Monday, June 29, 2015

Checklist for buying stocks - IMPORTANT!

Just finished reading "Education of a Value Investor" by Guy Spier. A short and informative narrative by a value investor about his own journey. I found it really useful and would like to incorporate a few key lessons from what I have read. We all know the importance of checklists, pilots and surgeons use them, so should investors. Charlie Munger had said it years ago that all prudent investors should have one and Guy got the idea from Charlie.

Guy went one step further by saying that the checklist should be used as a final step to just make sure that we don't get screwed by our brains telling us all sorts of stuff. You see, our brains have this ability to rationalize everything and convince ourselves to do all the things that we desire and not to do the things that we do not want to do. Like when we are due for our weekly jog this afternoon, the brain will start telling us, "It's too hot, there's haze coming, or oh just take a break this week, you worked too hard... etc". So similarly, when we are all excited to buy a stock, the brain will overlook all the impt warning signs and say, "Yeah, it's a great buy, don't worry about the balance sheet, or the parent company will buy it out if it falls, or the competitors are too weak to matter... etc". Don't fall for all that Jedi mind tricks that we play to ourselves. Use a checklist. Here's mine in no particular order. It's still a work in progress but I guess it's important to start somewhere.

1. Look at the balance sheet and Net Debt to EBITDA or cashflow, does it look prudent enough? Usually Net Debt to EBITDA should not be more than 4x.


2. Does it have sustainable ROE over the last few years? Should be a double digit number or at least high single digit if it has a lot of cash on its balance sheet.

3. What is the track record of its management. How much did they pay themselves? Did they screw minority shareholders?

4. What is the nature of the business, is it a cut-throat dog-eat-dog business? What is their moat? How many players in the industry? What is the combined share of the largest players?

5. How many times have the company raised capital?

6. Who are the other shareholders? Are there a lot of insiders?

7. Free cashflow (FCF) track record: does it have a consistent and even better, rising FCF over time?

8. Finally valuations, valuations, valuations. Is it below PE of 20x and EV/EBITDA of 14x. How about it's free cashflow yield. Can it return 3x over 10 years?

As mentioned, this is a starting list and although it could work for me, your checklist should be different. It's more as a reference to be shared here and over time we should keep revising our checklists. 

In the book, the author also mentioned that we are all slaves to our unique brain wirings and it is very difficult to overcome some of these innate idiosyncrasies. So we need to change our physical and social environment to help us. For him, he moved from New York to Zurich to get away from what he called the "Wall Street Vortex" that sucked him into lots of unhealthy behaviours like following too closely to short-term newsflow and comparing egos with the who's who in Big Apple. Also, for our social environment, it is well-known that people who are overweight have more friends who are overweight as well. Sadly, it's the environment that would change us, not the other way round. 

We need to tip everything to our favour which means we need to change our physical environment to ensure that it is compatible with our wirings. This would be making our home and work environment really conducive. I think for me one simple and yet important aspect is really just to reduce clutter. Keep our workplace simple and effective, stop buying unnecessary stuff and work with minimal tools and gadgets. Reducing clutter is the real boost to efficiency.

We also need to improve our social environment. Stop wasting time with people who don't value add. We have to keep the best friends that have given us the best advice over time, friends who are willing to share, non-pretentious, people whom we are 100% comfortable hanging out with. This could be the single most important change we make at the current stage of our lives. It takes years to build good and strong relationships and the window is closing for those of us reaching the midway in life. Once we surround ourselves with the best people we cannot help but improve! 

To conclude, I would like to share this old adage that comes to mind, "Make new friends but keep the old, one is silver but the other is gold." Make sure we have a lot more of these friends with the highest caliber!


Thursday, June 25, 2015

Jardine C&C Rights Issue!

Jardine Cycle and Carriage (JCNC) announced a surprised SGD billion dollar rights issue a week ago. Well given how the stock has declined a month before, I guess it wasn't a surprise to some insiders. Now that the cat is out of the bag, it's time to do a quick and dirty analysis on this blue blue chip. 

For the un-initiated, JCNC is probably most well-known in Singapore as the distributor for Mercedes-Benz and making tons of money on that franchise but in reality, the Singapore business contributes at most 10% to profits and the bulk of the business actually comes from Indonesia. JCNC's subsidiary Astra is the largest automobile and motorcycle distributor in the ASEAN's largest country and earning very, very good profits. Astra itself is also a conglomerate and owns a bunch of other businesses including plantations and construction machinery (as a distributor for Komatsu). So well, Cycle and Carriage is but a small piece of the puzzle.


Jardine Cycle and Carriage is itself c.75% owned by its parent which is locked in a cross shareholding structure to ensure that they would never be taken over. Jardine Strategic (JS) owns the chunk in JCNC and its counterpart Jardine Matheson (JM) owns Strategic and other stuff while JS also owns JM. Yes... mega-convolution. The Jardine group has a long and convoluted history which we shall discuss in a minute. In a nutshell, it is a conglomerate owning another conglomerate while owned by another conglomerate.

Why so complicated? Well, that's because Jardine is a dynasty and as we know from Chinese drama series about the imperial dynasties, things are more than complicated when we have huge families, multiple wives and concubines. It's already complicated with just one wife... so tell me what happens when there are five ;) ? Besides that, Jardine was actually active during the Qing Dynasty, most infamous for their role as opium traders. This fact alone, causes much controversy to this day which is perhaps attributed to why the families have kept themselves very private and the listed companies are also more than secretive despite their status as public companies.

Nevertheless, Jardine companies have been known as good companies with competent business managers and so investors had turned a blind eye to its lack of disclosure and secrecy over the years. Jardine Cycle and Carriage has generated tremendous value to shareholders in the last five to ten year, thanks to the wonderful business franchise it has in Indonesia.

Jardine's compounding capability


Jardine's business in Indonesia is run by its subsidiary Astra. This is one of the strongest franchise in this part of the world and has helped Astra grow strongly so much so that it is now usually regarded as a proxy for Indonesia. So when global investors are positive about Indon, rather than buying some Indon ETF, they would actually buy Astra. 

Now what's so great about Astra's business? Well, essentially it is the de-facto vehicle distributor in the country with c.50% market share in both cars and motorcycles. It markets for Toyota and Honda and dominates the market. Even better, it also does the financing when consumers buy their vehicles and it also operates the service and maintenance for the vehicles it sells. These are high margin businesses with strong cashflow generation. With this core business it has since branched into insurance, manufacturing, construction, property amongst others although auto distribution remains very important. From its subsidiaries, JCNC has been able to deliver USD 1bn in free cashflow (FCF) annually in recent years.

Finally, let's discuss its rights issue. Why did this great firm, doing great, come to ask for money out the blue? The official reasons were that its debt level of c.USD 4 billion was too high and given that it also spent close to another billion to buy a stake in Siam City Cement, it wanted to beef up its balance sheet. Also given that the parent owns 75% of the firm and has essentially underwritten the whole deal, it stands to benefit from any other shareholders not subscribing and further increase its stake.

The rights would be issued at $26, a 26% discount to its current price so it would be imperative for any existing shareholders to subscribe (esp with the Great Singapore Sale coming to an end, 26% discount is BIG DEAL!). The question is then should new investors buy at this juncture? Well... given that it has fallen quite a bit and FCF actually hits 10% now and if we buy, we get more rights at $26, it seemed like a no brainer to buy now. 

On this note, I would also like to highlight 10% FCF yield is quite a nice rule of thumb to make good money. This is provided that the FCF is sustainable and needless to say the company is a going concern with solid management and a good business franchise. There are usually "10% FCF yield stocks" that screens can throw out but if they are not sustainable then it's meaningless. Once in a rare while you see a great franchise giving 10% FCF. Today it looks like it's JCNC.

Now why is 10% so special? Essentially it means that the co. need not grow, it can just stay status quo for 10 years and we are still good. Say if you give me $100 today and I will give you $10 a year indefinitely. At any time, you can also sell it to someone else and get back your principal of $100. That's a pretty good deal isn't it? Over the course of my investing career, I have found that when a reasonably okay company reaches 10% FCF, usually there's easy money to be made.

What about risks? Of course there are risks, every investment has risks and the call is whether the risk reward is asymmetrical. The first risk for Jardine is obviously the investment that it is making. Siam City Cement is a brand new business in Thailand where the group has not much of track record. It remains unclear why they made the investment. Also as a conglomerate simply owning stakes, its cashflow is limited to the dividends that its subsidiaries pay. Hence the need for capital raising from time to time. The stock has also suffered as a result of the woes of Indonesia and the rupiah weakness but I believe this one is pretty well-known and should be factored in today's stock price.

But having said all that, at 10% FCF yield, JCNC is very palatable and is likely to continue to grow out of these short term issues over 5 to 10 years. Taking a short term view now means only seeing the doom and gloom but in a decade, this would probably look like one of the rare times to be able to buy this strong franchise cheap! 

Saturday, May 30, 2015

China A shares: Mistake turned Multi-Bagger

A long time ago, in blog posts far away, we discussed the merits and demerits of ETFs. It was around the earlier posts that time (2009 and 2010) that I bought into the China A share ETF thinking that buying into the country that would conquer the 21st Century made sense. As it turned out, it didn't. The only ETF that one should buy is the S&P 500. ETFs, by and large, did not help investors make money. Investing is just such a game. What looked so right doesn't turn out right after all.

Buying China seemed so right!

Today's story is about how a mistake turned out into a multi-bagger and what are the lessons that we could learn. I must say, this is first and foremost a mistake. It was luck that turned it into a multi-bagger. The whole process was painful despite making money and if I were able to re-make some decisions, I would do things differently. Now, looking back, there were good lessons learnt. It's really through mistakes that we learnt most. So sometimes, we really should thank bad happenings and results and also our adversaries for showing us our weaknesses. To sum it up nicely, I think the three lessons would be:

1. Understand the downside well
2. Long term holding power
3. Move in incremental steps wisely

At the time of buying China A shares around 2009-2010, it was supposedly a high confidence bet. The Global Financial Crisis hit all markets bad, China was down 50-60% from its peak, it was really looking cheap. The investment thesis was that China would continue to grow to become the world's largest economy in time, surpassing the US. It was hard to pick Chinese stocks well, so why not just buy the whole Chinese market. China A shares was trading at low teens PE, really not expensive. Although financials dominated the index but that was normal for most emerging markets so things should be ok. 

What was the downside? Well it was the implosion of all these Chinese banks that made up half of the index. So if these halved, maybe maximum impact to the ETF could be 20-25%? And if that happened, maybe it was time to add more! As it turned out, the banks didn't implode but the whole market just continue to languish. It went from low teens to single digit PE, earnings didn't improve, so the ETF did go down 20-25% and this blogger added more not understanding it was a mistake. There's a term for this, and it's well depicted in the following pic. Haha.

It's called catching a falling knife...

Fortunately, that assumption of maximum downside for China's A shares didn't turn out to be too wrong, the market just did nothing for many, many years which was bad enough as it meant 0% return. But to try to gauge the downside is always important. In good companies with some business moats, usually the downside could be 20-30%. If that happens, the right decision is to buy more. In some cases, the downside is 50%, then one would need to know what is the blue sky scenario, ie what's the maximum upside so as to justify risking losing 50% of capital. In others, the downside could be 100%, losing everything. This is like buying dot.com co.s or small firms with no moat. There is no recovery no matter how long term we are. 

This brings us to the second saving grace which was having long term holding power. So while the A shares did nothing for many years, I wasn't compelled to sell. It was locking up some capital which could have been put to better use but by keeping it to a certain percentage of the portfolio, it was also bearable. What would have been unbearable would be using leverage or making it too big a bet. These are the technical aspects that could have easily changed everything. So always use cash and size our bets wisely. More on this later.

After waiting for half a decade, things suddenly changed in a few months. The catalyst was the Hong Kong Shanghai stock connect. Investors suddenly realized that A shares were "too cheap". If they were connected via Hong Kong, there would be lots of demand for these from global investors. So the whole market started rallying. Meanwhile, domestic Chinese investors saw the wave coming and they didn't want to miss out! Aunties, students, retirees, workers, dogs, cats and their offsprings all started opening brokerage accounts to buy stocks. A shares went from 2,000 points to 5,000 points! For me, it was a mistake turning into a multi-bagger! Woo-hoo!

Snapshot of the ETF's factsheet in May 2015

Lady luck smiled at me more than anything else. It wasn't skill or patience. Although if we calculate the return over 5 years, it would be just 5-9%pa or so. No big deal. I am just glad I got bailed out. I sold the bulk of my ETF while leaving some to participate if there's any more craziness. This is #3: move in incremental steps wisely. Remember that the markets and the future is not predictable. So rather than moving in big steps, thinking that what we decided will pan out as we expect, it is always advisable to move incrementally. Have more than two bullets for each target, we are shooting targets we don't know which way they will move! 

For almost every purchase, it is always prudent to start buying just 1/3 of a full position. If it falls, that we could add. If it runs, then it's just too bad but at least we have 1/3. It is also advisable to phase our buys over time periods like every 6 or 12 months. Market are unpredictable, so never think that we are so damn correct and will be proven right and never put our eggs into one basket. This works for selling as well.

So for the A shares, when it started moving and I was up 50%, I sold 1/3. It then went on to move up another 20% or so and I sold another 1/3. After selling the second tranche, I was left with almost pure profits so A shares could fall to zero, I would still have made money and if it continues to go crazy, I could still participate in further upside. Moving incrementally is one of the most important moves in investing but rarely discussed.

Of course, it doesn't help to cut it too finely or double down unto mistakes. Again, this is an art and it is really hard to come up with specific rules that could work universally. This A share saga was a rare case of a mistake making money. In general, we would be counting on mistakes to help us refine our investment process while hopefully not paying up too much tuition fees to learn basic lessons like understanding the downside well, taking the long term approach and moving incrementally.

A happy Vesak Day long weekend to all Buddhists out there!

Sunday, May 10, 2015

2015 High Dividend Stocks in Singapore and Global! (Part 2)

2015 High Dividend Stocks (39-57)

The third part of this year's list produced a few interesting names. Let's look at the global firms. These are household names that are likely suitable candidates for long term portfolios: Pearson, General Electric, Caterpillar, Siemens, Coach, Kimberly Clark etc. All strong companies with proven track record now looking reasonably priced at 3-3.7% dividend yields, mostly with double digit ROEs and PE in teens. Sounds too good to be true? In most cases, things probably are so. Do dig deeper and figure things out. We have to work hard to make money!

Say Caterpillar, it has significant exposure to global mining which is in a huge decline after China slowed and all the commodities got hit by slow demand, over capacity and low prices. Iron ore fell from $100 to $40 and copper also suffered a 30-40% decline from its peak. Even oil is not spared. Who could have predicted that oil would crashed to $50 in 2014? 

This is actually a very important point in investing which is worth highlight here again. Prediction is futile. Everyone loves to predict the future. Singapore property prices would be rising into 2015, 2016, 2017, whatever. Japan is dead with aging population and declining workforce. Who needs cars when we have horses. Well, Singapore property prices dropped! Japan's stock market went to a 15 year high with the Nikkei at 20,000 and we no longer see horses today.

The answer to good investing is not to be able to predict but to be able to buy things that are safe and reasonably priced. Once in a while, we see some no-brainers and real bargains but they are quickly snapped up. Bargains also come when things are so bad that no one dares to buy anything. That's the time to come in. Be greedy when others are fearful. 

Amongst the global names, Pearson looks pretty interesting. For the un-initiated, Pearson is the #1 education firm in the world with US$8bn in revenue. It sells both print and digital textbooks and education materials and also administer tests for educators and owns strong brands like Penguin, Longman, Prentice Hall and the Financial Times and The Economist. Don't play play! Pearson generates consistent and strong free cash flow of US$1bn on average over the last decade. It currently trades at a 5-6% free cashflow yield which is pretty cheap for such a great business. 

The stock had been weak with some issues in the US market where analysts opined that iPad and Google will make education materials completely free and kill Pearson left-right-centre. There was also this huge debate about shifting US junior and high school education to a new Common Core standards (something like O Levels?) but then teachers would also be judged by how good they taught. It became a major political issue and Pearson was right in the middle of it. So the stock languished for some time. Of course, we all know educators are one of the most stubborn people to change anything, so personally, I don't think Pearson's franchise is under any serious threat. 

Hence it's really a great time to own this! Imagine you can tell people you own Financial Times! (FYI: I already owner)

Criteria used for 2015

As per the previous years, I have used the same criteria over and over again with just minor tweaks. This year we included the major markets, cut off dividend at 3% yield and cut off average ROE, Free Cashflow (FCF) and EBIT margin as shown in the snapshot above (8%, 5%, 8% respectively for those unable to see the snapshot). With global markets at near highs, the cut offs, as one could tell, are not great nor at bargain levels. Usually FCF yield at 10% would be considered as a great entry point. Sadly, we haven't seen that in many years.

Oh, not forgetting the Singapore stocks, the few names in this pack were also good stuff. Jardine Cycle and Carriage, one of my core holdings and probably ok to buy now. Osim, Singpost and Wing Tai are also well-known names. Unfortunately, I have not studied recently. Readers with recent updates do share!

So that's that for this year! Hope to have some good catch! Huat Ah!

Again here are the past lists:

Wednesday, April 08, 2015

2015 High Dividend Stocks in Singapore and Global! (Part 1)

It's time for the annual dividend stock list! For this year, we have included the global major markets in the universe to spice things up a little. We already know all the good Singapore names: SIA Engineering, CSE, M1. The value add and effort of using this screen to find another good gem in Singapore really doesn't pay off as well after years screening and more years of research. So we cast a wider net and look at global names. Now, the world is our oyster!

2015 High Dividend Stocks (1-19)

First let's look at the Singapore names again. There will always been some obscure names. The diligent ones who have the bandwidth can really go study each and every one. For this list, we see UMS, TIH etc. Frankly I have not the slightest idea what they do. It could be very interesting, so readers here if you find out, do report back! For this set of names (more to come, this screen has a total of over 60 names), sadly, there is nothing new for me. The names that we know well have been studied and discussed. SIA Engineering remains one of the top favourites. The stock fell 15% in the last 12 months, yield is now 5% but it is also still not cheap at 20x PE. This reflects the high quality of the firm. The concern last year was that it was losing business as airplanes are now better equipped with efficient engines, requiring less maintenance. There was also some impact with Ebola and the tragic crashes of various airlines and firm specific issues of losing some orders. But the long term outlook remains intact. More LCCs, more airplanes flying, hence more maintenance. Singapore will see T4 and then T5. We are not slowing down. So just keep buying if it corrects and collect the 5% dividend  along the way. 

2015 High Dividend Stocks (20-38)

The next batch of names look more interesting. Again we know the Singapore ones all too well. SATS, SPH, Singtel, Starhub. My top pick would be SATS, with the similar angle that they would benefit with the opening of T4 and T5. Their Japan business could also turn around finally now that inbound tourism to Japan is becoming a big thing! Singtel is the stalwark, slow and steady but it charged 20% in the last 12 months and now hit $4.3. I would wait for it to correct back to $3 plus to add more. I have held this stock since it was $1 plus and collected a decade of dividends. That would be the kind of investing I advocate for all the readers here.

The two interesting global names here are Garmin and National Oilwell Varco or NOV. I know very little about these two but a first cut definitely looks promising. Garmin is a mapping and technology firm building its brand in wearables, sports related gadgets and GPS related applications. It is a very important niche and one that is not easily replicated. Remember Apple's map follies when it first launched that landed people in the middle of nowhere, out of gas and food? It's no joke. But heard they have improved. Google is the biggest competitor, but Garmin being just focused on maps might help. Anyways, definitely need more work.

NOV is an interesting one. Nobody remembers what it really stood for. Ok, I gave the full name above. But in the industry, it's known as No Other Vendor, as a joke. They are that powerful. As a client, you have no other vendor, it's NOV. You have to use their products to drill oil on land, sea, deep sea, ice etc. It's now interesting as it collapsed with the rest of the oil industry, alongside our Keppel and Sembmarine. So maybe good to do more research.

That's a start for these year's series of dividend posts. More to come! Stay tuned!

Tuesday, March 24, 2015

Tribute to Singapore's Titan: Lee Kuan Yew

To me, Lee Kuan Yew and Goh Keng Swee were the best political duos the world had ever seen. Our two Titans who shared tremendous intellect and common goals started with bold ideals to provide for the people, then went on to build a nation from scratch, from a kampung to a global hub, from third world to first. They are true heros. I wrote with intensity for Dr Goh five years ago. Mr Lee deserves as much respect as our first Prime Minister, as our leader, and indeed, as our founding father. However, so much had already been written about the great man, one would barely have new and differentiated views. So I shall focus on his leadership and his team.

The best endeavours in human achievement often see enduring partnerships between a strategist and/or architect and a visionary leader. Zhuge Liang and Liu Bei, Takeo Fujisawa and Honda Soichiro, Sergey Brin and Larry Page. For all the good fortune of Singaporeans, we had Goh Keng Swee and Lee Kuan Yew. The two best brains that generations had seen, deciding to come together and built a nation with no natural resources nor hinterland, not for personal benefits or personal glory but for the greater good of their people. Let's remember the team behind as well, Fong Swee Suan, Rajaratnam, Toh Chin Chai, Hon Sui Sen and all our other unsung heroes. This is as much a tribute to all honorable men who played their part in building Singapore.

Mr Lee was the force binding this dream team to execute with his charisma, his foresight, his tough attitude and his commitment. Oh, and he was really committed, here's one of my favourite quotes:

Whoever governs Singapore must have that iron in him. Or give it up. This is not a game of cards. This is your life and mine. I’ve spent a whole lifetime building this and as long as I’m in charge, nobody is going to knock it down.

His goals were simple yet monstrous: to provide a roof over everyone's head, to give everyone a job and a livelihood and to provide top notch affordable education to every Singaporean. And he did all that. He succeeded way beyond expectations. Because he really gave everything for Singapore and inspired every Singaporean then to do the same as well. He was also the orator who convinced the people to take the pain when the going got tough, to delay gratification and to work hard for the future. His grit fueled the people to endure, to strengthen themselves and then to soar to greater heights.

My father's generation adored Lee Kuan Yew and his team. They saw the transformation of Singapore. They saw how their environment changed from a laid back village to a metropolis, mostly in astonishment that so much could be achieved in such a short time. They were the beneficiaries of the shelter over their heads and owning homes they could call their own. They were employed in the stable jobs the Government created, earned their livelihoods and saw better education for their kids. Lee Kuan Yew was their idol, their god. Hence they bought all the books, collected all the newspaper cuttings and mourned when Mrs Lee passed on. Mr Lee, do kindly say hi when you see them as you reunite with Mrs Lee. 

Yes, we have come so far because Lee Kuan Yew gave his life to build this nation. It is now our job to continue his legacy and also to pass on his greatness to our future generations. RIP Mr Lee, thank you. Thank you for all that you have done for Singapore. 

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Tuesday, February 24, 2015

CNY Post - Business Moats. Must Read!

Investing is about finding discounts (or margin of safety). The discount is the difference between the intrinsic value of the company, and the current stock price. Intrinsic values of companies do not change daily. Good companies can grow or compound value. Bad firms destroy value. So the trick is to find good companies, and buy them cheap or at a fair price. They only get really cheap during financial crisis. In normal times, like now, we have to look hard. It is not easy but not impossible.

Good companies have what we call business moats or economic moats. They keep building their businesses around certain factors that keep competition at bay. Business moats are not easy to identify to many laypeople. We would usually think that technology is a moat, or innovation or perhaps government support. But these are usually not moats. They can keep competition at bay for a while. But they are not sustainable. Especially government support or policies which can change in a wink.

True business moats that I see time and again are:

1. Brands
2. Scale
3. Eco-system
4. Switching cost
5. Distribution

Technology is usually not a moat because it is usually copied. Some guy invents a new technology, say, the electric vehicle. For 100 years we pump petrol to make cars move. No longer do we need to visit gas stations to fill up our cars for them to run. Then we see 10 other manufacturers making electric cars. Tesla's moat is definitely not that it makes cars that runs on batteries. It's gonna be something else (if they succeed though, they are still burning cash). But that's topic for another day, let's talk about innovation first.

I think innovation comes together with building brands. By itself, innovation is not enough to defend a business. Innovation is also always copied. But if a strong player has a strong brand, by further strengthening it with innovation, then the business moves towards impenetrability. We discussed Colgate and Swatch before. It’s also the same with Kao (in laundry detergent: Attack & Attack Neo), Diageo (Johnnie Walker) and Reckitt (Durex condoms) etc.

Economies of scale is very important, hence investors always look at market share and the industry structure. If the market leader grows to be a certain size, it is very hard for any competitor to replace it. As the largest player, it will also has the lowest cost of production, the biggest spending power, the attraction for talent to join. It is very powerful. When a certain company has over 40-50% market share in certain products, usually its scale is so huge that it's impossible for any competitors to fight them head on.

Eco-system, switching cost and distribution are similar. By building a network that supplement the business, it makes it hard for customers to leave or for competitors to enter. Facebook built an eco-system locking in the world, our friends, families are all on Facebook, we cannot switch easily. Alibaba also has a strong eco-system with its taobao online shopping mall and now all sorts of stuff including a money markets fund and Alipay and taxi apps etc. Honda’s strong distribution and sales network in motorcycles is why it flourishes in the emerging markets. When your bike breaks down, you need the service guy to be round the corner, imagine buying a Korean bike and nobody can service it! Johnnie Walker/Diageo is also sold in over 100 countries, since 100 years ago. We can find those small bottles of Johnnie Walker in a remote village in Vietnam or Africa for that matter. Diageo’s distribution network cannot be easily replicated. In fact Diageo has brand, scale and distribution, which makes its business moat so huge that it's mind boggling!

I do not think the moat list ends here, there will be other moats. It takes time and experience to understand them. Warren Buffett took 50 years. Bros and gals, we are just starting here... As we learn about these business moats, it helps us become better investors and better thinkers. I learnt by reading daily, newspapers, annual reports, books, magazines. This is a hobby that requires you to read a lot. If you like to invest but not reading, something doesn't gel here. Also, screens are killing our eyes, so nowadays actually I would prefer hard copies. Trees or your eyes. Your choice.

But actually, the most important thing in investing is buying with a margin of safety. The 30-40% discount. Even if you have identified the best businesses with the best moats, it will all come to waste if you bought it at a high price. The high price could have factored in years of growth so your return is bound to be miserable. Say a great business can compound at 10% per year. But you bought it at say, 40% over-valuation, it takes 4 years for catch up. So even if you hold it for 5 years, you would only have earned 10% over 5 years. That's 2% per year. That's miserable return, you might as well put in fixed deposit.

To buy at good discounts is not easy. Hence Buffett mentioned that great companies should be bought at fair value. i.e. if the company compounds value at 10%, then just buy at par, no need discount.  Bcos every year it will deliver you 10%. To get it at a good discount, usually it only happens once in a long while, when markets crash big time. Things would look so bad that buying stocks would be the last thing on your mind. At that point, it takes courage to buy when fear grips the whole world, and the stock markets. Hence, "be greedy when others are fearful."

Well it's Chinese New Year or CNY, it's good to be a bit greedy, just a bit and just for these 15 days.  Happy CNY to all! Huat Ah!

Thursday, January 29, 2015

Genting's Management and Financials

Geez 2015 came and the first month is ending! Time and tide really waits for no man. In investing, time helps in compounding, and we just have to keep reminding ourselves that we need to act early and incrementally while we are young. Because, if we don't, before we know it, we are 40, or 50 and the first half is gone and we are into half-time. Need to think quickly how we want to play the second half.

Today, Let's continue our analysis on Genting. We answered the first few questions: what's the investment thesis, is it a good business, is it cheap etc. Next, we focus on the management. Genting Singapore is essentially being run by two savvy executives and supported by strong managers who know the business well. The chairman is from the founding family and his lieutenant helps him run the day to day operations. Meanwhile the board is also made of more independent directors than insiders which is good for governance. Overall Genting's management has shown to be above board and has generated value for shareholders. The only caveat would be its minimal disclosure and its shareholder return policy while that has also improved with the recent share buyback announcement.

Genting's Board

Next questions: does it have Strong Financials and its Geographical and Industry Exposure? Well, Genting is all Singapore and gambling (just a bit of non-gaming entertainment). For financials, we use the cheatsheet that has appeared various times here (below). Numbers in blue are derived from others on the sheet. The first thing to highlight is that the sheet was updated in Sep 14. Well that's with investing, we are so busy with life, so things like updating spreadsheets shouldn't be top priority. Today let's use this one. Most of the time, things don't change that much in 3 months. Investing is a long marathon. People who wants to play it day by day and week by week are missing the point.

Ok, besides the date, one of the other first things worth highlighting would be its strong free cashflow. Genting is estimated to generate S$800m in free cashflow or FCF in the sheet but it is likely to have the ability to do a billion in the future. Casino is bloody good business once the initial capital outlay is done. Gamblers simply keep coming to drop money, and when times are good, they actually don't mind doing it. Genting is suffering now as per the Macau casinos because of the impact of Xi Jin Ping's anti-corruption campaign. But as the Asia middle income continues to grow, wealthy people will also keep spending and they would want to visit Singapore. Hence it should be a matter of time that free cashflow reaches a billion over time.

Genting's cheatsheet

As the stock nosedive with bad news about delays in Japan, Korea and clampdown in China, we can now get Genting at 5.8% free cash flow yield. If it its a billion in free cashflow, we are talking about 7% and if we consider that the S$2 billion of cash needs to come back to shareholders, then we get close to 10% free cashflow! 10% free cashflow is like a super bargain for a multi-billon dollar firm. It doesn't come often. 

Now, one might question, if Genting is generating so much cash, why doesn't it pay more dividend? Well, that should come in time, but again, things move in years in the world of investing, so shareholders would just have to be patient. Genting didn't start out throwing close to a billion dollar cash. It was listed in the early 1990s but only started to have stable positive free cashflow in the last few years. Before Resort World Singapore was opened, it was committed to build it at the doldrums of the financial crisis, burning S$2 billion in 2009. 

So dividend was never discussed then. Now that things have change, investors hoped for a better shareholder return and Genting responded with a share buyback. Part of the reason was also that the capex needed for Korea and Japan would be delayed, so might as well return cash to shareholders and generate some goodwill. That could be the start of better dividend and shareholder return.

Ok. We discussed all the good news, what about the bad news? 

The key risk is Genting's working capital. In the cheatsheet, it is shown as WC of S$4.7 billion. Somewhere in the right column there is also Accounts Receivables at S$1.5 billion .These are huge no.s considering that Net Profit and free cashflow are still just S$800-900 million. This also relates to Genting's strategy of growing its VIP clientele. 

VIP gamblers don't bring cash to play. They play on credit and Genting has to provide that credit. Some of these clients come from god-knows-where and they disappear after playing. So these are the account receivables on Genting's balance sheet. Some of these monies would likely not come back. So there is this huge risk of impairment in the quantum of S$500-1,000 million! This would be a big hit to its balance sheet with just S$9 billion in equity.

Well the mitigating factor is that Genting has clarified that things are under control and they have provisioned for 1/3 of the amount. Also the market has known this for quite a while so this negative is probably largely factored in.

Genting's franchise

So that's really the short and sweet analysis on Genting, the stock is at a multi-year low, there is the slowdown in gambling and the looming account receivables, but we should continue to see stable growth as the mass affluent from ASEAN and China continue to flock to Sentosa. Not forgetting that Universal Studios still have a lot of room to grow and it is opening its own brand hotel in Jurong later this year which will contribute to near term growth.

As the picture above shows, Genting's transformation to a world class resort would continue. By leverage on the brand name of Universal, Sentosa and Singapore, it would grow and generate even more cash going forward. To be able to get it at 7% free cashflow should look like a bargain years from now. 

This is one stock that probably won't affect our sleep at night.

The first post on Genting.