Aug 2010 sharebuilder additions

18 Aug 2010

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

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.

Sharebuilder additions for March 2010

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

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%

February Sharebuilder additions

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

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

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

Added more Fraser and Neave

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).

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.