 42.6% to 42.3% in 2Q 10, target below 40% by end FY10

Yet another stable quarter with no surprises from CIT; dividend yield is about 9.9%, should be expected to head lower as more assets are sold to lower gearing. Yield is still substantial, and more than average S-Reits (about 6-7%), while rents have been locked in at low levels and have the potential to be raised in future. We are pleased that the management is taking a prudent approach to lower debt without destroying shareholder value by a dilutive rights issue or placement exercise. Portfolio assets have been revalued upwards; strong rebound in manufacturing sector should have positive implications for industrial rents going forward.

Portfolio changes - Sold CapitaMall Trust

2010-07-20T22:51:00.001+08:00

Sold 2000 shares of CapitaMall Trust at $1.99 today, yield has fallen to about 4.5%, not insignificant given the low interest rate environment, but still lower than the yields on other REITs (6%-10%). While we continue to think that CapitaMall Trust is unparalleled in terms of both asset quality and management strength, we see limited upside to the stock at this juncture and would look to invest the proceeds from the sale in a higher-yielding REIT or Trust.

July 2010 Sharebuilder additions

2010-07-19T22:59:00.001+08:00

F&N - 18 shares at $5.44
STI ETF - 34 shares at $3.01

Tat Hong to take Tutt Bryant private

2010-07-16T17:25:00.000+08:00

Tat Hong Holdings yesterday announced a takeover bid for Tutt Bryant, a subsidiary listed on the ASX. The company already owns 100,650,051 shares of Tutt Bryant (70.36%), and will offer A$0.92 for the remaining shares it does not own. The offer (which will cost Tat Hong A$39.02 million) will be funded from both internal resources and bank facilities, and is a 46% premium to the traded price on 14 July 2010, the day before the announcement of the offer. The acquisition of Tutt Bryant will boost consolidated earnings, and also book value (the book value of Tutt Bryant is about A$1.12, but NTA approximately A$0.84), while gearing is only expected to rise slightly.

Further disposal by Mermaid Maritime

2010-07-13T16:19:00.000+08:00

Mermaid Maritime yesterday announced the disposal of its 22.5% interest in Allied Marine & Equipment Sdn. Bhd., a provider of subsea engineering services to the offshore and gas industry. Mermaid will receive RM75,537,524 for its stake in the company (approximately US$23.4 million), which will result in a gain of about RM38,388,453, a profit of almost US$12 million.

There is certainly serious "house cleaning" going on in Mermaid Maritime, and the proceeds of the sale (expected 15 September 2010) will add to the substantial cash balance. As an investor in the company, we can only hope (and pray) that the management will use the cash well.

Best World W130705

2010-07-12T22:36:00.000+08:00

Best World Intl. went ex-dividend today for bonus warrants (1-for-5). The warrant (Best World W130705) expires on 5 July 2013, and has an exercise price of $0.30. The warrants cannot be exercised until six months from the listing date.

Mermaid cuts losses on KM-1

2010-07-06T20:31:00.000+08:00

Mermaid Maritime announced on 21 June that it had sold off its stake in the KM-1 tender rig project, which has been plagued with delays. The disposal will result in a loss of US$7.35 million to the company, about a $0.013 hit to tangible book value of approximately $0.72.

The KM-1 was expected to be a key source of earnings going forward, which explains the sharp selloff following the news. While the move is highly disappointing, valuing the company based on its book value (and huge cash horde) shows that the stock now trades at a 35% discount to book (factoring in the loss on KM-1). At such a steep discount, we are reluctant to sell, but we are cognisant that how management deploys its current cash holdings (as well as the cash to be received for the disposal transaction) will be critical to the company's success.

The stock has certainly been a major disappointment, but the company is likely to have over $110 million in cash at the end of 2010 (current market value is $365 million), and we will watch to see what opportunities this cash horde will buy at the end of the year. We are not keen on adding to our small holding in the company given the lower conviction we have in the management (which recently saw the departure of its Managing Director), but will look to see how the company deploys the vast funds it has at its disposal.

Portfolio gains 2.1% in June, STI up by 3%

2010-07-06T19:44:00.000+08:00

Our portfolio gained 2.1% in a turbulent June (to $0.999 a unit), underperforming the STI's 3% gain. The portfolio is essentially flat (-0.1%) for 1H 2010, while the STI is 0.6% lower on a total return basis. Key contributors to the portfolio's performance were Memtech International (+15.8%), Berkshire Hathaway (+13%) and Best World International (+11.5%), while Wells Fargo (-10.8%) and Noble Group (-5.5%) were key detractors.

Wells Fargo slugged, but Berkshire Hathaway surges

US equities were some of the worst-performing stocks in June, as economic data largely surprised on the downside. Wells Fargo was a key "beneficiary" of the poor sentiment on the sector which had largely stemmed from fears over European debt crisis contagion effects, and the weak US housing market served to dampen sentiment on the stock even further. With financial reform focusing on credit card issuers (and the maximum interest they are allowed to charge), many expect bank bottomlines to feel some form of negative impact. At US$24.88 (on 2 July 2010), the stock trades at just 1.21X book value and we may scoop up more shares on the cheap if a market panic ensues, perhaps sparked by negative newsflow from European bank stress tests.

On the other hand, Berkshire Hathaway gained 13% in June, as Buffett showed his ability to pick football teams as well as he picks companies. His insurance unit reportedly insured Carrefour against losses (the retailer reportedly had a promotion where they would refund customers of flat screen televisions if France won the World Cup), and avoided a $30 million loss as France exited the competition in the first round.

Interesting to note, but obviously, this was not the reason for the run-up in Berkshire stock in June. The stock was added to the Russell 1000 index on 28 June, and made up about 1.1% of the index upon inception. Fund managers and index funds which track the Russell 1000 had to purchase the stock, driving up the stock's price over the course of June, even as the overall US market slumped. While this was obviously a good time to sell, we continue to like the company's philosophy (and of course, its management) and are reluctant to sell out. The stock may experience weakness after fund managers have had their fill, but we continue to hold the stock for its long term potential, rather than try to benefit from its short term fluctuations.

K-Green Trust dividend in specie

2010-06-18T22:34:00.000+08:00

Keppel Corp went ex-dividend for the dividend-in-specie of K-Green Trust shares (1 share per 5 shares of KepCorp). Based on our 351 shares of KepCorp shares, we will receive 70 shares of the new entity.

Best World share buyback

2010-06-16T22:03:00.000+08:00

Best World International today announced that it has bought back 131,000 shares at $0.335 per share, for a total consideration of $43,977.75. This is not a huge sum (relative to its cash position of $39.56 million, or $0.1918 per share!), but the buyback dominated the daily trading volume of 299,000 shares, making up 43.8% of total traded shares. Liquidity for the stock is relatively poor, possibly a key factor preventing institutional investors from considering the stock as a potential investment.

In a second announcement today, the company also announced that it has received in-principle approval for the proposed listing of bonus warrants and shares. Further details on the issue will be given at a later date.

"S-Chipped" (Reprise) 2010

2010-06-16T01:42:00.001+08:00

The latest Fujian Zhenyun saga is a saddening reprise of the many blow-ups which occured in the S-Chip space in early 2009. FerroChina, Fibrechem, Beauty China, Sino-Environment, Oriental Century, Celestial Nutrifoods, China Milk and China Sun are just some of the troubled companies which have run into trouble, and have since been suspended (or are pending delisting).

Earlier in 2009, S-Chips fell like flies, succumbing to a mix of fraud/accounting irregularities, an inability to meet liabilities or in several cases, the forced sale of shares which had earlier been pledged by a major shareholder of the company (and yet, not disclosed to the Exchange).

An Early Warning in September 2008

In what was to be one of the most timely warnings issued by a brokerage, JP Morgan actually released a report dated 18 September 2008 where 21 S-Shares with a market cap of over US$200 million were screened for potential warning signs - just eight passed without any warning bells (Cosco Corp, Yanlord Land, Delong Holdings, People's Food, China Fishery, Hsu Fu Chi, China Aviation Oil and Epure Intl). Interestingly, all eight are "alive" and relatively healthy today (Delong Holdings appears to be doing the worst, but it was never a great business to begin with, in our opinion).

A 30% hit rate!

The other stocks flagged by JPM were Yangzijiang, China Hongxing, Li Heng Chemical, Centraland Ltd, FerroChina, Synear Food, China Sky Chem, China XLX Fertiliser, Fibrechem Tech, China Milk, Pacific Andes Hldg, Celestial Nutrifoods, Midas Holdings. While some of these 13 stocks have not done too poorly since (YZJ, XLX, Midas), it is shocking that JPM's simple analysis of potential warning bells managed to spot 4 troubled companies (FerroChina, Fibrechem, China Milk and Celestial Nutrifoods), a "hit rate" of over 30%! FerroChina shares were actually suspended in October 2008, less than a month after the report emerged.

DBS Vickers states the obvious

As S-chips continued to implode in early 2009, owning S-chips was akin to stomping around a minefield. If you were lucky (and your company wasn't the one in trouble for any particular day), you merely had to suffer collateral damange as investors fled from the sector (and who can blame them!). A (largely redundant)12 March 2009 report by DBS Vickers ("Navigating a Chinese minefield") only served to rub salt into bleeding wounds; the damage had already been done! Former market darlings like Beauty China, Fibrechem Tech and Sino-Env had already run into trouble by then, while the Celestial's inabiltiy to meet impending liabilities from its putable convertibles was already well-documented by then.

Avoiding the S-Chip space

Our familiarity with most of the S-chip names comes from having actually being invested in a handful (yes, a handful!) of them at some point of time. Naively, we took balance sheets and accounting statements at face value. Low single-digit PEs, net cash exceeding market capitalisation, book values exceeding market value by several multiples - we interpreted this as a buying opportunity of a lifetime. It was indeed a tremendous buying opportunity, but not in S-Chips.

When one is unable to trust financial statements and the management's integrity is suspect, we see absolutely no reason to seek out opportunities in the S-Chip space. While we scrutinise balance sheets to assess financial integrity of companies we invest in, we remain cognizant of our limitations (little or no accessbility to company management). Therefore, most of our investments are in larger-cap established companies where corporate governance is not an issue. For our smaller-cap investments, we prefer to avoid the S-Chip space completely, and prefer to choose companies incorporated in Singapore.

"CONFESSIONS of a S-Chip CEO" is lengthty, but essential reading for those who still seek investments where many fear to tread. Whether the letter is real or a fake is a moot point, but it serves as a warning that in the financial world, money can be made in zero-sum games of financial innovation, and investors will do well to avoid being the patsy in the poker game.

Noble invests in palm oil

2010-06-15T00:13:00.000+08:00

Noble invests in palm oil origination in Indonesia

14 June 2010, Hong Kong

Noble Group (SGX: N21), a global supplier of agricultural, energy, metals and mineral products, has acquired a 51% stake in PT. Henrison Inti Persada ("Company"). The Company intends to develop approximately 32,500 ha of land for palm oil production in Sorong Regency, West Papua Province, Indonesia.

The transaction is Noble’s first project in the oil palm sector and establishes a strong platform for the Group to expand and increase its investments in this area in the future. The investment enables Noble to expand its edible oil supply chain and secure a continuous flow of crude palm oil.

The Company is to be registered as a member of the Roundtable on Sustainable Palm Oil (“RSPO”). The RSPO are an organisation whose membership is made up of, amongst others, palm growers, palm oil producers, retailers, investors in the sector and environmental/conservation NGOs. The RSPO promotes the production of palm oil in a sustainable manner based on economic, social and environmental criteria.

“We focus our investments on areas that are synergistic with our businesses both in terms of product and geography,” said Noble Group Executive Chairman Richard Elman. “This move into palm oil plantations will complement our global agriculture and energy businesses. Our operating experience in Indonesia should prove to be an asset in helping us manage this and future projects.” He added, “With increasing convergence between agriculture and energy, this investment is a clean fit for the Group’s diversified portfolio.”

This transaction is not material for the purpose of the Singapore Exchange Listing Rules.

Noble Group today announced its investment in palm oil, further diversifiying its agriculture and energy business by acquiring a 51% stake in PT. Henrison Inti Persada (HIP). HIP is one of four palm oil plantation companies which are under the Kayu Lapis Indonesia Group. While the 32,500 ha plantation to be developed may be small in comparison to listed peer's Golden Agri's 427,253 ha (more than 13 times the size!), it will still provide decent revenue potential.

A hectare of oil palm can yield between 3.5 to 5 tonnes of crude palm oil a year, so going by this assumption, HIP's site has the potential to produce between 113,750 and 162,500 tonnes of CPO a year, generating revenue of US$84 to US$120 million each year, based on current CPO spot prices of about US$741 a tonne. As a gauge of the value of this investment, a simplified analysis of First Resource's balance sheet yields biological assets carried at US$1,065,800,000; based on 113,000 ha of plantations, this works out to about US$5,000 per hectare, which indicates that PT. Henrison Inti Persada's plantation could be worth about US$162 million. Granted, since the plantation will require further investment for development (it is not yet plantable, and further investments in processing plants will have to be made), Noble's initial investment is likely only a fraction of its estimated US$80 million share.

New position: Courage Marine

2010-06-14T18:33:00.001+08:00

We purchased 18,000 shares of Courage Marine today at $0.185, adding a new position to the portfolio. The BDI has fallen from its lofty peaks of 10,000+ points in late 2007 and early 2008, and now resides at about 3,200 points (after hitting a low of 663 in Dec 08). Dry bulk shipping rates have been volatile, and it is not surprising that a shipping firm like Courage Marine which depends on spot rates for charters has seen extreme volatility in its revenues over the past two years. Revenue plunged from US$90.5 million in 2007 to US$27.94 million in 2009 as shipping rates collapsed, and baring some exceptional items, the company was loss-making in 2009.

Given the extremely cyclical and uncertain nature of dry-bulk shipping, why then are we making an investment in this particular company? First, while we are no experts on timing the shipping cycle, it is probably more accurate to say that we are nearer the trough of the cycle than the peak. Most shippers are trading near or below book value, and we have yet to see a convincing return of profitability in the dry bulk segment. The time to buy cyclical stocks is when they trade at extremely high PEs, or when they are loss-making; the time to sell is when they trade at low PEs, indicating that peak earnings have been achieved.

Second, we like the company's conservative and unique approach to dry bulk shipping. Typically, companies choose to lock in long-term COAs when freight rates are high (eg. Mercator Lines), and often purchase newly-builds for such long-term charters. While this appears like a safe way to generate income, the approach fails to account for the potential of reneging by the charterer, especially when rates have plunged substantially. More often that not, the shiponwer is left with little choice but to lower the contracted rate, or face the prospect of fighting a long and expensive lawsuit. Courage Marine deals largely in the spot market, and to a lesser extent with COAs.

However, the company's fleet is exclusively made up of old ships - the average age of its fleet is bearing on 30, which is usually when a ship gets scrapped. Because of its focus on older vessels, the company has avoided overpaying of expensive new vessels, and avoids the long delays for newly-builds to arrive. In a prudent manner, the company has expended its fleet from 4 vessels in 2001 to 10 currently, and yet has maintained its net cash position (think Wheelock Properties Singapore), a rarity in the shipping industry where leverage is often used with reckless abandon.

While having a fleet of older ships comes with higher maintenence costs, the company has managed to keep operating costs low (operating costs rose just 65% in 1Q 10, compared to the 158% increase in revenue). Also, since its ships are depreciated on a 30-year basis, the residual book value of its fleet is minimal, compared to the book value of a much newer fleet (eg. Mercator Lines). It is highly likely that some of the older vessels are being carried at minimal value (since their age exceeds 30, there is only drydocking left to depreciate), despite their ability to generate income. At about 1.2X book, we think that the stock is rather cheap.

While most other shippers were attempting to slash their fleet and cancel newly-build contracts, Courage Marine managed to capitalise on the shipping downturn by purchasing several vessels at fire-sale prices (old ones, of course). The low prices paid mean that the company requires little debt (most vessels are funded by internal resources), and even allows the company the flexibility to scrap vessels when steel prices rise (the company scrapped a capesize vessel for a quick profit of US$400,000 in just a little over a month).

The company has paid out a healthy stream of dividends since its IPO, and even paid out a US$0.00472 dividend for 2009, a year where the company barely broke even. We anticipate that if shipping rates see a rebound, it will not be surprising if the company is able to fund a dividend in excess of 10% (based on our purchase price).

Capitaland - Sprouting more branches with CapitaMalls Malaysia Trust

2010-06-13T00:49:00.001+08:00

CapitaMalls Asia, which is 65.5% owned by Capitaland, announced on Friday that it has received approval from the Securities Commission of Malaysia to list a Trust (CapitaMalls Malaysia Trust) on Bursa Malaysia. The trust will consist of 1,350,000,000 units upon IPO, whereby 786,522,000 units will be offered for IPO, leaving CapitaMalls Asia with a 41.74% stake. This could fall to as low as 33% if an over-allotment option is exercised.

The trust will hold CapitaMalls Asia’s Malaysia shopping malls, and three Malaysian shopping mall assets will be injected into the trust upon IPO. These are the Gurney Plaza in Penang, an interest in Sungei Wang Plaza in Kuala Lumpur, and The Mines in Selangor, resulting in a total net lettable area of approximately 1.88 million sq ft for the portfolio. AmTrustee Berhad has been appointed as the trustee for CapitaMalls Malaysia Trust, and has valued the portfolio at approximately RM2,130.0 million (this is substantially different from the RM1,482.48 based on the indicative price of RM1.10 which cornerstone investors EPF Malaysia and Great Eastern Life Assurance have agreed upon, suggesting that some debt may also be injected into the initial portfolio).

This latest proposed listing augments our investment thesis for Capitaland - the company continues its excellent job of asset recycling, which frees up capital much more quickly for further growth. Along the years, Capitaland has created enormous amounts of shareholder value via REIT securitisation of its assets. Still maintaining a stake in each, the company could offload new developments quickly, and utilise the proceeds for further expansion, instead of waiting for years to recoup the development costs. The company also earns recurring income from the management of the trust assets, most of which are being paid for by new shareholders brought in under the REIT structure.

The listing of CapitaMalls Asia allowed Capitaland to monetise part of an important subsidiary for over $2.8 billion, but still retain its majority interest in the subsidiary (65.5%), and this proposed listing of CapitaMalls Malaysia Trust is further indication that the "Macquarie-style" model of asset recycling is very much alive under the Capitaland group.

WBL continues to streamline operations, sells Applied Engineering

2010-06-11T23:12:00.000+08:00

WBL Corp today announced that it has reached a conditional agreement to sell its wholly-owned Applied Engineering Pte Ltd to Advanced Holdings for a cash consideration of $18 million. Applied Engineering specialises in the design and fabrication of process equipment such as pressure vessels, shell & tube heat exchangers and other equipment, and supports the petrochemical, oil and gas industries both in Singapore and the region.

The sale for $18 million looks like a good deal (on WBL's part), given that the book value of Applied Engineering Pte Ltd on WBL's books is only $8.5 million. The sale price is twice of the carrying value, and the proceeds will be in cash, which may be deployed to other parts of the business, or returned to shareholders in the form of a special dividend. $18 million is no paltry sum, especially when there are only about 280 million shares outstanding (assuming full conversion of convertibles and including dilution for ESOS). Currently, there are about 250 million outstanding shares, which means the latest sale represents cash of about $0.072 per share. The company still has a substantial cash horde of $435 million (as of end March 2010), which increases the possibility of a special dividend.

We are hardly worried about the lowered profit contribution from WBL's "Engineering and Distribution" business following the sale, as the segment only contributed earnings of $2.9 million in 1H 2010. Other businesses in the "Engineering and Distribution" segment include Far East Motor (automobile servicing and repair), SPC Wearnes (bottled LPG), Pacific Silica Pty Ltd (silica mining), O’Connor’s (engineering systems), Polytek Engineering (laundry, boiler and washroom equipment and accessories), Wealco Equipment (water jet propulsion) and Welmate (architectural ceiling and partition systems).

While the remaining businesses may not see such generous buyers, it is likely that they may be sold off in the near future as WBL continues to streamline its operations to concentrate on property development and technology.

Sold SGX, a quarter of the portfolio in cash

2010-06-09T23:29:00.001+08:00

Singapore Exchange Limited (“SGX”) wishes to announce an investment of $250 million in technology, comprising $70 million for a new securities trading engine and $180 million for infrastructure outsourcing services and data centres, collectively known as the Reach initiative. The investment of $70 million was previously announced by SGX on 4 March 2010.

The investment in the Reach initiative is to create the fastest access to Asia by implementing a new high-performance trading engine, a state-of-the-art data centre, as well as introducing co-location services to its customers. The Reach initiative also includes establishing presence at key data centres in Chicago, London, New York and Tokyo. The infrastructure outsourcing services will enable SGX to benefit from improved access to technical capabilities, implementation of enhanced processes and comprehensive infrastructure management tools. (3 June 2010)

We sold SGX (finally!) at $7.28 today, bringing the portfolio's cash level to almost 25%. We actually bought SGX at around the $4+ level in mid-March 2009, in the belief that the company (and its stock price) were sure beneficiaries of a market recovery. The stock's returns have been decent since, but we see little upside from current levels, despite the hype over the new $250 million trading system which promises to boost revenues. The exchange expects additional annual recurring expenses of $12 million due to this new system, which is paltry compared to the $200+ million operating expenses SGX racks up every year, but we are sceptical that the new trading system will actually provide a substantial boost to revenue.

The problem we have with SGX is that growth for the exchange is difficult to create. The new CEO, Magnus Bocker, is pulling out all the stops to try to increase revenue, and the latest $250 million investment represents a foray into algorithmic trading, which Mr Bocker hopes will drive trading velocity in cash equities trading. In our opinion, it will be difficult to induce algorithmic traders into providing liquidity for a large number of stocks listed on the exchange - either due to a low free float or a distinct lack of buying interest. The small market capitalisation of many counters also compounds the problem. More likely, algorithmic trading will be focused on the usual suspects (the market darlings which adorn the daily top volume list) and some of the larger capitalisation companies. Traders need other buyers and sellers in order to make money, so why focus on low investor interest companies where they have to make a market to induce buyers? As has been the case in the past, higher velocity and investor interest in a select group of stocks will likely drive investors away from others, more like a zero-sum game.

Moreover, Singapore's positioning as a financial hub (and "Asia's exchange") remains in question, given that Hong Kong already enjoys tremendous levels of trading volume. Much of this stems from Hong Kong's proximity to China, whose citizens possess tremendous household wealth. Hong Kong is already facing stiff competition from the Shanghai exchange, and going forward we expect to see Shanghai obtain a more-than-fair share of new large-cap listings. What does this leave SGX? Zilch (except for numerous poor quality third-tier S-Chips).

SGX's monopoly status looks safe at present, with its infrastructure setup preventing other players from quickly stealing market share in the local market. However, with the limited growth from local retail investors, SGX is looking overseas for growth. While this could be a way to boost revenue, SGX already charges one of the highest clearing fees in the world, and there could be downward pressures on pricing, reducing margins. The ASX has recently announced lowered fees as a result of the entrant of new competitors, which could be something that SGX may face further down the road.

Noble buys stake in USEC Inc

2010-06-08T22:28:00.000+08:00

Noble Group today reported that it had purchased 5,848,940 shares of USEC Inc, a 5.13% stake in the company. The purchase cost was US$30,194,176.53, which works out to US$5.16 a share, an 8.2% premium to USEC's close of US$4.77 on Monday. USEC Inc is in the nuclear energy business, and supplies low enriched uranium (LEU) to commercial nuclear power plants in the United States and internationally.

Sold Jardine Strategic, market technicals unfavourable

2010-06-07T22:54:00.002+08:00

We sold our shares in Jardine Strategic today (500 shares at US$21.22), despite the much anticipated sell-off in the stock market following huge losses on Wall St last Friday. Nonfarm payrolls were poorer that expected, renewing fears that the recovery in the US isn't going to plan. Also, a curious statement from Hungary's ruling party indicating that Hungary would go the way of Greece in terms of its debt problems further fuelled investor worries.

As we have described in a previous post, European debt problems are unlikely to simply disappear, and the likely result would be a sovereign default by one or more European economies. We have yet to see a selling climax, despite the sharp YTD falls in some markets.

While we reiterate that valuations are attractive for the stock market in general, we have to acknowledge the unfavourable market technicals - the Dow Jones and S&P 500 have both fallen below their 200 day moving averages, and the moving average now appears to be a resistance for both indices. With such bearish market technicals coupled with the fact that we have yet to see the market capitulate (or a failure/near-failure of one or two European banks), we have little choice but to err on the side of caution. With our sale of Jardine Strategic Holdings, we have raised the cash level of the portfolio to about 19%. We will also be looking to dispose of SGX to increase cash to about a quarter of the portfolio.

There is a good chance that we may be wrong in our reading of the market, which is why we will remain largely invested, but our larger cash holding will help us to buffer risks to the downside, and will be a useful source of ammunition should distressed opportunities appear.

Liew Mun Leong eats his own cooking

2010-06-07T00:15:00.001+08:00

Capitaland CEO Liew Mun Leong has purchased a unit at the Interlace for $3,737,500, while his son has also purchased a $2,467,000 unit in the same development. A discount was not announced for both transactions.

Best World to issue bonus warrants

2010-06-05T21:37:00.001+08:00

Best World International yesterday proposed the issuance of bonus warrants (exercise price $0.30) on the basis of 1 warrant for every 5 existing shares, which can be exercised 6 months from their listing and have a "shelf life" of 3 years. The rationale behind the proposed warrant issue was to reward existing shareholders as part of their 20th anniversary celebrations, allowing shareholders to participate in the growth of the company.

A bonus issue at this point of time is a curious step, given that the company has a large cash horde and we would have been happier if the company paid out some of that cash as a bonus dividend. However, a warrant issue is interesting and provides a new dimension to our investment in Best World Intl. We are no experts at valuing options or warrants, but if market conditions continue to be poor, we will not be surprised if the warrant is grossly underpriced by the market (due in part to the poor liquidity expected). We look forward to the listing and will be very happy to scoop up more warrants for leveraged exposure to the stock if the price "warrants" it.

Mermaid Maritime extends contract for MTR-2

2010-06-03T21:54:00.000+08:00

Mermaid Maritime (a beleagured performer in our portfolio) today reported an extension of its MTR-2 rig's drilling contract with Chevron in Indonesia. The rig was originally contracted until June 2010, and the rig's services have been extended for another 9 months. The company cited a potential contract value of US$24.5 million, which works out to about a US$90,700 day rate, up slightly from the US$88,814 gross day rate for 2009.

While the day rate was not up substantially, it is comforting to know that Chevron's contract has been extended. MTR-1 remains a disappointment, having not secured any work since September 2009, and the 6-month lull period anticipated by the management has been too optimistic a scenario. However, a third rig (KM-1, 75% owned by Mermaid) is slated for delivery this year (after originally scheduled for a 4Q 09 delivery), and will be contracted for 5 years drilling for Petronas.

Portfolio drops 8.1% in May, STI down 6.9%

2010-06-01T11:53:00.000+08:00

The portfolio fell 8.1% in May (to $0.978 per unit), against a 6.9% drop for the STI (on a total return basis). On a year-to-date basis (at 31 May 2010), the portfolio is 2.2% lower, compared to the STI's 3.6% decline. The month of May was a very poor month for our investments, as Greek debt fears and Korean tensions compounded negative investor sentiment. Most major markets were lower for the month, while small cap stocks suffered huge losses as investors fled riskier assets.

On a month-to-date basis, F&N, WBL, STI ETF and Capitaland were the best performers, falling 0.8%, 3.1%, 4.7% and 4.8% respectively. The worst performers were Mermaid Maritime (-34.9%), Memtech (-25.1%) and Guocoleisure (-18.5%).

We have obviously made very poor investment decisions with our small cap picks, and our investment in Mermaid Maritime looks particular disasterous. The company reported a larger-than-expected quarterly loss, and its unutilised tender rig now appears to be on the market for use as accommodation (day rates of about US$20-30k, rather than drilling activity (US$70k and up). Coupled with the woes in the gulf of Mexico due to the Deepwater Horizon spill, drillers are not having the best of times despite the relatively high price of oil (which appears to be sustained above US$65). While Mermaid's activities are largely in South East Asia, the poor earnings announcement and negativity on offshore drilling at present are weighing down on the stock. We admit our failure to cut losses on the position, but we are very reluctant to sell the stock at a near-40% discount to book (about $0.77 a share).

Memtech obviously suffers from a lack of liquidity, and has fallen 25.1% in May on relatively low volume. The business appears to be turning around (the company made US$967,000 in 1Q 10, from a $746,000 loss in 1Q 09). The company continued to generate cash in 1Q 10, and its cash balance stood at US$40.32 million at the end of the quarter, before the payment of the annual dividend. 75.1% of the stock's market cap is covered by cash (after the dividend is deducted), and the stock trades at a 56.5% to NAV.

WBL's 1H '10 profit up 93% to $40 million, declares 5 cent interim dividend

2010-06-01T00:31:00.001+08:00

WBL Corp recently announced 1H '10 earnings of $44.4 million ($40.2 million recurring), up from $12 million (after an $8.8 million non-recurring loss) in 1H '09. The company's prefered measure of earnings is operating PATMI (Profit After Tax and Minority Interests), a measure of recurring income to common stockholders.

One-off gains transpired from the disposal of some buildings under Starsauto/Wisma O’Connor’s /Wearnes Electronics Shenyang (+$4.3 million), the provision and disposal of investments under Property Management Co./ Sanguine Microelectronics/Advance Science Lab (+$0.6 million) and the cessation of Starsauto/Kunming Speedling (+$0.8 million). A planned plant closure related to MFLEX's operations in the US resulted in an asset impairment of $1.5 million.

The property business division was the largest PATMI contributor in 1H '10 ($21.2 million), but 2Q '10 profit from property was just $6.5 million, was fewer units were made available for sale in Shanghai and Suzhou. The Chengdu Orchard Villa which was launched in 1Q 10 saw higher sales.

As we have previously highlighted, the Chinese property market has demonstrated speculative tendencies, especially in tier-one cities like Shanghai (where WBL has a presence), and the Chinese government has clamped down on excessive rises in prices by implementing a series of new property regulations. This has had an impact on WBL's Shanghai property sales, but this may also be due to fewer releases of units in response to the Chinese government's actions. Whatever the reason for the drop-off in property revenue, we are glad that our exposure to Chinese property is via a diversified business like WBL's, whose fortunes are not predicated by a strong property market, and can afford to hold its landbank until market conditions improve.

Euro-led slow down, tensions in Korea, can it get any worse?

2010-05-25T21:51:00.001+08:00

The STI lost 2.7% today, falling to 2651.19, at the lowest level since early November 2009. Current investor worries (in decreasing order of importance) are:

A Euro-led global slowdown, leading to a double-dip global recession
Issues related to the Euro area: a potential debt default by one of the PIIGs, a break-up of the Euro-zone, uncertainty over European bank balance sheets, systemic meltdown of the global financial system (ie. Lehman's 2008 failure)
War breaking out on the Korean peninsula
Chinese asset bubble/tightening worries
A (largely benign) financial reform bill being passed in the US, and perhaps, the potential impact of Basel III on financial institutions

While stock markets have corrected severely from their April highs, most (if not all) major stock markets have recently broke through their 200-day moving averages, a rather bearish indication from a long-term technical perspective. We would rather not commit more new funds at this juncture, as the technicals are suggesting further downside but post-correction valuations look rather appealing for many stocks we are watching.

We can hardly think of any potential positive news which may provide the investment community with a shot in the arm at this juncture (especially to alleviate problems 1 & 2), so any impending rebound will largely be the results of technicals (and the technicals hardly look favourable now!). Given that we are currently short on "powder", we want to keep some dry in anticipation of a major capitulation in the stock market. Investor sentiment is largely negative now which means that we may be approaching the point of capitulation, but we probably need to watch for some of the following to occur:

Sell-side analysts need to turn very bearish (consensus estimates for most markets are still on the rise)
GDP estimates need to be revised downwards (like market earnings estimates, still on the rise)
A "haircut" taken by holders of PIIGs debt, possibly beginning with Greek debt

As austerity measures face significant protests, it is increasingly likely that the country's creditors will have to take a hit. When this happens (we think the market is not yet pricing this in, given the euphoria over the ECB/IMF bailout package), the market could suffer an even larger decline. As has been the case in various financial crises, the failure or near-failure of major financial institutions often mark the market bottom. In the current issues with Europe, the marking down of Greek, Portuguese or Irish debt by European financial institutions could mark the climax of a market capitulation, in which we would be very happy buyers of quality companies which are also sold down in the fray of madness (despite their seemingly lack of association with the troubles of the European economy).

We continue to like and own Wells Fargo, and are well aware that any negative sentiment on the financial sector will undoubtedly hurt the stock. Nonetheless, the company's strong fundamentals, low (and stable) cost of funding, and prudent management render the company an attractive investment, separating it from its peers.

STI down 11.1% from recent peak, bought some Noble Group shares

2010-05-21T23:41:00.001+08:00

The STI was 1.9% lower today, after weakness on Wall Street last night. The Singapore stock market has declined over 10% from the recent peak in early April, a sharp drop in just five weeks. Considering the risks known at present, most of them stem from European debt problems and the collateral damage often simplified in the media as the "Greek contagion".

While throwing into question the risk-free rate of certain developed European economies is certainly unprecedented, systemic risks have been substantially reduced after the huge bailout package put together by the EU and the IMF. We are investing on the basis that a credit market seizure on the scale following Lehman's collapse in late 2008 will not occur again, which means the risks for Singapore stocks will largely be associated with lower levels of consumer demand. This is yet another indication of the growing disparity between emerging economies and developed ones, and Singapore is fortunate to have companies positioned to benefit from emerging market growth, without the tricky corporate governance issues.

The market correction is painful, yet inevitable and long-awaited. Wilmar was sold down yesterday on fears that the Indonesian government would take legal action to reclaim certain unauthorised tax rebates that the company had received over the past three years. The stock has already corrected more than 20% from its recent peak to levels last seen in July 2009, a worthwhile punt, but we will have to study the company in greater detail before making an investment decision.

In response to the market sell-off, we added $10,000 in new money today to the overall portfolio (the portfolio is almost fully invested). With some of the proceeds, we purchased 1910 shares of Noble Group, (one lot at $1.60, 910 shares at an average cost of $1.624) at to top up our holdings to 5000 shares. Noble recently did a 6 for 11 bonus issue, which meant that we held 3090 shares from the original 2000. With the shares falling as much as 9.4% this morning (with no negative company-specific news), we decided to add to our position in the stock.

Sharebuilder additions for May

2010-05-18T22:20:00.000+08:00

Bought the following via the Sharebuilder (18 May 2010):

21 shares of Fraser and Neave at $4.75
33 shares of STI ETF at $2.92694

Portfolio gains 4% in April, but May starts in horrible fashion

2010-05-07T07:20:00.000+08:00

The portfolio gained 4% in April, as NAV rose to $1.064. On a total return basis, the benchmark STI gained 3.6%. Year-to-date, the portfolio has risen 6.4% and has outperformed the STI's 3.5% (recall that this is after performance fees of 20% of an outperformance of a 6% annual return).

While we would like to focus on what went well in May, that is rather irrelevant at present as the first few days of May has seen markets reverse their gains. The STI is already 1% lower (YTD, as of 6 May 2010), while our portfolio is marginally positive, up 2.4% over the same period. Instead of moping over the poor performance of our holdings, we have re-examined our investment thesis for each stock and have highlighted lower conviction ideas which we will wish to sell in the near future. At the same time, we have also identified stocks which we may want to increase exposure to if the market presents suitable opportunities. We are relatively pleased with our holdings overall (and view the recent market weakness as a temporary condition).

Thus far, our key low-conviction idea is SGX. We dislike the high valuations and the company's growth potential is likely overrated. Latest earnings have been slightly disappointing, and we think that the Exchange is not likely to be successful in the futures market (traders prefer anonymity). Other products like ETFs have shown a bit of promise - volumes have been rising but are a far cry from being a stable source of revenue. Overall, the breadth of products has been expanding, but the actual impact on revenue has not fared quite as well.

On the other hand, SGX still maintains its monopoly status as a clearing house in Singapore, and a wildly exuberant market could send the stock heading much higher, as market turnover rises. It will likely take more than normalised trading volumes to provide an upward lift to the stock price, something we are not comfortable "speculating" on.

At the same time, Chinese property stocks have displayed considerable weakness as the Chinese government implemented new regulations to cool the property market, and several stocks have been beaten down considerably (names like Yanlord Land spring to mind). We purchased another 1000 shares of Capitaland at $3.57 today (6 May 2010), amid the weak market conditions. The stock trades at just a slight premium to book value (about 1.13X), a far cry from the 2.75X seen in the 2007 bull market. Capitaland has been sold down on concerns over its Chinese property exposure (about 35% of assets), and we think the recent correction provides a good entry point to double our exposure in the stock.

[on a less fundamental note, the 38.2% retracement from the Apr 2007 decline to the 9 Mar 2009 bottom is $3.55 (adjusted for rights)]

Sold Hotung for a quick profit!

2010-04-30T20:11:00.000+08:00

We bought Hotung at US$0.11 on 5 March. On the strength of liquidity provided by the company's share buybacks, the stock rose to a recent high of US$0.135, and we were able to sell our 15,000 shares at US$0.13 on 30 April for a quick profit. Admitedly, the US dollar has weakened against the SGD on the back of MAS monetary policy tightening, but the stock also went ex-dividend (approximately US$0.0076 per share) on 29 April, which means we are collecting a further $150 in dividends.

1Q 2010 results - CMT, CIT, WFC

2010-04-21T18:12:00.052+08:00

CapitaMall Trust

CapitaMall Trust reported 1Q 10 distributable income of S$71.1 million, or about 2.23 cents per share. Actual amount available for distribution was S$80.6 million (approximately 2.54 cents per share) so assuming no retained income (100% distribution), we can expect an annualised DPU of about 10 cents.

Asset enhancement projects are underway (Raffles City basement extension, Jurong Entertainment Centre) which provide a form of organic growth without having to resort to further acquisitions. The incremental net property income expected from the JEC project (construction contract below budgeted amount) is S$16.1 million per annum, which could potentially increase annual DPU by as much as 0.5 cents, or 5% of DPU.

Cambridge Industrial Trust

CIT reported net property income of S$16.3 million, down q-o-q due to the divestment of 32 strata units at 48 Toh Guan East (Enterprise Hub). Distributable income was S$11.1 million, down from S$11.9 million in 4Q 09 and translates to DPU of 1.274 cents.

Long term debt (S$390.1 million, expiring Feb 2012) has been swapped to fixed from variable, which will probably result in higher interest expense over the subsequent quarters (and hence lower DPU). Gearing was at 42.6%, and the Managers have highlighted a preference to bring this down to around 38% by the end of the year. Longer term, target gearing is between 30-35%.

We continue to like CIT for its stable income, high occupancy rate and relatively long average lease term (approximately 4.4 years, with just 6.9% of rentals expiring before 2013). SGD assets which yield close to 10% are impossible to find at this juncture, but we are also mindful of the various risks which the REIT entails. The fiasco with AIMS AMP Capital Industrial REIT is particulary troubling, and cost us unnecessary money. Unfortunately, we do not have any viable alternatives at this juncture (CACHE Logistics Trust was interesting, but we prefer not to invest in IPOs), and will retain our rather large position in CIT for the steady source of quarterly income.

Wells Fargo

Wells Fargo reported net income of US$2.5 billion for 1Q 10, or EPS of US$0.45, ahead of the US$0.42 expected by the consensus. PTPP (Pre-tax Pre-provision profit) was US$9.3 billion for the quarter, an indication of the immense earning power of WFC. Tier 1 capital rose to 10%, considered a relatively healthy position while loss provisions rose slightly to US$25.1 billion, up from US$24.5 billion in the previous quarter. As an indication that banks are turning the corner, WFC's Chief Credit and Risk officer believes that quarterly provision expenses and credit losses have peaked, while non-performing assets which commonly lag credit losses are still expected to increase, but will peak before year end.

WFC managed a 4.27% net interest margin for the quarter (easily the highest among large US banks), translating to net interest income of US$11.3 billion. Much of this can be attributed to the strong (sticky) deposit base, where total interest-bearing deposits of US$632 billion cost the bank just 0.47% to borrow! The low cost (and also stable source) of borrowing is WFC's competitive edge, as opposed to short-term borrowings which are currently cheap, but can cause a bank's downfall should a crisis emerge and short-term financing dries up.

Third Avenue Management LLC nominates WBL director

2010-04-20T18:13:00.001+08:00

SGX-listed WBL Corporation Limited (Wearnes) – an international conglomerate with key businesses in technology, automotive, property and engineering & distribution – today announced the appointment of Benjamin C. Duster, IV, Esquire, as Non-Executive and Non-Independent Director with effect from 19 April 2010.

Mr Duster is currently Executive Managing Director of Watermark Advisors, LLC, a US-based strategic advisory firm specialising in mergers and acquisitions, private capital raises, strategic valuations and financial modeling. Prior to this, he was with Masson & Company, LLC; Wachovia Securities, where he was Managing Director; and Salomon Brothers, where he worked for 16 years. Currently Chairman of the Compensation Committee of Toronto Stock Exchange-listed pulp and paper producer Catalyst Paper Corporation, Mr Duster has also chaired various board committees of companies listed in Canada, New York and Poland. Mr Duster holds a Juris Doctor-MBA from Harvard University and a Bachelor of Arts (cum laude) in Economics from Yale College. He was admitted to the Illinois Bar in 1985 and is a registered representative of the National Association of Securities Dealers.

Mr Ng Ser Miang, Chairman of Wearnes, said, "The Board welcomes Mr Duster, who brings with him a wealth of experience in the legal, corporate finance and corporate strategy & development aspects of many global businesses. His domain knowledge, international perspectives and cross-border network will be added assets to the Group."

"Mr Duster is nominated by Third Avenue Management LLC, a substantial shareholder of the Company. The Nominating Committee of the Company reviewed his nomination and based on his qualifications and experience, recommended his appointment to the Board of Directors. "

Considering that Third Avenue Management owns 17.47% of WBL Corp, it is a positive indication that the investment firm has nominated a director on board. WBL has a huge asset base, but it may take some experienced "prodding" to realise some of this value.

Gloucester-Macarthur merger: Noble shareholders vote "No"

2010-04-19T22:59:00.002+08:00

19 April 2010, Hong Kong

"Noble Group wishes to announce that the merger proposal between Macarthur and Gloucester was soundly defeated by shareholders in a vote held in Hong Kong at 2.30pm today."

The Noble-Peabody-New Hope tussle for Macarthur Coal took another strange twist today, as Noble shareholders voted down the merger of Gloucester and Macarthur, a deal which would see Noble own almost a quarter of the new entity. Considering that the proposal was "soundly defeated", this strongly suggests that Noble's management has other plans in mind (Richard Elman's trust still owns a controlling stake while CIC would not jeopardise the company's expansionary plans, not after acquiring such a substantial stake).

Certainly, after being so close to sealing the deal, there is no way that Noble will give up Macarthur (and its assets) so easily, and the voting down of the proposal simply indicates that a new strategy is in place, perhaps a hostile one. Noble owns 30% of Middlemount Mine, a significant asset in the Macarthur portfolio of mining assets, and has the option to raise this stake to 50% for A$100 million. Also, Noble owns 10% of the Monto project, of which Macarthur remains the majority owner. There could also be options attached to Noble's stake in Monto, which upon exercising could reduce the attractiveness of Macarthur to Peabody (Noble highlighted its interest in both projects in a warning note directed at Peabody on 5 April, saying its quiver is "far from empty").

We look forward with great excitement to see what Noble has up its sleeves in this game of M&A chess.

Sharebuilder purchases for today (19 Apr 2010):
32 shares of STI ETF at $2.9989, 20 shares of Fraser and Neave at $4.84

Euphoria, but not in the stock market....yet

2010-04-13T22:23:00.000+08:00

As we approach the 3,000 point barrier on the STI, a key question arises- is the stock market peaking? If broad-based sentiment is any indicator, we are getting close. Some troubling observable indications:

Skyrocketing COE prices (but maybe just a manifestation of the "kiasu-ism" on the reduction in availability)
An increasingly excited domestic property market (just count the huge number of ads in the Saturday edition of the Straits Times)
A huge number of IPOs (11 so far this year, and we're only in April)
High over-subscription for IPOs (CACHE's placement tranche was 7.2X subscribed, while the public tranche was about 20X subscribed)
A disconnect between large cap and small cap stock price movements (small cap stocks have recently found favour)

We do not profess to be excellent market timers, but these indications may be seen as "early warning signs". Nevertheless, we note that the largest gains are often had at the later stages of a market rally. Moreover, valuations of the stock market in general does not appear too stretched, which suggests that an impending sell-off (if any) may not be too substantial. We invest for the long-term, and as long as valuations of our holdings remain reasonable, we are reluctant to sell core parts of the portfolio based on any perceived notion of where the general stock market is headed.

We will be looking to trim positions in non-core holdings should the market display signs of "irrational exuburance", but current conditions are hardly euphoric yet.

Added Mermaid Maritime to the portfolio

2010-04-07T23:08:00.001+08:00

Added 5,000 shares (at $0.725) of Mermaid Maritime, the Thai offshore company. Company owns two tender rigs and has a third to be delivered later this year. Currently, one existing tender rig is awaiting a new contract; strong oil prices could see the rig secure a higher charter rate, which could be a catalyst for share price performance in the near term. The stock trades slightly below book, has a long track record of specialisation in the area of offshore services, and has a strong parent (Thoresen Thai Agencies), so corporate governance issues are unlikely to arise.

Strong rebound in March 2010

2010-04-07T22:34:00.002+08:00

The portfolio rebounded strongly in March, gaining 4.9% (net of an accrued performance fee of 20% based on a 6% annual targeted return), bringing NAV to $1.023, up 2.3% YTD. In comparison, the STI on a total return basis gained 5.2% in March, and is essentially flat YTD.

On a percentage basis, Best World was the strongest performer, with a 36.2% monthly return. The announcement of expansionary plans in the Phillipines was enough to incite trading in the stock. Renewed investor interest in Jardine Strategic Holdings sent the stock rising 21% for the month, a huge boost to the overall portfolio (JSH is our largest single position in the portfolio). As previously mentioned, we view the underlying businesses as highly attractive in their own right, and the parent holding company simply offers the opportunity to purchase the whole basket at a substantial discount to market value. Another notable performer was Wells Fargo, which gained 14% for the month (also a substantial holding for us). Worries over financial reform in the US appear to have subsided for the moment, and investors are beginning to focus on P/E multiples for bank valuations, instead of book value. Wells Fargo currently trades at a forward PE of 11.3X, which leaves much upside potential based on a PE multiple re-rating alone.

Noble was the chief laggard in the portfolio, as concerns over a director's share sale and uncertainty over the merger of subsidiary Gloucester Coal and Macarthur Coal weighed on stock performance. US coal giant Peabody recently made a takeover offer for Macarthur Coal on the condition that its proposed merger with Gloucester Coal does not go through. At stake for Noble is a near 25% stake in the consolidated Macarthur, which is poised to benefit from steel production in China. While uncertainty still lingers, a second refuted bid by Peabody suggests that Noble has the upper hand, but we will be watching developments closely over the next week or so (Macarthur shareholders vote for the Gloucester-Macarthur merger on 12 April).

BEST WORLD 36.2%

JARDINE STRATEGIC 21.0%

Hotung Investment Holdings 18.3%

FRASER AND NEAVE 16.9%

WELLS FARGO 14.0%

KEPPELCORP 12.2%

GUOCOLEISURE 8.7%

Capitaland 6.9%

STI ETF 6.1%

CAMBRIDGE 4.5%

SPH 3.0%

CAPITAMALL 1.7%

BERKSHIRE HATH-B 1.3%

ASCENDAS I-TRUST 1.0%

SGX 0.3%

WBL Corp -2.8%

TAT HONG -3.3%

NOBLE GRP -3.5%

$6,000 of new money was added into the portfolio, resulting in the creation of 5865.10 new units on 31 March 2010.

Bought some Memtech International

2010-04-06T22:58:00.001+08:00

Bought some Memtech International today (25,000 shares at $0.12). Stock trades at a steep discount to NAV but comes with low liquidity (and low investor interest). The company has been a laggard as other smaller-cap technology companies have rebounded strongly, and could be a beneficiary of a turnaround in the sector. While profitability has remained sluggish so far, profits and revenue could rebound strongly in subsequent quarters, driving share performance.

Bill Miller of Legg Mason Value and the "collateral-driven" banking crisis of 2007-2009

2010-04-01T18:56:00.000+08:00

I had the privilege to hear from legendary fund manager Bill Miller last week at the Ritz Carlton, where Legg Mason held an investment forum. Bill Miller's Legg Mason Value fund is most famous for having beaten the S&P500 for 15 consecutive years. Unfortunately, Bill has been in the news more recently in 2008 for his then-disastrous bets on financial institutions (some may recall the comparisons made with Bill Gross of Pimco, who placed bets on the debt of Freddie Mac and Fannie Mae, while Miller held the stocks. The government's bailout immensely benefited the debt holders of these enterprises, while shareholders took massive hits).

While he "returned to form" with an outperformance of the S&P 500 in 2009, his explanation of how he incorrectly read the recent financial crisis was far more poignant for some in the audience (like myself). He talked about how the 2007-2009 banking crisis was a "collateral-based" problem, while the 1987 crash was precipitated by a "liquidity" problem. He bought financial stocks when the Fed first injected liquidity in 2007, a grave mistake as the crisis was collateral-driven, which meant that the assets backing the deposits held by banks were actually turning sour, resuling in bank capital continuing to shrink until the prices of the colletaral (sub-prime, mortgage backed securities etc.) were actually propped up to prevent further falls. This only occurred in early 2009, which was the perfect time to be buying bank stocks.

Is the next bubble in Chinese real estate?

2010-03-26T17:25:00.002+08:00

The global stock market has largely shrugged off troubles with Greek debt (its too disconnected from most economies, too small and insignificant, and members of the EU will have to bail out Greece before another financial crisis develops), US policy uncertainty (on healthcare and the banking sector), as well as early signs of tightening activity in China. The US recently hit new 18-month highs, with the Dow Jones Industrial rising for 8 consecutive sessions. Despite the moderate levels of optimism displayed by investors in general, we consider it prudent to focus on potential issues which could derail the stock market in the near future.

Unsettling reports out of China

Of particular interest at this juncture is the potential bubble in Chinese real estate, an issue which could have profound backlash on various risk asset classes, Chinese property developers notwithstanding. China's real estate prices rose 10.7% year-on-year in February 2010 (according to the National Bureau of Stastics), following a 9.5% gain in January, fueling worries that Chinese property prices have risen too fast and too furiously. Various "on-the-ground" experiences reflect the increasing bubbly nature of the property frenzy (Real estate: China’s god of fortune, CHINA PROPERTY: Aspiring tycoon makes killing in virtual home sales).

Official statistics of home prices in China are generally not a good reflection of actual on-the-ground conditions, making it difficult to assess the situation. These less-than-accurate growth figures are also difficult to relate to the entire property market, with varying nuances affecting different segments of the market. Generally, various reports suggest that first-tier cities (Shanghai, Beijing, Shenzhen and Guangzhou) are experiencing some semblance of substantial overvaluation, while the problem is less prominent in second-tier cities. Low levels of borrowings (generally, most Chinese buyers pay cash for a majority of their home purchase) are a positive indication, differentiating the Chinese property market from other property bubble crashes in the past (US, Japan) where large levels of mortgage debt were employed. However, "this time is different" is usually inconsequential at the end of the day, whether in the heights of an asset bubble, or in the depths of deep recession.

No one really knows if the property market will collapse, but we want exposure

We admit that we are not in a good position to judge the extent of disconnect between property fundamentals and prices being paid. On the other hand, we continue to believe in the long-term potential of the Chinese economy, which entails some of the best growth potential over the next decade or two, on the back of unparalleled potential consumption and spending power (driven by the continued trend in urbanisation and growing affluence), and Chinese property represents one of the best ways to benefit from this immense long-term trend. Yet, talk of speculative-like property prices in first-tier Chinese cities (and some second-tier ones) is rather unsettling.

Indirect plays

Given the uncertainty over Chinese property, we have incorporated exposure to the Chinese property sector via indirect plays, rather than investing in companies who are wholly-leveraged to the Chinese property market like Yanlord Land. Capitaland is a leading real estate developer in South East Asia with a view on increasing its assets in China over the long term, but retails large amounts of property assets in the region. WBL Corp holds extensive landbank acquired at much lower prices, but has a diversified mix of businesses which include automobile distribution as well as technology manufacturing. F&N is increasing operations in China, but retains its stronghold on the South East Asian drinks market with a dominant market share. None of these companies are expected to collapse in the event of a prolonged downturn in the Chinese property market, but are all well-positioned to benefit from the longer-term growth in this space.

Hotung - Tai Lung Capital increases holdings

2010-03-19T21:44:00.002+08:00

Tai Lung Capital purchased 2,438,000 shares on the 17th and 18th of March at US$0.12 apiece (Tai Lung Capital is the founding Huang family's investment company), the second major purchase by Tai Lung Capital this month. Earlier on March 11 and March 12, the Huang's investment company purchased 3,000,000 shares on the market at an average cost of US$0.1183 per share.

This brings the Huang family's deemed interest in Hotung to 15.62%, or 172,893,979 shares. This includes (1) 147,888,008 shares held by Tai Lung Capital Inc. (2) 18,944,774 shares held by Chung Lung Investment Co., Ltd. (3) 6,061,197 shares held by Mr. Chin-Wei Chen (the husband of Tsui-Hui Huang, the Chairwoman).

Sharebuilder additions for March 2010

2010-03-18T23:26:00.001+08:00

Bought 22 shares of F&N at $4.45 and 35 shares of STI ETF at $2.96

Jardine Strategic looking to buy back shares

2010-03-06T14:09:00.001+08:00

Jardine Strategic, our largest holding in the portfolio yesterday announced its 2009 full-year results. No surprises in terms of profit, as the major subsidiaries have all reported earlier. With about 621 million shares outstanding (after adjusting for crossholdings in Jardine Matheson), total reported shareholder equity of US11,743 million means NAV per share is US$18.91, which means that the stock is currently trading at a discount to book. Reported NAV based on market value of underlying holdings is much higher, at US$32.64, almost twice the last traded price. We continue to view Jardine Strategic Holdings as a cheaper alternative to get exposure to a great pool of businesses, rather than to purchase the individual companies.

What is interesting from the latest announcement is that Jardine Strategic is looking to buy back shares to reduce capital. The company is looking to spend up to US$250 million to repurchase 13.9 million shares in a buyback tender offer, pricing each share between US$18 and US$19. While this seems a paltry amount compared to outstanding shares of 1,107,130,421 (last reported), it must be noted that about 81% of the company's shares are locked up in Jardine Matheson, which will not be tendering any shares. This leaves about 210 million shares left to participate in the offer. Assuming all holders participate and a pro-rata offer results, this will result in a 6.6% decrease in free-float, leaving free-float at about 18%. This could have some negative implications on the weighting of the stock in the STI, and other major market indices which consider free-float as a key criteria. While the offer price appears tempting, it is unlikely that we will be able to sell our entire holding of 500 shares in the indicative US$18-19 range, and given that NAV is about US$18.91 a share, we will choose to keep our entire holding in the company, and benefit from the reduction in the number of outstanding shares.

New holding - Hotung Investment Holdings

2010-03-05T17:59:00.002+08:00

Bought 15,000 shares of Hotung Investment Holdings at the market close on a matching trade at US$0.11 (we were looking to buy 20,000 shares). The company is a market leader in venture capital based in Taiwan, but is curiously listed on the Singapore Exchange, where it receives little investor interest. The company recently reported earnings, which have recovered from 2008 where write-downs were aplenty. More importantly, the company trades at just half of book value, which makes it rather interesting.

Sold JNJ for WBL

2010-03-03T22:00:00.001+08:00

We sold our holdings in Johnson & Johnson (50 shares at $63.40) and purchased another lot of WBL (at $5.05), given our strong conviction on the latter. JNJ probably offers an excellent play on three areas of the healthcare sector - Pharmaceuticals, medical devices and consumer care, but the stock is more fairly valued (at a mid-teen PE and is unlikely to double anytime soon!). Also, the healthy dividend paid each quarter is not extremely attractive to us, especially after being net of tax (30%) and administration fees. We continue to retain some exposure to JNJ via our holding in Buffett's Berkshire Hathaway.

Portfolio flat in February

2010-03-01T23:34:00.002+08:00

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD

NOBLE GRP 10.1%

TAT HONG W130802 9.1%

BERKSHIRE HATH-B 4.8%

CAPITAMALL 4.7%

FRASER AND NEAVE 2.4%

KEPPELCORP 0.5%

SPH 0.3%

JOHNSON & JOHNSON 0.2%

BEST WORLD 0.0%

WBL Corp -0.2%

STI ETF -0.4%

ASCENDAS I-TRUST -0.5%

GUOCOLEISURE -1.6%

Capitaland -2.1%

JARDINE STRATEGIC -3.1%

CAMBRIDGE -3.3%

SGX -3.5%

WELLS FARGO -3.9%

TAT HONG -8.6%

Sold off CMA

2010-02-26T17:32:00.002+08:00

Sold off the remaining lot of CMA at $2.24

Why WBL Corp

2010-02-25T23:22:00.001+08:00

BACKGROUND INFORMATION FROM SGXThe Company was incorporated in 1912, under the name CFF Wearne & Co as a public company. However, it traces its history to a family automotive business in the early 1900s.
WBL Corporation Ltd (“Wearnes”) is a dynamic international group with key activities in Technology Manufacturing, Automotive Distribution and Technology Solutions. Management continues to focus on building the Group’s operational and technical expertise to keep Wearnes in the forefront with the leaders in these areas and to build and sustain shareholder value. Today, Wearnes is ranked among the top 75 companies by market capitalisation on the SGX-ST and has revenues of some S$2 billion with operations in over 10 countries.

While the company's main revenue (and profit) drivers are from technology, the company's substantial landbank in China is of keen interest to us. WBL Corp also has various property assets in Singapore, Malaysia and a sand mine in Australia, all of which have potential for future property development. The company generally trades with low liquidity and suffers from a lack of broker coverage, and thus has a higher potential of being an undervalued stock. Is that really the case? Let's examine the company's underlying assets to find out more:

Outstanding Shares
The company issued $158,427,479 worth of convertible bonds back in April 2009 (at $1 par, convertible at $2.29). As of 31 Dec 2009, there remain 37,117,474 shares to be issued to satisfy the convertible issue, which means that there are 281,924,862 fully diluted shares outstanding (including unissued ESOS). This brings market cap to a manageable $1.4 billion (at today's close).

Brief valuation overview
Last reported NAV per share: $3.34 (price-to-book 1.5X)
Fully diluted NAV per share: $2.89 (price-to-book 1.74X)

Of course, NAV is not a good reflection of WBL's underlying value, considering the many assets (including the huge undeveloped landbank) which are carried at book value. However, based on book value alone, valuations are already not demanding.

Chinese property assets
The company's FY2009 (end Sep 2009) annual report lists the various development properties and undeveloped landbank in five cities in China - Shenyang, Chengdu, Chongqing, Suzhou and Shanghai. To be conservative, we have simply assumed that all WBL's development properties in China are undeveloped land, and have looked at recently transacted land prices as a gauge of valuation.

	Land Area (sqm)	Estimated Price per sqm (RMB)	Estimated Valuation (in RMB)
Shenyang, China	134,432	3000	403,297,200
Chengdu, China	325,864	4000	1,303,456,000
Chongqing, China	51,660	1300	67,157,740
Suzhou, China	133,502	1300	173,552,197
Shanghai, China	213,869	7000	1,497,081,600
Total			3,444,544,737

According to our estimates, the Chinese property assets are worth at least RMB 3.4 billion, or about $706 million. Assuming the stake in Ampwalk (KL) is worth RM550psf, the 2,451 sqm of commercial property adds another $6 million to "development properties" for a total of $712 million. These assets are carried at $258.5 million on the balance sheet (as at 30 Sep 2009).

Listed Equities
WBL Corp owns substantial stakes in three listed companies - Singapore-listed MFS Technology (77%), Nasdaq-listed Multi-Fineline Electronix Inc (58%), and Singapore-listed United Engineers (about 9.2%, classified as available-for-sale non-current financial assets on the balance sheet). As at 25 February 2010, these stakes were collectively worth $614.9 million (based on market value).

Listed Equity investments (as at 25 Feb 2010)
MFS Tech	$113,653,800.00
MULTI-FINELINE ELECTRONIX INC.,	$457,369,208
United Engineers	$43,858,240
	$614,881,248.23

Debt position
Looking at the balance sheet on 31 Dec 2009, WBL's cash and receivables exceed total liabilities by about $75 million.

Other unlisted entities

This consists of all the other major businesses - automotive, construction, the Australian sand mining operations etc. Most of these businesses are profitable but we are not going to attribute any value to them first.

Stock appears undervalued

Based on the market values of the three listed entities and our conservative estimates for the Chinese development properties (including the Ampwalk property in KL), and factoring in net cash of $75 million, we arrive at $1.4 billion, which indicates that we are getting all other businesses (the unlisted entities) for free. Notwithstanding this, the Chinese assets have been valued conservatively (as if they were raw undeveloped land, at slightly lower than market prices), so we are getting the future development potential of the land for free as well. Throw in the long history of the company with a good track record of corporate governance, and we are getting exposure to the lucrative Chinese property market via the guise of an under-researched technology company.

A target price is difficult to derive, but assuming an RNAV of $1.1 billion for the development properties, and another $400 million for the unlisted businesses (according to Kim Eng's estimates), coupled with the $615 million listed equities, we can derive a $7.47 RNAV for WBL Corp.

New Holding - WBL Corp

2010-02-23T23:22:00.000+08:00

Bought 1 lot of WBL Corp at $5.06
Will post more information on the company soon.

February Sharebuilder additions

2010-02-19T16:02:00.000+08:00

Added the following via the POEMS sharebuilder:

Date Security Name Qty Price($) Investment Amt ($)

18/02/2010 FRASER & NEAVE 24 4.12000 98.88

18/02/2010 KEPPELCORP 17 8.39000 142.63

18/02/2010 SPH 64 3.75000 240.00

18/02/2010 STI ETF 35 2.83000 99.05

Portfolio down 2.2% in January; commodity price impact on Noble's earnings

2010-02-08T21:42:00.001+08:00

Equities generally had a rather poor January, leading to a 2.2% decline in the portfolio for the month. Assuming the portfolio started 2010 at $1.000, each unit ended the month at $0.979. Still, this was significantly better than the 6% decline in the Straits Times Index, or the MSCI World's 4.3% decline.

BERKSHIRE HATH-B	+16.5%
WELLS FARGO	+5.5%
SPH	+3.5%
CAMBRIDGE	+2.2%
KEPPELCORP	+1.7%

CAPITAMALL	-6.1%
TAT HONG	-6.2%
GUOCOLEISURE	-7.9%
CAPITAMALLS ASIA	-8.7%
NOBLE GRP	-11.4%

Berkshire Hathaway was the outstanding performer, jumping 16.5% as investors piled into the stock in anticipation of its addition into the S&P 500 (replacing Burlington Northern). Wells Fargo turned in a respectable performance (+5.5%) while SPH also gained on better-than-expected profits.

Noble Group was the worst performer, falling 11.4% as commodity prices wavered. Noble's dependence on commodity prices is often overestimated by most investors, who choose to lump the company together with other commodity producers who suffer a large hit to earnings when commodity prices decline. Noble's business model involves hedging inventory as it is passed along the supply chain, which involves little exposure to commodity prices.

Noble's earnings hardly fluttered as commodity prices went from boom to bust in the 2008-2009 crisis, indicating a relatively low dependence on an appreciation in commodity prices. High prices require Noble to post more collateral to hedge, a drain on cash resources, which means that Noble would prefer lower, or at least less volatile commodity prices.

Despite the sharp declines, the stock is not terribly cheap as the market attempts to factor in strong future earnings growth (Richard Elman has been quoted as targeting US$1 billion in profit sometime over the next few years). The company has excellent management and is extremely focused on shareholder value, which has resulted in the stock being the best performer on the STI in 2009. As one of the few companies in the STI with truly strong earnings growth potential, we will want to accumulate more Noble shares, but will wait patiently for a better entry level to add to our existing position.

Added more F&N

2010-02-08T17:26:00.000+08:00

Purchased a further 150 shares of F&N at $3.80

On Capitaland's selldown, and keeping some powder dry

2010-01-27T19:57:00.009+08:00

The Singapore market continued its descent today, a sixth straight day of decline. The STI closed 27 January 2010 at 2706.26, 6.6% below the closing level of 2009. The purchase of Capitaland on 25 Jan now looks like a "silly" buy, the stock closing today at $3.74, some 7.4% lower than our recent buy price.

Capitaland hit a recent peak of $4.38 on 20 Jan, after announcing the acquisition of Orient Overseas' Chinese property assets. Sell side analysts were in a rush to upgrade the stock, citing the transaction as "accretive to RNAV". Of course, the People's Bank of China's hawkish approach to lending subsequently led to a 360-degree reversal in sentiment on Chinese property stocks, leading to a sell down in Capitaland and other property companies with exposure to Chinese real estate.

As mentioned briefly in our prior post, we like Capitaland for its strong management and good track record of execution. Its ability to spin-off assets to the wide range of trusts and privately-held property funds under management is also a major selling point. The "premature" tightening activity by the Chinese central bank should be seen as a positive move to allow for more sustained growth in the years to come, rather than to have the economy grow too fast in the short term. After all, we are looking to hold our position in Capitaland for many years to come, to benefit from the Chinese growth story. So in a twisted sort of way, early measures by the Chinese central bank are generally positive in our view, but the resulting correction in markets presents a short-term opportunity.

Today we sold one non-core holding, Micro-Mechanics (7,000 shares, $0.40) and two lots of CapitaMallsAsia ($2.28). While Micro-Mechanics possesses a uniquely shareholder-friendly management, we think that it would be good to keep some powder dry in the event of a larger-than-expected market correction. Exposure to CapitaMallsAsia was obtained through the recent IPO at $2.12, and while we regretfully failed to take profits at the recent peak of $2.70 (!), the stretched valuations of the stock make it a low-conviction stock in the portfolio. The valuation of the underlying Chinese property funds are difficult to value, and even with recent revaluation done, the stock trades at about 1.3X book. We prefer exposure to the parent Capitaland, and have thus sold two lots to build portfolio cash reseves.

A market correction; bought Capitaland

2010-01-25T18:54:00.005+08:00

Since opening at about 2,932 points on 20 June, the STI has corrected sharply to a low of 2,791 points at today's market open. The market has been impacted by worries of premature tightening activity in China, coupled with poor US market performance last Wednesday, Thursday and Friday, which wiped more than 500 points off the Dow Jones Industrial Average over the three days.

The US market has been hurt by Obama's statements on new regulatory moves to prevent banks from becoming too big to save in the future, as well as a proposed tax (for a decade at least) on the largest financial institutions to fund a potential US$100+ billion TARP shortfall.

Neither the tax nor the proposed restrictions on proprietary trading make much sense, considering that proprietary trading was hardly the reason why the financial crisis precipitated in 2007. A core portfolio holding, Wells Fargo, may be directly affected if new regulations dictate that the bank is too large in mortgage operations (considering that WFC swollowed Wachovia in late 2008, practically doubling its assets). However, given the lack of clarity at the moment, it is difficult to justify selling the stock based on uncertainty alone. As previously mentioned, WFC is easily worth $50 a share.

A market correction (current "threats" pose no obvious harm to the economic recovery) is a shame to waste, and one lot of Capitaland was picked up at $4.04 in early morning trade. Capitaland has a very strong management team, and its track record is almost impeccable. The many avenues for the developer to offload newly developed properties is also a huge (and rather unique) selling point. The recent acquisition of Orient Overseas Developments' Chinese property assets raises its China exposure to about 36%, making the company an excellent play on the Chinese market (without the usual corporate governance issues).

Added more Fraser and Neave

2010-01-22T18:46:00.001+08:00

Picked up another 130 shares of F&N (80 at $4.24, 50 at $4.25) on the unit share market today. Note that stock is still cum-dividend (10.5 cents, ex-dividend on 1 Feb 10).

Wells Fargo worth at least $50!

2010-01-21T19:16:00.008+08:00

Wells Fargo managed to post a small profit of US$0.08 per common share, against expectations of a loss: 4Q 09 earnings were impacted by the repayment of TARP (US$0.47 impact). WFC's results look decent; the bank posted record profit and revenue for 2009, helped by the Wachovia acquisition in 4Q 08.

Buffett was earlier quoted estimating WFC's pre-tax pre-provision profit (PTPP) at US$40 billion a year and the bank has not disappointed, with 2009 PTPP at US$39.7 billion, doubling 2008's US$19.3 billion. WFC took a US$21.7 billion provision for credit losses in 2009, up from US$16 billion in 2008. A quick sensitivity analysis using varying estimates for annual credit losses yields EPS estimates of between US$2.71 and US$4.74, which means the stock still looks a bargain. Credit losses under more normalised conditions could be closer to US$10 billion a year, which would translate to fair value at about US$52, more than 80% upside from current levels.

Quek Leng Chan raises Guocoleisure stake

2010-01-20T20:06:00.000+08:00

Deemed Stake raised from 56.50 % To 65.53 % on 15-01-2010 via purchase through Guoco Group

New holding: Fraser and Neave

2010-01-18T23:07:00.007+08:00

Added 120 shares of Fraser and Neave via the unit share market at $4.52 per share today. F&N's last reported NAV was $4.01 per share, so at about 1.13X price-to-book, the stock is not unreasonably priced. F&N traded at a large premium to NAV in the 2006-2007 market run up, but was priced at a huge discount to book in the 2008-2009 market downturn. At its recent low of $1.86 on 9 March 2009, the stock was trading at approximately 54% discount to NAV.

Of course, the stock has run up considerably, and valuations appear to be much less attractive. Nevertheless, the company is the clear market leader in beverages and beers, at least in South East Asia. The stability of the drinks business is complemented by the more volatile property business, and the two managed REITs offer opportunities for an asset-light approach (similar to Capitaland's). This is a quality company with a long track record, and could be a core holding within the portfolio. A dollar-cost-averaging approach will be taken via the POEMS sharebuilder programme.

Being the 18th of January, buying odd lots under the sharebuilder programme kicked in. Added 51 shares of SPH at $3.79 and 33 shares of STI ETF at an average cost of $2.98645.

QLC the buyer in Guocoleisure married deal?

2010-01-17T22:40:00.001+08:00

A huge block of Guocoleisure shares were traded at 61 cents in a married deal just after lunch last Friday. The seller is likely Third Avenue Fund Management, which looks to have dumped its significant stake in the company at a substantial loss (shares were acquired at about $1.20 a few years back).

What is more interesting is the identity of the buyer, who may be Quek Leng Chan, the Malaysian billionaire who controls the Hong Leong Group. QLC is already the largest shareholder and previously attempted to privatise the company through Guoco Group at $1.25. Could another privatisation offer be in the works?

Hopefully not, as any offer at this stage would likely be closer to the recent trading range of 70-plus cents rather than the $1-plus figure most minority shareholders are hoping for.

With the company's shares still at a significant discount to book value, the shares remain an attractive investment. In particular, the Bass Strait Royalty is a gem of an investment, returning solid profit year after year and requiring no capital injections or operating costs. With oil prices remaining elevated, the royalty is expected to produce a significant contribution to overall profit in the years to come.

SAIZEN W120602 sold

2010-01-11T18:52:00.001+08:00

Sold SAIZEN W120602 warrants today (12,000 at $0.085, 8,000 at $0.08), taking a small profit. The value of the warrants were just 1.5% of the overall portfolio. We are looking to boost the cash position through the sale of non-core holdings, which will be useful ammunition in the event of a market correction (which is long overdue).

Initial Portfolio Holdings

2010-01-01T15:59:00.001+08:00

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.