Sunday, 18 August 2019

Should Retail Investors Continue To Invest In This Uncertain Macro-Economic Environment? Or Time For Exit and Wait Strategy?

Should retail investors continue to invest in this uncertain macro-economic environment? Or time for exit and wait strategy? During my last post, I have briefly mentioned that there are some groups of investor who have sold off most if not all their REIT portfolio as they believed that REITs are overvalued and have rallied too much against their fundamentals. Also, such groups believe that economic recession is imminent and have switched to bonds and gold. On the other hand, I have another group of obstinate friends who believed in the buy and hold forever camp who asked me why I started selling off my Mapletree Industrial REIT and Starhill Global a few weeks back. Long term always beat timing the market is the core belief of this group of folks.

1. State of the current marco economic situation
I think that the first question to ask is which part of the economic cycle are we in right now? For those who think that we are still at the peak, you will need to start catching up on the recent news. There is no doubt that we are in the downtrend with Singapore GDP falling. There are also various gloomy re-forecast of future GDP numbers by other countries. We also have various bad news from the big boys such as Deutsche bank and automaker Nissan laying off workers. Donald Trump trade war with China is ongoing. For those who thinks that Donald Trump has blinked and pulled back additional tariffs against China, note that this is only a temporary measure to postpone the event to the end of the year to appease the US electorate. Upcoming Brexit and Hong Kong never ending riots add further uncertainties to the regional economic situation. The inversion on short term and long term bond yield curve also created massive panic. Probability of further sells off are high based on the recent news.

2. Exit now and wait for lowest point of the next upcoming recession?
With regard to selling off everything right now to take advantage of market timing, there is a high risk of missed opportunity cost. Also, I have seen many expert economists and analysts declaring recessions after recessions every year and I have serious doubt over their crystal ball being able to pin-point the exact lowest point of the next upcoming recession. According to the Bloomberg Businessweek, economists are terribly bad at forecasting recession. They also tend to underestimate the magnitude of the slump until one year later before they can give such conclusion. 

3. Continue holding and investing?
For the buy and hold camp, this can filter down to even more sub-groups of strategies. I shall not delve into the details here. The only point I want to add here is make sure one does not get caught in forced liquidation of your stock portfolio during the worst trough of the crisis. If you suddenly need to come up with money for down payment of a new home or renovation, or if one is forced into margin call, then this is the worst nightmare that will destroy the opportunity of upsides when the market recover.

Just to sidetrack a bit, REITs are definitely not super defensive assets. The 2008/2009 Global Financial Crisis period saw a huge plunge in many of their value by more than 50%. Also, among REITs, the level of fluctuation also depends on which class of assets they belong to and also their leverage level.

There is also a misconception that during huge plunge in value of REITs, their dividend yield will also dropped by the same proportion. This is not true. The dividend yield at the lowest point could be in the double digit percentage yield due to the extreme low price. But many investors stayed away due to the high leverage employed by REITs and the fear of REITs going into liquidation if they cannot secure new bank loans. I guess the problem at this point in time is whether retail investors practice what they always advocate as common sense, that is, "buy low and sell high".  The irrational fear of losing one's hard earn money will be very real at that juncture where everyone is afraid that the great recession will worsen and evolve into a great depression similar to the 1930s during the most pessimistic period.

4. Summary
For myself, I have taken a hybrid approach. I sold off around 20% of my previous portfolio-mostly Industrial  REIT, office REIT and also Retail REIT (Starhill Global). My current holdings is now make up mainly of only Retail REITs, Healthcare REIT & stock and also business trust (Netlink). I hope that in the upcoming months, I will have an opportunity to accumulate some DBS, OCBC or UOB blue chips.

Saturday, 10 August 2019

Love And Destiny- 三生三世宸汐缘

No time to blog recently as I was too busy watching and chasing "Love and Destiny". This fantasy drama series was so good that I was totally mesmerised by it. The beautiful backdrop and the tragic story line was just too awesome. This amazing series is being produced by the same production team behind the immensely popular "Eternal Love" series in 2017 starring Yang Mi. "Love and Destiny" is actually a prequel to it and in 2020, the sequel to "Eternal Love" which is in post production phase will be coming to viewers and fans.

The story goes like this: Fifty thousand years ago, Jiu Chen, the God of War and Protector of the 6 realms sacrificed  his life to seal away the powerful Demon Lord who intended to plague the world into chaos and destruction. Jiu Chen's body was then buried in the Sea of Eternal Slumber. Fifty thousand years later, a young fairy, named Ling Xi, accidentally ventured into his heavenly grave and awoke him from his eternal slumber. The mystery of how this young fairy could have brought the God of War back to life is the main story plot. The eternal fight between Good and Evil continues.

3 things I learnt from Love and Destiny that draws parallel to real life and our investment philosophy:

1. Similar to office politics at work, there are Sabo King/Queen out there that hatches schemes to harm others in order to discredit someone or to preserve one's status. If you naively think that all colleagues adore you and do not bother to watch your own back, you may get knifed without even knowing what happened until it is too late. While one should not practise office politics to harm others, one must always be aware of one's own working surroundings in order not to get played out by the Sabo King/Queen.

2. While we sometimes make bad decision or encounter great adversity, we should always look past that into the silver lining in such disastrous moment. What does not kill you only serves to make you stronger. Reflect and make yourself better. No one is perfect. There is no need to feel depress or sad or think that it is the end of the world. Being alive is wonderful in itself.

3. Many people think that they are always right. Just like investment style, there are people who stubbornly believe that the whole world should follow their own investment principle which is the best of the best. Such folks are just unable to see the viewpoints of others. For example, I have recently seen friends and other folks telling me that the recent rally in REITS make this asset class overpriced and have sold off all their REITS while awaiting the "Great Recession" to come and then buy at the bottom after 30% to 50% discount. They are asking me why I only sold off 20% while retaining the bulk of my retail REITS, namely SPH REITS and Frasers Centrepoint Trust.

Strangely, I have another group of obstinate friends who believed in the buy and hold forever camp who asked me why I started selling off my Mapletree industrial REIT and Starhill Global a few weeks back. Long term always beat timing the market is the core belief of this group of folks.

In my next post (after I finish watching Love and Destiny-I am eagerly awaiting the final 10 episodes next week), I want to pen down some of my thoughts regarding the current economic downtrend which has already started. Also, I want to point out that just like "Tao", we should follow the way of the universe in harmony and not just set some very detailed rules to follow blindly. Once you named something, it is no longer "Tao". Will also touch base on the topic of should we sell off our REITS now or should we continue holding on for their dividends? There are just too many totally conflicting viewpoints out there at this juncture. 

Saturday, 27 July 2019

Gutter Politics-Mahathir Still Hanging On And Showtime

I am glad that Mahathir had temporarily stopped bashing Singapore over the raw water pricing issue. But not sure how long the fragile peace will last. Malaysia has stopped the export of sand to Singapore to curb Singapore's land reclamation expansion, in particular, the Tuas Mega Port project. It is of course not in their interest to see Singapore developing well. 

Many have forgotten how vulnerable our tiny Singapore is and have taken things for granted. Singapore does not have natural resources such as oil, tin, copper or large agricultural land. The only thing we have is our stellar reputation for getting things done. That is what attracts foreign MNC to set up base in Singapore. British billionaire James Dyson recently moved his organization HQ to Singapore and have spent close to S$100mil investing in Singapore luxury super-penthouse at Wallich Residences and a freehold bungalow next to the Singapore Botanic Gardens. His Dyson organization would have rented premises and also created jobs for many local Singaporeans due to this move to Singapore.

If our reputation fails, then our property prices and stock investments will all plunge in value rapidly. Destabilizing elements from external foreign threats can be severe in Singapore. The 1964 racial riots in Singapore as a result of Malaysia racial politics spillover which incited hatred among our main races then. Hence I am happy that Mahathir is now busy playing with his fellow politicians over the recent "gutter politics aka sex scandal" saga.

Wednesday, 24 July 2019

Margin Account Opening- Gearing Up For the Storm

Almost a month ago, I went down to Maybank Kim Eng Customer Service Centre at Beach Road (Gateway West) to open a margin trading account. It was a struggle for me as I have given them a wrong CDP account (last digit typo) which leads to some administrative issues with getting the margin account setup. Just when I thought that the worst was over after the administrative hassle over phone calls and emails, I received news that some value-added services will no longer be free and become chargeable from August 1st, 2019 onwards.
Extract from Maybank Kim Eng Website

The main attraction originally was the low financing cost of 3.5% per annum as well as the free dividend handling charges coupled with no maintenance fees. But this has since changed with handling fees also for dividends. When I last checked with the  Customer Service Officer, Maybank Kim Eng may waive off any custodian charges if there is active trading.

Since I figured that the terms have changed to mediocre, there is no longer any incentive to commence trading with Maybank Kim Eng. I called up my usual trading representative in UOB Kay Hian for help with regard to their higher 5% margin financing relative to Maybank Kim Eng and DBS Vickers. I was surprised that her management at UOB Kay Hian is willing to offer a concessionary rate (subject to some additional conditions to manage their credit risk) in view of my long trading history with them. So moral of the story I learned is that you never know if you never ask.

Monday, 22 July 2019

One Pearl Bank Averge Selling Price At 2400psf And Sold 160 Units At Weekend Launch!

One Pearl Bank and its close proximity to 3 MRT lines and other amenities say a lot about its superb location. The two curved towers design of One Pearl Bank is simply grandeur and will no doubt become the new iconic landmark of Outram and Chinatown area in 2023. Capitaland has once again shown why it is one of the top developers in Singapore.

One Pearl Bank has 774 units spread over two magnificent towers and the developer will raise it 21 metres above the ground level to elevate the greenery flow from Pearl’s Hill City Park in order to merge the continuity flow with the iconic building. Lush landscaping of 135,000 shrubs, plants and flowers will be planted throughout the development and a footpath will be built to directly link it to Pearl’s Hill City Park. Also, based on URA’s Masterplan 2019, Pearl’s Hill City Park will be connected to Fort Canning Park through the Singapore River. 

The facilities available are also impressive with 2 swimming pools (main pool and a children’s pool) among the lush landscaping. There is also the standard gym an 24 hours security. Concierge service is also available for residents. This is truly awesome and I am very impressed by the dazzling level of architecture that integrates all elements into this entire development.

Personal thoughts:
How I wish I could grab a unit at this luxurious & iconic development but alas, the price tag is at around S$ 2,400psf on average. Capitaland managed to sell an eye-popping 160 units over the recent weekend launch (considered a magnificent feat relative to the sales figures of other newly launched projects). Out of these, 87% of units sold are one bedroom and two bedroom probably due to the lower price quantum. The 3 bedders and above made up only 13% of sales. So I am not sure whether this points to an overarching weakness in the overall local property market. However, one thing is for certain, even if the price does drop 20% or 30% in the event of a recession, I will still not be able to afford it…haha. I still think that private property prices in Singapore are super expensive. 

People kept comparing Singapore to Hong Kong and some even remarked that Singaporeans are a lot luckier than Hong Kong residents as, at least, our local properties are so much more affordable. Well, I do not really agree, I think that it is crazy that Singaporeans need to work 25 years to 30 years to pay off the mortgage. We are more of a slave to the banks.

So do you think that the launch of One Pearl Bank and its sales of 160 units reflect the beginning of an upbeat property market or the sales will splutter with the emergence of more bad news from the Singapore economy? Will you rush in to buy a unit for investment before all the 1 bedder and 2 bedders sell out?

Saturday, 13 July 2019

3 Reasons Why I Am Not Taking Part in Prime US REIT IPO

The recent talk of the town is the upcoming Prime US REIT IPO. Prime US REIT is a US-based office REIT that offered an attractive yield of 7.6% at the offer price of US$0.88 per unit. The other plus points of Prime REIT are that its office properties are freehold and have long WALE of 5.5 years. The public offering will end on 15 July 2019 (Monday). Despite the many star attributes, I will not be taking part in this office REIT IPO due to 3 main reasons.

1.   The US economy is weakening with the ongoing trade war
James Powell just gave an indication of a possible Federal Reserve interest rate cut in view of weak US economic fundamentals. Global economies are in the doldrums. Singapore is already facing technical recession due to the close association with external export.

Deutsche bank worldwide 18,000 job cuts in investment banking, clearly shows that not all is good in banking these days. The bulk of the axe is believed to be falling on Wall Street (US) and Europe. Such grand-scale layoff closely resembled the loss of banking jobs in the aftermath of the failure of Lehman Brothers during the Global Financial Crisis days in 2008.

The increasing amount of bad economic news is worrying and will definitely dampen investors and consumers sentiment. I prefer to take a wait and see approach on upcoming quarterly/mid-year financial reporting of major companies first. There is no need to rush in to grab any IPO as if they are selling hotcakes at this juncture.

2.    Long WALE of 5.5 years does not mean that the profits of Prime US REIT will not drop.
The theoretical point here is that the WALE of 5.5 years is an “average”. If the recession kicks off next year and drag for another 1 to 2 years, chances are some of the tenancy of units in the portfolio will be expiring. Given the possible bad state of the economy and lack of business activities in the event of such a pessimistic scenario, most of such tenants will either be reducing their office sizes or closing down offices. Any successful rental reversion will also most likely be negative for the landlord.

3.   Prime US REIT is denominated in USD- Forex exposure for Singapore investors
Forex is always a double-edged sword. If you believe that the US economy and widening annual deficit will lead to an eventual weakening or even possible collapse of the USD, best to stay away. However, if one believes US economy is ever innovating and have sufficient resources such as shale oil to fund the deficit and recover, then it should appreciate steadily.

I actually like Prime US REIT a lot for its many good attributes as well as good geographical diversification for my investment portfolio. However, in view of all the bad news emerging in the global economies as well as locally, I thought I will give this interesting IPO a miss for now and see whether there are better opportunities opening up in Q3 2019.     

Monday, 8 July 2019

Will SingMedical Group Opt For Privatisation By Following The Footstep Of Thomson Medical Centre And Health Management International?

In order to unlock the undervalued business of SingMedical Group (“SMG”) which I mentioned briefly in my post on 9 June 2019, I have suggested the possible option of privatization using the example of Thomson Medical Centre which had previously been acquired by the local business tycoon Peter Lim before doing a “future relisting” on the SGX 6 years later. Thomson Medical is close to my heart as I used to be involved in part of its accounting and financial work many years back. Also interestingly, another medical group, Health Management International recently announced a privatisation initiative after years of languishing share price performance amidst good financial results.   

1. Acquisition of Thomson Medical Centre by local business tycoon Peter Lim and eventual privatization and “relisting” it on SGX.
To recap, Thomson Medical Centre (“TMC”) was founded by Dr Lim Cheng Wei Chen in 1979. It was listed on SGX in 2005 and was the fourth healthcare services provided on SGX after (i)Parkway Holdings, (ii) Raffles Medical Group and (iii) Health Management International. In 2010, Peter Lim made an offer to buyout TMC based on a valuation of approximately S$513 Mil which was a whopping 60% premium over the last traded price. TMC was subsequently delisted from SGX in January 2011.

Of course, there were some critics then who thought that Peter Lim might have overpaid for TMC by paying such a colossal premium over the business. It turns out that the astute businessman Peter Lim had the last laugh as he sold the TMC business (along with TMC Life Science) in 2017 to Rowley shareholders for S$1.9 billion which is multiple times (3.8 times) the amount he paid initially. Peter Lim’s bet on the aging population and booming healthcare services via the building up of healthcare portfolio was simply right on the spot and brilliant. Also, by injecting the assets into his public investment vehicle Rowley, Peter Lim looks set to participate further in its future growth. Rowley later changed its name to Thomson Medical Group.    

2. Health Management International partnership with private equity firm EQT and proposed privatization offer of S$0.73 per share
On 5th July’19, Health Management International (“HMI”) had also announced a proposed privatization by offering S$0.73 per share via a partnership with private equity firm EQT. This represented a premium of 24.8% over the volume-weighted average price of HMI over the last 1 mth. Existing shareholders of HMI can choose to sell their shares directly or swap them for new shares in the offeror.

One of the main reasons cited by HMI management for privatization is due to the challenges in raising capital is because it is highly dependant on the market conditions. This draws a similar parallel dilemma to what SMG is facing too, that is, rights issue at an ever declining prices due to the undervalued business by the market.

After privatization, HMI will build up the current business with new funds of up to S$150Mil from EQT for investments and acquisitions. The target is to work towards another IPO within 18 months after the initial 4 years of repackaging at a higher valuation. This is clearly another business plan that resembles the billionaire Peter Lim’s strategic investment into TMC in 2010 and the partial exit in 2017.

3. Is there the possibility that SingMedical Group will also be privatized and shareholders offered a premium to last traded price?
This is only a remote possibility at this juncture as CHA Medical Group had just provided an equity convertible loan of S$10Mil to SMG to fund new acquisitions.

However, if share prices still languish as it had been over the past 2 years despite the turnaround of its business and better financial performance by Dr Beng, future capital raising exercises will be detrimental to the shareholders of SMG as only a very low amount can be raised which forms a vicious downward cycle on the share price. The substantial shareholders will not be happy with such perpetual share price spiraling downwards after every rights issue.

SMG can choose to either work with the Korean CHA Medical Group or partnered with a private equity firm (just like HMI) to buy out the current shareholders and then do an IPO or business injection into a shell company already on SGX to realise its intrinsic value.

 4. Will retail shareholders of SingMedical Group benefit from such privatization attempt?
The answer is actually a resounding “NO” based on its past few years of excellent financial performance and also rapid business expansion. The offeror can make a low ball offer of just a token 25% more (say S$0.50 per share) than the last traded price of S$0.395 per share. However, many retail shareholders may have no choice but to take up the low offer as once the firm delisted, they may be stuck with the shares on hand with no buyers since it is no longer trading on the stock exchange.

The last valuation of SMG business was just recently concluded by CHA Medical Group valued the business at a price of S$0.605 per share. Hence “privatization offer” may not necessarily be a good thing for retail shareholders but it does enable investors to cash out at some premium if the undervaluation in market price situation has been prevailing for many years.

5. Summary
Summarising, I hope that Dr Beng and his management team will consider the implementation of a Group dividend policy as a mean to try to narrow the current significant gap between market pricing and the intrinsic value (current earning multiple benchmarking to the other medical players on SGX is way too low). If this still does not work, a strategic review of options such as privatization should be considered to unlock the intrinsic value of the SMG business.  

Please also see my previous postings on SingMedical Group: