Correction continues, adding more

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.

Should Genting Singapore be worth more than Capitaland?

Market Capitalisation in SGD billions

Capitaland - Sprouting more branches with CapitaMalls Malaysia Trust

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.  

Liew Mun Leong eats his own cooking

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.

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

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)]

Strong rebound in March 2010

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.

Is the next bubble in Chinese real estate?

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.

Portfolio flat in February

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%

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

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.

On Capitaland's selldown, and keeping some powder dry

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

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).

New holding: Fraser and Neave

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.

Initial Portfolio Holdings

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